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net loss was $ 2,418,189 for fiscal year 2015 compared to a net loss of $ 437,940 for the fiscal year ended march 31 , 2014. the increase in the net loss for fiscal 2015 was primarily due to lower sales to the company and unaffiliated customers and higher costs for salaries and wages included in selling , general and administration expenses . gross margins of the hong kong joint venture for fiscal 2015 decreased to 15.3 % from 23.3 % in the prior fiscal year . the primary reason for the decrease is the increase in included labor in production costs . selling , general and administrative expenses of the hong kong joint venture for fiscal 2015 were $ 5,245,720 , compared to $ 5,310,546 in the prior fiscal year . as a percentage of sales , these expenses were 33.3 % and 27.9 % , respectively , for the fiscal years ended march 31 , 2015 and 2014. investment income and interest income , net of interest expense was $ 674,961 for fiscal year 2015 , compared to $ 681,883 for fiscal year 2014. cash needs of the hong kong joint venture are currently met by cash on hand . during fiscal year 2015 , working capital decreased from $ 9,287,873 on march 31 , 2014 to $ 5,387,533 on march 31 , 2015. critical accounting policies management 's discussion and analysis of our consolidated financial statements and results of operations are based upon our consolidated financial statements included as part of this document . the preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets , liabilities , revenues and expenses and related disclosures of contingent assets and liabilities . on an ongoing basis , we evaluate these estimates , including those related to bad debts , inventories , income taxes , impairment of long-lived assets , and contingencies and litigation . we base these estimates on historical experiences and on various other assumptions that are believed to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources . actual results may differ from these estimates under different assumptions or conditions . we believe that the following critical accounting policies affect management 's more significant judgments and estimates used in the preparation of its consolidated financial statements . for a detailed discussion on the application of these and other accounting policies , see note a to the consolidated financial statements included in this annual report . certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates . by their nature , these judgments are subject to an inherent degree of uncertainty and actual results could differ from these estimates . these judgments are based on our historical experience , terms of existing contracts , current economic trends in the industry , information provided by our customers , and information available from outside sources , as appropriate . our critical accounting policies include : - 10 - income taxes : the company recognizes a liability or asset for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements . these temporary differences may result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled . the deferred tax assets are reviewed periodically for recoverability and a valuation allowance is provided whenever it is more likely than not that a deferred tax asset will not be realized . the company established an initial valuation allowance of $ 300,000 on its deferred tax assets during the year ended march 31 , 2013 to recognize that certain foreign tax credits expiring in future periods will likely not be realized . upon further review of updated projected taxable income and the components of the deferred tax asset in accordance with applicable accounting guidance at september 30 , 2013 , it was determined that it is more likely than not that the tax benefits associated with the remaining components of the deferred tax assets will not be realized . this determination was made based on continued taxable losses during fiscal 2014 , which were not in line with projections , as well as product offering delays which cause uncertainty as to whether the company will generate sufficient taxable income to use the deferred tax assets prior to their expiration . accordingly , a valuation allowance was established to fully offset the value of the deferred tax assets . our ability to realize the tax benefits associated with the deferred tax assets depends primarily upon the timing of future taxable income and the expiration dates of the components of the deferred tax assets . if sufficient future taxable income is generated , we may be able to offset a portion of future tax expenses . the company follows asc 740-10 that gives guidance to tax positions related to the recognition and measurement of a tax position taken or expected to be taken in a tax return and requires that we recognize in our financial statements the impact of a tax position , if that position is more likely than not to be sustained upon an examination , based on the technical merits of the position . interest and penalties related to income tax matters are recorded as income tax expenses . the company has recorded a long-term liability of $ 0 and $ 25,000 at march 31 , 2015 and 2014 , respectively , for an uncertain income tax position , tax penalties , and any imputed interest thereon . see note f , income taxes . revenue recognition : revenue is recognized at the time product is shipped and title passes pursuant to the terms story_separator_special_tag net loss was $ 2,418,189 for fiscal year 2015 compared to a net loss of $ 437,940 for the fiscal year ended march 31 , 2014. the increase in the net loss for fiscal 2015 was primarily due to lower sales to the company and unaffiliated customers and higher costs for salaries and wages included in selling , general and administration expenses . gross margins of the hong kong joint venture for fiscal 2015 decreased to 15.3 % from 23.3 % in the prior fiscal year . the primary reason for the decrease is the increase in included labor in production costs . selling , general and administrative expenses of the hong kong joint venture for fiscal 2015 were $ 5,245,720 , compared to $ 5,310,546 in the prior fiscal year . as a percentage of sales , these expenses were 33.3 % and 27.9 % , respectively , for the fiscal years ended march 31 , 2015 and 2014. investment income and interest income , net of interest expense was $ 674,961 for fiscal year 2015 , compared to $ 681,883 for fiscal year 2014. cash needs of the hong kong joint venture are currently met by cash on hand . during fiscal year 2015 , working capital decreased from $ 9,287,873 on march 31 , 2014 to $ 5,387,533 on march 31 , 2015. critical accounting policies management 's discussion and analysis of our consolidated financial statements and results of operations are based upon our consolidated financial statements included as part of this document . the preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets , liabilities , revenues and expenses and related disclosures of contingent assets and liabilities . on an ongoing basis , we evaluate these estimates , including those related to bad debts , inventories , income taxes , impairment of long-lived assets , and contingencies and litigation . we base these estimates on historical experiences and on various other assumptions that are believed to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources . actual results may differ from these estimates under different assumptions or conditions . we believe that the following critical accounting policies affect management 's more significant judgments and estimates used in the preparation of its consolidated financial statements . for a detailed discussion on the application of these and other accounting policies , see note a to the consolidated financial statements included in this annual report . certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates . by their nature , these judgments are subject to an inherent degree of uncertainty and actual results could differ from these estimates . these judgments are based on our historical experience , terms of existing contracts , current economic trends in the industry , information provided by our customers , and information available from outside sources , as appropriate . our critical accounting policies include : - 10 - income taxes : the company recognizes a liability or asset for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements . these temporary differences may result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled . the deferred tax assets are reviewed periodically for recoverability and a valuation allowance is provided whenever it is more likely than not that a deferred tax asset will not be realized . the company established an initial valuation allowance of $ 300,000 on its deferred tax assets during the year ended march 31 , 2013 to recognize that certain foreign tax credits expiring in future periods will likely not be realized . upon further review of updated projected taxable income and the components of the deferred tax asset in accordance with applicable accounting guidance at september 30 , 2013 , it was determined that it is more likely than not that the tax benefits associated with the remaining components of the deferred tax assets will not be realized . this determination was made based on continued taxable losses during fiscal 2014 , which were not in line with projections , as well as product offering delays which cause uncertainty as to whether the company will generate sufficient taxable income to use the deferred tax assets prior to their expiration . accordingly , a valuation allowance was established to fully offset the value of the deferred tax assets . our ability to realize the tax benefits associated with the deferred tax assets depends primarily upon the timing of future taxable income and the expiration dates of the components of the deferred tax assets . if sufficient future taxable income is generated , we may be able to offset a portion of future tax expenses . the company follows asc 740-10 that gives guidance to tax positions related to the recognition and measurement of a tax position taken or expected to be taken in a tax return and requires that we recognize in our financial statements the impact of a tax position , if that position is more likely than not to be sustained upon an examination , based on the technical merits of the position . interest and penalties related to income tax matters are recorded as income tax expenses . the company has recorded a long-term liability of $ 0 and $ 25,000 at march 31 , 2015 and 2014 , respectively , for an uncertain income tax position , tax penalties , and any imputed interest thereon . see note f , income taxes . revenue recognition : revenue is recognized at the time product is shipped and title passes pursuant to the terms
| in may 2014 , the company previewed eleven new sealed smoke and carbon monoxide alarms at the international hardware show in las vegas , and the company believes that prospective customers ' responses were very positive . the company believes that based on projected sales of the new sealed units , the company will begin to return to profitability after the complete line of sealed units is available for sale later this fiscal year . comparison of results of operations for the years ended march 31 , 2015 and 2014 sales . in fiscal year 2015 , our net sales are $ 9,891,554 compared to sales in the prior year of $ 12,577,127 , a decrease of $ 2,685,573 ( 21.4 % ) . our lower sales are primarily attributable to delays in engineering and independent approvals causing delays in the introduction of the company 's new sealed battery alarms . gross profit . gross profit margin is calculated as net sales less cost of goods sold expressed as a percentage of net sales . our gross profit margin for the fiscal year ended march 31 , 2015 was 23.5 % compared to 22.6 % in fiscal 2014. the increase in 2015 gross margin is attributed the mix of products sold that includes a higher percentage of the company 's new products that generally have higher margins . selling , general and administrative expense . selling , general and administrative expenses decreased from $ 4,251,274 in fiscal 2014 to $ 4,175,584 in fiscal 2015. as a percentage of net sales , these expenses were 42.2 % for the fiscal year ended march 31 , 2015 and 33.8 % for the prior fiscal year . the decrease in dollars primarily reflects a lower costs associated with lower sales , and the increase as a percentage is due to the fixed nature of certain selling , general and administrative expenses . research and development . research and development expense for the fiscal year ended march 31 , 2015 was $ 776,778 , of which approximately $
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over the past few years , we have intentionally narrowed our assortments in these categories and re-allocated linear footage to the โ ownable โ and โ winnable โ categories . our product assortments in these categories focus on value , and savings in comparison to competitors , in areas such as food prep , table top , home maintenance , small appliances , and electronics . our merchandising management team is aligned with our merchandise categories , and their primary goal is to increase our total company comparable store sales ( โ comp โ or โ comps โ ) . our review of the performance of the members of our merchandise management team focuses on comps by merchandise category , as we believe it is the key metric that will drive our long-term net sales . by focusing on growing our โ ownable โ and โ winnable โ merchandise categories , and managing contraction in our convenience categories , we believe our merchandise management team can effectively address the changing shopping behaviors of our customers and implement more focused offerings within each merchandise category , which we believe will lead to continued comp growth . marketing the top priority of our marketing activities is to increase our net sales and comps . over the past few years , we have reviewed our brand identity to gain further insights into jennifer 's perception of us and how best to improve the overall effectiveness of our marketing efforts . our research has affirmed that jennifer is deal-driven and comes to us for our value-priced merchandise assortment . she appreciates our ability to assist her in fashioning and furnishing her home so that she can enjoy the space with family and friends . we believe our strong price value perception and the surprise and delight factor in our stores enhances our ability to effectively connect with jennifer in a way that lets her understand when shopping at big lots , she can afford to live big , while saving lots . in an effort to align our messaging with the positive aspects of jennifer 's perception of our brand , we have focused our marketing efforts on driving our value proposition in every season and category . we continue to increase our use of social and digital media outlets including conducting entire campaigns through these outlets ( specifically on facebook ยฎ , instagram ยฎ , pinterest ยฎ , twitter ยฎ , and youtube ยฎ ) to drive an increased understanding of our value proposition with our core customer and to attempt to communicate that message to new potential customers . these outlets enable us to deliver our message directly to jennifer and provide her with the opportunity to share direct feedback with us , which can enhance our understanding of what is most important to her and how we can improve the shopping experience in our stores . given our customer 's proficiency with mobile devices and digital media , we focus on communicating with her through those channels . we launched a new loyalty program , the big rewards program in november of 2017 , to more effectively incentivize our loyal customers and encourage new membership by highlighting the significant features and benefits . our new loyalty program rewards jennifer with a coupon after every third purchase , a birthday surprise offer , and special rewards after large-ticket furniture purchases . we believe our big rewards program will help increase engagement with jennifer and clearly communicate our offerings . at february 2 , 2019 , our big rewards program had over 17 million active members ( defined as having made a purchase in the last 12 months ) and we have a focused concerted efforts to grow the membership base in our big rewards program in 2019. in addition to electronic , social and digital media , our marketing communication efforts involve a mix of television advertising , printed ad circulars , and in-store signage . the primary goals of our television advertising are to promote our brand and , from time to time , promote products or special discounts in our stores . we have also shifted towards using more digital streaming media in concentrated markets of our stores , which allows us to connect deeper and more frequently with jennifer . our printed advertising circulars and our in-store signage initiatives focus on promoting our value proposition on our unique merchandise offerings . shopping experience in 2017 , we introduced a new in-store shopping experience with our โ store of the future โ concept , which more deeply incorporates our brand identity and seeks to enhance the way jennifer shops our stores , including : showcasing our โ ownable โ and โ winnable โ merchandise categories by moving our furniture department to the front center of the prototype store with seasonal and soft home on either side to improve the coordination of our home decorating solutions . we moved food and consumables to the back of the prototype store , while keeping them visible 22 with clear sight lines from the entrance of the store . we have also added color coordinated way-finding signage to help jennifer navigate our stores . creating a warm and personalized tone throughout the store through improved lighting , new flooring , softening the colors on our walls , and greeting jennifer with a โ hello โ wall as she enters the store . we increased the length of our check-out counter and removed signage and clutter to make checking out more friendly and efficient . additionally , we have added furniture vignettes and incorporated lifestyle photography to provide visual solutions for jennifer . highlighting our focus on the community and local events . the wall behind the check-out counter thanks jennifer for shopping us . we personalized the signage throughout the store and back room to reflect our friendly and community-oriented values . see โ real estate โ below for the projected roll-out schedule for the store of the future concept . story_separator_special_tag in addition to implementing our store of the future concept , we are also reviewing cross-category presentation opportunities through the lens of โ life 's occasions , โ where we display our product offerings in a solution format , with items from various departments placed in vignettes to promote occasions , such as fall tailgating . the intent of these cross-category presentations is to demonstrate the breadth and value of products that we offer to jennifer in one convenient experience . our expectation is to re-introduce jennifer to the โ treasure โ that we offer , while removing the challenges of the โ hunt โ from the experience . in addition to our efforts to improve the in-store shopping experience , we continue to focus on improving our e-commerce platform . our integrated e-commerce platform has offered a narrowed assortment of our in-store offerings . in 2017 , we began offering expanded fabric and color options on select products on our e-commerce platform in our furniture and seasonal categories , including items only available online . in 2019 , we intend to integrate our in-store experience and our e-commerce platform by launching our โ buy on-line , pick-up in store โ solution . jennifer will be able to identify and purchase products on-line for easy pick-up in one of our stores . additionally , we expect to expand our on-line assortment to offer a broader assortment of goods for a more complete shopping experience . lastly , we continue to offer a private label credit card and our easy leasing lease-to-own solutions for customer financing and a coverage/warranty program , focused on our furniture and seasonal merchandise categories , to round out jennifer 's experience . our private label credit card provides access to revolving credit , through a third party , for use on both larger ticket items and daily purchases . our easy leasing lease-to-own program provides a single use opportunity for access to third-party financing . our coverage/warranty program provides a method for obtaining multi-year warranty coverage for furniture and our living purchases . real estate historically , we have determined that our average store size of approximately 22,000 selling square feet is appropriate for us to provide our core customer with a positive shopping experience and properly present a representative assortment of merchandise categories that our core customer finds meaningful . after studying our store design and layout in relation to the changing retail landscape and needs of our core customers and testing certain design and layout revisions , we rolled-out our store of the future layout to two geographic test markets in 2017. in 2018 , we began the chain-wide conversion to our store of the future layout and converted 164 stores through either remodels or new openings . currently , we intend to convert the majority of the remainder of our store fleet over approximately the next three years . as we increase our capital investment in our stores , we have collaborated with our landlords to negotiate longer lease terms and renewal options . as discussed in โ item 2. properties , โ of this form 10-k , we have 224 store leases that will expire in 2019. during 2019 , we anticipate opening approximately 50 new stores and closing up to 45 of our existing locations . the majority of these closings will involve the relocation of stores to improved locations within the same local market , with the balance resulting from a lack of renewal options or our belief that a location 's sales and operating profit volume are not strong enough to warrant additional investment in the location . as part of our evaluation of potential store closings , we consider our ability to transfer sales from a closing store to other nearby locations and generate a better overall financial result for the geographic market . for our remaining store locations with fiscal 2019 lease expirations , we expect to exercise our renewal option or negotiate lease renewal terms sufficient to allow us to continue operations and achieve an acceptable return on our investment . 23 2018 compared to 2017 net sales net sales by merchandise category ( in dollars and as a percentage of total net sales ) , net sales change ( in dollars and percentage ) , and comps in 2018 compared to 2017 were as follows : replace_table_token_12_th we periodically assess and make minor adjustments to our product hierarchy , which can impact the roll-up to our merchandise categories . our financial reporting process utilizes the most current product hierarchy in reporting net sales by merchandise category for all periods presented . therefore , there may be minor reclassifications of net sales by merchandise category compared to previously reported amounts . net sales decreased $ 26.3 million , or 0.5 % , to $ 5,238.1 million in 2018 , compared to $ 5,264.4 million in 2017 . the decrease in net sales was principally due to fiscal 2017 consisting of 53 weeks and fiscal 2018 consisting of 52 weeks , which decreased net sales by $ 69.1 million . the fiscal week difference was partially offset by a 1.2 % increase in comps , which increased net sales by $ 62.3 million . the decrease in net sales was also affected by the net decrease of 15 stores since the end of 2017 , which decreased net sales by approximately $ 19.5 million . our โ ownable โ furniture and seasonal merchandise categories and our โ winnable โ soft home merchandise category generated positive comps : soft home experienced increases in net sales and comps which were primarily driven by continued improvement in the product assortment , quality , and perceived value by our customers , particularly in our flooring , home decor , and bath departments , as well as increased selling space .
| in 2018 , our selling and administrative expenses include $ 7.0 million of costs associated with the retirement of our former chief executive officer and $ 3.5 million of costs associated with the settlement of our shareholder litigation matter , which is described in further detail in note 10 to the accompanying consolidated financial statements . in 2017 , our selling and administrative expenses include recoveries of $ 3.0 million from our insurance carriers related to a legal matter . additionally , our income tax expense reflects a $ 4.5 million charge for the impact of the tax cuts and jobs act of 2017 related to our net deferred tax position and a $ 3.5 million benefit for the reduction in our federal tax rate . in 2016 , our selling and administrative expenses include $ 27.8 million of costs associated with the termination of our pension plans , which was completed near the end of fiscal 2016 , partially offset by a $ 3.8 million gain on the sale of a company-owned property in california . operating strategy the core principle of our operating strategy has been to consistently re-evaluate the regularly shifting needs and wants of our core customer , jennifer , to ensure that our customer value proposition stays current and relevant to her . this core principle applies to all aspects of our business , but particularly focuses on merchandising , marketing , and our customers ' shopping experience , which we believe represent the key drivers of our net sales . as a result of the continual re-evaluation process of our strategy , we have shifted our focus to what we call โ ownable โ or โ winnable โ merchandise categories , as we believe this is where jennifer has given us the most latitude in providing her with merchandise that meets her needs and presents a surprise and delight factor in our stores . our goal is to offer jennifer affordable solutions in every season and category . through our โ ownable โ and โ winnable โ merchandise categories , we are committed to offering product assortments that score highly in quality , brand , fashion , and value ( โ qbfv โ ) at a price tag jennifer will love .
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we have incurred net losses in each year since inception . our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our current or future product candidates . our net losses were $ 17.2 million and $ 34.2 million ( including $ 18.1 million related to nonrecurring merger costs ) for the years ended december 31 , 2020 and 2019 , respectively . as of december 31 , 2020 , we had an accumulated deficit of $ 82.8 million . substantially all of our net losses have resulted from costs incurred in connection with : ( i ) advancing our research and development programs , ( ii ) general and administrative costs associated with our operations , including the costs associated with operating as a public company , and ( iii ) in-process research and development costs associated with the merger . we expect to continue to incur significant and increasing operating losses for at least the next several years . we expect that our expenses and capital funding requirements will increase substantially in connection with our ongoing activities , particularly if and as we : advance cirmtuzumab through clinical development in multiple indications , with a primary focus in mcl ; generate clinical proof-of-concept data with tk216 in ewing sarcoma , an orphan pediatric cancer indication ; advance our ror1-targeting car-t therapy candidate to clinical development , initially in hematological cancers and then in solid tumors ; respond to the impacts of the covid-19 pandemic , which has slowed enrollment into our clinical trials ; evaluate cirmtuzumab in additional ror1-positive solid tumors ; evaluate tk216 in additional tumors with ets fusion proteins or overexpression ; continue to develop additional product candidates ; acquire or inโlicense other product candidates and technologies ; maintain , expand and protect our intellectual property portfolio ; establish a commercial manufacturing source and secure supply chain capacity sufficient to provide commercial quantities of any product candidates for which we may obtain regulatory approval ; seek regulatory approvals for any product candidates that successfully complete clinical trials ; establish a sales , marketing and distribution infrastructure to commercialize any products for which we may obtain regulatory approval ; and add operational , financial and management information systems and personnel , including personnel to support our planned product development and future commercialization efforts , as well as to support our transition to a public reporting company . 107 we will not generate product sales revenue unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates . if we obtain regulatory approval for any of our product candidates and do not enter into a commercialization partnership , we expect to incur significant expenses related to developing our internal commercialization capability to support product sales , marketing and distribution . in addition , we expect to incur additional costs associated with operating as a public company . as a result , we believe we will need substantial additional funding to support our continuing operations and pursue our business strategy . until such time as we can generate significant product sales revenue , if ever , we expect to finance our operations through a combination of equity offerings , debt financings , government funding , or other sources , including potentially collaborations , licenses and other similar arrangements . we may not be able 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 , reduce or eliminate the development and commercialization of one or more of our product candidates or delay our pursuit of potential in licenses or acquisitions . because of the numerous risks and uncertainties associated with product development , we are unable to 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 . we expect that our existing cash and cash equivalents will be sufficient to fund our operating expenses and capital expenditure requirements for at least the next twelve months . we have based this estimate on assumptions that may prove to be wrong , and we could exhaust our available capital resources sooner than we expect . beyond that point , we will need to raise additional capital to finance our operations , which can not be assured . business update regarding covid-19 the covid-19 worldwide pandemic has presented substantial public health and economic challenges and is affecting economies , financial markets and business operations around the world . international and u.s. governmental authorities in impacted regions have taken actions in an effort to slow the spread of covid-19 , including issuing and modifying varying forms of โ stay-at-home โ orders , and restricting business functions outside of one 's home . in response , we have put restrictions on employee travel and working from our executive offices , with many employees continuing their work remotely . to date , we have been able to continue to supply cirmtuzumab and tk216 clinical trial sites for patients enrolled in our ongoing clinical trials and do not currently anticipate any interruptions in the supply of cirmtuzumab or tk216 . while we are continuing the clinical trials we have underway in sites across the u.s. , we expect that covid-19 precautions may directly or indirectly impact the timeline for some of our clinical trials . story_separator_special_tag for example , some of our clinical trial sites , including those located in areas severely impacted by the pandemic , have placed new patient enrollment into clinical trials on hold or , for patients travelling from out-of-state , have implemented a 14-day self-quarantine before appointments . for our existing patients , we are actively working with all of our clinical trial sites to minimize disruptions and address concerns on an individual site or patient basis in order to allow participating patients to continue to receive treatment at home or in alternative healthcare settings while minimizing their potential exposure to the virus that causes covid-19 . if restrictions related to the covid-19 outbreak continue for a prolonged period of time or if additional clinical trial sites pause patient enrollment or treatments , our clinical trial milestones would be negatively impacted . additionally , our expectations for the timing of first-in-human dosing of our ror1 car-t therapy in china has been delayed . any delays in the completion of our clinical trials and any disruption in our supply chain could have a material adverse effect on our business , results of operations and financial condition . the 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 , including as a result of new information that may emerge concerning covid-19 and the actions taken to contain or treat it , the success or failure of vaccination programs , the emergence of new variants of covid-19 , as well as the economic impact on local , regional , national and international markets . 108 components of results of operations grant revenue we have not and do not expect to generate any product sales revenue in the foreseeable future . if our development efforts for our product candidates are successful and result in regulatory approval , we may generate product sales revenue in the future . we can not predict if , when , or to what extent we will generate revenue from the commercialization and sale of our product candidates . we may never succeed in obtaining regulatory approval for any of our product candidates . our grant revenue has been derived from a california institute for regenerative medicine , or cirm , grant subaward with uc san diego . in august 2017 , cirm awarded an $ 18.3 million grant to researchers at uc san diego to advance our phase 1/2 clinical trial evaluating cirmtuzumab in combination with ibrutinib for the treatment of patients with b-cell lymphoid malignancies , including mcl and cll . oncternal is conducting this study in collaboration with uc san diego and estimates it will receive approximately $ 14.0 million in development milestones under research subaward agreements throughout the award project period , estimated to be from october 1 , 2017 to march 31 , 2022. in addition , we are committed to certain co-funding requirements and are required to provide uc san diego progress and financial update reports throughout the award project period . we received subaward payments of $ 1.4 million and $ 6.2 million in the years ended december 31 , 2020 and 2019 , respectively . as of december 31 , 2020 , we believe we have met our obligations under the cirm award and uc san diego subawards . operating expenses research and development research and development expenses consist primarily of costs incurred for the preclinical and clinical development of our product candidates , cirmtuzumab , tk216 and our ror1-targeting car-t therapy candidate , which include : expenses under agreements with third-party contract organizations , investigative clinical trial sites that conduct research and development activities on our behalf ; costs related to develop and manufacture preclinical study and clinical trial material ; salaries and employee-related costs , including stock-based compensation ; costs incurred under our collaboration and third-party licensing agreements ; and laboratory and vendor expenses related to the execution of preclinical and clinical trials . we accrue all research and development costs in the period for which they are incurred . costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors , collaborators and third-party service providers . advance payments for goods or services to be received in future periods for use in research and development activities are deferred and then expensed as the related goods are delivered and as services are performed . any unearned advances would be refunded when known . we expect our research and development expenses to increase substantially for the foreseeable future as we : ( i ) invest in additional operational personnel to support our planned product development efforts , and ( ii ) continue to invest in developing our product candidates preclinically , advance them into later stages of clinical development , and as we begin to conduct larger clinical trials . 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 clinical trials . our direct research and development expenses are tracked by product candidate and consist primarily of external costs , such as fees paid under third-party license agreements and to outside consultants , contract research organizations , or cros , contract manufacturing organizations and research laboratories in connection with our preclinical development , process development , manufacturing and clinical development activities . we do not allocate employee costs and costs associated with our discovery efforts , laboratory supplies and facilities , including 109 other indirect costs , to specific product candidates because these costs are deployed across multiple programs and , as such , are not separately classified . we use internal resources primarily to conduct our research as well as for managing our preclinical development , process development , manufacturing and clinical development activities .
| unallocated expenses increased $ 1.0 million for the year ended december 31 , 2020 , compared to the year ended december 31 , 2019 , primarily due to higher personnel costs , including higher share-based compensation expense of $ 0.3 million . in-process research and development expenses in-process research and development expenses decreased $ 18.1 million for year ended december 31 , 2020 , compared to the year ended december 31 , 2019 , due solely to the completion of the merger in 2019. general and administrative expenses general and administrative expenses for the years ended december 31 , 2020 and 2019 were $ 8.4 million and $ 7.3 million , respectively , an increase of $ 1.1 million . the increase is primarily due to the following partially offsetting factors : ( i ) higher personnel and professional related costs of $ 1.3 million , including higher share-based compensation expense of $ 0.7 million , ( ii ) higher director 's and officer 's insurance costs of $ 0.6 million , ( iii ) lower patent costs of $ 0.3 million , and ( iv ) lower public company and other expenses of $ 0.5 million . other income ( expense ) other income of $ 0.3 million in 2020 was primarily related to the forgiveness of the ppp loan . other expense of $ 1.3 million in 2019 was primarily related to the change in fair value of warrant liability . liquidity and capital resources we have incurred losses and negative cash flows from operations since inception . as of december 31 , 2020 , we had an accumulated deficit of $ 82.8 million and anticipate that we will continue to incur net losses for the foreseeable future . as of december 31 , 2020 , we had $ 116.7 million in cash and cash equivalents . we believe we have sufficient cash to fund our projected operating requirements into 2023 . cash flows the following table summarizes our net cash flow activity for each of the periods presented ( in thousands ) : replace_table_token_4_th 112 operating activities during the year ended december 31 , 2020 , operating activities used $ 17.5 million , resulting from our net loss of $
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refer to note 3 to vf 's consolidated financial statements for additional information on acquisitions . on october 5 , 2018 , vf completed the sale of the van moer business , which was included in the work segment . on october 26 , 2018 , vf completed the sale of the reef ยฎ brand business , which was included in the active segment . all references to dispositions below represent the impact of operating results of the reef ยฎ brand and the van moer business , beginning in the period of disposition . the nautica ยฎ brand business , the licensing business ( which comprised the licensed sports group and jansport ยฎ brand collegiate businesses ) , and the former contemporary brands segment have been reported as discontinued operations in our consolidated statements of income , and the related held-for-sale assets and liabilities have been presented as assets and liabilities of discontinued operations in the consolidated balance sheets , through their respective dates of disposal . unless otherwise noted , amounts , percentages and discussion for all periods included below reflect the results of operations and financial condition from vf 's continuing operations . on august 13 , 2018 , vf announced its intention to spin-off its jeans business , which includes the wrangler ยฎ , lee ยฎ and rock & republic ยฎ brands , as well as the vf outlet business . the spin-off creates two independent , publicly traded companies . the transaction is expected to be tax-free to vf and its shareholders and is effected through a pro-rata distribution of the new company 's stock to existing vf shareholders whereby each vf shareholder will receive one share of the new company 's stock for every seven shares of vf stock held on the record date . the spin-off , which was completed after march 30 , 2019 on may 22 , 2019 , is not reflected in our historical financial statements . refer to note 4 to vf 's consolidated financial statements for additional information on discontinued operations and other divestitures . highlights of the year ended march 2019 year ended march 2019 revenues were up 12 % to $ 13.8 billion compared to the twelve months ended march 2018 , primarily due to the $ 1.0 billion contribution from organic growth and a $ 696.3 million contribution from acquisitions , including a 1 % unfavorable impact from foreign currency . active segment revenues increased 16 % over the twelve months ended march 2018 to $ 4.7 billion , including a 2 % unfavorable impact from foreign currency . outdoor segment revenues increased 9 % over the twelve months ended march 2018 to $ 4.6 billion , including a $ 224.4 million contribution from acquisitions and a 1 % unfavorable impact from foreign currency . direct-to-consumer revenues increased 14 % over the twelve months ended march 2018 , including a 1 % unfavorable impact from foreign currency and a 3-percentage point contribution from acquisitions . direct-to-consumer revenues accounted for 33 % of vf 's total revenues in the year ended march 2019 . vf opened 110 retail stores in the year ended march 2019 . e-commerce revenues increased 32 % in the year ended march 2019 compared to the twelve months ended march 2018 , including a 1 % unfavorable impact from foreign currency and a 9-percentage point contribution from acquisitions . international revenues increased 10 % over the twelve months ended march 2018 , including a 3 % unfavorable impact from foreign currency and a 6-percentage point contribution from acquisitions . international revenues represented 41 % of vf 's total revenues in the year ended march 2019 . gross margin increased 10 basis points to 50.7 % in the year ended march 2019 compared to the twelve months ended march 2018 , reflecting benefits from a mix-shift to higher margin businesses and increased pricing , partially offset by costs related to the acquisition , integration and separation of businesses and certain increases in product costs . cash flow from operations was $ 1.7 billion in the year ended march 2019 . earnings per share increased 63 % to $ 3.14 in the year ended march 2019 from $ 1.92 in the twelve months ended march 2018. the twelve months ended march 2018 included a $ 1.15 negative transitional impact from the enactment of the tax cuts and jobs act ( `` tax act '' ) compared to a $ 0.09 negative impact in the year ended march 2019 due to adjustments on provisional amounts recorded . the increase was also driven by organic growth in the active , outdoor and work segments , continued strength in our direct-to-consumer and international businesses and contributions from acquisitions . these improvements were partially offset by expenses related to the acquisition , integration and separation of businesses , costs related to relocation and other strategic business decisions and declines in the jeans segment . vf increased the quarterly dividend rate by 11 % in the year ended march 2019 , marking the 46 th consecutive year of increase in the rate of dividends paid per share . vf repurchased $ 150.7 million of its common stock and paid $ 767.1 million in cash dividends , returning $ 917.8 million to stockholders . vf corporation fiscal 2019 form 10-k 23 story_separator_special_tag per diluted share ) in 2018 . refer to additional discussion in the โ information by reportable segment โ section below . year ended december 2017 compared to year ended december 2016 gross margin improved 120 basis points to 50.5 % in 2017 compared to 49.3 % in 2016 , reflecting a 180 basis point benefit from pricing , a mix-shift toward higher margin businesses and lower restructuring costs , which was partially offset by an unfavorable 60 basis point impact from foreign currency . selling , general and administrative expenses as a percentage of total revenues increased 230 basis points in 2017 compared to 2016 . story_separator_special_tag this increase is primarily due to investments in our key growth priorities , which include direct-to-consumer , product innovation , demand creation and technology initiatives . the increases were partially offset by lower restructuring costs in 2017 . in 2017 , operating margin decreased 40 basis points , to 12.8 % from 13.2 % in 2016. in addition to the items described above , the operating margin decrease was partially offset by a 70 basis point increase from goodwill and intangible asset impairments in 2016 that did not recur in 2017 . net interest expense increased $ 0.3 million to $ 85.9 million in 2017 . the increase in net interest expense was due to higher interest rates on short-term borrowings and higher interest on long-term debt balances due to a full year of interest on the 850 million euro-denominated 0.625 % fixed-rate notes issued in september 2016 , which were partially offset by the payoff of the $ 250.0 million of 5.95 % fixed-rate notes on november 1 , 2017 and an increase in international short-term investment rates . outstanding interest-bearing debt averaged $ 3.2 billion for 2017 compared to $ 2.6 billion for 2016 , with short-term borrowings representing 27 % and 37 % of average debt outstanding for the respective years . the weighted average interest rates on outstanding debt were 3.1 % in 2017 and 3.5 % in 2016 , as the impact of the issuance of 850 million euro-denominated 0.625 % fixed-rate notes in september of 2016 was offset by higher short-term debt rates . other income ( expense ) , net primarily consists of foreign currency gains and losses , the funding fee charged on the sale of our trade receivables , other components of net periodic pension cost ( excluding the service cost component ) and non-operating gains and losses . other income ( expense ) netted to $ ( 10.7 ) million and $ ( 85.2 ) million in 2017 and 2016 , respectively . a pension settlement charge of $ 50.9 million was included in 2016 , which did not recur in 2017. the effective income tax rate was 49.1 % in 2017 compared to 16.0 % in 2016 . the effective income tax rate is substantially higher in 2017 when compared to 2016 primarily due to discrete tax expense associated with the tax act . the tax act reduces the federal tax rate on u.s. earnings to 21 % and moves from a global taxation regime to a modified territorial regime . as part of the legislation , u.s. companies are required to pay a tax on historical earnings generated offshore that have not been repatriated to the u.s. additionally , revaluation of deferred tax asset and liability positions at the lower federal base rate of 21 % is also required . the transitional impact of the tax act resulted in a provisional net charge of $ 465.5 million , or $ 1.15 per share , during the three months ended december 2017 . this amount , which is included in the income taxes line item in the consolidated statements of income , is primarily comprised of approximately $ 512.4 million related to the transition tax and approximately $ 89.5 million tax benefit related to revaluing u.s. deferred tax assets and liabilities using the new u.s. corporate tax rate of 21 % . other provisional charges of $ 42.6 million were primarily related to u.s. federal and state tax on foreign income and dividends and establishing a deferred tax liability for foreign withholding taxes as the company is not asserting indefinite reinvestment on short-term liquid assets of certain foreign subsidiaries . all other foreign earnings , including basis differences of certain foreign subsidiaries , continue to be considered indefinitely reinvested . the 2017 effective income tax rate included a net discrete tax expense of $ 438.9 million , which included the provisional net charge of $ 465.5 million related to the tax act , $ 25.2 million of tax benefits related to stock compensation , $ 2.9 million of net tax benefit related to the realization of previously unrecognized tax benefits and interest , and $ 1.9 million of discrete tax expense related to the effects of tax rate changes , exclusive of the tax act . the $ 438.9 million net discrete tax expense in 2017 increased the effective income tax rate by 31.0 % compared to a favorable 3.4 % impact of discrete items in 2016 . without discrete items , the effective tax rate during 2017 decreased by approximately 1.3 % primarily due to the negative tax impact related to the 2016 goodwill impairment . the international effective tax rate was 13.1 % and 10.9 % for 2017 and 2016 , respectively . as a result of the above , income from continuing operations in 2017 was $ 0.7 billion ( $ 1.79 per diluted share ) , compared to $ 1.1 billion ( $ 2.56 per diluted share ) in 2016. refer to additional discussion in the โ information by reportable segment โ section below . vf corporation fiscal 2019 form 10-k 25 transition period three months ended march 2018 compared to three months ended march 2017 ( unaudited ) the following table presents a summary of the changes in net revenues from the comparable period in 2017 : ( in millions ) three months ended march net revenues โ 2017 $ 2,500.3 organic growth 191.6 acquisitions 233.1 impact of foreign currency 120.4 net revenues โ 2018 $ 3,045.4 vf reported a 22 % increase in revenues for the three months ended march 2018 compared to the 2017 period . the revenue increase was attributable to the williamson-dickie acquisition , organic growth in the active segment and continued strength in our direct-to-consumer and international businesses . these increases were partially offset by declines in the jeans segment . excluding the impacts from foreign currency , international sales grew in every region in the three months ended march 2018 . additional details on revenues are provided in the section titled โ information by reportable segment โ .
| gross margin in 2019 was positively impacted by a mix-shift to higher margin businesses and increased pricing , partially offset by $ 45.9 million of costs related to the acquisition , integration and separation of businesses , and costs related to the relocation of our global headquarters and certain brands to denver , colorado . selling , general and administrative expenses as a percentage of total revenues increased 40 basis points in 2019 compared to 2018 . this increase is primarily due to $ 186.7 million of expenses related to the acquisition , integration and separation of businesses , and relocation of our global headquarters and certain brands to denver , colorado . the increase is also due to continued investments in our key strategic growth initiatives . these costs were partially offset by leverage of operating expenses on higher revenues . in 2019 , operating margin decreased 30 basis points , to 12.1 % from 12.4 % in 2018 , primarily due to the items described above . net interest expense decreased $ 1.4 million to $ 85.4 million in 2019 . the decrease in net interest expense was due to higher international bank balances in high yielding currencies and the payoff of the $ 250.0 million of 5.95 % fixed-rate notes on november 1 , 2017 , which was partially offset by higher interest rates on increased levels of short-term borrowings . outstanding interest-bearing debt averaged $ 3.4 billion for both 2019 and 2018 , with short-term borrowings representing 35.3 % and 30.9 % of average debt outstanding for the respective years . the weighted average interest rates on outstanding debt were 3.1 % in 2019 and 2.9 % in 2018 . other income ( expense ) , net primarily consists of foreign currency gains and losses , the funding fee charged on the sale of our trade receivables , other components of net periodic pension cost ( excluding the service cost component ) and non-operating gains and losses . other income ( expense ) netted to $ ( 63.0 ) million and $ ( 1.8 ) million in 2019 and 2018 , respectively . included in other
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portfolio composition the total value of our investment portfolio was $ 706.8 million as of december 31 , 2012 , as compared to $ 507.1 million as of december 31 , 2011 . as of december 31 , 2012 , we had investments in 82 portfolio companies with an aggregate cost of $ 700.2 million . as of december 31 , 2011 , we had investments in 63 portfolio companies with an aggregate cost of $ 498.3 million . as of both december 31 , 2012 and 2011 , none of our portfolio investments represented greater than 10 % of the total fair value of our investment portfolio . as of december 31 , 2012 and december 31 , 2011 , our investment portfolio consisted of the following investments : replace_table_token_9_th investment activity during the year ended december 31 , 2012 , we made twenty-six new investments , including recapitalizations of existing portfolio companies , totaling $ 340.5 million , eight additional debt investments in existing portfolio companies of $ 7.8 million and five additional equity investments in existing portfolio companies totaling approximately $ 0.6 million . in addition , we sold equity investments in twelve portfolio companies for total proceeds of approximately $ 11.0 million , resulting in realized gains totaling approximately $ 6.2 million . we had sixteen portfolio company loans repaid at par totaling approximately $ 138.4 million , which resulted in realized gains totaling approximately $ 0.5 million , and received normal principal repayments , partial loan prepayments and pik interest repayments totaling approximately $ 19.0 million in the year ended december 31 , 2012 . during the year ended december 31 , 2011 , we made twenty-one new investments , including recapitalizations of existing portfolio companies , totaling $ 200.2 million , seven additional debt investments in existing portfolio companies of $ 24.3 million and five additional equity investments in existing portfolio companies totaling approximately $ 0.5 million . in addition , we sold three equity investments in portfolio companies for total proceeds of approximately $ 17.8 million , resulting in realized gains totaling approximately $ 13.5 million , and converted subordinated debt investments in one portfolio company to equity , resulting in a realized loss of approximately $ 3.0 million . we had seven portfolio company loans repaid at par totaling approximately $ 39.8 million , which resulted in realized gains totaling approximately $ 0.5 million , and received normal principal repayments , partial loan prepayments and pik interest repayments totaling approximately $ 13.4 million in the year ended december 31 , 2011 . 63 total portfolio investment activity for the years ended december 31 , 2012 and 2011 was as follows : replace_table_token_10_th replace_table_token_11_th ( 1 ) excludes non-accrual debt investments . 64 non-accrual assets generally , when interest and or principal payments on a loan become past due , or if we otherwise do not expect the borrower to be able to service its debt and other obligations , we will place the loan on non-accrual status and will generally cease recognizing interest income on that loan for financial reporting purposes until all principal and interest have been brought current through payment or due to a restructuring such that the interest income is deemed to be collectible . as of december 31 , 2012 , the fair value of our non-accrual assets was approximately $ 2.4 million , which comprised 0.3 % of the total fair value of our portfolio , and the cost of our non-accrual assets was approximately $ 14.9 million , which comprised 2.1 % of the total cost of our portfolio . as of december 31 , 2011 , the fair value of our non-accrual assets was approximately $ 7.6 million , which comprised 1.5 % of the total fair value of our portfolio , and the cost of our non-accrual assets was approximately $ 11.0 million , which comprised 2.2 % of the total cost of our portfolio . our non-accrual assets as of december 31 , 2012 were as follows : gerli and company in november 2008 , we placed our debt investment in gerli and company , or gerli , on non-accrual status . as a result , under generally accepted accounting principles in the united states , or u.s. gaap , we no longer recognize interest income on our debt investment in gerli for financial reporting purposes . during 2008 and 2009 , we recognized unrealized losses on our debt investment in gerli of $ 1.2 million and $ 0.5 million , respectively . in 2010 , we recognized an unrealized gain on our debt investment in gerli of approximately $ 0.7 million . during the first quarter of 2011 , we restructured our investment in gerli . as a result of the restructuring , we received a new note from gerli with a face amount of $ 3.0 million and a fair value of approximately $ 2.3 million and preferred stock with a liquidation preference of $ 0.4 million . in the year ended december 31 , 2011 , we recognized total unrealized depreciation on our debt investment of approximately $ 1.1 million . in addition , in the second quarter of 2012 , we invested $ 250,000 in a gerli senior subordinated note . under the terms of the new note , interest on the note is payable only if gerli meets certain covenants , which they were not compliant with as of december 31 , 2012. in the year ended december 31 , 2012 , we recognized total unrealized depreciation on our debt investment in gerli of approximately $ 1.5 million . as of december 31 , 2012 , the cost of our new debt investment in gerli was $ 3.3 million and the fair value was $ 0.7 million . fire sprinkler systems , inc. in october 2008 , we placed our debt investment in fire sprinkler systems , inc. , or fire sprinkler systems , on non-accrual status . story_separator_special_tag as a result , under u.s. gaap , we no longer recognize interest income on our debt investment in fire sprinkler systems for financial reporting purposes . during each of the years ended december 31 , 2008 , 2009 , 2010 , and 2011 we recognized unrealized losses of $ 1.3 million , $ 0.3 million , $ 0.3 million and $ 0.5 million , respectively , on our subordinated note investment in fire sprinkler systems . in the year ended december 31 , 2012 , we recorded an additional $ 0.5 million unrealized loss on our debt investment . as of december 31 , 2012 , the cost of our debt investment in fire sprinkler systems was $ 3.0 million and the fair value of such investment was $ 0.1 million . equisales , llc in may 2012 , we placed our debt investment in equisales , llc , or equisales , on non-accrual status . as a result , under u.s. gaap , we no longer recognize interest income on our debt investment in equisales for financial reporting purposes . during the year ended december 31 , 2012 , we recorded unrealized depreciation of $ 2.8 million on our debt investment in equisales . as of december 31 , 2012 , the cost of our debt investment in equisales was $ 3.2 million and the fair value of such investment was $ 0.3 million . venture technology groups , inc. in november 2012 , we placed our debt investment in venture technology groups , inc. or vtg , on non-accrual status . as a result , under u.s. gaap , we no longer recognize interest income on our debt investment in vtg for financial reporting purposes . during the year ended december 31 , 2012 , we recorded unrealized depreciation of $ 4.2 million on our debt investment in vtg . as of december 31 , 2012 , the cost of our debt investment in vtg was $ 5.5 million and the fair value of such investment was $ 1.3 million . 65 pik non-accrual assets in addition to our non-accrual assets , as of december 31 , 2012 , we had debt investments in one portfolio company ( our subordinated notes to home physicians ) that were on non-accrual only with respect to the pik interest component of the loans . as of december 31 , 2012 , the fair value of these debt investments was approximately $ 6.2 million , or 0.9 % of the total fair value of our portfolio and the cost of these assets was approximately $ 11.9 million , or 1.7 % of the total cost of our portfolio . story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; color : # 000000 ; text-decoration : none ; '' > 2011 was primarily related to increased salary and incentive compensation costs and increased non-cash compensation expenses driven in part by an increase in employee headcount . net investment income as a result of the $ 27.4 million increase in total investment income and the $ 7.4 million increase in expenses , net investment income for the year ended december 31 , 2011 was $ 40.5 million compared to net investment income of $ 20.5 million during the year ended december 31 , 2010 . net increase in net assets resulting from operations for the year ended december 31 , 2011 , we realized a gain on the sale of one control investment of approximately $ 12.2 million , a loss on the disposal of one control investment of $ 0.1 million and a loss on the conversion of debt to equity of $ 3.0 million related to one control investment . in addition , we realized a gain on the repayment of a non-control/non-affiliate investment of approximately $ 0.5 million , and a gain on the sale of two non-control/non-affiliate investments of $ 1.4 million . in addition , during the year ended december 31 , 2011 , we recorded net unrealized appreciation of investments totaling approximately $ 6.4 million , comprised of ( i ) unrealized appreciation on 33 investments totaling approximately $ 25.6 million , ( ii ) unrealized depreciation on 19 investments totaling approximately $ 9.6 million and ( iii ) $ 9.6 million of net unrealized depreciation reclassification adjustments related to the realized gains and losses noted above . for the year ended december 31 , 2010 , we realized a gain on the sale of one affiliate investment of approximately $ 3.6 million , gains on the sales of two non-control/non-affiliate investments totaling approximately 67 $ 0.5 million , a realized loss on the partial conversion of one non-control/non-affiliate debt investment to equity of approximately $ 3.0 million , a realized loss on the conversion of one affiliate debt investment to equity of approximately $ 7.4 million , and a realized gain of $ 0.9 million on the repayment of a convertible note from another non-control/non-affiliate investment . in addition , during the year ended december 31 , 2010 , we recorded net unrealized appreciation of investments totaling approximately $ 10.9 million , comprised of ( i ) unrealized appreciation on 19 investments totaling approximately $ 18.6 million , ( ii ) unrealized depreciation on 18 investments totaling approximately $ 13.9 million and ( iii ) $ 6.2 million in net unrealized appreciation reclassification adjustments related to the realized gains and realized loss noted above . as a result of these events , our net increase in net assets from operations during the year ended december 31 , 2011 was $ 56.8 million as compared to $ 25.4 million for the year ended december 31 , 2010 . liquidity and capital resources we believe that our current cash and cash equivalents on hand , our available leverage under our credit facility and our anticipated cash flows from operations will be adequate to meet our cash needs for our daily operations for at least the next twelve months .
| the increase in interest and other financing fees is related to ( i ) interest on our 2019 senior notes of approximately $ 4.0 million for the year ended december 31 , 2012 , ( ii ) interest on our 2022 senior notes of approximately $ 1.0 million for the year ended december 31 , 2012 , ( iii ) credit facility fees and interest of approximately $ 0.6 million for the year ended december 31 , 2012 and ( iv ) amortization of deferred financing fees related to costs associated with the 2019 and 2022 senior notes partially offset by lower weighted average rates on outstanding sba-guaranteed debentures for the year ended december 31 , 2012 as compared to weighted average rates on outstanding sba-guaranteed debentures for the year ended december 31 , 2011 . the increase in general and administrative costs in 2012 was primarily related to increased salary and incentive compensation costs and increased non-cash compensation expenses driven in part by an increase in employee headcount . net investment income as a result of the $ 27.0 million increase in total investment income and the $ 9.8 million increase in expenses , net investment income for the year ended december 31 , 2012 was $ 57.7 million compared to net investment income of $ 40.5 million during the year ended december 31 , 2011 . net increase in net assets resulting from operations for the year ended december 31 , 2012 , we realized a gain on the sale of one control equity investment of approximately $ 0.8 million , gains on the sale of three affiliate equity investments of approximately $ 2.0 million , gains on the sales of five non-control/non-affiliate equity investments totaling approximately $ 3.4 million and gains on the repayment of two non-control/non-affiliate debt investments totaling approximately $ 0.5 million . in addition , during the year ended december 31 , 2012 , we recorded net unrealized depreciation of investments totaling approximately $ 2.9 million , comprised of ( i ) unrealized appreciation on 34 investments totaling approximately $ 28.2 million , ( ii ) unrealized depreciation on 25 investments totaling approximately $ 26.5 million and ( iii ) $ 4.6 million of net unrealized depreciation reclassification adjustments related to the realized gains and losses noted above . 66 for the year ended december 31 , 2011 , we realized a gain on the sale of one control investment of approximately $ 12.2 million , a loss on the disposal of one control investment of $ 0.1 million
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we expect our operating strategy will allow us to maintain a strong balance sheet and liquidity position while continuing to increase our revenues and profitability . our operating strategy has produced positive results in recent years . however , we can not provide any assurances that the initiatives listed above will continue to be successful , and we may need to adjust components of our strategy to meet future market conditions . 27 story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > south central : louisiana , oklahoma and texas southwest : arizona and new mexico west : california , hawaii , nevada , oregon , utah and washington the following tables and related discussion set forth key operating and financial data for our homebuilding operations by reporting segment as of and for the fiscal years ended september 30 , 2016 , 2015 and 2014 . as described in note a , the prior year amounts presented throughout this discussion reflect certain reclassifications made to conform to the classifications used in the current year . replace_table_token_4_th _ ( 1 ) net sales orders represent the number and dollar value of new sales contracts executed with customers ( gross sales orders ) , net of cancelled sales orders . 29 replace_table_token_5_th _ ( 1 ) cancellation rate represents the number of cancelled sales orders divided by gross sales orders . net sales orders 2016 versus 2015 the value of net sales orders increased 12 % to $ 12.0 billion ( 40,814 homes ) in 2016 from $ 10.7 billion ( 37,380 homes ) in 2015 , with increases in all of our regions . the increases in the value of sales orders were primarily due to increases in volume and to a lesser extent , increases in selling prices in most regions . the number of net sales orders increased 9 % , and the average price of net sales orders increased 2 % to $ 294,000 during 2016 compared to 2015 . our florida markets contributed most to the higher volume in our southeast region and our las vegas market contributed most to the higher volume in our west region . the volume increases in our other regions reflect continued stable to moderately improved market conditions in these markets . we believe our business is well positioned to continue to generate increased sales volume ; however , our future sales volumes will depend on the economic strength of each of our operating markets and our ability to successfully implement our operating strategies in each market . 2015 versus 2014 the value of net sales orders increased 29 % to $ 10.7 billion ( 37,380 homes ) in 2015 from $ 8.3 billion ( 29,709 homes ) in 2014 , with increases in all of our regions . the increases in sales order value were primarily due to increases in volume as we expanded our operations and increased our market share in many of our markets . to a lesser extent , an increase in selling prices in our south central region also contributed to the increase in sales order value . the number of net sales orders increased 26 % , and the average price of our net sales orders increased 3 % to $ 287,300 during 2015 compared to 2014 . the increases in our east and southeast regions reflect the positive impact of our may 2014 acquisition of the homebuilding operations of crown communities . crown communities added 527 net sales orders to the east region 's results in 2015 , compared to 236 net sales orders in 2014 , and added 1,359 net sales orders to the southeast region 's results in 2015 , compared to 508 net sales orders in 2014 . 30 replace_table_token_6_th sales order backlog sales order backlog represents homes under contract but not yet closed at the end of the period . many of the contracts in our sales order backlog are subject to contingencies , including mortgage loan approval and buyers selling their existing homes , which can result in cancellations . a portion of the contracts in backlog will not result in closings due to cancellations . 31 replace_table_token_7_th 2016 versus 2015 revenues from home sales increased 13 % to $ 11.8 billion ( 40,309 homes closed ) in 2016 from $ 10.5 billion ( 36,648 homes closed ) in 2015 . the overall increase in home sales revenues reflects the continued stable to moderately improved market conditions in most of our markets . the number of homes closed in fiscal 2016 increased 10 % from 2015 due to increases in most of our regions . our florida markets contributed most to the higher volume in our southeast region and our phoenix market contributed most to the higher volume in our southwest region . the decrease in homes closed in our midwest region was primarily due to lower volume in our chicago and denver markets . 2015 versus 2014 revenues from home sales increased 34 % to $ 10.5 billion ( 36,648 homes closed ) in 2015 from $ 7.8 billion ( 28,670 homes closed ) in 2014 . during fiscal 2015 , home sales revenues increased in all of our regions as we expanded our operations and increased our market share in many of our markets . 32 the number of homes closed increased 28 % , and the average selling price of those homes increased 5 % to $ 285,700 during 2015 compared to 2014 . the increases in our east and southeast regions reflect the positive impact of our may 2014 acquisition of the homebuilding operations of crown communities . crown communities added 585 closings to the east region 's results in 2015 , compared to 213 closings in 2014 , and added 1,292 closings to the southeast region 's results in 2015 , compared to 508 closings in 2014 . story_separator_special_tag excluding the impact of crown communities , the increase in homes closed in our east region was primarily due to increases in our carolina markets , and in our southeast region was primarily due to increases in our florida markets . the increase in our midwest region was due to increases in our chicago and denver markets . in our south central region , the highest percentage increases in homes closed occurred in our houston , austin and fort worth markets . our phoenix market contributed the most to the increase in our southwest region . the increase in our west region was primarily due to increases in most of our california markets . homebuilding operating margin analysis replace_table_token_8_th _ ( 1 ) prior period percentages for selling , general and administrative expense and other ( income ) expense reflect certain reclassifications made to the prior year financial statements to conform to the classifications used in the current year . see note a. home sales gross profit 2016 versus 2015 gross profit from home sales increased 15 % to $ 2.4 billion in 2016 from $ 2.1 billion in 2015 and increased 40 basis points to 20.2 % as a percentage of home sales revenues . the 40 basis point increase in the home sales gross profit percentage resulted from improvements of 30 basis points due to the average selling price of our homes closed increasing by more than the average cost and 10 basis points due to a decrease in the amortization of capitalized interest and property taxes as a percentage of home sales revenues . 2015 versus 2014 gross profit from home sales increased 25 % to $ 2.1 billion in 2015 from $ 1.7 billion in 2014 and decreased 150 basis points to 19.8 % as a percentage of home sales revenues . approximately 150 basis points of the decrease in the home sales gross profit percentage resulted from the average cost of our homes closed increasing by more than the average selling price . additionally , our home sales gross margin decreased approximately 20 basis points due to an increase in warranty and construction defect expenses as a percentage of home sales revenues . these decreases were partially offset by a 10 basis point improvement from a decrease in the amortization of capitalized interest and property taxes as a percentage of homes sales revenues and a 10 basis point improvement related to a decrease in the amount of purchase accounting adjustments for recent acquisitions . 33 our gross profit margins have remained relatively stable since fiscal 2015. based on current market conditions , we expect continued stability in our gross margins . we remain focused on managing the pricing , incentives and sales pace in each of our communities to optimize the returns on our inventory investments and adjust to local market conditions . these actions could cause our gross profit margins to fluctuate in future periods . land sales and other revenues land sales and other revenues were $ 78.7 million , $ 89.6 million and $ 53.8 million in fiscal 2016 , 2015 and 2014 , respectively . we continually evaluate our land and lot supply , and fluctuations in revenues and profitability from land sales can occur based on how we manage our inventory levels in various markets . we generally purchase land and lots with the intent to build and sell homes on them . however , some of the land that we purchase includes commercially zoned parcels that we may sell to commercial developers . we may also sell residential lots or land parcels to manage our supply or for other strategic reasons . as of september 30 , 2016 , we had $ 33.2 million of land held for sale that we expect to sell in the next twelve months . inventory and land option charges at the end of each quarter during fiscal 2016 , we reviewed the performance and outlook for all of our land inventories and communities for indicators of potential impairment and performed detailed impairment evaluations and analyses when necessary . as of september 30 , 2016 , we performed detailed impairment evaluations of communities and land inventories with a combined carrying value of $ 160.9 million and recorded impairment charges of $ 11.4 million during the fourth quarter to reduce the carrying value of impaired communities and land to their estimated fair value . total impairment charges during fiscal 2016 , 2015 and 2014 were $ 20.3 million , $ 44.9 million and $ 75.2 million , respectively . impairments in fiscal 2016 and 2015 primarily related to strategic decisions to sell inactive parcels of land , most of which were in our east and southwest regions during fiscal 2016 and in our east , southeast and west regions during fiscal 2015 . impairments in fiscal 2014 primarily related to underperforming projects in the chicago market of our midwest region and in the suburban washington , d.c. market of our east region . as we manage our inventory investments across our operating markets to optimize returns and cash flows , we may modify our pricing and incentives , construction and development plans or land sale strategies in individual active communities and land held for development , which could result in the affected communities being evaluated for potential impairment . also , if housing or economic conditions weaken in specific markets in which we operate , or if conditions weaken in the broader economy or homebuilding industry , we may be required to evaluate additional communities for potential impairment . these evaluations could result in additional impairment charges . during fiscal 2016 , we wrote off $ 11.1 million of earnest money deposits and pre-acquisition costs related to land option contracts that we expect to terminate . earnest money and pre-acquisition cost write-offs for fiscal 2015 and 2014 were $ 15.4 million and $ 10.0 million , respectively .
| homebuilding debt to total capital was 29.2 % , improving from 36.1 % . financial services and other : financial services and other revenues increased 12 % to $ 295.6 million . financial services and other pre-tax income was $ 89.1 million , compared to $ 105.1 million . consolidated results : consolidated pre-tax income increased 20 % to $ 1.4 billion , compared to $ 1.1 billion . consolidated pre-tax income as a percentage of consolidated revenues was 11.1 % , compared to 10.4 % . net income increased 18 % to $ 886.3 million , compared to $ 750.7 million . diluted earnings per share increased 16 % to $ 2.36 , compared to $ 2.03 . total equity was $ 6.8 billion , compared to $ 5.9 billion . book value per common share increased 14 % to $ 18.21 , compared to $ 15.99 . return on inventory improved 260 basis points to 15.4 % . net cash provided by operations was $ 618.0 million , compared to $ 700.4 million . 28 results of operations โ homebuilding our operating segments are our 39 homebuilding operating divisions , which we aggregate into six reporting segments . these reporting segments , which we also refer to as reporting regions , have homebuilding operations located in the following states : east : delaware , georgia ( savannah only ) , maryland , new jersey , north carolina , pennsylvania , south carolina and virginia midwest : colorado , illinois and minnesota southeast : alabama , florida , georgia , mississippi and tennessee < font
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interest received on impaired loans and leases may be recorded as interest income . however , if management is not reasonably certain that an impaired loan and lease will be repaid in full , or if a specific time frame to resolve full collection can not yet be reasonably determined , all payments received are recorded as reductions of principal . fair value measurements and fair value of financial instruments . fair values of financial instruments are volatile and may be influenced by a number of factors , including market interest rates , prepayment speeds , discount rates , credit ratings and yield curves . fair values for investment securities are based on quoted market prices , where available . if quoted market prices are not available , fair values are based on the quoted prices of similar instruments or an estimate of fair value by using a range of fair value estimates in the market place as a result of the illiquid market specific to the type of security . when the fair value of a security is below its amortized cost , and depending on the length of time the condition exists and the extent the fair value is below amortized cost , additional analysis is performed to determine whether an other-than-temporary impairment condition exists . available-for-sale and held-to-maturity securities are analyzed quarterly for possible other-than-temporary impairment . the analysis considers ( i ) the length of time and the extent to which the fair value has been less than cost , ( ii ) the financial condition and near-term prospects of the issuer , and ( iii ) the intent and ability of the company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value . often , the information available to conduct these assessments is limited and rapidly changing , making estimates of fair value subject to judgment . if actual information or conditions are different than estimated , the extent of the impairment of the security may be different than previously estimated , which could have a material effect on the company 's results of operations and financial condition . income taxes . the company accounts for income taxes under the liability method of accounting for income taxes . deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse . deferred tax expense is the result of changes in deferred tax assets and liabilities . the principal types of differences between assets and liabilities for financial statement and tax return purposes are allowance for loan and lease losses , core deposit intangible , deferred loan costs , deferred compensation and valuation reserves on leases held for sale . the company evaluates tax positions that may be uncertain using a recognition threshold of more-likely-than-not , and a measurement attribute for all tax positions taken or expected to be taken on a tax return , in order for those tax positions to be recognized in the financial statements . additional information regarding the company 's uncertain tax positions is set forth in note 9 to the notes to the audited consolidated financial statements contained herein . -26- goodwill and other identifiable intangible assets . the company reviews goodwill for impairment annually as of november 30 or when circumstances indicate a potential for impairment at the reporting unit level . u.s. gaap requires at least an annual review of the fair value of a reporting unit that has goodwill in order to determine if it is more likely than not ( that is , a likelihood of more than 50 % ) that the fair value of a reporting unit is less than its carrying amount , including goodwill . if this qualitative test determines it is unlikely ( less than 50 % probability ) the carrying value of the reporting unit is less than its fair value , then the company does not have to perform a step one impairment test . if the probability is greater than 50 % , a step one goodwill impairment test is required . the step one test compares the fair value of each reporting unit to the carrying value of its net assets , including goodwill . the company has determined that it has one reporting unit , community banking . the company performed a qualitative analysis to determine whether ยthe weight of evidence , the significance of all identified events and circumstancesย indicated a greater than 50 % likelihood existed that the carrying value of the reporting unit exceeded its fair value and if a step one test would be required . the company identified nine qualitative assessments that are relative to the banking industry and to the company . these factors included macroeconomic factors , banking industry conditions , banking merger and acquisition trends , lakeland 's historical performance , the company 's stock price , the expected performance of lakeland , the change of control premium of the company versus its peers and other miscellaneous factors . after reviewing and weighting these factors , the company , as well as a third party adviser , determined as of november 30 , 2011 that there was a less than 50 % probability that the fair value of the company was less than its carrying amount . therefore , no step one test was required . story_separator_special_tag average rates paid on interest-bearing liabilities , ( 4 ) the company 's net interest spread ( i.e. , the average yield on interest-earning assets less the average cost of interest-bearing liabilities ) and ( 5 ) the company 's net interest margin . rates are computed on a tax equivalent basis assuming a 35 % tax rate . consolidated statistics on a tax equivalent basis replace_table_token_6_th ( a ) includes non-accrual loans , the effect of which is to reduce the yield earned on loans , and deferred loan fees . story_separator_special_tag ( b ) includes interest-bearing cash accounts . ( c ) net interest income on a tax equivalent basis divided by interest-earning assets . interest income on a tax equivalent basis decreased from $ 126.7 million in 2010 to $ 118.6 million in 2011 , a decrease of $ 8.1 million , or 6 % . the decrease in interest income was due to a 34 basis point decrease in the average yield on interest-earning assets , as a result of loans being refinanced at lower rates and lower yields on new loans and investments . the yield on average loans and leases at 5.24 % in 2011 was 35 basis points lower than 2010. the yield on average taxable and tax-exempt investment securities decreased by 36 basis points to 2.36 % and 52 basis points to 4.38 % , respectively , in 2011 . -29- interest income on a tax equivalent basis decreased from $ 135.0 million in 2009 to $ 126.7 million in 2010 , a decrease of $ 8.3 million , or 6 % . the decrease in interest income was due primarily to a 37 basis point decrease in the average yield earned on interest-earning assets . this decrease reflects the declining interest rate environment along with a lower percentage of earning assets being deployed in loans and leases , as the size of the lease portfolio decreased by $ 53.3 million from the end of 2009. the yield on average loans and leases at 5.59 % in 2010 was 24 basis points lower than 2009. the yield on average taxable investment securities decreased by 75 basis points to 2.72 % in 2010. total interest expense decreased from $ 25.9 million in 2010 to $ 20.1 million in 2011 , a decrease of $ 5.8 million , or 22 % . average interest-bearing liabilities decreased $ 42.6 million and the cost of those liabilities decreased from 1.21 % in 2010 to 0.96 % in 2011. the decrease in yield was due primarily to the continuing low rate environment and a $ 56.3 million reduction in higher yielding time deposits as customers preferred to keep their deposits in short-term transaction accounts . the decrease in time deposits was offset by increases in savings accounts , interest-bearing transaction accounts , and non-interest bearing deposits of $ 13.0 million , $ 6.7 million , and $ 62.7 million , respectively . total interest expense decreased from $ 40.4 million in 2009 to $ 25.9 million in 2010 , a decrease of $ 14.5 million , or 36 % . average interest-bearing liabilities decreased $ 3.0 million and the cost of those liabilities decreased from 1.89 % in 2009 to 1.21 % in 2010. the decrease in yield was due to the low rate environment and a change in deposit mix . average interest-bearing deposits increased from $ 1.81 billion in 2009 to $ 1.86 billion in 2010 , an increase of $ 48.1 million , or 3 % . within this category , average time deposits decreased $ 132.8 million , while average savings accounts and interest-bearing transaction accounts increased $ 180.9 million . average borrowings decreased from $ 329.9 million in 2009 to $ 278.8 million in 2010 as a result of several factors including growth in deposits , which outpaced loan and lease growth and because of prepayments of long-term debt since the third quarter of 2009. net interest margin net interest margin is calculated by dividing net interest income on a fully taxable equivalent basis by average interest-earning assets . the company 's net interest margin was 3.85 % , 3.95 % and 3.74 % for 2011 , 2010 and 2009 , respectively . the decrease in net interest margin from 2010 to 2011 was primarily a result of the decrease in yield on interest-earning assets . the increase in net interest margin from 2009 to 2010 was primarily a result of the decrease in cost of interest-bearing liabilities . the net interest margins for 2011 , 2010 and 2009 would have been 3.94 % , 4.02 % and 3.81 % , respectively , had all of the non-accrual loans performed in accordance with their terms . provision for loan and lease losses in determining the provision for loan and lease losses , management considers national and local economic conditions ; trends in the portfolio including orientation to specific loan types or industries ; experience , ability and depth of lending management in relation to the complexity of the portfolio ; adequacy and adherence to policies , procedures and practices ; levels and trends in delinquencies , impaired loans and leases and net charge-offs and the results of independent third party loan and lease review . the provision for loan and lease losses decreased from $ 19.3 million in 2010 to $ 18.8 million in 2011. net charge-offs increased from $ 17.5 million or 0.88 % of average loans and leases in 2010 to $ 17.7 million or 0.89 % of average loans and leases in 2011. the provision for loan and lease losses decreased from $ 51.6 million in 2009 to $ 19.3 million in 2010. the 2009 loan and lease loss provision resulted from continued charge-offs in lakeland 's leasing portfolio , increases in non-performing loans in its commercial portfolio and the company 's decision to reduce the exposure in its leasing portfolio by designating certain lease pools as held for sale . the company 's decision to sell designated -30- lease pools resulted in mark-to-market adjustments totaling $ 22.1 million as well as additional net charge-offs in the leasing portfolio of $ 23.0 million in 2009. the charge-offs in 2009 resulted from a continued deterioration in economic conditions and in the underlying collateral value of the leases .
| the company 's effective tax rate was 30.5 % in 2011 , compared to 34.5 % in 2010. the decrease in the effective tax rate was driven by increased tax benefits attributable to the real estate investment trust ( ยreitย ) subsidiary established in december 2010. while non-performing assets of $ 50.2 million on december 31 , 2011 increased $ 5.6 million from december 31 , 2010 , non-performing assets decreased $ 7.5 million from september 30 , 2011 to december 31 , 2011 due to the favorable resolution of several non-performing loans . net income for 2011 was $ 19.9 million compared to net income of $ 19.2 million in 2010. net income available to common shareholders in 2011 was $ 17.7 million or $ 0.69 per diluted share compared to $ 15.2 million or $ 0.60 per diluted share in 2010 . -27- net interest income net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets . the company 's net interest income is determined by : ( i ) the volume of interest-earning assets that it holds and the yields that it earns on those assets , and ( ii ) the volume of interest-bearing liabilities that it has assumed and the rates that it pays on those liabilities . net interest income increases when the company can use noninterest- bearing deposits to fund or support interest-earning assets . net interest income for 2011 on a tax-equivalent basis was $ 98.5 million , representing a decrease of $ 2.3 million , or 2 % , from the $ 100.8 million earned in 2010. the decrease in net interest income primarily resulted from a 34 basis point decrease in the yield on interest-earning assets , which was partially offset by a 25 basis point decline in the cost of interest-bearing liabilities . the net interest spread as a result declined nine basis points to 3.67 % . although the net interest spread declined , the decline was mitigated by an increase in income earned on free funds ( interest-earning assets funded by non-interest bearing liabilities ) resulting from an increase in average non-interest bearing deposits of $ 62.7 million . the components of net interest income will be discussed in greater detail below . interest income and expense volume/rate analysis . the following table shows the impact that changes in average balances of the company 's assets and liabilities and changes in average interest rates have had
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under the full cost method , all costs associated with the acquisition , exploration and development of oil and gas properties are capitalized and accumulated in a country-wide cost center . this includes any internal costs that are directly related to development and exploration activities , but does not include any costs related to production , general corporate overhead or similar activities . proceeds received from property disposals are credited against accumulated cost except when the sale represents a significant disposal of reserves , in which case a gain or loss is recognized . the sum of net capitalized costs and estimated future development and dismantlement costs for each cost center are amortized using the equivalent unit-of-production method , based on proved oil and gas reserves . the capitalized costs are amortized over the life of the reserves associated with the assets , with the dd & a recognized in the period that the reserves are produced . dd & a is calculated by dividing the period 's production volumes by the estimated volume of reserves associated with the investment and multiplying the calculated percentage by the sum of the capitalized investment and estimated future development costs associated with the investment . changes in our reserve estimates will therefore result in changes in our dd & a per unit . costs associated with production and general corporate activities are expensed in the period incurred . 44 exploratory wells in progress are excluded from the dd & a calculation until the outcome of the well is determined . similarly , unproved property costs are initially excluded from the dd & a calculation . unproved property costs not subject to the dd & a calculation consist primarily of leasehold and seismic costs related to unproved areas . unproved property costs are transferred into the amortization base on an ongoing basis as the properties are evaluated and proved reserves are established or impairment is determined . unproved oil and gas properties are assessed quarterly for impairment to determine whether we are still actively pursuing the project and whether the project has been proven either to have economic quantities of reserves or that economic quantities of reserves do not exist . under the full cost method of accounting , capitalized oil and gas property costs less accumulated dd & a and net of deferred income taxes may not exceed the full cost ceiling . the full cost ceiling is equal to the present value , discounted at 10 % , of estimated future net revenues from proved oil and gas reserves plus the unimpaired cost of unproved properties not subject to amortization , plus the lower of cost or fair value of unproved properties that are subject to amortization . when net capitalized costs exceed the full cost ceiling , impairment is recognized . derivative instruments . we use derivative instruments , typically costless collars and fixed-rate swaps , to manage price risk underlying our oil and gas production . we may also use puts , calls and basis swaps in the future . all derivative instruments are recorded in the consolidated balance sheets at fair value . we offset fair value amounts recognized for derivative instruments executed with the same counterparty . although we do not designate any of our derivative instruments as cash flow hedges , such derivative instruments provide an economic hedge of our exposure to commodity price risk associated with forecasted future oil and gas production . these contracts are accounted for using the mark-to-market accounting method and accordingly , we recognize all unrealized and realized gains and losses related to these contracts currently in earnings and they are classified as gain ( loss ) on oil price risk derivatives in our consolidated statements of operations . our board of directors sets all risk management policies and reviews the status and results of derivative activities , including volumes , types of instruments and counterparties . the master contracts with approved counterparties identify the ceo as the company representative authorized to execute trades . discontinued operations- mining properties . due to the disposition of our mining properties in february 2016 , all of our mining properties are included in discontinued operations . effective january 1 , 2015 , we adopted new accounting guidance related to the recognition and presentation of discontinued operations in our financial statements . under the revised guidance , beginning in 2015 only disposals of businesses that represent strategic shifts that have a major effect on our operations and financial results are reported in discontinued operations . accordingly , the disposal of our mining segment qualified for reporting as discontinued operations . we capitalized all costs incidental to the acquisition of mining properties and related equipment . the costs of operating a related water treatment plant on the mine property , holding costs to maintain permits , mining exploration costs and general corporate overhead were expensed as incurred . joint interest operations . we do not serve as operator for any of our oil and gas properties . therefore , we rely to a large extent on the operator of the property to provide us with timely and accurate information about the operations of the properties . joint interest billings from the operators serve as our primary source of information to record revenue , operating expenses and capital expenditures for our properties on a monthly basis . many of our properties are subject to complex participation and operating agreements where our working interests and net revenue interests are subject to change upon the occurrence of certain events , such as the achievement of โ payout. โ these calculations may be subject to error and differences of interpretation which can cause uncertainties about the proper amount that should be recorded in our accounting records . when these issues arise , we make every effort to work with the operators to resolve the issues promptly . revenue recognition . we record oil and gas revenue under the sales method of accounting . story_separator_special_tag under the sales method , we recognize revenues based on the amount of oil or natural gas sold to purchasers , which may differ from the amounts to which we are entitled based on our interest in the properties . gas balancing obligations as of december 31 , 2016 and 2015 were not significant . 45 stock based compensation . we measure the cost of employee services received in exchange for all equity awards granted , including stock options , based on the fair market value of the award as of the grant date . we recognize the cost of the equity awards over the period during which an employee is required to provide service in exchange for the award , usually the vesting period . for awards granted which contain a graded vesting schedule , and the only condition for vesting is a service condition , compensation cost is recognized as an expense on a straight-line basis over the requisite service period as if the award was , in substance , a single award . recently issued accounting standards please refer to the section entitled recent accounting pronouncements under note 1 โ organization , operations and significant accounting policies in item 8 of this report on form 10-k for additional information on recently issued accounting standards and our plans for adoption of those standards . story_separator_special_tag center '' > 47 general and administrative expenses . presented below is a comparison of our general and administrative expenses for the years ended december 31 , 2016 and 2015 ( dollars in thousands ) : replace_table_token_15_th general and administrative expenses decreased by $ 3.1 million for the year ended december 31 , 2016 compared to the year ended december 31 , 2015. this decrease was primarily attributable to a reduction of $ 1.9 million , $ 0.7 million , and $ 0.5 million in compensation and benefits , stock based compensation , and employee severance costs , respectively . the reductions are attributable to a reduction in employees and overhead . non-operating income ( expense ) . presented below is a comparison of our non-operating income ( expense ) for the years ended december 31 , 2016 and 2015 ( dollars in thousands ) : replace_table_token_16_th we recognized a realized gain on oil price risk derivatives of $ 1.4 million for the year ended december 31 , 2016 compared to a loss of $ 0.1 million for 2015. we recognized an unrealized loss on oil price risk derivatives of $ 1.6 million for the year ended december 31 , 2016 compared to a gain of $ 1.6 million for 2015. the realized and unrealized loss for 2016 was $ 0.2 million compared to a realized and unrealized gain of $ 1.6 million for 2015. during each of the years ended december 31 , 2016 and 2015 , we recorded a gain on the sale of assets of $ 0.1 million , which resulted from the sale of non-oil and gas related property and equipment . during the year ended december 31 , 2016 , we recorded a gain on investment of $ 0.8 million from the receipt of shares related to the disposition of a portion of our mining assets . during the year ended december 31 , 2016 , we determined that our marketable equity securities had experienced an impairment in value which resulted in an unrealized loss of $ 0.2 million . during the year ended december 31 , 2016 , we realized a gain on the revaluation of our outstanding warrants of $ 0.2 million . our warrant liability is accounted for using the mark-to-market accounting method whereby gains and losses from changes in the fair value of derivative instruments are recognized immediately into earnings . no warrants were outstanding for the year ending december 31 , 2015. we will continue to revalue our outstanding warrants on a quarterly basis . interest expense increased by $ 0.2 million during the year ended december 31 , 2016 compared to 2015. this increase was primarily attributable to an increase in our weighted average borrowing for 2016 . 48 discontinued operations . due to the disposition of our mining properties in february 2016 , all of our mining properties are included in discontinued operations for all periods presented in this report . at year end december 31 , 2016 we recognized no impairment charge and december 31 , 2015 , we recognized an impairment charge of $ 22.6 million , respectively , when we determined that the carrying value could not be recovered . during the years ended december 31 , 2016 and 2015 , the costs of operating our water treatment plant on the mine property , holding costs to maintain permits , and general corporate overhead associated with the mine property were expensed as incurred . the total operating and holding expenses amounted to $ 2.1 million for the year ended december 31 , 2016 compared to $ 3.0 million for 2015. the total operating and holding expense amount of $ 2.1 million for the year ended december 31 , 2016 includes the value of the preferred stock issued as part of the transaction considerations . comparison of our statements of operations for the years ended december 31 , 2015 and 2014 during the year ended december 31 , 2015 , we recorded a net loss of $ 92.9 million as compared to a net loss of $ 2.1 million for the year ended december 31 , 2014. our loss from continuing operations was $ 67.3 million for the year ended december 31 , 2015 compared to a loss from continuing operations of $ 1.0 million for the year ended december 31 , 2014. in the following sections we discuss our revenue , operating expenses , non-operating income , and discontinued operations for the year ended december 31 , 2015 compared to the year ended december 31 , 2014. revenue .
| we expect this differential to continue ( with the amount of the differential varying over time ) and that our oil sales revenue will be affected by lower realized prices from this region . 46 for the year ended december 31 , 2016 , we produced 211,988 boe , or an average of 581 boe per day , as compared to 313,901 boe or 860 boe per day in 2015. production for our williston basin properties decreased by 59,806 boe during 2016 , which is a 32 % reduction compared to 2015. this decrease of 32 % is consistent with the decrease in williston basin production as a result of normal production declines combined with lower working interests for wells that have achieved payout . production for our eagle ford and buda properties in south texas decreased by 43,899 boe during 2016 , which is a 48 % reduction compared to 2015. this reduction was attributable to the normal decline in production for wells in this area and we did not participate in further drilling in this area during 2016. oil and gas production costs . presented below is a comparison of our oil and gas production costs for the years ended december 31 , 2016 and 2015 ( dollars in thousands ) : replace_table_token_13_th for the year ended december 31 , 2016 , production taxes decreased by $ 0.2 million compared to 2015. the decrease in production taxes is primarily a result of lower oil and gas sales . for the year ended december 31 , 2016 , lease operating expense decreased by $ 4.4 million which was primarily due to the implementation of cost reduction strategies by the operators of our wells , combined with a downward revision to our payable to major operator liability due to revised ownership interests in the associated properties . depreciation , depletion and amortization . our dd & a rate for the year ended december 31 , 2016 was $ 11.93 per boe compared to $ 26.80 per boe for 2015. our dd & a rate can fluctuate as a result of changes in drilling and completion costs , impairments , divestitures ,
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jinong 's top five distributors accounted for 1.6 % of its fertilizer revenues for the fiscal year ended june 30 , 2016. gufeng had 300 distributors , including some large state-owned enterprises . gufeng 's top five distributors accounted for 75.2 % of its revenues for the fiscal year ended june 30 , 2016. in addition to the distributors jinong and gufeng has had for its respective products , we also gained access to 528 new distributors through the acquisition of the six vies completed in june 2016. agricultural products through yuxing , we develop , produce and sell high-quality flowers , green vegetables and fruits to local marketplaces and various horticulture and planting companies . we also use certain of yuxing 's greenhouse facilities to conduct research and development activities for our fertilizer products . the three prc provinces that accounted for 87.8 % of our agricultural products revenue for the fiscal year ended june 30 , 2016 were shaanxi ( 75.5 % ) , gansu ( 3.5 % ) , shanghai ( 3.4 % ) . recent developments new products during the three months ended june 30 , 2016 , jinong launched 2 new fertilizer products . jinong 's new products generated approximately $ 19,520of jinong 's fertilizer revenues for the three months ended june 30 , 2016. jinong also added 12 new distributors for the three months ended june 30 , 2016. jinong 's new distributors accounted for approximately $ 1,922,002 of jinong 's fertilizer revenues for the three months ended june 30 , 2016. during the three months ended june 30 , 2016 , gufeng added 1 new distributors . 45 strategic acquisitions on june 30 , 2016 , through jinong , we entered into ( i ) strategic acquisition agreements ( the โ saa โ ) , and ( ii ) agreements for convertible notes ( the โ acn โ ) , with the shareholders of the companies as identified below ( the โ targets โ ) . company name business scope cash payment for acquisition ( rmb [ 1 ] ) principal of notes for acquisition ( rmb ) shaanxi lishijie agrochemical co. , ltd. sales of pesticides , agricultural chemicals , chemical fertilizers , agricultural materials ; manufacture and sales of mulches . 10,000,000 3,000,000 songyuan jinyangguang sannong service co. , ltd. promotion and consulting services regarding agricultural technologies ; retail sales of chemical fertilizers ( including compound fertilizers and organic fertilizers ) ; wholesale and retail sales of pesticides , agricultural machineries and accessories ; collection of agricultural information ; development of saline-alkali soil ; promotion and development of high-efficiency agriculture and agriculture informatization , agricultural and biological engineering high technologies ; e-commerce ; cultivation of freshwater fish , poultry , fruits , flowers , vegetables , and seeds ; recycle and complex utilization of straw and stalk ; technology transfer and training ; recycle of agricultural economic ; ecological industry planning . 8,000,000 12,000,000 shenqiu county zhenbai agriculture co. , ltd. cultivation of crops ; storage , sales , preliminary processing and logistics distribution of agricultural by-products ; promotion and application of agricultural technologies ; purchase and sales of agricultural materials ; electronic commerce . 3,000,000 12,000,000 weinan city linwei district wangtian agricultural materials co. , ltd. promotion and application of new agricultural technologies ; professional prevention of plant diseases and insect pests ; sales of plant protection products , plastic material , chemical fertilizers , pesticides , agricultural mulches , micronutrient fertilizers , hormones , agricultural machineries and medicines , and gardening tools . 6,000,000 12,000,000 aksu xindeguo agricultural materials co. , ltd. wholesale and retail sales of pesticides ; sales of chemical fertilizers , packaged seeds , agricultural mulches , micronutrient fertilizers , compound fertilizers , plant growth regulators , agricultural machineries , and water economizers ; consulting services for agricultural technologies ; purchase and sales of agricultural by-products . 10,000,000 12,000,000 xinjiang xinyulei eco-agriculture science and technology co. , ltd sales of chemical fertilizers , packaged seeds , agricultural mulches , micronutrient fertilizers , organic fertilizers , plant growth regulators , agricultural machineries , and water economizers ; purchase and sales of agricultural by-products ; cultivation of fruits and vegetables ; consulting services and training for agricultural technologies ; storage services ; sales of articles of daily use , food and oil ; on-line sales of the above mentioned products . total 37,000,000 51,000,000 ( 1 ) the exchange rate between rmb and u.s. dollars on june 30 , 2016 is rmb1=us $ 0.1508 , according to the exchange rate published by bank of china . 46 pursuant to the saa and the acn , the shareholders of the targets , while be in possession of the equity interests and will continue to be the legal owners of such interests , agreed to pledge and entrust all of their equity interests , including the proceeds thereof but excluding any claims or encumbrances , and the operations and management of its business to jinong , in exchange of an aggregated amount of rmb37,000,000 ( approximately $ 5,579,600 ) to be paid by jinong within three days following the execution of the saa , acn and the vie agreements , and convertible notes with an aggregated face value of rmb51,000,000 ( approximately $ 7,690,800 ) with an annual fixed compound interest rate of 3 % and term of three years . jinong acquired the targets using the vie arrangement based on our need to further develop our business and comply with the regulatory requirements under the prc laws . as our business focuses on the production of fertilizer , all of our business activities intertwine with those in the agriculture industry in china . specifically , we deal with compliance , regulation , safety , inspection , and licenses in fertilizer production , farm land use and transfer , growing and distribution of agriculture goods , agriculture basic supplies , seeds , pesticides , and trades of grains . it is an industry in which heavy regulations get implemented and strictly enforced . story_separator_special_tag in addition , e-commerce , which is also under strict government regulations in the prc , has lately become a sale and distribution channel for agricultural products . currently , we are developing an online platform to connect the physical distribution network we either own or lease . compared with the regulatory environment in other jurisdictions , the regulatory environment in the prc is unique . for example , the โ m & a rules โ purports to require that an offshore special purpose vehicle controlled directly or indirectly by prc companies or individuals and formed for purposes of overseas listing through acquisition of prc domestic interests held by such prc companies or individuals obtain the approval of the china securities regulatory commission ( the โ csrc โ ) prior to the listing and trading of such special purpose vehicle 's securities on an overseas stock exchange . on september 21 , 2006 , the csrc published on its official website procedures regarding its approval of overseas listings by special purpose vehicles . however , the csrc has not issued any definitive rules or interpretations concerning whether offerings such as the offering are subject to the csrc approval procedures under the m & a rules . based on our understanding of the prc laws ( including the m & a rules ) , a prior approval from the csrc is not required for the offering because ( 1 ) the company established its first foreign invested enterprise in 1999 , prior to the adoption of m & a rules ; ( 2 ) the company did not acquire any equity interests or assets of a prc company owned by its controlling shareholders or beneficial owners who are prc companies or individuals , as such terms are defined under the m & a rules . however , uncertainties still exist as to how the m & a rule will be interpreted and implemented and our opinion stated above is subject to any new laws , rules and regulations or detailed implementations and interpretations in any form relating to the m & a rule . for both e-commerce and agriculture industries , prc regulators limit the investment from foreign entities and set particularly rules for foreign-owned entities to conduct business . we expect these limitations on foreign-owned entities will continue to exist in e-commerce and agriculture industries . vie arrangement , however , provides feasibility for the purpose of obtaining administrative approval process and avoiding industry restrictions that be imposed on an entity that is a wholly-owned subsidiary of a foreign entity . the vie agreements reduces uncertainty and the current limitation risk . it is our understanding that the vie agreements , as well as the control we obtained through vie arrangement , are valid and enforceable . such legal structure does not violate the known , published , and current prc laws . while there are substantial uncertainties regarding the interpretation and application of prc laws and future prc laws and regulations , and there can be no assurance that the prc authorities will take a view that is not contrary to or otherwise different from our belief and understanding stated above , we believe the substantial difficulty that we experienced previously to conduct business in agriculture as a foreign ownership ca be greatly reduced by the vie arrangement . further , as an integral part of the vie arrangement , the underlying equity pledge agreements provide legal protection for the control we obtained . pursuant to the equity pledge agreements , we have completed the equity pledge processes with the targets to ensure the complete control of the interests in the targets . the shareholders of the targets are not entitled to transfer any shares to the third party under the exclusive option agreements . if necessary , they may transfer shares to our company without consideration . while the vie arrangement provides us with the feasibility to conduct our business in the e-commerce and agriculture industries , validity and enforceability of vie arrangement is subject to ( i ) any applicable bankruptcy , insolvency , fraudulent transfer , reorganization , moratorium or similar laws affecting creditors ' rights generally , ( ii ) possible judicial or administrative actions or any prc laws affecting creditors ' rights , ( iii ) certain equitable , legal or statutory principles affecting the validity and enforceability of contractual rights generally under concepts of public interest , interests of the state , national security , reasonableness , good faith and fair dealing , and applicable statutes of limitation ; ( iv ) any circumstance in connection with formulation , execution or implementation of any legal documents that would be deemed materially mistaken , clearly unconscionable , fraudulent , coercionary at the conclusions thereof ; and ( v ) judicial discretion with respect to the availability of indemnifications , remedies or defenses , the calculation of damages , the entitlement to attorney 's fees and other costs , and the waiver of immunity from jurisdiction of any court or from legal process . validity and enforceability of vie arrangement is also subject to risk derived from the discretion of any competent prc legislative , administrative or judicial bodies in exercising their authority in the prc . as a result , there can no assurance that any of such prc laws will not be changed , amended or replaced in the immediate future or in the longer term with or without retrospective effect . 47 story_separator_special_tag font-size : 10pt '' > 49 selling expenses our selling expenses consisted primarily of salaries of sales personnel , advertising and promotion expenses , freight-out costs and related compensation . selling expenses were $ 13,527,911 , or 5.0 % , of net sales for the fiscal year ended june 30 , 2016 , as compared to $ 9,010,486 or 3.4 % of net sales for the fiscal year ended june 30 , 2015 , an increase of $ 4,517,425 , or 50.1 % .
| cost of goods sold by jinong for the fiscal year ended june 30 , 2016 was $ 53,515,169 , an increase of $ 1,566,318 , or 3.0 % , from $ 51,948,851 for the fiscal year ended june 30 , 2015. the increase in cost of goods was mainly due to jinong 's higher raw material cost . cost of goods sold by gufeng for the fiscal year ended june 30 , 2016 was $ 116,427,052 , an increase of $ 12,065,224 , or 11.6 % , from $ 104,361,828 for the fiscal year ended june 30 , 2015. this increase was primarily attributable to an increase in the cost of raw materials and an increase in its sales . for year ended june 30 , 2016 , cost of goods sold by yuxing was $ 5,813,468 , an increase of $ 2,725,761 , or 88.3 % , from $ 3,087,707 for the fiscal year ended june 30 , 2015. this increase was mainly due to the increase in yuxing 's net sales . gross profit total gross profit for the fiscal year ended june 30 , 2016 decreased by $ 10,926,571 to $ 93,029,331 , as compared to $ 103,955,902 for the fiscal year ended june 30 , 2015. gross profit margin was 34.6 % and 39.5 % for the fiscal year ended june 30 , 2016 and 2015 , respectively . gross profit generated by jinong decreased by $ 6,204,549 , or 7.9 % , to $ 72,201,768 for the fiscal year ended june 30 , 2016 from $ 78,406,317 for the fiscal year ended june 30 , 2015. gross profit margin from jinong 's sales was approximately 57.4 % and 60.1 % for the fiscal year ended june 30 , 2016 and 2015 , respectively . the decrease in gross profit margin was mainly due to the increase in product costs . for the fiscal year ended june 30 , 2016 , gross profit generated by gufeng was $ 18,234,368 , a decrease of $ 6,079,410 , or 25 % , from $ 24,313,778 for the fiscal year ended june 30 , 2015. gross profit margin from gufeng 's sales was approximately 13.5 % and 18.9 % for the
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we devote a significant amount of our efforts on fundraising , planning and conducting clinical trials , activities in connection with obtaining regulatory approval , and product research . for the year ended september 30 , 2020 , we had a net loss of $ 4,691,377 versus a net loss of $ 4,547,582 in the prior year . the losses for each of the years ended september 30 , 2020 and 2019 can be attributable to research and development expenses , including regulatory approval and product research , general and administrative costs , primarily relating to legal costs associated with intellectual property and patent application costs , general corporate legal expenses all of which were partially offset by adjustments to the derivative liabilities . cash used in operating activities decreased $ 223,547 during the year ended september 30 , 2020 to $ 5,044,755 , compared to $ 5,268,302 for the year ended september 30 , 2019. cash at september 30 , 2020 decreased by $ 1,221,020 to $ 959,309 compared to $ 2,180,329 as of september 30 , 2019. business overview we are a biotechnology company marketing or developing a number of products based on our innovative ac5 ยฎ self-assembling technology platform . we believe these products can be important advances in the field of stasis and barrier applications , which includes stopping bleeding ( โ hemostasis โ ) , controlling leaking ( โ sealant โ ) and managing wounds created during surgery , trauma or interventional care or from disease . we have generated no revenues to date and have devoted substantially all of our operational effort to the research , development and regulatory programs necessary to turn our core technology into commercial products . our goal is to make care faster and safer for patients with products for use in external wounds , which we refer to as dermal sciences applications , and products for use inside the body , which we refer to as biosurgery applications . core technology our flagship products and product candidates are derived from our ac5 self-assembling peptide ( sap ) technology platform and are sometimes referred to as ac5 or the โ ac5 devices. โ these include ac5 advanced wound system and ac5 topical hemostat , which have received marketing authorization as medical devices in the united states and europe , respectively , and which are intended for skin applications , such as management of complicated chronic wounds or acute surgical wounds . other products are in development for use in minimally invasive or open surgical procedures and include , for example , ac5-g tm for gastrointestinal endoscopic procedures and ac5-v ยฎ and ac5 surgical hemostat for hemostasis inside the body , all of which are currently investigational devices limited by law to investigational use . products based on the ac5 platform contain a biocompatible peptide that is synthesized from proteogenic , naturally occurring l-amino acids . unlike products that contain traditional peptide sequences , when applied to a wound , ac5-based products intercalate into the interstices of the connective tissue and self-assemble into a protective physical-mechanical nanoscale structure that can provide a barrier to leaking substances , such as blood , while also acting as a biodegradable scaffold that enables healing . self-assembly is a central component of the mechanism of action of our technology . individual ac5 peptide units readily build themselves , or self-assemble , into an ordered network of nanofibrils when in aqueous solution by the following process : ยท peptide strands line up with neighboring peptide strands , interacting via hydrogen bonds ( non-covalent bonds ) to form a ribbon-like structure called a beta sheet . ยท this process continues such that hundreds of strands organize with charged and polar side chains oriented on one face and non-polar side chains oriented on the opposite face of the beta sheets . ยท interactions of the resulting structure with water molecules and ions results in formation nanofibrils , which extend in length and can join together to form larger nanofibers . ยท this network of ac5 peptide nanofibers forms the physical-mechanical barrier that is responsible for sealant , hemostatic and other properties , regardless of the presence of antithrombotic agents , and which subsequently becomes the scaffold that supports the repair and regeneration of damaged tissue . based on the intended application , we believe that the underlying ac5 sap technology can impart important features and benefits to our products that may include , for instance , stopping bleeding ( hemostasis ) , mitigating contamination , modulating inflammation , donating moisture , and enabling an appropriate wound microenvironment conducive to healing . for instance , ac5 advanced wound system , which is indicated for the management of partial and full-thickness wounds , such as pressure sores , leg ulcers , diabetic ulcers , and surgical wounds , is shipped and stored at room temperature , is applied directly as a liquid , can conform to irregular wound geometry , and does not possess sticky or glue-like handling characteristics . we believe these properties enhance its utility in several settings and contribute to its user-friendly profile . we believe that our technology lends itself to a range of potential applications in which there is a wound inside or on the body , and in which there is need for a hemostatic agent or sealant . for instance , the results of certain preclinical and clinical investigations that either we have conducted or others have conducted on our behalf have shown quick and effective hemostasis with the use of ac5 sap technology , and that time to hemostasis ( โ tth โ ) is comparable among test subjects regardless of whether such test subject had or had not been treated with therapeutic doses of anticoagulant or antiplatelet medications , commonly called โ blood thinners. โ furthermore , the transparency and physical properties of certain ac5 devices may enable a surgeon to operate through it in order to maintain a clearer field of vision and prophylactically stop or lessen bleeding as surgery starts , a concept that we call crystal clear surgery . story_separator_special_tag an example of a product that contains related features and benefits is ac5 topical hemostat , which is indicated for use as a dressing and to control mild to moderate bleeding , each during the management of injured skin and the micro-environment of an acute surgical wound . 35 operations much of our operational efforts to date , which we often perform in collaboration with partners , have included selecting compositions and formulations for our initial products ; conducting preclinical studies , including safety and other tests ; conducting a human trial for safety and performance of ac5 ; developing and conducting a human safety study to assess for irritation and sensitization potential ; securing marketing authorization for our first product in the united states and in europe ; developing , optimizing , and validating manufacturing methods and formulations , which are particularly important components of self-assembling peptide development ; developing methods for manufacturing scale-up , reproducibility , and validation ; engaging with regulatory authorities to seek early regulatory guidance as well as marketing authorization for our products ; sourcing and evaluating commercial partnering opportunities in the united states and abroad ; and developing and protecting the intellectual property rights underlying our technology platform . our long-term business plan includes the following goals : ยท conducting biocompatibility , pre-clinical , and clinical studies on our products and product candidates ; ยท obtaining additional marketing authorization for products in the united states , europe , and other jurisdictions as we may determine ; ยท continuing to develop third party relationships to manufacture , distribute , market and otherwise commercialize our products ; ยท continuing to develop academic , scientific and institutional relationships to collaborate on product research and development ; ยท expanding and maintaining protection of our intellectual property portfolio ; and ยท developing additional product candidates in dermal sciences , biosurgery , and other areas . in furtherance of our long-term business goals , we expect to continue to focus on the following activities during the next twelve months : ยท seek additional funding as required to support the milestones described previously and our operations generally ; ยท work with our manufacturing partners to scale up production of product compliant with current good manufacturing practices ( โ cgmp โ ) , which activities will be ongoing and tied to our development and commercialization needs ; ยท further clinical development of our product platform ; ยท assess our technology platform in order to identify and select product candidates for potential advancement into development ; ยท seek regulatory input to guide activities related to expanded and new product marketing authorizations ; ยท continue to expand and enhance our financial and operational reporting and controls ; ยท pursue commercial partnerships ; and ยท expand and enhance our intellectual property portfolio by filing new patent applications , obtaining allowances on currently filed patent applications , and or adding to our trade secrets in self-assembly , manufacturing , analytical methods and formulation , which activities will be ongoing as we seek to expand our product candidate portfolio . in addition to capital required for operating expenses , depending upon additional input from eu and us regulatory authorities , as well as the potential for additional regulatory filings and approvals during the next 2 years , additional capital may be required . the estimated capital requirements potentially could increase significantly if a number of risks relating to conducting these activities were to occur , including without limitation those set forth under the heading โ risk factors โ in this filing . we anticipate that our operating and other expenses will continue to increase as we continue to implement our business plan and pursue and achieve these goals . after giving effect to the funds received in past equity and debt financings and assuming our use of that funding at the rate we presently anticipate , as of december 10 , 2020 we believe that our current cash on hand will meet our anticipated cash requirements into the second quarter of fiscal 2021. we could spend our financial resources much faster than we expect , in which case we would need to raise additional capital as our current funds may not be sufficient to operate our business for the entire duration of that period . preclinical testing we have engaged and continue to engage third parties in the united states and abroad to advise on and or perform certain preclinical bench-top and animal research and development studies , typically with assistance from our team . these third parties can include contract research organizations , academic institutions , consultants , advisors , scientists , clinicians , and or other collaborators . we completed the biocompatibility studies required to receive marketing authorizations for ac5 advanced wound system in the united states and ac5 topical hemostat in europe , and such test results support that the products are biocompatible . we will perform further biocompatibility testing that we deem necessary for additional indications , classifications , jurisdictions , and or as required by regulatory authorities . acute and survival animal studies assessing safety and performance of our technology have also demonstrated favorable outcomes in dermal sciences and biosurgical applications . clinical testing we have engaged and continue to engage third parties in the united states and abroad to advise on and or perform certain clinical studies and related activities , typically with assistance from our team . these third parties can include contract research organizations , academic institutions , consultants , advisors , scientists , clinicians , and or other collaborators . 36 we completed two clinical studies . the first study , which met its primary and secondary endpoints , assessed the safety and performance of our product candidate in 46 patients with bleeding skin wounds that resulted from excision of skin lesions and followed for 30 days . the second study assessed our product candidate on skin , determining that it was neither an irritant nor a sensitizer , and no immunogenic response or serious or other adverse events attributable to our product were reported in any of the approximately 50 enrolled volunteers .
| o ther income/ ( expense ) other income during the year ended september 30 , 2020 was $ 679,271 , a decrease of $ 1,144,904 compared to total other income of $ 1,824,175 for the year ended september 30 , 2019. the net decrease in other income was the result of the change in the fair value of derivative liabilities . liquidity and capital resources working capital at september 30 , 2020 , we had total current assets of $ 2,142,975 ( including cash of $ 959,309 ) and working capital of $ 1,496,734. our working capital as of september 30 , 2020 and september 30 , 2019 is summarized as follows : replace_table_token_2_th total current assets as of september 30 , 2020 were $ 2,142,975 , a decrease of $ 746,706 compared to $ 2,889,681 as of september 30 , 2019. the decrease in current assets is primarily attributable to general and administrative expenses and research and development expenses incurred in connection with activities to develop our primary product candidate partially offset by $ 2,167,162 received from the issuance of common stock and warrants , $ 176,300 received from the ppp loan , $ 550,000 received from the issuance of convertible notes and $ 932,728 from the exercise of series d warrants . our total current assets as of september 30 , 2020 and september 30 , 2019 were comprised primarily of cash , inventory and prepaid expenses and other current assets . total current liabilities as of september 30 , 2020 were $ 646,241 , a decrease of $ 67,570 compared to $ 713,811 as of september 30 , 2019. the decrease is primarily due to a decrease in accounts payable partially offset by the current portion of the ppp loan and an increase in accrued expenses and other liabilities . our total current liabilities as of september 30 , 2020 were comprised of accounts payable , accrued expenses and other liabilities and the current portion of the ppp loan . our total current liabilities as of september 30 , 2019 were comprised of accounts
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the collaboration agreement was subsequently amended in december 2016 to include commercialization rights in canada . in april 2016 , based on results of our phase 3 pivotal trial meteor , which met its primary endpoint of improving pfs , as well as its secondary endpoints of improving os and orr , the fda approved cabometyx for the treatment of patients with advanced rcc who have received prior anti-angiogenic therapy . in may 2016 , we announced that cabosun met its primary endpoint , demonstrating a statistically significant and clinically meaningful improvement in pfs compared with sunitinib in patients with advanced intermediate- or poor-risk rcc . based on these results , we are working towards the submission of a snda in the third quarter of 2017 for cabozantinib as a treatment for first-line advanced rcc . in june 2016 , we presented results from our phase 3 pivotal trial meteor at the asco 2016 annual meeting , showing that cabometyx demonstrated a statistically significant and clinically meaningful increase in os . compared with everolimus , cabometyx was associated with a 34 % reduction in the rate of death and median os was 21.4 months for patients receiving cabometyx versus 16.5 months for those receiving everolimus ( hr=0.66 , 95 % ci 0.53-0.83 , p=0.0003 ) . in june 2016 , our collaboration partner genentech announced preliminary results from a phase 1b trial evaluating the safety and clinical activity of the combination of cobimetinib with ateolizumab in patients with metastatic crc , which included 23 patients with advanced crc ( 22 with mutant kras and one with wild-type kras ) . the orr for the combination was 17 % , including four confirmed prs ; additionally five patients achieved sd . responses were seen in tumors with the microsatellite stable , or mss , phenotype , which comprises 95 % of crc . mss crc has historically been refractory to immuno-oncology agents . the median duration of response was not yet reached , with a range of 5.4 months to more than 11.1 months . no dose-limiting toxicities were observed . in september 2016 , the ec approved cabometyx for the treatment of adult patients with advanced rcc following prior vegf-targeted therapy and in december 2016 , ipsen recorded its first commercial sales in europe . in october 2016 , we announced positive results from the nci-ctep-sponsored phase 1 trial of cabozantinib in combination with nivolumab in patients with previously treated genitourinary tumors . in november 2016 , we announced genentech 's efforts to advance the development program for cobimetinib , through the initiation and announcement of multiple phase 3 pivotal trials exploring the combination of cobimetinib with other targeted and immuno-oncology agents for the treatment of melanoma and crc . in january 2017 , we entered into a collaboration and license agreement with takeda for the commercialization and further clinical development of cabozantinib in japan . story_separator_special_tag results of operations โ comparison of years ended december 31 , 2016 , 2015 and 2014 revenues revenues by category were as follows ( dollars in thousands ) : replace_table_token_5_th ( 1 ) includes amortization of upfront payments . ( 2 ) includes milestone payments . net product revenues by product were as follows ( dollars in thousands ) : replace_table_token_6_th the increase in net product revenues for the year ended december 31 , 2016 , as compared to 2015 , was primarily due to the impact of the commercial launch of cabometyx in late april 2016 , and , to a lesser extent , an increase in demand for cometriq . cabometyx was approved by the fda on april 25 , 2016 as a treatment for patients with advanced rcc who have received prior anti-angiogenic therapy . net product revenues for cabometyx during 2016 were also favorably impacted by the build of channel inventory by the specialty pharmacies and distributors to whom we sell cabometyx in connection with its initial launch . the 23 % increase in net product revenues for cometriq for the year ended december 31 , 2016 , as compared to 2015 , was primarily due to a 15 % increase in the number of cometriq units sold and to a lesser extent , an increase in the average selling price of the product . the 36 % increase in net product revenues for the year ended december 31 , 2015 , as compared to 2014 , was primarily due to a 26 % increase in the number of cometriq units sold and , to a lesser extent , the impact of a change to the โ sell-in โ method which resulted in the one-time recognition of $ 2.6 million of deferred revenue attributable to sales to the specialty pharmacy that sells cometriq in the u.s. in the first quarter of 2015. the cometriq sales volume increases in both periods were driven by increased product demand . royalty and product supply revenues , net for the years ended december 31 , 2016 and 2015 primarily includes recognition of $ 2.8 million and $ 14 thousand , respectively , of royalties on ex-u.s. net sales of cotellic following genentech 's launch of the product in late 2015. there was no such royalty and product supply revenue during the comparable period in 2014. license revenues for the year ended december 31 , 2016 consisted of the recognition of $ 13.3 million of the upfront payments and non-substantive milestone received in 2016 in connection with our collaboration and license agreement with ipsen . the upfront payment of $ 200.0 million , received in the first quarter of 2016 , the $ 60.0 million milestone we achieved upon the approval of cabozantinib by the ema in second-line rcc , and the $ 10.0 million upfront payment received in 56 december 2016 in consideration for the commercialization rights in canada are being recognized ratably over the remaining term of the collaboration agreement . the collaboration agreement continues through early 2030 , which is the current estimated patent expiration of cabozantinib in the european union . story_separator_special_tag there was no such license revenue during the comparable periods in 2015 and 2014. contract revenues for the year ended december 31 , 2016 reflect recognition of two $ 10.0 million milestones for the first commercial sales of cabometyx by ipsen in germany and the united kingdom , $ 15.0 million from a milestone payment earned from daiichi sankyo related to its worldwide license of our compounds that modulate mineralocorticoid receptor , including cs-3150/esaxerenone ( a specific rotational isomer of xl550 ) in september 2016 and $ 5.0 million from a milestone payment earned from merck related to its worldwide license of our pi3k-d program in july 2016. contract revenues for the year ended december 31 , 2015 reflect a $ 3.0 million contingent payment from merck related to that same license . there was no such contract revenue during the comparable period in 2014. total revenues by significant customer were as follows ( dollars in thousands ) : replace_table_token_7_th we recognize net product revenue net of discounts and allowances that are further described in โ note 1. organization and summary of significant accounting policies โ to our โ notes to consolidated financial statements โ contained in part ii , item 8 of this annual report on form 10-k. the activities and ending reserve balances for each significant category of discount and allowance were as follows ( dollars in thousands ) : replace_table_token_8_th the balance at december 31 , 2014 consisted primarily of a project management fee payable to sobi which was paid during the year ended december 31 , 2015. other activity during 2015 was related to discounts and allowances on product sales of cometriq through a single specialty pharmacy . the growth in the ending reserve balances and the activity for the year ended december 31 , 2016 resulted from the increase in discounts and allowances on increased product sales through an expanded distribution network , which includes five specialty pharmacies and three specialty distributors , which we implemented following the launch of cabometyx and the continued distribution of cometriq through one specialty pharmacy and one specialty distributor . 57 cost of goods sold the cost of goods sold and our gross margins were as follows ( dollars in thousands ) : replace_table_token_9_th cost of goods sold is related to our product revenues and consists primarily of a 3 % royalty payable to glaxosmithkline on net sales of any product incorporating cabozantinib , indirect labor costs , the cost of manufacturing , write-downs related to expiring and excess inventory , and other third party logistics costs of our product . portions of the manufacturing costs for inventory were incurred prior to the regulatory approval of cabometyx and cometriq and , therefore , were expensed as research and development costs when those costs were incurred , rather than capitalized as inventory . the sale of products containing previously expensed materials resulted in a 7 % , 6 % and 9 % reduction in the cost of goods sold during the years ended december 31 , 2016 , 2015 and 2014 , respectively . as of december 31 , 2016 , we have $ 1.2 million in previously expensed materials that will not be charged to costs of goods sold in future periods . cost of goods sold also includes write-downs related to excess and expiring inventory . such write-downs were $ 0.5 million for the year ended december 31 , 2016 as compared to $ 1.2 million for 2015 and $ 0.2 million for 2014 . gross margin percentage is net product revenues less cost of goods sold , divided by net product revenues . the increase in cost of goods sold was primarily related to the launch of cabometyx during the year ended december 31 , 2016 and increases in the number of units of cometriq sold during the years ended december 31 , 2016 and 2015 , as compared to the preceding periods . the increase in gross margins for the year ended december 31 , 2016 , as compared to 2015 , was related to the change in product mix as cabometyx has a lower manufacturing cost than cometriq . the decrease in gross margins for the year ended december 31 , 2015 , as compared to 2014 , was related to the increase in write-downs related to excess and expiring inventory , described above . research and development expenses total research and development expenses were as follows ( dollars in thousands ) : replace_table_token_10_th research and development expenses consist primarily of clinical trial expenses , personnel expenses , stock-based compensation , consulting and outside services , the allocation of general corporate costs , and temporary personnel expenses . the nominal decrease in research and development expenses for the year ended december 31 , 2016 , as compared to 2015 , was primarily related to clinical trial costs , which includes services performed by third-party contract research organizations and other vendors who support our clinical trials . the decrease in clinical trial costs was $ 8.9 million for the year ended december 31 , 2016 , as compared to 2015 . the decrease in clinical trial costs was predominantly due to decreases in costs related to meteor , our phase 3 pivotal trial in advanced rcc and was partially offset by increases in costs related to celestial , our phase 3 pivotal trial in advanced hcc . decreases in research and development expenses for the year ended december 31 , 2016 , as compared to 2015 , also related to a decrease in the allocation of general corporate costs and stock-based compensation . the allocation of general corporate costs decreased by $ 4.2 million for the year ended december 31 , 2016 as compared to the comparable period in 2015 , primarily due to headcount growth in the selling , general and administrative functions .
| we anticipate that we will continue to face a number of challenges and risks to our business that may impact our ability to execute on our 2017 business objectives . in particular , we anticipate that for the foreseeable future our ability to generate meaningful revenue to fund our commercial operations and our development and discovery programs is dependent upon the successful commercialization of cabometyx for the treatment of advanced rcc in territories where it has been or may soon be approved . the commercial potential of cabometyx for the treatment of advanced rcc remains subject to a variety of factors , most importantly , cabometyx 's perceived benefit/risk profile as compared to the benefit/risk profiles of other treatments available or currently in development for the treatment of advanced rcc . our ability to generate meaningful product revenue from cabometyx is also affected by a number of other factors , including the extent to which coverage and reimbursement for cabometyx is available from government and other third-party payers . obtaining and maintaining appropriate coverage and reimbursement for cabometyx is increasingly challenging due to , among other things , the attention being paid to healthcare cost containment and other potential austerity measures being discussed in the u.s. and worldwide , as well as increasing policy interest in the u.s. with respect to pharmaceutical drug pricing practices . our ability to fulfill the commercial potential of cabozantinib also depends on our ability to expand the compound 's use by generating data in clinical development that will support regulatory approval of cabozantinib in additional indications . our immediate focus in this regard is a potential regulatory approval of our snda for cabozantinib for first-line advanced rcc based upon data from cabosun . this approval represents a greater challenge than others because cabosun was not originally designed as a registrational trial . however , given the positive nature of cabosun results , we are planning to submit a snda to the fda . achievement of
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logistics : in the fourth quarter 2018 , operating income for the company 's logistics segment was $ 4.4 million higher than in the fourth quarter 2017 due to improved performance across all of the service lines . the company expects logistics ' operating income for the full year 2019 to approximate the level achieved in 2018 of $ 32.7 million . in the first quarter 2019 , the company expects operating income to be moderately higher than the level achieved in the first quarter 2018. depreciation and amortization : for the full year 2019 , the company expects depreciation and amortization expense to be approximately $ 130 million , inclusive of dry-docking amortization of approximately $ 31 million . ebitda : while the company expects net income in 2019 to decline year-over-year , we expect ebitda in 2019 to be approximately $ 286 million , which is approximately the level achieved in 2018 after taking into account the full year impact in 2018 of the $ 12.0 million of lease expense related to the sale and leaseback of mv maunalei . as previously disclosed on november 27 , 2018 , a subsidiary of matson entered into an agreement whereby mv maunalei was sold for approximately $ 106.0 million , and subsequently leased back from the buyer under an operating lease agreement . as a result of this transaction , the company expects on an annual basis $ 12.0 million in lease expense and $ 4.8 million in lower depreciation and amortization expense ( including dry-docking amortization ) , resulting in $ 7.2 million in lower operating income . 26 other income ( expense ) : the company expects full year 2019 other income ( expense ) to be approximately $ 2.7 million in income , which is attributable to other component costs related to the company 's pension and post-retirement plans . interest expense : the company expects interest expense for the full year 2019 to be approximately $ 24 million . income taxes : in the fourth quarter 2018 , the company 's effective tax rate was 23.4 percent . for the full year 2019 , the company expects its effective tax rate to be approximately 26.0 percent , which excludes a positive non-cash adjustment of $ 2.9 million expected in the first quarter of 2019 related to the reversal of a tax act expense adjustment in 2018. capital and vessel dry-docking expenditures : for the full year 2018 , the company made other capital expenditure payments of $ 62.6 million , capitalized vessel construction expenditures of $ 338.6 million , and dry-docking payments of $ 19.2 million . for the full year 2019 , the company expects to make other capital expenditure payments , including maintenance capital expenditures , of approximately $ 120 million , vessel construction expenditures ( including capitalized interest and owner 's items ) of approximately $ 225 million , and dry-docking payments of approximately $ 12 million . the level of other capital expenditures , including maintenance capital expenditures , for 2019 is higher than our targeted annual maintenance level of approximately $ 50 million due to the installation of three new cranes , refurbishment of three existing cranes , and the infrastructure upgrade at the sand island terminal ; the scrubber installation on three vessels in the china service ; and the construction of a new cross-dock facility in anchorage for span alaska . story_separator_special_tag > operating income for the year ended december 31 , 2017 decreased $ 9.4 million , or 6.0 percent , compared to the prior year . the decrease was due to a decrease of $ 18.1 million for ocean transportation , partially offset by an increase of $ 8.7 million for logistics in operating income . the reasons for changes in operating revenue , operating costs and expenses , and operating income are described below , by business segment , in the analysis of operating revenue and income by segment . 28 interest expense was $ 24.2 million for the year ended december 31 , 2017 , compared to $ 24.1 million for the year ended december 31 , 2016. the increase in interest expense was due to higher borrowings as a result of recent acquisitions and vessel construction payments , offset by higher capitalized interest . other income ( expense ) , net for the year ended december 31 , 2017 was income of $ 2.1 million , compared to expense of $ 2.1 million for the year ended december 31 , 2016 , and relates to the amortization of certain components of net periodic benefit costs or gains related to the company 's pension and post-retirement plans . income taxes during the year ended december 31 , 2017 was a non-cash income tax benefit of $ 105.8 million , or 84.5 percent of income before income taxes , as compared to income tax expense of $ 49.1 million , or 37.6 percent of income before income taxes in the prior year . the non-cash income tax benefit includes the benefit of $ 154.0 million related to the remeasurement of the company 's deferred assets and liabilities , and other discrete tax adjustments resulting from applying the tax act as of december 31 , 2017. excluding the impact of the tax act , adjusted income tax expense would have been $ 48.2 million , or 38.5 percent of income before income taxes for the year ended december 31 , 2017. the adjusted 2017 income tax rate would have been higher than the 2016 income tax rate as the 2016 income tax rate was favorably impacted by the release of unrecognized tax benefit reserves during 2016. net income during the year ended december 31 , 2017 increased $ 149.6 million , or 183.8 percent , compared to the prior year . analysis of operating revenue and income by segment additional detailed information related to the operations and financial performance of the company 's reportable segments is included in part ii item 6 and note 3 to the consolidated financial statements in item 8 of part ii below . story_separator_special_tag the following information should be read in relation to the information contained in those sections . ocean transportation : 2018 compared with 2017 : replace_table_token_9_th ( 1 ) approximate volumes included for the period are based on the voyage departure date , but revenue and operating income are adjusted to reflect the percentage of revenue and operating income earned during the reporting period for voyages in transit at the end of each reporting period . ( 2 ) includes containers from services in various islands in micronesia and the south pacific , and in okinawa , japan . ocean transportation revenue increased $ 69.5 million , or 4.4 percent , during the year ended december 31 , 2018 , compared with the year ended december 31 , 2017. this increase was primarily due to higher fuel surcharge revenue , higher average freight rates in china and higher revenue in japan , partially offset by lower revenue in guam . on a year-over-year feu basis , hawaii container volume decreased by 0.7 percent primarily due to lower eastbound volume ; alaska volume increased by 2.5 percent primarily due to an increase in northbound volume , partially offset by a decrease in southbound volume as a result of a weaker-than-expected seafood season compared with the very strong seafood harvest levels in 2017 ; china volume was 6.7 percent lower due to fewer sailings and lower volume during the lunar new year period ; guam volume was 3.0 percent lower primarily due to increased competition ; and other containers volume increased 39.3 percent largely due to the japan service . 29 ocean transportation operating income increased $ 4.7 million , or 3.7 percent , during the year ended december 31 , 2018 , compared with the year ended december 31 , 2017. this increase was primarily due to higher average rates in china and hawaii and a higher contribution from ssat , partially offset by higher terminal handling costs and a lower contribution from guam . the company 's ssat terminal joint venture investment contributed $ 36.8 million during the year ended december 31 , 2018 , compared to a contribution of $ 28.2 million during the year ended december 31 , 2017. the increase was primarily attributable to higher lift volume . ocean transportation : 2017 compared with 2016 : replace_table_token_10_th ( 1 ) approximate volumes included for the period are based on the voyage departure date , but revenue and operating income are adjusted to reflect the percentage of revenue and operating income earned during the reporting period for voyages in transit at the end of each reporting period . ( 2 ) includes containers from services in various islands in micronesia and the south pacific , and in okinawa , japan . ( 3 ) 2016 includes the benefit of a 53 rd week . ocean transportation revenue increased $ 30.7 million , or 2.0 percent , during the year ended december 31 , 2017 , compared with the year ended december 31 , 2016. this increase was primarily due to higher fuel surcharge revenue and higher average freight rates in china , partially offset by lower construction-related volume , one less week and the absence of competitive volume gains in hawaii and lower volume in guam due to competitive losses and one less week . on a year-over-year feu basis , hawaii container volume decreased by 6.5 percent primarily due to lower construction-related volume , one less week , and the absence of competitive volume gains in the prior year ; alaska volume decreased by 1.5 percent primarily due to one less week , partially offset by higher southbound volume attributable to the stronger seafood season ; china volume was 7.1 percent higher due to stronger demand for the company 's expedited service and additional sailings during the year ; and guam volume was 18.1 percent lower due to competitive losses and one less week . ocean transportation operating income decreased $ 18.1 million , or 12.5 percent , during the year ended december 31 , 2017 , compared with the year ended december 31 , 2016. this decrease was primarily due to lower volumes in hawaii , higher terminal handling costs and lower volume in guam , partially offset by higher average freight rates in china , a higher contribution from ssat , and favorable timing of fuel surcharge collections . the company 's ssat terminal joint venture investment contributed $ 28.2 million during the year ended december 31 , 2017 , compared to a $ 15.8 million contribution in the year ended december 31 , 2016. the increase was primarily attributable to improved lift volume . logistics : 2018 compared with 2017 : replace_table_token_11_th 30 logistics revenue increased $ 106.4 million , or 22.4 percent , during the year ended december 31 , 2018 , compared with the year ended december 31 , 2017. this increase was primarily due to higher transportation brokerage revenue . logistics operating income increased $ 11.8 million , or 56.5 percent , for the year ended december 31 , 2018 , compared with the year ended december 31 , 2017. the increase was primarily due to higher contributions from transportation brokerage and freight forwarding . logistics : 2017 compared with 2016 : replace_table_token_12_th ( 1 ) logistics operating results include span alaska operating results from the date of acquisition on august 4 , 2016. logistics revenue increased $ 74.6 million , or 18.6 percent , during the year ended december 31 , 2017 , compared with the year ended december 31 , 2016. this increase was primarily due to the inclusion of freight forwarding revenue from the acquired span alaska business , higher intermodal volumes , and higher fuel surcharge revenue . logistics operating income increased $ 8.7 million , or 71.3 percent , during the year ended december 31 , 2017 , compared with the year ended december 31 , 2016. the increase was primarily due to the inclusion of freight forwarding operating results attributable to the acquired span alaska business , partially offset by lower intermodal yield .
| interest expense was $ 18.7 million for the year ended december 31 , 2018 compared to $ 24.2 million for the year ended december 31 , 2017. the reduction in interest expense was due to higher capitalized interest related to the construction of new vessels . other income ( expense ) , net was $ 2.6 million for the year ended december 31 , 2018 , compared to $ 2.1 million for the year ended december 31 , 2017 , and relates to the amortization of certain components of net periodic benefit costs or gains related to the company 's pension and post-retirement plans . income taxes during the year ended december 31 , 2018 was an expense of $ 38.7 million , or 26.2 percent of income before income taxes , as compared to a non-cash income tax benefit of $ 105.8 million , or 84.5 percent of income before income taxes in the prior year . the non-cash income tax benefit for the year ended december 31 , 2017 included the benefit of $ 154.0 million related to the remeasurement of the company 's deferred assets and liabilities , and other discrete tax adjustments resulting from applying the tax cuts and jobs act of 2017 ( the โ tax act โ ) . excluding the impact of the tax act , adjusted income tax expense would have been $ 48.2 million , or 38.5 percent of income before income taxes , for the year ended december 31 , 2017. the 2018 income tax rate is lower than the adjusted 2017 income tax rate primarily due to a reduction in federal tax rate from 35 percent in 2017 to 21 percent in 2018 , offset by $ 2.9 million , or 2.0 percent of non-cash expense related to discrete tax adjustments resulting from applying the tax act in 2018. net income during the year ended december 31 , 2018 decreased $ 122.0 million , or 52.8 percent , compared to the prior year . consolidated results : 2017 compared with 2016 : replace_table_token_8_th fiscal year : fiscal year ended december 31 , 2017 and 2016 include 52 weeks and 53 weeks , respectively . consolidated operating revenue for the year ended december 31 , 2017
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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 commissions paid to brokers , employment 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 condensed consolidated 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 . 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 for these lines are being non-renewed at the end of their current annual terms . for the twelve months ended december 31 , 2019 , these policies represent approximately 10.7 % of net premiums earned and as of december 31 , 2019 , 42.8 % of loss and lae reserves net of reinsurance recoverables . see discussion below under โ additional financial information โ . 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 . 26 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 ( โ alternative distribution โ ) . 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 . story_separator_special_tag 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 . replace_table_token_7_th ( 2 ) outside of new york for the year ended december 31 , 2019 , alternative distribution made up 3.2 % of direct written premiums for our homeowners and dwelling fire components of personal lines . critical accounting policies and estimates our condensed 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 condensed consolidated financial statements and related notes . in preparing these condensed 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 condensed 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 . 27 story_separator_special_tag as of december 15 , 2019 had very little impact on provisional ceding commissions earned due to the short amount of time it was in effect during year ended 2019. contingent ceding commissions earned we receive a contingent ceding commission based on a sliding scale in relation to the losses incurred under our quota share treaties . the lower the ceded loss ratio , the more contingent commission we receive . the amount of contingent ceding commissions we are eligible to receive under the 2017/2019 treaty is subject to change based on losses incurred from claims with accident dates beginning july 1 , 2017. the amount of contingent ceding commissions we are eligible to receive under our prior years ' quota share treaties is subject to change based on losses incurred related to claims with accident dates before july 1 , 2017. the 2017/2019 treaty structure limits the amount of contingent ceding commissions that we can receive by setting a higher provisional commission rate than the rates received in prior years . as a result of the higher upfront provisional ceding commissions that we received under the 2017/2019 treaty , there is not an opportunity to earn additional contingent ceding commissions under this treaty . under the 2017/2019 treaty โ net โ treaty structure , catastrophe losses in excess of the $ 5,000,000 retention will fall outside of the quota share treaty and such losses will not have an impact on contingent ceding commissions . in year ended 2018 , catastrophe losses of $ 1,506,000 were ceded under our personal lines quota share treaty . these catastrophe losses resulted in the loss ratios for the period july 1 , 2017 through june 30 , 2018 ( attributable to the 2017/2019 treaty ) being higher than the contractual loss ratio at which provisional ceding commissions were being earned . as a result , we incurred a reduction to the contingent ceding commissions of $ 459,000 relative to what would have been earned had the catastrophe losses not occurred . effective july 1 , 2018 , the provisional ceding commission rate was a fixed rate with no downward adjustment required related to loss ratio ; accordingly , in year ended 2019 , catastrophe losses of $ 927,000 that were ceded under our personal lines quota share treaty did not have an effect on contingent ceding commissions . see โ reinsurance โ below for information as to our personal lines quota share treaty effective december 15 , 2019 , and july 1 , 2019 , 2018 and 2017 . 31 net investment income net investment income was $ 6,869,000 in year ended 2019 compared to $ 6,186,000 in year ended 2018. the increase of $ 683,000 , or 11.0 % , was due to an increase in average invested assets in year ended 2019. the average yield on invested assets was 3.51 % as of december 31 , 2019 compared to 3.79 % as of december 31 , 2018. the pre-tax equivalent yield on invested assets was 3.26 % and 3.44 % as of december 31 , 2019 and 2018 , respectively .
| direct written premiums from our expansion business were $ 25,647,000 in year ended 2019 compared to $ 9,080,000 in year ended 2018. 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 31 , 2020 ( โ 2019/2020 treaty โ ) . in addition to the 2019/2020 treaty , our personal lines quota share reinsurance treaties in effect for year ended 2019 and year ended 2018 were covered under a treaty covering a two-year period from july 1 , 2017 through june 30 , 2019 ( โ 2017/2019 treaty โ ) . the following table describes the quota share reinsurance ceding rates in effect for each treaty year during year ended 2019 and year ended 2018 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 . replace_table_token_11_th ( 1 ) 2017/2019 treaty was a two-year treaty ; quota share reinsurance rate was reduced to 10 % effective july 1 , 2018 ( the โ 2018 cut-off โ ) . ( 2 ) the 2017/2019 treaty expired on a run-off basis effective july 1 , 2019 ( the โ 2019 run-off โ ) . ( 3 ) the 2019/2020 treaty was effective december 15 , 2019 with a quota share reinsurance rate of 25 % . 29 see โ reinsurance โ below for changes to our personal lines quota share treaty effective december 15 , 2019 , and july 1 , 2019 , 2018 and 2017. net written premiums increased $ 5,785,000 , or 4.8 % , to $ 125,579,000 in year ended 2019 from $ 119,794,000 in year ended 2018. net written premiums include direct and assumed premiums , less the amount of written premiums ceded under our reinsurance treaties ( quota share , excess of loss , and catastrophe ) .
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with certain exceptions , as described in the series c certificate of designation , the shares of series c convertible preferred stock have no voting rights . each share of series c convertible preferred stock is convertible at any time at the holder 's option into one share of common stock . the offering comprised of : ( 1 ) 4,607,940 class a units , priced at a public offering price of $ 3.40 per class a unit , with each unit consisting of one share of common stock and one warrant to purchase one share of common stock , at an exercise price of $ 3.40 per share that expires on the fifth anniversary of the date of issuance ; and ( 2 ) 2,450,880 class b units , priced at a public offering price of $ 3.40 per class b unit , with each unit consisting of one share of series c convertible preferred stock and one warrant to purchase one share of common stock , at an exercise price of $ 3.40 per share that expires on the fifth anniversary of the date of issuance . the underwriter exercised an over-allotment option to purchase an additional 1,058,820 shares of common stock and warrants to purchase 1,058,820 shares of common stock in the offering . the net proceeds to the company , after deducting underwriting discounts and commissions and estimated offering expenses payable by the company , are expected to be approximately $ 25,223,000. a total of 2,450,880 shares of series c convertible preferred stock were issued in the january 2021 offering . in january 2021 , all series c convertible preferred stock were converted into common stock and there are no remaining shares of series c convertible preferred stock outstanding . elimination of series a convertible preferred stock on december 16 , 2020 , the company filed a certificate of elimination ( the โ certificate of elimination โ ) with the delaware secretary of state with respect to 547,345 authorized shares of series a convertible preferred stock , par value $ 0.0001 per share . the series a convertible preferred stock had been designated pursuant to the certificate of designation of preferences , rights and limitations of series a convertible preferred stock filed with the delaware secretary of state on november 25 , 2019. as of the date of the filing of the certificate of elimination , no shares of series a convertible preferred stock were outstanding . upon filing the certificate of elimination , the 547,345 authorized shares of series a convertible preferred stock were returned to the status of authorized but unissued shares of preferred stock of the company , without designation as to series or rights , preferences , privileges or limitations . reverse stock split the company effected a 1-for-10 reverse stock split of its common stock that became effective after market close on december 1 , 2020. the reverse stock split uniformly affected all issued and outstanding shares of the company 's common stock . the reverse stock split provided that every ten shares of the company 's issued and outstanding common stock was automatically combined into one issued and outstanding share of common stock , without any change in par value per share . the number of authorized shares of common stock remained at 75,000,000 shares . as a result of the reverse stock split , proportionate adjustments were made to the per share exercise price and or the number of shares issuable upon the exercise or vesting of all then outstanding stock options , deferred restricted stock awards and warrants , which will result in a proportional decrease in the number of shares of the company 's common stock reserved for issuance upon exercise or vesting of such stock options , deferred restricted stock awards and warrants , and , in the case of stock options and warrants , a proportional increase in the exercise price of all such stock options and warrants . in addition , the number of shares reserved for issuance under the company 's equity compensation plans immediately prior to the effective date will be reduced proportionately . no fractional shares were issued as a result of the reverse stock split . stockholders of record who would otherwise have been entitled to receive a fractional share were rounded up to the nearest whole number . 46 all of the share numbers , share prices , and exercise prices have been adjusted , on a retroactive basis , to reflect this 1-for-10 reverse stock split . purchase agreement with lincoln park capital , llc on june 8 , 2020 , the company entered into a purchase agreement ( the โ purchase agreement โ ) with lincoln park capital fund , llc ( โ lpc โ ) , pursuant to which the company has the right to sell to lpc , and lpc has committed to purchase from us , from time to time , up to $ 10,000,000 of our common stock , subject to certain limitations , during the 30 months term of the purchase agreement . on june 9 , 2020 , lpc purchased 52,500 shares of common stock at a price per share of $ 6.50 ( the โ initial purchase shares โ ) under the purchase agreement . thereafter , under the purchase agreement , on any business day selected by us , the company may direct lpc to purchase up to 25,000 shares ( and in certain circumstances up to 50,000 shares ) of our common stock . ( see note 12 โ common stock . ) lpc has no right to require the company to sell any shares of common stock to lpc , but lpc is obligated to make purchases as the company directs , subject to certain conditions . the purchase price per share for each such regular purchase will be based off of prevailing market prices of our common stock immediately preceding the time of sale without any fixed discount . story_separator_special_tag other than certain exceptions as described above and the purchase agreement , there are no trading volume requirements or restrictions under the purchase agreement , and the company will control the timing and amount of any sales of our common stock to lpc . paycheck protection program loan the paycheck protection program ( โ ppp โ ) was established under the coronavirus aid , relief , and economic security act ( the โ cares act โ ) and is administered by the u.s. small business administration . on april 24 , 2020 , viveve , inc. ( โ viveve โ ) , a wholly-owned subsidiary of the company , entered into a promissory note evidencing an unsecured loan in the aggregate amount of approximately $ 1,343,000 made to viveve under the ppp ( the โ ppp loan โ ) . the ppp loan to viveve is being made through western alliance bank . the interest rate on the ppp loan is 1.00 % and the term is two years . beginning seven months from the date of the ppp loan , viveve is required to make monthly payments of principal and interest . the promissory note evidencing the ppp loan contains customary events of default relating to , among other things , payment defaults or breaching the terms of the ppp loan documents . the occurrence of an event of default may result in the repayment of all amounts outstanding , collection of all amounts owing from viveve , or filing suit and obtaining judgment against viveve . under the terms of the cares act , ppp loan recipients can apply for and be granted forgiveness for all or a portion of the loan granted under the ppp . such forgiveness will be determined , subject to limitations , based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest , rent , and utilities . no assurance is provided that viveve will obtain forgiveness of the ppp loan in whole or in part . in october 2020 , the company was notified that the terms of its ppp loan with western alliance bank have been modified . the amount of time that the company has to spend the proceeds of the ppp loan ( the โ covered period โ ) has been extended from 8 weeks to 24 weeks . the date to begin repaying unforgiven portions of the ppp loan has also been extended from six months after the funding date to up to 10 months after the end of the covered period ( approximately 16 months ) depending on when the company applies for forgiveness . the sba will also cover interest on the forgiveness portion of the loan during this period . there has been no change to the maturity date of the loan . all ppp loans much be repaid or forgiven within two years after the funding date . we submitted our ppp loan forgiveness application to the sba in october 2020. however , no assurance can be given that the ppp loan will be forgiven . nasdaq delisting notice and compliance determination on april 21 , 2020 , we received written notice from the listing qualifications department of the nasdaq stock market llc , or nasdaq , notifying us that we are not in compliance with the minimum bid price requirements set forth in nasdaq listing rule 5550 ( a ) ( 2 ) for continued listing on the nasdaq capital market and granting us time until december 28 , 2020 to regain compliance . on december 1 , 2020 , we effected a 1-for-10 reverse stock split of our issued and outstanding common stock . the reverse stock split became effective at 5:00 p.m. eastern time on december 1 , 2020 and our common stock began trading on a split-adjusted basis on the nasdaq capital market on december 2 , 2020. following our reverse stock split described above , on december 16 , 2020 , we were notified by nasdaq that as of december 15 , 2020 , it had maintained a closing bid above $ 1.00 for a period of 10 consecutive trading days and therefore had regained compliance with the minimum bid price requirement . on may 4 , 2020 , karen zaderej resigned from our board of directors . ms. zaderej was an independent director and a member of the audit committee of the board of directors , and as a result of her resignation , we no longer complied with nasdaq 's majority independent board requirements because a majority of the board of directors was not comprised of independent directors , and nasdaq 's audit committee requirements because our audit committee was not comprised of at least three independent directors . in accordance with nasdaq listing rules , we notified nasdaq of ms. zaderej 's resignation and the resulting non-compliance . on may 6 , 2020 , we received a notice from nasdaq acknowledging the fact that we do not meet the requirements of such rules and granting us time until november 2 , 2020 to regain compliance . on october 28 , 2020 , our board of directors appointed sharon collins presnell , ph.d. , to serve as a member of the board of directors and its audit committee . on october 29 , 2020 , the company received a letter from nasdaq noting that , as a result of the appointment of dr. presnell to our board of directors and its audit committee , we evidenced compliance with requirements for continued listing on nasdaq . 47 2020 warrant offering on april 15 , 2020 , the company reduced the exercise price of the outstanding series a warrants and series b warrants from $ 15.50 per share to $ 6.10 per share .
| for the years ended december 31 , 2020 and 2019 , rental revenue recognized during the period was $ 1,337,000 and $ 530,000 , respectively . as of december 31 , 2020 and 2019 , the company had deferred revenue in the amount of $ 345,000 and $ 662,000 related to its rental program . additionally , late in the first quarter of 2020 and through the end of the year 2020 , the negative impact of the covid-19 pandemic was in full effect in the united states and most other countries . government and public health agencies issued directives halting performance of non-essential medical treatments and elective procedures in an effort to combat the spread of the coronavirus and protect public health and safety . as a result , viveve 's customers either temporarily closed their medical practices or dramatically reduced services and staff . the consequence has been both a public health and economic crisis that continues for existing and prospective viveve customers . in a supportive partnership response , viveve contacted all of its subscription customers and provided them with a three-month deferral of the rental payment . although clinics in various regions are beginning to re-open and provide limited services , we anticipate that until the covid-19 pandemic abates , more practices begin to re-open and elective patient 's safety concerns are reduced that we will continue to experience reduced revenue from existing subscription customers , as well as a greatly reduced number of new and prospective customers . 51 gross profit replace_table_token_1_th gross profit was $ 296,000 , or 5 % of revenue , for the year ended december 31 , 2020 compared to gross profit of $ 1,016,000 , or 15 % of revenue , for the year ended december 31 , 2019 , a decrease of $ 720,000 , or approximately 71 % . the decrease in gross profit was primarily due to the lower sales volume of viveve systems sold as the company transitioned its u.s. business model to a recurring revenue rental model versus selling systems under a capital equipment sales model that was launched
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the growth in supplies , which includes labels and wristbands , is the result of the laserband acquisition in july of 2012 plus organic growth in supplies . sales to customers by geographic region were as follows ( in thousands , except percentages ) : replace_table_token_14_th gross profit gross profit increased 2.4 % due to higher volumes partially offset by unfavorable movements in product mix . movements in foreign currency , net of hedges , decreased gross profit by $ 1.0 million . operating expenses operating expenses are summarized below ( in thousands , except percentages ) : replace_table_token_15_th operating expenses for 2013 increased 4.9 % . the increase is due to increased expenses across all functional areas offset by the absence of a goodwill impairment charge which represents 2.8 % of 2012 operating expenses . the acquisition of both laserband and stepone contributed to the increase in zebra 's operating expenses . several categories accounted for these increases , including compensation costs , outside professional services , depreciation and information systems expenses . acquisition costs are related to investigated and completed acquisitions during the period . amortization of intangible assets increased from additions of current technology , patent and patent rights and customer relationships during the year , including the acquisition of laserband in july 2012. exit and restructuring costs in 2012 and 2013 primarily relate to the restructuring of the location solutions business management structure . exit and restructuring costs during the third quarter of 2012 , revenue from location solutions fell below plan from slower than anticipated growth in the automotive and process manufacturing industries and weakness in the government sector . as a result , we initiated the locations solutions 2012 restructuring plan . in the second quarter of 2013 , management determined that additional restructuring actions would be required to meet our financial goals for the location solutions business . we anticipate that the results of our restructuring actions will reduce costs of the location solutions business by $ 4.0 million per year . these savings should be fully realized by the first quarter 2014. the savings from the location solutions restructuring plan will primarily benefit cost of goods sold , engineering and selling and marketing expenses . 33 during 2007 , zebra began a plan to outsource printer manufacturing to a third-party contract manufacturer . the transition to the third-party manufacturer was completed during 2010. during the fourth quarter of 2012 , we determined that further supply chain cost reductions were possible by moving certain supply chain support operations closer to our contract printer manufacturer 's facility , which is located in china . we anticipate these actions will generate $ 2.6 million in annual savings to our cost of goods sold . these actions were completed by the end of 2013. operating income the operating income decrease for 2013 was the result of operating expense increases as noted above and partially offset by higher gross profit . other income ( expense ) zebra 's non-operating income and expense items are summarized in the following table ( in thousands ) : replace_table_token_16_th the increase in other income is the result of a net $ 1.6 million favorable litigation settlement associated with an investment loss that was recorded in prior years . income taxes the effective tax rate for 2013 was 18.1 % compared to an effective tax rate of 25.8 % for 2012. the 2012 rate reflects a discrete item for nondeductible asset impairment charge , increasing the tax rate by 1.9 % for the full year . further , in 2012 , in order to streamline the management , financing and capital structure of its foreign affiliates , zebra established a foreign holding company and restructured the ownership structure of its foreign affiliates . this new holding company structure allows zebra to consolidate the ownership of its significant foreign affiliates under a single holding company . in addition , the structure introduced leverage which gives zebra the ability to facilitate cash pooling and improve the capital structure of its non-us operations . the new capital structure and global financing favorably impacts the zebra 's effective tax rate and facilitates the tax efficient movement of zebra 's foreign cash to finance the ongoing operating and investment needs of the foreign subsidiaries . the restructuring was completed in the second quarter of 2012 and was in place for the full year in 2013. in addition , the us r & d credit reinstatement for the 2012 income tax year resulted in a tax benefit of $ 0.9 million . finally , zebra recorded a favorable provision to return adjustment resulting in a reduction to the effective tax rate of 1.1 % following the filing of zebra 's 2012 income tax returns . 34 critical accounting policies and estimates management prepared the consolidated financial statements of zebra under accounting principles generally accepted in the united states of america . these principles require the use of estimates , judgments and assumptions . we believe that the estimates , judgments and assumptions we used are reasonable , based upon the information available . our estimates and assumptions affect the reported amounts in our financial statements . the following accounting policies comprise those that we believe are the most critical in understanding and evaluating zebra 's reported financial results . revenue recognition revenue includes sales of hardware , supplies , software and services ( including repair services , extended service contracts , and professional services ) and bundled sales of equipment , software and services . we enter into revenue arrangements that may consist of multiple deliverables of our products and services due to the needs of our customers . zebra recognizes revenue when persuasive evidence of an arrangement exists , delivery has occurred and title has passed to the customer , which happens at the point of shipment , provided that no significant obligations remain , the price is fixed and determinable and collectability of the sales price is reasonably assured . story_separator_special_tag for hardware sales , in addition to the criteria discussed above , revenue recognition occurs when no significant obligations remain and allowances for discounts , price protection , returns and customer incentives can be reasonably estimated . in addition to cooperative marketing and other incentive programs , zebra has arrangements with some distributors which allow for price protection and limited rights of return , generally through stock rotation programs . under the price protection programs , zebra gives distributors credits for the difference between the original price paid and zebra 's then current price . under the stock rotation programs , distributors are able to exchange certain products based on the number of qualified purchases made during the period . we monitor and track these programs and record a provision for future payments or credits granted as reductions of revenue based on historical experience . recorded revenues are reduced by these allowances . zebra enters into post contract maintenance and support agreements ; revenues are deferred and then recognized ratably over the service period and the cost of providing these services is expensed as incurred . zebra includes shipping and handling charges billed to customers as revenue when the product ships ; any costs incurred related to these services are included in cost of sales . fair value of financial instruments fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date . our financial assets and financial liabilities that require recognition under the accounting guidance generally include available-for-sale investments , employee deferred compensation plan , foreign currency derivatives and interest rate swaps . the guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available . observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of us . unobservable inputs that reflect our assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances . zebra 's investments in marketable debt securities are classified as available-for-sale except for securities held in zebra 's deferred compensation plan which are considered to be trading securities . in general we use quoted prices in active markets for identical assets to determine fair value . if active markets for identical assets are not available to determine fair value , then we use quoted prices for similar assets or inputs that are observable either directly or indirectly . zebra has foreign currency forwards to hedge certain foreign currency exposures and interest rate swaps to hedge a portion of the variability in future cash flows on debt . we use broker quotations or market transactions , in either the listed or over-the-counter markets to value our foreign currency exchange contracts and relevant observable market inputs at quoted intervals , such as forward yield curves and zebra 's own credit risk to value our interest rate swaps . accounts receivable we maintain an allowance for doubtful accounts for losses that we estimate will arise from our customers ' inability to make required payments . we make estimates of the collectability of our accounts receivable by considering factors such as historical bad debt experience , specific customer creditworthiness , the age of the accounts receivable balances and current economic trends that may affect a customer 's ability to pay . if the data we use to calculate the allowance for doubtful accounts does not reflect the future ability to collect outstanding receivables , additional provisions for doubtful accounts may be needed and our results of operations could be materially affected . accounts receivable reserves as of december 31 , 2014 , were $ 1.1 million or 0.2 % of the balance due . 35 inventories we value our inventories at the lower of the actual cost to purchase or manufacture using the first-in , first-out ( fifo ) method , or the current estimated market value . we review inventory quantities on hand and record a provision for excess and obsolete inventory based on forecasts of product demand and production requirements for the subsequent twelve months . over the last three years , our inventory reserves have ranged from 1.5 % to 11.9 % of gross inventory . as of december 31 , 2014 , inventory reserves were $ 5.8 million , or 1.5 % of gross inventory . we believe this reserve level is appropriate considering the quantities and quality of the inventories as of december 31 , 2014. goodwill and other intangible assets we perform an annual review of goodwill or sooner if indicators of potential impairment are identified . we review performance and other indicators and determine at that time if the goodwill test associated with the acquisition should be evaluated on a qualitative or quantitative basis . if quantitative , the process we would expect to use , and have used historically , compares the book value of net assets to the fair value of the reporting units . if the fair value is determined to be less than the book value or qualitative factors indicate that it is more likely than not that goodwill is impaired , a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value at the testing date . we estimate the fair value of the reporting units using discounted cash flow and certain market value data . of the goodwill recognized at december 31 , 2014 , approximately $ 2.336 billion relates to the enterprise acquisition transaction . approximately $ 153.5 million of goodwill existed prior to the enterprise acquisition and is recorded in the legacy zebra business .
| segment information is as follows ( in thousands ) : legacy zebra segment ย year to date ( amounts in thousands , except percentages ) replace_table_token_8_th legacy zebra segment sales net sales for 2014 increased 15.1 % , compared to 2013. this increase is a result of growth across all regions and across all product categories , with notable increases in supplies and service contracts , tabletop , desktop and mobile printers . increased services and software revenue is attributable to both organic growth and the december 2013 acquisition of hart systems increased sales by $ 23.7 million . movement in foreign currency , net of hedges , increased sales growth by $ 10.2 million . legacy zebra segment gross profit gross margin of 50.0 % , versus 48.5 % for 2013 , reflects the favorable impact of lower product costs , improved absorption of fixed costs , lower freight costs , and revenue related to the december 2013 acquisition of hart systems llc . favorable movements in foreign currency , net of hedges , increased gross profit by $ 7.1 million . legacy zebra segment operating income operating income increased 33.4 % from prior year . this is the result of favorable movements in gross profit offset by increases in operating expenses . these expenses exclude acquisition costs , amortization of intangibles and exit and restructuring costs . enterprise segment ย for two months ended december 31 , 2014 ( amounts in thousands , except percentages ) replace_table_token_9_th enterprise sales on october 27 , 2014 , zebra acquired enterprise , a provider of industry-leading data capture , mobile computing , specialty printing and asset tracking solutions and services . this transaction strengthens and expands zebra 's product portfolio and geographic reach . 29 for the two months ended december 31 , 2014 , net sales for enterprise was $ 482.2 million , excluding a reduction of $ 6.2 million in a purchase price accounting adjustment related to the valuation of service contracts . for the period , sales of mobile computing products were strong , with
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our pros the company had six pros as of december 31 , 2015 : securcare , northwest , optivest , guardian , move it , and storage solutions . we have entered into definitive agreements with entities related to hide-away to add hide-away as our seventh pro . the transaction is expected to close early in the second quarter of 2016 , following the satisfaction of customary closing conditions . we seek to further expand our platform by continuing to recruit additional established self storage operators , while integrating our operations through the implementation of centralized initiatives , including management information systems , revenue enhancement , and cost optimization programs . our national platform allows us to capture cost savings by eliminating redundancies and utilizing economies of scale across the property management platforms of our pros while also providing greater access to lower-cost capital . 38 our structure our structure promotes operator accountability as subordinated performance units issued to our pros in exchange for the contribution of their properties are entitled to distributions only after those properties satisfy minimum performance thresholds . in the event of a material reduction in operating cash flow , distributions on our subordinated performance units will be reduced before distributions on our common shares held by our common shareholders . in addition , we expect our pros will generally co-invest subordinated equity in the form of subordinated performance units in each acquisition that they source , and the value of these subordinated performance units will fluctuate with the performance of their contributed properties . therefore , our pros are incentivized to select acquisitions that are expected to exceed minimum performance thresholds , thereby increasing the value of their subordinated equity stake . we expect that our shareholders will benefit from the higher levels of property performance that our pros are incentivized to deliver . properties we seek to own properties that are well located in high quality sub-markets with highly accessible street access and attractive supply and demand characteristics , providing our properties with strong and stable cash flows that are less sensitive to the fluctuations of the general economy . many of these markets have multiple barriers to entry against increased supply , including zoning restrictions against new construction and new construction costs that we believe are higher than our properties ' fair market value . we owned a geographically diversified portfolio of 277 self storage properties , located in 16 states , comprising approximately 15.8 million rentable square feet , configured in approximately 123,000 storage units , as of december 31 , 2015 . of these properties , 214 were acquired by us from our pros and 63 were acquired by us from third-party sellers . during the year ended december 31 , 2015 , we acquired 58 self storage properties with an aggregate fair value of $ 313.0 million , comprising approximately 3.7 million rentable square feet , configured in approximately 28,500 storage units . of these acquisitions , 25 were acquired by us from our pros and 33 were acquired by us from third-party sellers . during the year ended december 31 , 2014 , we acquired 83 self storage properties with an aggregate fair value of $ 479.1 million , comprising approximately 5.5 million rentable square feet , configured in approximately 42,100 storage units . of these acquisitions , 60 were acquired by us from our pros and 23 were acquired by us from third-party sellers . in january and february 2016 , we acquired 16 self storage properties for approximately $ 85.0 million , comprising approximately 1.0 million rentable square feet , configured in approximately 7,300 storage units . of these acquisitions , four were acquired by us from our pros and 12 were acquired by us from third-party sellers . results of operations when reviewing our results of operations it is important to consider the timing of acquisition activity . we acquired 58 self storage properties during the year ended december 31 , 2015 , and 83 self storage properties during the year ended december 31 , 2014. further , during the year ended december 31 , 2013 , we acquired 49 self storage properties and our predecessor contributed 88 properties to our operating partnership , including one property that we disposed of in may 2014. our predecessor 's financial statements for the three months ended march 31 , 2013 include all self storage properties controlled by our predecessor as of and for the period presented , including 22 self storage properties that have not been and will not be contributed to our operating partnership or any downreit partnership . as a result of these and other factors , we do not believe that our historical results of operations or our predecessor 's discussed and analyzed below are comparable or necessarily indicative of our future results of operations or cash flows . to help analyze the operating performance of our self storage properties , we also discuss and analyze operating results relating to our same store portfolio . our same store portfolio is defined as those properties owned and operated for the entirety of the applicable periods presented , excluding any properties we sold or where we completed a storage space expansion which caused the property 's year-over-year operating results to no longer be comparable . the following discussion and analysis of the results of our operations and financial condition should be read in conjunction with the accompanying consolidated financial statements in item 8. certain figures , such as interest rates and other percentages , included in this section have been rounded for ease of presentation . percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding . for this reason , percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our consolidated financial statements or in the associated text . certain other amounts that appear in this section may similarly not sum due to rounding . story_separator_special_tag 39 year ended december 31 , 2015 compared to the year ended december 31 , 2014 net income was $ 4.8 million for the year ended december 31 , 2015 , compared to net loss of $ 16.4 million for the year ended december 31 , 2014 , an increase of $ 21.2 million . the increase was primarily due to an increase in net operating income ( `` noi '' ) resulting from an additional 58 self storage properties we acquired from january 1 , 2015 to december 31 , 2015 and reductions in acquisition costs , interest expense and organizational and offering expenses , partially offset by increases in depreciation and amortization and general and administrative expenses . for a description of noi , see `` non-gaap financial measures โ noi `` . overview as of december 31 , 2015 , our same store portfolio consisted of 135 self storage properties . we owned 142 self storage properties that did not yet meet the same store portfolio criteria as of december 31 , 2015 . these properties include 141 self storage properties that we acquired during 2014 and 2015 and one property where we completed a storage space expansion during the year ended december 31 , 2015 which caused the property 's year-over-year operating results to no longer be comparable . see `` -- -results of operations '' above for the definition of our same store portfolio . the following table illustrates the changes in rental revenue , other property-related revenue , property operating expenses , and other expenses for the year ended december 31 , 2015 compared to the year ended december 31 , 2014 ( dollars in thousands ) : replace_table_token_5_th 40 total revenue our total revenue increased by $ 56.9 million , or 74.0 % , for the year ended december 31 , 2015 , as compared to the year ended december 31 , 2014 . this increase was primarily attributable to incremental rental revenue from 141 self storage properties we acquired between january 1 , 2014 and december 31 , 2015 , an increase in average total portfolio occupancy from 85.5 % to 87.9 % , the acquisition of properties with higher rents , increased market rates and fees , and regular rental increases for in-place tenants . rental revenue rental revenue increased by $ 55.0 million , or 73.5 % , for the year ended december 31 , 2015 , as compared to the year ended december 31 , 2014 . the increase in rental revenue was primarily due to a $ 50.8 million increase in non-same store revenue which was attributable to incremental rental revenue of $ 32.3 million from 83 self storage properties acquired between january 1 , 2014 and december 31 , 2014 , and $ 18.6 million from 58 self storage properties acquired during the year ended december 31 , 2015 . these increases were partially offset by a $ 0.1 million decrease in rental revenue related to a self storage property sold during the year ended december 31 , 2014. same store portfolio rental revenues increased $ 4.2 million , or 7.9 % , due to a 4.8 % increase in same store rental revenue divided by average occupied square feet ( `` rental revenue per occupied square foot '' ) from $ 9.50 to $ 9.96 , driven primarily by a combination of increased contractual lease rates and fees , and an increase in average occupancy from 85.6 % to 88.1 % . average occupancy is calculated based on the average of the month-end occupancy immediately preceding the period presented and the month-end occupancies included in the respective period presented . other property-related revenue other property-related revenue represents ancillary income from our self storage properties , such as tenant insurance-related access fees and commissions and sales of storage supplies . other property-related revenue increased by $ 1.9 million , or 89.9 % , for the year ended december 31 , 2015 , as compared to the year ended december 31 , 2014 . this increase primarily resulted from a $ 1.9 million increase in non-same store other property-related revenue which was attributable to incremental other property-related revenue of $ 1.2 million from 83 self storage properties acquired between january 1 , 2014 and december 31 , 2014 , and $ 0.7 million from 58 self storage properties acquired during the year ended december 31 , 2015 . total operating expenses total operating expenses increase d $ 42.4 million , or 70.9 % for the year ended december 31 , 2015 compared to the year ended december 31 , 2014 . as discussed below , this change was primarily due to an increase of $ 17.5 million in property operating expenses , $ 8.1 million in general and administrative expenses , and $ 16.9 million in depreciation and amortization . property operating expenses property operating expenses increase d $ 17.5 million , or 62.7 % , for the year ended december 31 , 2015 compared to the year ended december 31 , 2014 . this increase story_separator_special_tag store portfolio criteria as of december 31 , 2014 . our predecessor 's financial statements for the three months ended march 31 , 2013 include all self storage properties controlled by our predecessor as of and for the period presented , including 22 self storage properties that have not been and will not be contributed to our operating partnership or any downreit partnership . see `` -- -results of operations '' above for the definition of our same store portfolio .
| 41 depreciation and amortization depreciation and amortization increased $ 16.9 million , or 70.9 % , for the year ended december 31 , 2015 , compared to the year ended december 31 , 2014 . this increase was attributable to incremental depreciation expense of $ 8.3 million from 83 self storage properties acquired between january 1 , 2014 and december 31 , 2014 , and $ 4.3 million from 58 self storage properties acquired during the year ended december 31 , 2015 . in addition , amortization of customer in-place leases increased $ 3.7 million from $ 8.3 million for the year ended december 31 , 2014 to $ 12.0 million for the year ended december 31 , 2015 . customer in-place leases are amortized over the 12-month period following the respective acquisition dates of our self storage properties . as of december 31 , 2015 , the unamortized balance of customer in-place leases totaled $ 4.2 million . interest expense interest expense decreased $ 2.3 million , or 9.8 % , for the year ended december 31 , 2015 , compared to the year ended december 31 , 2014 . the decrease in interest expense was primarily due to increases in amortization of debt premiums of $ 2.2 million , a decrease in unrealized losses on interest rate swaps of $ 0.3 million and a decrease of $ 0.6 million of amortization of debt issuance costs , partially offset by increases in weighted average borrowings outstanding . loss on early extinguishment of debt loss on early extinguishment of debt decreased $ 0.1 million , or 10.4 % , for the year ended december 31 , 2015 , compared to the year ended december 31 , 2014 . the decrease was due to a $ 0.2 million decrease in prepayment penalties partially offset by $ 0.1 million increase in write-offs of unamortized issuance costs . loss on early extinguishment of debt during the year ended december 31 , 2015 relates to the payoff of several debt instruments in connection with the company 's initial
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although the calendar 2012 u.s. grape harvest came in larger than the calendar 2011 u.s. grape harvest , the company continues to believe the current overall supply of wine is generally in balance with demand within the u.s. the company expects that the larger calendar 2012 u.s. grape harvest may provide some relief from the recent tightening of supply within certain u.s. varietals due to relatively smaller u.s. grape harvests in the prior two calendar years . the company remains committed to its long-term financial model of growing sales , including international expansion of its constellation wines and spirits segment 's branded portfolio , expanding margins and increasing cash flow in order to achieve earnings per share growth and improve return on invested capital . marketing , sales and distribution of the company 's products are managed on a geographic basis in order to fully leverage leading market positions . in addition , market dynamics and consumer trends vary across each of the company 's markets . within its primary markets ( u.s. and canada ) , the company offers a range of beverage alcohol products across the branded wine and spirits and , through crown imports , imported beer categories in the u.s. the environment for the company 's products is competitive in each of the company 's markets . for the year ended february 28 , 2013 ( โ fiscal 2013 โ ) , the company 's net sales increased 5 % over the year ended february 29 , 2012 ( โ fiscal 2012 โ ) , primarily due to ( i ) u.s. base branded ( as defined below ) wine and spirits volume growth , ( ii ) net sales of branded wine acquired in the acquisitions of mark west and ruffino ( both as defined below ) , and ( iii ) favorable product mix shift , partially offset by higher promotional spend . operating income for fiscal 2013 increased 7 % over fiscal 2012 primarily due to the items discussed above combined with lower restructuring charges and unusual items , partially offset by an increase in selling , general and administrative expenses . net income for fiscal 2013 decreased 13 % over fiscal 2012 primarily due to the items discussed above offset by increases in interest expense , net , and the provision for income taxes . the following discussion and analysis summarizes the significant factors affecting ( i ) consolidated results of operations of the company for fiscal 2013 compared to fiscal 2012 , and fiscal 2012 compared to the year ended february 28 , 2011 ( โ fiscal 2011 โ ) , and ( ii ) financial liquidity and capital resources for fiscal 2013 . references to base branded exclude the impact of ( i ) branded wine acquired in the acquisitions of ruffino and mark west , and or ( ii ) branded wine for the constellation wines and spirits segment previously sold through the company 's cwae segment , as appropriate . this discussion and analysis should be read in conjunction with the company 's consolidated financial statements and notes thereto included herein . recent developments crown imports in june 2012 , the company signed an agreement to acquire the remaining 50 % equity interest in crown imports for approximately $ 1.85 billion ( the โ initial purchase agreement โ ) . as discussed previously , crown 30 imports has the exclusive right to import , market and sell primarily modelo 's mexican beer portfolio ( the โ modelo brands โ ) in the u.s. and guam . crown imports ' portfolio of brands includes corona extra , the best-selling imported beer and the sixth best-selling beer overall in the u.s. ; corona light , the leading imported light beer ; and modelo especial , the third largest and one of the fastest growing major imported beer brands . in february 2013 , the company signed an amended and restated agreement to acquire the remaining 50 % equity interest in crown imports for the previously agreed amount of approximately $ 1.85 billion ( the โ february 2013 crown purchase agreement โ ) . in addition , the company signed an agreement to purchase ( i ) all of the outstanding capital stock of compaรฑia cervecera de coahuila , s.a. de c.v. , the company which owns the piedras negras brewery located in nava , coahuila , mexico ( the โ brewery โ ) , ( ii ) all of the outstanding capital stock of servicios modelo de coahuila , s.a. de c.v. ( the โ services company โ ) , and ( iii ) the perpetual brand rights for the modelo brands currently sold in the u.s. and certain extensions ( collectively , the โ february 2013 purchased shares and licensed rights โ ) for approximately $ 2.9 billion , in aggregate , subject to a post-closing adjustment . the february 2013 crown purchase agreement and the february 2013 purchased shares and licensed rights are collectively referred to as the โ february 2013 beer business acquisition. โ in april 2013 , the company entered into amendments to the agreements regarding the february 2013 beer business acquisition ( the โ first amendments โ ) , pursuant to which , among other things , the company is required to build out and expand the brewery to a nominal capacity of at least 20 million hectoliters of packaged beer annually by december 31 , 2016. in addition , the first amendments provide , among other things , that the united states will have approval rights , in its sole discretion , for amendments or modifications to the amended agreements and the united states will have a right of approval , in its sole discretion , of any extension of the term of interim supply arrangements beyond three years . the february 2013 beer business acquisition together with the first amendments is referred to as the โ beer business acquisition. story_separator_special_tag โ the pending beer business acquisition is expected to position the company as the third largest producer and marketer of beer for the u.s. and the largest multi-category supplier of beverage alcohol in the u.s. in august 2012 , the company entered into financing arrangements to fund the initial purchase agreement consisting of the term a-2 facility and the august 2012 senior notes ( both as defined below under the caption โ financial liquidity and capital resources - debt ) . because of the differences between the terms relating to the february 2013 beer business acquisition and the initial purchase agreement , the company determined that the conditions for the release of the escrowed property ( as defined below under the caption โ financial liquidity and capital resources - debt ) to the company pursuant to the escrow agreement ( as defined below under the caption โ financial liquidity and capital resources - debt ) could not be satisfied . accordingly , the company gave notice to the escrow agent on february 19 , 2013 , to release the escrowed property for purposes of effecting the special mandatory redemption ( as defined below under the caption โ financial liquidity and capital resources - debt ) . as a result , the august 2012 senior notes were redeemed on february 20 , 2013 , and the escrow agreement was terminated in accordance with its terms . the company expects permanent financing for the beer business acquisition to consist of a combination of available cash and debt financings , including an amended delayed draw u.s. term loan facility ( in favor of the company ) , one or more new credit facilities ( in favor of a european subsidiary of the company ) under an amended and restated senior credit facility , an accounts receivable securitization facility ( as discussed below ) , the issuance of certain notes or debt securities , and revolver borrowings under an amended and restated senior credit facility . the company has a fully committed , amended and restated bridge financing in place through december 30 , 2013 , upon which it could draw to fund a portion of the beer business acquisition if any of its expected financing is unavailable . the company currently expects to complete the beer business acquisition around the end of the company 's first quarter of fiscal 2014 , or shortly thereafter , subject to the satisfaction of certain closing conditions , including the receipt of any required regulatory approvals and the consummation of certain transactions between anheuser-busch inbev sa/nv and modelo and certain of its affiliates . the company can not guarantee , however , that this transaction will be completed upon the agreed upon terms , or at all . the results of operations of the beer business acquisition will be reported in the crown imports segment and will be included in the consolidated results of operations from the date of acquisition . the beer business acquisition is expected to be significant and the company expects it to have a material impact on the company 's future results of operations , financial position and cash flows . 31 acquisition in fiscal 2013 and fiscal 2012 and equity method investment in fiscal 2011 mark west in july 2012 , the company acquired mark west for $ 159.3 million . the transaction primarily includes the acquisition of the mark west trademark , related inventories and certain grape supply contracts ( โ mark west โ ) . the purchase price was financed with revolver borrowings under the may 2012 credit agreement ( as defined below ) . the results of operations of mark west are reported in the constellation wines and spirits segment and are included in the consolidated results of operations of the company from the date of acquisition . ruffino in connection with the company 's december 2004 investment in ruffino s.r.l . ( โ ruffino โ ) , the company granted separate irrevocable and unconditional options to the two other shareholders of ruffino to put to the company all of the ownership interests held by these shareholders for a price as calculated in the joint venture agreement . each option was exercisable during the period starting from january 1 , 2010 , and ending on december 31 , 2010. during the year ended february 28 , 2010 , the 9.9 % shareholder of ruffino exercised its option to put its entire equity interest in ruffino to the company . in may 2010 , the company settled this put option through a cash payment of 23.5 million ( $ 29.6 million ) to the 9.9 % shareholder of ruffino , thereby increasing the company 's equity interest in ruffino from 40.0 % to 49.9 % . in december 2010 , the company received notification from the 50.1 % shareholder of ruffino that it was exercising its option to put its entire equity interest in ruffino to the company for 55.9 million . prior to this notification , the company had initiated arbitration proceedings against the 50.1 % shareholder alleging various matters which should have affected the validity of the put option . however , subsequent to the initiation of the arbitration proceedings , the company began discussions with the 50.1 % shareholder on a framework for settlement of all legal actions . the framework of the settlement would include the company 's purchase of the 50.1 % shareholder 's entire equity interest in ruffino on revised terms to be agreed upon by both parties . as a result , the company recognized a loss for the fourth quarter of fiscal 2011 of 43.4 million ( $ 60.0 million ) on the contingent obligation . this loss is included in selling , general and administrative expenses on the company 's consolidated statements of comprehensive income . on october 5 , 2011 , the company acquired the 50.1 % shareholder 's entire equity interest in ruffino for 50.3 million ( $ 68.6 million ) . in conjunction with this acquisition , all of the aforementioned legal actions were settled .
| gross profit as a percent of net sales decreased slightly to 39.6 % for fiscal 2013 from 40.0 % for fiscal 2012 primarily due to the factors discussed above . selling , general and administrative expenses selling , general and administrative expenses increased to $ 584.7 million for fiscal 2013 from $ 521.5 million for fiscal 2012 , an increase of $ 63.2 million , or 12 % . this increase is due to increases in ( i ) unusual items , which consist of certain amounts that are excluded by management in their evaluation of the results of each operating segment , of $ 27.8 million , ( ii ) the constellation wines and spirits segment of $ 23.8 million , and ( iii ) the corporate operations and other segment of $ 11.6 million . the increase in unusual items consists of the following : replace_table_token_7_th the increase in constellation wines and spirits ' selling , general and administrative expenses is primarily due to increases ( on a constant currency basis ) in general and administrative expenses of $ 10.5 million , selling expenses of $ 8.0 million and advertising expenses of $ 6.0 million . the increase in general and administrative expenses is primarily due to an overlap of a prior year favorable legal settlement in the u.s. related to the use of a certain intangible asset , combined with an increase in general and administrative expenses associated with the acquisition of ruffino . the increases in advertising and selling expenses is primarily due to a planned increase in marketing , advertising and selling behind the segment 's branded wine and spirits portfolio . the increase in corporate operations and other 's selling , general and administrative expenses is due to an increase in general and administrative expenses driven largely by an increase in higher compensation and benefits and other costs related to the company 's initiative to implement a comprehensive , multi-year program to strengthen and enhance the company 's global business capabilities and
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income from operations fell $ 27.5 million as a result of contribution income declines in both connected home and smb , offset by contribution income increases in the arlo segment . the increase in arlo contribution income was due to the significant growth in net revenue not being met with proportionate increases in operating expenditures . contribution income declines in connected home and smb were as a result of lower gross profit attainment , due in part to higher investment in channel promotional activities as well as increased sales returns . on a geographic basis , net revenue increased in the americas and emea and declined in apac during fiscal 2017 compared to fiscal 2016. the increase in americas net revenue was primarily driven by higher gross shipments of our arlo smart security cameras , mobile and home wireless products , partially offset by declines in gross shipments of broadband modem and gateway products and switches . the increase in emea was primarily driven by increased gross shipments of our arlo smart security cameras , home wireless , switches , and mobile products , partially offset by a reduction in gross shipments of broadband modem and gateway and powerline products . apac net revenue decreased due to a decline in gross shipments of our broadband modem and gateway products , partially offset by increased gross shipments of mobile products and arlo smart security cameras . looking forward , we expect strong growth in our arlo segment driven by increasing demand for our arlo smart security cameras as well as through the introductions of new product categories and services , while we move forward with our planned separation of the arlo business . for details on our planned separation of the arlo business , refer to note 14 , subsequent event , in notes to consolidated financial statements in item 8 of part ii of this annual report on form 10-k. we also expect growth in our smb segment driven by sales of our 10gig , poe , web-managed and app-managed switches and rackmount storage products . we are targeting low single digit growth in our connected home segment compared with the same period of the prior year . we expect service provider net revenue to be approximately $ 50 to $ 55 million per quarter and anticipate an increased share of this revenue will be derived from arlo in fiscal 2018. in addition , we expect a shift in consumer preference away from single point wifi routers to whole home wifi systems which may require increased marketing and promotional expenditures to achieve similar levels of market share as we have experienced in the wifi router category . critical accounting policies and estimates our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the united states of america and pursuant to the rules and regulations of the u.s. securities and exchange commission ( `` sec '' ) . the preparation of these financial statements requires management to make assumptions , judgments and estimates that can have a significant impact on the reported amounts of assets , liabilities , revenues and expenses . we base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances . actual results could differ significantly from these estimates . these estimates may change as new events occur , as additional information is obtained and as our operating environment changes . on a regular basis we evaluate our assumptions , judgments and estimates and make changes accordingly . we also discuss our critical accounting estimates with the audit committee of the board of directors . note 1 , the company and summary of significant accounting policies , in notes to consolidated financial statements in item 8 of part ii of this annual report on form 10-k describes the significant accounting policies used in the preparation of the consolidated financial statements . we have listed below our critical accounting policies that we believe to have the greatest potential impact on our consolidated financial statements . historically , our assumptions , judgments and estimates relative to our critical accounting policies have not differed materially from actual results . 38 revenue recognition revenue from product sales is generally recognized at the time the product is shipped provided that persuasive evidence of an arrangement exists , title and risk of loss has transferred to the customer , the selling price is fixed or determinable and collection of the related receivable is reasonably assured . currently , for some of our customers , title passes to the customer upon delivery to the port or country of destination , upon their receipt of the product , or upon the customer 's resale of the product . at the end of each fiscal quarter , we estimate and defer revenue related to product where title has not transferred . the revenue continues to be deferred until such time that title passes to the customer . we assess collectability based on a number of factors , including general economic and market conditions , past transaction history with the customer , and the creditworthiness of the customer . if we determine that collection is not reasonably assured , then revenue is deferred until receipt of the payment from the customer . we have product offerings with multiple elements . our multiple-element product offerings include hardware with free services , networking hardware with embedded software , various software subscription services , and support , which are considered separate units of accounting . in general , the hardware and networking hardware with embedded software are delivered up front , while the free services are delivered over the stated service period , or the estimated useful life . the subscription services and support are delivered over the subscription and support period whether included in a multiple-element offering or not . we allocate revenue to the deliverables based upon their relative selling price . story_separator_special_tag revenue allocated to each unit of accounting is then recognized when persuasive evidence of an arrangement exists , title and risk of loss has transferred to the customer , the selling price is fixed or determinable and collection of the related receivable is reasonably assured . when applying the relative selling price method , we determine the selling price for each deliverable using vendor-specific objective evidence ( `` vsoe '' ) of fair value of the deliverable , or when vsoe of fair value is unavailable , its best estimate of selling price ( โ esp โ ) , as we have determined it is unable to establish third-party evidence of selling price for the deliverables . in determining vsoe , we require that a substantial majority of the selling prices for a deliverable sold on a stand-alone basis fall within a reasonably narrow pricing range , generally evidenced by approximately 80 % of such historical stand-alone transactions falling within +/-15 % of the median price . we determine esp for a deliverable by considering multiple factors including , but not limited to , market conditions , competitive landscape , internal costs , gross margin objectives and pricing practices . the objective of esp is to determine the price at which we would transact a sale if the deliverable were sold on a stand-alone basis . the determination of esp is made through consultation with and formal approval by our management , taking into consideration the go-to-market strategy . we have not made any material changes in the accounting methodology we use to estimate deferred revenue related to product where title has not transferred . our estimated deferred revenue can vary from actual results and we may have to record additional deferred revenue , which could materially impact our financial position and results of operations . allowances for warranty obligations , returns due to stock rotation , sales incentives and doubtful accounts our standard warranty obligation to our direct customers generally provides for a right of return of any product for a full refund in the event that such product is not merchantable or is found to be damaged or defective . at the time revenue is recognized , an estimate of future warranty returns is recorded to reduce revenue in the amount of the expected credit or refund to be provided to our direct customers . at the time we record the reduction to revenue related to warranty returns , we include within cost of revenue a write-down to reduce the carrying value of such products to net realizable value . our standard warranty obligation to end-users provides for replacement of a defective product for one or more years . factors that affect the warranty obligation include product failure rates , material usage , and service delivery costs incurred in correcting product failures . the estimated cost associated with fulfilling the warranty obligation to end-users is recorded in cost of revenue . because our products are manufactured by third-party manufacturers , in certain cases we have recourse to the third-party manufacturer for replacement or credit for the defective products . we give consideration to amounts recoverable from our third-party manufacturers in determining our warranty liability . our estimated allowances for product warranties can vary from actual results and we may have to record additional revenue reductions or charges to cost of revenue , which could materially impact our financial position and results of operations . in addition to warranty-related returns , certain distributors and retailers generally have the right to return product for stock rotation purposes . upon shipment of the product , we reduce revenue for an estimate of potential future stock rotation returns related to the current period product revenue . we analyze historical returns , channel inventory levels , current economic trends and changes in customer demand for our products when evaluating the adequacy of the allowance for sales returns , namely stock 39 rotation returns . our estimated allowances for returns due to stock rotation can vary from actual results and we may have to record additional revenue reductions , which could materially impact our financial position and results of operations . we accrue for sales incentives as a marketing expense if we receive an identifiable benefit in exchange and can reasonably estimate the fair value of the identifiable benefit received ; otherwise , it is recorded as a reduction of revenues . our estimated provisions for sales incentives can vary from actual results and we may have to record additional expenses or additional revenue reductions dependent on the classification of the sales incentive . we maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments . we regularly perform credit evaluations of our customers ' financial condition and consider factors such as historical experience , credit quality , age of the accounts receivable balances , and geographic or country-specific risks and economic conditions that may affect a customer 's ability to pay . the allowance for doubtful accounts is reviewed quarterly and adjusted if necessary based on our assessments of our customers ' ability to pay . if the financial condition of our customers should deteriorate or if actual defaults are higher than our historical experience , additional allowances may be required , which could have an adverse impact on operating expenses . valuation of inventory we value our inventory at the lower of cost and net realizable value , cost being determined using the first-in , first-out method . we continually assess the value of our inventory and will periodically write down its value for estimated excess and obsolete inventory based upon assumptions about future demand and market conditions . on a quarterly basis , we review inventory quantities on hand and on order under non-cancelable purchase commitments , including consignment inventory , in comparison to our estimated forecast of product demand for the next nine months to determine what inventory , if any , are not saleable .
| the decline in smb net revenue was due to a combination of lower gross shipments of switches combined with increased investment in channel promotional activities and higher proportionate sales returns compared to the prior year period . emea net revenue increased for the year ended december 31 , 2017 , compared to the prior year , driven by increased gross shipments of our arlo smart security cameras , partially offset by declines in gross shipments of our broadband modem and gateway and powerline products . arlo net revenue increased 107.2 % compared to the prior year period . connected home and smb net revenue declined by 16.4 % and 3.9 % , respectively , mainly due to declines in gross shipments of the aforementioned product categories . additionally , connected home net revenue was further impacted by increases in channel promotional activities and provisions for sales returns compared to the prior year period . apac net revenue decreased for the year ended december 31 , 2017 , compared to the prior year period . the decrease was primarily attributable to lower gross shipments of our broadband modem and gateway products , partially offset by higher gross shipments of mobile products and arlo smart security cameras . 2016 vs 2015 the increase in americas net revenue for the year ended december 31 , 2016 compared to the prior year was primarily driven by increases in gross shipments of our arlo smart security cameras , broadband modem and gateway products and switches . the increase was partially offset by a fall in gross shipments of mobile hotspots to service provider customers . in addition , the increase in gross shipments to non-service provider customers was offset in part by higher channel promotion activities expenditure deemed to be a reduction of revenue under the authoritative guidance for revenue recognition . we experienced strong end user demand for our arlo smart security cameras , nighthawk home networking products and orbi wifi systems . service provider net revenue fell
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until such time as we may complete development of , receive regulatory approval for , and generate product sales from pimavanserin or other products , we expect our revenues to be derived primarily from payments under our current agreements with allergan and potential additional collaborations , as well as grant funding . we have been a party to three collaboration agreements with allergan , one of which concluded in march 2013. our two ongoing collaboration agreements with allergan involve the development of product candidates in the areas of chronic pain and glaucoma . we are eligible to receive payments upon achievement of development and regulatory milestones , as well as royalties on future net product sales , if any , under each of our ongoing collaboration agreements with allergan . however , we no longer receive research funding from these agreements and additional payments are dependent upon the advancement of our applicable product candidates . each of our current agreements with allergan is subject to termination upon notice by allergan . in march 2009 , we entered into a collaboration agreement with meiji seika pharma . in july 2012 , we and meiji seika pharma jointly decided to discontinue the development program that was being pursued under the collaboration , and the collaboration agreement was terminated pursuant to its terms . upon the termination of this agreement and the end of our related performance obligations , we recorded as revenue all of the remaining deferred revenue from this collaboration during the third quarter of 2012. research and development expenses our research and development expenses have consisted primarily of fees paid to external service providers , salaries , and related personnel expenses , facilities and equipment expenses , and other costs . we charge all research and development expenses to operations as incurred . our research and development activities are primarily focused on our most advanced product candidate , pimavanserin . we currently are responsible for all costs incurred in the development of pimavanserin . we use external service providers to manufacture our product candidates and for the majority of the services performed in connection with the preclinical and clinical development of pimavanserin . historically , we have used our internal research and development resources , including our employees and discovery infrastructure , across several projects and many of our costs have not been attributable to a specific project . accordingly , we have not reported our internal research and development costs on a project basis . to the extent that external expenses are not attributable to a specific project , they are included in other programs . the following table 49 summarizes our research and development expenses by project for the years ended december 31 , 2014 , 2013 , and 2012 ( in thousands ) : replace_table_token_4_th while we intend to submit an nda to the fda for nuplazid in the first quarter of 2015 , at this time , due to the risks inherent in the regulatory and approval processes , we are unable to estimate with any certainty the costs we will incur for the continued development of nuplazid for parkinson 's disease psychosis . due to the risks inherent in clinical development , we also are unable to estimate with certainty the costs we will incur for the development of pimavanserin for other indications , including alzheimer 's disease psychosis and schizophrenia . due to these same factors , we are unable to determine with any certainty the anticipated completion dates for our current research and development programs . clinical development and regulatory approval timelines , probability of success , and development costs vary widely . while our current focus is primarily on preparing to support a review of the nda by the fda , and advancing the development of pimavanserin for other indications , we anticipate that we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success of each product candidate , as well as an ongoing assessment of each product candidate 's commercial potential and our financial position . we can not forecast with any degree of certainty which product opportunities will be subject to future collaborative or licensing arrangements , when such arrangements will be secured , if at all , and to what degree any such arrangements would affect our development plans and capital requirements . we expect our research and development expenses to increase and continue to be substantial as we pursue the development of pimavanserin , including remaining preparations that are needed to support the fda review of nuplazid for parkinson 's disease psychosis for which we plan to submit an nda in the first quarter of 2015 , our ongoing open-label safety extension study , our ongoing phase ii trial for alzheimer 's disease psychosis , and potential studies in other indications , including schizophrenia . the lengthy process of completing clinical trials and supporting development activities and seeking regulatory approval for our product opportunities requires the expenditure of substantial resources . any failure by us or delay in completing clinical trials , or in obtaining regulatory approvals , could cause our research and development expenses to increase and , in turn , have a material adverse effect on our results of operations . general and administrative expenses our general and administrative expenses have consisted primarily of salaries and other costs for employees serving in executive , finance , business development , and business operations functions , as well as professional fees associated with legal and accounting services , and costs associated with patents and patent applications for our intellectual property . in addition , starting in the second half of 2013 , we began to hire the senior leadership of our commercial organization that is helping us prepare for the planned future launch of nuplazid and we are currently preparing to build a specialty sales force in the u.s. that will focus on promoting nuplazid , if approved by the fda . story_separator_special_tag we expect our general and administrative expenses to increase in future periods to support activities associated with our preparation for , and planned launch of , nuplazid and our further development of pimavanserin in indications other than parkinson 's disease psychosis . 50 critical accounting policies and estimates our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements . we have identified the accounting policies that we believe require application of management 's most subjective judgments , often requiring the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods . our actual results may differ substantially from these estimates under different assumptions or conditions . revenue recognition we recognize revenues in accordance with authoritative guidance established by u.s. generally accepted accounting principles , or gaap . our revenues are primarily related to our collaboration agreements , which may provide for various types of payments to us , including upfront payments , funding of research and development , milestone payments , and licensing fees . our collaboration agreements also include potential payments for product royalties ; however , we have not received any product royalties to date . we consider a variety of factors in determining the appropriate method of accounting under our collaboration agreements , including whether the various elements can be separated and accounted for individually as separate units of accounting . where there are multiple deliverables identified within a collaboration agreement that are combined into a single unit of accounting , revenues are deferred and recognized over the expected period of performance . the specific methodology for the recognition of the revenue is determined on a case-by-case basis according to the facts and circumstances of the applicable agreement . upfront , non-refundable payments that do not have stand-alone value are recorded as deferred revenue once received and recognized as revenues over the expected period of performance . revenues from non-refundable license fees are recognized upon receipt of the payment if the license has stand-alone value , we do not have ongoing involvement or obligations , and we can determine the best estimate of the selling price for any undelivered items . when non-refundable license fees do not meet all of these criteria , the license revenues are recognized over the expected period of performance . non-refundable payments for research funding are generally recognized as revenues over the period the related research activities are performed . payments for reimbursement of external development costs are generally recognized as revenues using a contingency-adjusted performance model over the expected period of performance . payments received from grants are recognized as revenues as the related research and development is performed and when collectability is reasonably assured . we evaluate milestone payments on an individual basis and recognize revenues from non-refundable milestone payments when the earnings process is complete and collectability is reasonably assured . non-refundable milestone payments related to arrangements under which we have continuing performance obligations are recognized as revenues upon achievement of the associated milestone , provided that ( i ) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement and ( ii ) the amount of the milestone payment is reasonable in relation to the effort expended or the risk associated with the milestone event . where separate milestone payments do not meet these criteria , we recognize revenue using a contingency-adjusted performance model over the expected period of performance . accrued expenses we are required to estimate accrued expenses as part of our process of preparing financial statements . examples of areas in which subjective judgments may be required include , among other things , costs associated with services provided by contract organizations for preclinical development , manufacturing of our product candidates , and clinical trials . we accrue for costs incurred as the services are being provided by monitoring the status of the trial or services provided , and the invoices received from our external service providers . in the case of clinical trials , a portion of the estimated cost normally relates to the projected cost to treat a patient in the trials , and this cost is recognized based on the number of patients enrolled in the trial . other indirect costs are generally recognized on a straight-line basis over the estimated period of the study . as actual costs become 51 known to us , we adjust our accruals . to date , our estimates have not differed materially from the actual costs incurred . however , subsequent changes in estimates may result in a material change in our accruals , which could also materially affect our balance sheet and results of operations . stock-based compensation the fair value of each employee stock option and each employee stock purchase plan right granted is estimated on the grant date under the fair value method using the black-scholes valuation model , which requires us to make a number of assumptions including the estimated expected life of the award and related volatility . the estimated fair values of stock options or purchase plan rights , including the effect of estimated forfeitures , are then expensed over the vesting period . story_separator_special_tag href= '' https : //www.sec.gov/archives/edgar/data/0001070494/000119312515066078/ # toc '' > at december 31 , 2014 , we had $ 322.5 million in cash , cash equivalents , and investment securities compared to $ 185.8 million at december 31 , 2013. we anticipate that the level of cash used in our operations will increase in future periods in order to fund our planned nda-enabling work and commercial activities for nuplazid and our ongoing and planned development activities for pimavanserin for other indications . we expect that our cash , cash equivalents , and investment securities will be sufficient to fund our planned operations at least into the second half of 2016. we may require significant additional financing in the future to fund our operations .
| this increase was primarily due to an increase of $ 26.6 million in external service costs as well as an increase in costs associated with our expanded research and development organization , including $ 4.2 million in increased personnel costs , and $ 3.0 million in increased stock-based compensation . external service costs totaled $ 43.9 million , or 72 percent of our research and development expenses , in 2014 , compared to $ 17.3 million , or 65 percent of our research and development expenses , in 2013. the increase in external service costs was largely attributable to increased third-party costs related to our development of , and planned nda submission for , nuplazid . we expect our research and development expenses to increase in future periods as we continue to pursue the development of pimavanserin , including remaining preparations that are needed to support the fda review of our planned nda for nuplazid , our ongoing open-label safety extension study , our ongoing phase ii trial for alzheimer 's disease psychosis , and potential studies in other indications , including schizophrenia , as well as the development of our other product candidates . 52 general and administrative expenses general and administrative expenses increased to $ 32.7 million in 2014 , including $ 10.8 million in stock-based compensation , from $ 12.7 million in 2013 , including $ 3.5 million in stock-based compensation . the increase in general and administrative expenses was primarily due to an increase in costs associated with additional administrative and commercial personnel , including $ 7.3 million in increased stock-based compensation , and $ 4.7 million in increased personnel expenses , as well as an increase of $ 6.7 million in external service costs . the increase in external service costs was largely attributable to increased consulting and professional fees related to our pre-commercial activities . we anticipate that our general and administrative expenses will increase in future periods to support our planned development and commercial activities for nuplazid . comparison of the years ended december 31 , 2013 and
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we have a catalog of owned and long-term licensed content that is segmented into brands such as acorn ( british drama/mystery , including content produced by acl ) , rlje films ( independent feature films , action/thriller horror ) , urban movie channel ( or umc ) ( urban ) , acacia ( fitness ) , and athena ( documentaries ) . on june 24 , 2016 , we entered into a licensing agreement with universal screen arts ( or usa ) whereby usa took over our acorn u.s. catalog/ecommerce business becoming the official , exclusive , direct-to-consumer seller of acorn product in the u.s. during the quarter ended june 30 , 2016 , we also electronically distributed our last acacia catalogs . as a result of these actions , we have classified the u.s. catalog/ecommerce business as discontinued operations . during 2015 and the first quarter of 2016 , these businesses were included in our direct channels segment . in the fourth quarter of 2016 , we reclassified our remaining u.k. catalog/ecommerce business from digital channels to our wholesale distribution segment to reflect adjustments we made internally in terms of how we are viewing and managing our operations after the disposal of our u.s. ecommerce/catalog business . the reclassification for both our u.s. and u.k. catalog and ecommerce businesses were made retroactively for all periods presented . revenue sources net revenues by reporting segment as a percentage of total net revenues for the periods presented are as follows : replace_table_token_7_th ( 1 ) reported net revenues exclude revenues generated by our 64 % owned subsidiary , acl , which is accounted for under the equity method of accounting . revenues by geographical area as a percent of the total revenues are as follows : replace_table_token_8_th digital channels segment our digital channels segment currently operates in the u.s. and comprises approximately one-fifth of our overall revenue base . the digital channels segment revenues are derived from our online , proprietary , subscriber-based svod channels , acorn tv and umc . during 2016 , revenues from our digital channels totaled $ 16.3 million , which represents an increase of $ 8.7 million when compared to 2015 . 27 ip licensing segment our television drama productions are generally financed by the pre-sale of the initial broadcast license rights . revenues reported in this segment include the initial broadcast license revenue , generally from the u.k. territory , and sublicense revenue for other territories outside the u.s. , u.k. and australia . wholesale distribution segment dvd and blu-ray our primary source of revenues within the wholesale distribution segment continues to be from the exploitation of exclusive content on dvd and blu-ray through third-party vendors such as amazon , best buy , costco , target and walmart . digital , vod and broadcast revenues derived from digital and broadcast exploitation of our content continue to grow as a percentage of revenues . net revenues derived from digital , vod , third-party svod and broadcast exploitation account for approximately 34.9 % of the segment 's revenues in 2016 versus 32.6 % in 2015. this is consistent with consumer adoption trends . as retailers continue to offer consumer-friendly devices that make access to these on-demand services easier , including allowing consumption on portable devices such as smartphones and tablets , we believe we are well-positioned to capture business in this growing distribution channel . some of our digital retailers include amazon , google play , hulu , itunes , microsoft xbox , netflix , overdrive , shudder ( amc ) sony playstation , vimeo , vudu and youtube . our partners in the vod space include at & t , cablevision , comcast , directv , dish , indemand , verizon and vubiquity . other licensing we continue our efforts to acquire more programming with international rights . our key sublicensing partners , that cover territories outside the u.s. , the u.k. and australia , are with universal music group international , universal pictures australia and warner music australia . to date , most of the feature films we have acquired do not include rights outside of north america . however , given our presence in the united kingdom and australia , we are focusing our efforts to acquire more programming in all english-language markets . when appropriate , we now seek the greatest variety of distribution rights regarding acquired content in the greatest variety of formats . we believe that this will allow us to further diversify revenue streams . cost structure our most significant costs and cash expenditures relate to acquiring or producing content for exclusive exploitation . we generally acquire programming through exclusive license or distribution agreements , under which we either ( 1 ) pay royalties or ( 2 ) receive distribution fees and pay net profits after recoupment of our upfront costs . upon entering into a typical license ( royalty ) agreement , we pay an advance based on the estimated expected future net profits . once the advance payment has been recouped , we pay royalties to the content suppliers quarterly based on the net revenues collected from the previous quarter . under a typical exclusive distribution agreement , we may pay upfront fees , which are expressed as advances against future net profits . once the advance and any other costs incurred are recouped , we pay the content supplier their share of net cash-profits , which is after our distribution fee , from the prior quarter 's exploitation . in addition to advances , upfront fees and production costs , the other significant expenditures we incur are : dvd/blu-ray authoring and replication and digitalization of program masters ; packaging ; advertising , promotion and marketing funds provided to wholesale partners ; domestic shipping costs from self-distribution of exclusive content ; content hosting and delivery costs associate with our digital channels ; personnel ; and interest . we strive to achieve long-term , sustainable growth and profitability with a target return on investment ( roi ) of 20 % or more on new content acquisitions . story_separator_special_tag this financial target is based on all up-front expenses associated with the acquisition and release of a title , including advances and development costs , and is calculated after allocating overhead costs . 28 we also seek to maximize our operati onal cash flow and profitability by closely managing our marketing and discretionary expenses , and by actively negotiating and managing collection and payment terms . story_separator_special_tag style= '' text-align : justify ; margin-bottom:0pt ; margin-top:18pt ; text-indent:0 % ; font-weight : bold ; font-style : italic ; font-family : times new roman ; font-size:10pt ; text-transform : none ; font-variant : normal ; '' > equity earnings of affiliate equity earnings of affiliate ( which is acl ) increased $ 0.9 million for the year ended december 31 , 2016 to $ 3.1 million when compared to 2015. during 2016 , acl 's gross profit ( revenues less film cost amortization ) was higher in 2016 when compared to 2015. the increases are a result of higher publishing revenues due to new publishing contracts entered into and generally improved publishing royalty rates on existing contracts . improved margins were partially offset by increased general , administrative and other expenses , as well as increased income taxes . interest expense interest expense decreased $ 1.6 million for the year ended december 31 , 2016 , as compared to 2015. the decrease is a result of reduced interest rates on our senior debt combined with lower average outstanding debt balances during the years . during april 2015 , we made an accelerated principal payment of $ 10.0 million on our senior secured debt and reduced the interest rate on our subordinated debt . change in fair value of stock warrants and other derivatives the change in the fair value of our warrant and other derivative liabilities impacts the statement of operations . a decrease in the fair value of the liabilities results in the recognition of income , while an increase in the fair value of the liabilities results in the recognition of expense . changes in fair value are primarily driven by changes in our common stock price and its volatility . during 2016 , we recognized expense of $ 4.6 million due to changes in the fair value of our stock warrants and other derivative liabilities . during 2015 , we recognized income of $ 1.4 million due to changes in the fair value of our stock warrants and other derivative liabilities . loss on extinguishment of debt upon repaying our previous credit facility and entering into the amc credit agreement , on october 14 , 2016 , we recognized a $ 3.6 million loss from the early extinguishment of debt , which is reported separately within our statement of operations . this loss primarily represents the unamortized debt discount and deferred financing costs at the time of repayment and a prepayment penalty of $ 0.8 million . 31 other expense other expense mostly consists of foreign currency gains and losses resulting primarily from advances and loans by our u.s. subsidiaries to our foreign subsidiaries that have not yet been repaid . our foreign currency gains and losses are primarily impacted by changes in the exchange rate of the british pound sterling ( or the pound ) relative to the u.s. dollar ( or the dollar ) . as the pound strengthens relative to the dollar , we recognized other income ; and as the pound weakens relative to the dollar , we recognize other expense . during 2016 and 2015 , the pound weakened relative to the dollar and we recognized foreign currency losses of $ 1.5 million $ 1.1 million , respectively . income taxes we have fully reserved our net u.s. deferred tax assets , and such tax assets may be available to reduce future income taxes payable should we have u.s. taxable income in the future . to the extent such deferred tax assets relate to net operating losses ( or nol ) carryforwards , the ability to use our nol carryforwards against future earnings will be subject to applicable carryforward periods and limitations subsequent to a change in ownership . as of december 31 , 2016 , we had nol carryforwards for federal and state income tax purposes of approximately $ 111.6 million and $ 69.5 million , respectively . we recorded income tax expense of $ 0.2 million for each of the years ended december 31 , 2016 and 2015. our tax provision consists primarily of a deferred tax provision for certain deferred tax liabilities and a current tax provision for our u.k. operations . we are recording a deferred tax provision and liability for our equity earnings of affiliate ( acl ) . these earnings will be taxable in the u.k. , when and if we dispose of our investment . in 2015 , we also reversed a previously recognized deferred liability related to goodwill amortization that was being provided for tax purposes . because of the goodwill impairment recognized , the deferred liability was reversed and is no longer being recognized for financial statement purposes . this reversal resulted in a reduction to our tax expense in 2015 of $ 0.4 million . we are providing current income tax expense on pre-tax income from our consolidated u.k. subsidiaries at an effective tax rate of approximately 20 % . we are not providing a current tax provision ( benefit ) on our u.s. operations , other than for certain state minimum taxes , which are not material . loss from discontinued operations , net of income taxes our loss from discontinued operations decreased as our u.s. catalog/ecommerce business was winding down during 2016. for the years ended december 31 , 2016 and 2015 , our losses were $ 3.2 million and $ 6.3 million , respectively . discontinued operations revenues were $ 7.8 million and $ 25.9 million for the years ended december 31 , 2016 and 2015 , respectively .
| our new senior loan facility improves our debt servicing payment by lowering our cash interest rate by 800 basis points and requiring no principal payments until june 2019. the highlights above and the discussion below are intended to identify some of our more significant results and transactions during 2016 and should be read in conjunction with our consolidated financial statements and related discussions within this annual report . results of operations a summary of our results of operations is presented below for the years ended december 31 , 2016 and 2015 , as disclosed in our consolidated financial statements in item 8 , financial statements and supplementary data , herein referred to as our โ consolidated financial statements . โ our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the united states of america ( or u.s. gaap ) . replace_table_token_9_th 29 revenues a summary of net revenues by segment for the years ended december 31 , 2016 and 2015 is as follows : replace_table_token_10_th revenues for the year ended december 31 , 2016 decreased $ 18.7 million when compared to the year ended december 31 , 2015. the decrease in revenues is primarily driven by our wholesale distribution and ip licensing segments , which declined by $ 24.5 million $ 2.9 million , respectively . these decreases were partially offset by a $ 8.7 million increase in revenues from our digital channels segment . the increase in revenues in our digital channels segment primarily results from the 120.5 % growth in subscribers to our acorn tv channel . during 2016 , we launched our digital channels on amazon channels , an add-on streaming video service available to amazon prime customers . this strategic expansion into third-party distribution of our digital streaming services resulted in significant subscriber growth . in addition , we are continually featuring new content on our digital channels , which we believe is a key factor in attracting new subscribers for all of our channels . the decline in our ip licensing revenues was due to our release of a new acl title last year , partners in crime , with no similar release this year . our wholesale distribution segment 's revenue decline is
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the keytruda clinical trials program currently includes more than 30 tumor types in more than 200 clinical trials , including over 100 trials that combine keytruda with other cancer treatments ( see โ research and development โ below ) . the company is also launching zepatier and bridion in the united states . while the company continues to execute its strategy of pursuing business development opportunities to complement its internal research capabilities , as part of merck 's prioritization efforts , the company also continues to review its existing assets to determine whether they can provide the best short- and longer-term value with merck or elsewhere . in connection with its portfolio assessment process , the company divested its remaining ophthalmics business in international markets during 2015. the company 's portfolio assessment process is ongoing and future divestitures may occur . merck is focusing its research efforts on the therapeutic areas that it believes can make the most impact on addressing critical areas of unmet medical need , such as cancer , hepatitis c , cardiometabolic disease , resistant microbial infection and alzheimer 's disease . during 2015 , the company continued to make strides in its late-stage pipeline . mk-6072 , bezlotoxumab , is an investigational antitoxin for the prevention of clostridium difficile ( c. difficile ) infection recurrence that is currently under review with the fda and the european medicines agency ( ema ) . mk-1293 , an insulin glargine candidate for the treatment of patients with type 1 and type 2 diabetes being developed in a collaboration , is also under review in the eu , as is zepatier . keytruda is under review in the eu for the treatment of nsclc . in addition to phase 3 programs for keytruda in the therapeutic areas of bladder , breast , colorectal , gastric , head and neck , multiple myeloma , and esophageal cancers , the company also has more than 10 candidates in phase 3 clinical development in its core therapeutic areas , as well as other areas with significant potential , including mk-3102 , omarigliptin , an investigational once-weekly dipeptidyl peptidase-4 ( dpp-4 ) inhibitor in development for the treatment of adults with type 2 diabetes ; mk-0822 , odanacatib , an oral , once-weekly investigational treatment for patients with osteoporosis ; mk-8835 , ertugliflozin , an investigational oral sodium glucose cotransporter-2 ( sglt2 ) inhibitor being evaluated alone and in combination with januvia ( sitagliptin ) and metformin for the treatment of type 2 diabetes ; and mk-8237 , an investigational allergy immunotherapy tablet for house dust mite allergy . merck expects to submit applications for regulatory approval in the united states for each of these candidates , as well as mk-1293 described above , in 2016. as a result of continued portfolio prioritization , the company is out-licensing or discontinuing selected late-stage clinical development assets . during 2015 , the company out-licensed mk-1602 and mk-8031 , investigational small molecule oral calcitonin gene-related peptide ( cgrp ) receptor antagonists , which are being developed for the treatment and prevention of migraine . the company continued to make strong progress in 2015 reducing its cost base . as a result of disciplined cost management , merck has achieved its overall savings goal in 2015 as noted below . the company has in turn invested its resources to grow its strongest brands and to support the most promising assets in its pipeline . marketing and administrative expenses declined in 2015 as compared with 2014 reflecting in part this continued focus by the company on prioritizing its resources to the highest growth areas . in 2013 , the company initiated actions under a global restructuring program ( the 2013 restructuring program ) as part of a global initiative to sharpen its commercial and research and development focus . the actions under this program primarily include the elimination of positions in sales , administrative and headquarters organizations , as well as research and development . additionally , these actions include the reduction of the company 's global real estate footprint and improvements in the efficiency of its manufacturing and supply network . the company recorded total pretax costs of $ 527 million in 2015 and $ 1.2 billion in both 2014 and 2013 related to this restructuring program . the actions under the 2013 restructuring program were substantially completed by the end of 2015. the company has met its projected $ 2.0 billion in annual net cost savings for actions under the 2013 restructuring program . when the actions under the 2013 restructuring program are combined with the actions under the merger restructuring program ( discussed below ) , the company has also met its annual net cost savings projection of $ 2.5 billion compared with full-year 2012 expense levels . 35 the global restructuring program ( the merger restructuring program ) that was initiated in 2010 subsequent to the merck and schering-plough corporation ( schering-plough ) merger ( the merger ) is intended to streamline the cost structure of the combined company . the actions under this plan include the elimination of positions in sales , administrative and headquarters organizations , as well as the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities . the company recorded total pretax costs of $ 583 million in 2015 , $ 730 million in 2014 and $ 1.1 billion in 2013 related to this restructuring program . the non-facility related restructuring actions under the merger restructuring program are substantially complete . beginning january 1 , 2016 , the remaining restructuring actions under both plans , which primarily relate to ongoing facility rationalizations , will be accounted for in the aggregate prospectively . the company expects to complete such actions by the end of 2017 and incur approximately $ 1.5 billion of additional pretax costs . costs associated with the company 's restructuring actions are included in materials and production costs , marketing and administrative expenses , research and development expenses and restructuring costs . story_separator_special_tag the company estimates that approximately two-thirds of the cumulative pretax costs relate to cash outlays , primarily related to employee separation expense . approximately one-third of the cumulative pretax costs are non-cash , relating primarily to the accelerated depreciation of facilities to be closed or divested . in november 2015 , merck 's board of directors raised the company 's quarterly dividend to $ 0.46 per share from $ 0.45 per share . during 2015 , the company returned $ 9.3 billion to shareholders through dividends and share repurchases . in january 2016 , merck announced that it had reached an agreement with plaintiffs to resolve vioxx shareholder class action litigation pending in new jersey federal court . under the agreement , merck will pay $ 830 million to resolve the settlement class members ' claims , plus an additional amount for approved attorneys ' fees and expenses . in connection with the settlement , merck recorded a net pretax charge of $ 680 million in the fourth quarter of 2015 , which includes anticipated insurance recoveries . see note 10 to the consolidated financial statements . earnings per common share assuming dilution attributable to common shareholders ( eps ) for 2015 were $ 1.56 compared with $ 4.07 in 2014 . eps in both years reflect the impact of acquisition and divestiture-related costs and restructuring costs , as well as certain other items , which in 2014 include an $ 11.2 billion gain recognized in connection with the divestiture of mcc . non-gaap eps , which excludes these items , were $ 3.59 in 2015 and $ 3.49 in 2014 ( see โ non-gaap income and non-gaap eps โ below ) . competition and the health care environment competition the markets in which the company conducts its business and the pharmaceutical industry in general are highly competitive and highly regulated . the company 's competitors include other worldwide research-based pharmaceutical companies , smaller research companies with more limited therapeutic focus , generic drug manufacturers and animal health care companies . the company 's operations may be adversely affected by generic and biosimilar competition as the company 's products mature , as well as technological advances of competitors , industry consolidation , patents granted to competitors , competitive combination products , new products of competitors , the generic availability of competitors ' branded products , and new information from clinical trials of marketed products or post-marketing surveillance . in addition , patent rights are increasingly being challenged by competitors , and the outcome can be highly uncertain . an adverse result in a patent dispute can preclude commercialization of products or negatively affect sales of existing products and could result in the recognition of an impairment charge with respect to intangible assets associated with certain products . competitive pressures have intensified as pressures in the industry have grown . pharmaceutical competition involves a rigorous search for technological innovations and the ability to market these innovations effectively . with its long-standing emphasis on research and development , the company is well positioned to compete in the search for technological innovations . additional resources required to meet market challenges include quality control , flexibility to meet customer specifications , an efficient distribution system and a strong technical information service . the company is active in acquiring and marketing products through external alliances , such as licensing arrangements , and has been refining its sales and marketing efforts to further address changing industry conditions . however , the introduction of new products and processes by competitors may result in price reductions and product displacements , even for products protected by patents . for example , the number of 36 compounds available to treat a particular disease typically increases over time and can result in slowed sales growth or reduced sales for the company 's products in that therapeutic category . the highly competitive animal health business is affected by several factors including regulatory and legislative issues , scientific and technological advances , product innovation , the quality and price of the company 's products , effective promotional efforts and the frequent introduction of generic products by competitors . health care environment and government regulation global efforts toward health care cost containment continue to exert pressure on product pricing and market access . in the united states , federal and state governments for many years also have pursued methods to reduce the cost of drugs and vaccines for which they pay . for example , federal laws require the company to pay specified rebates for medicines reimbursed by medicaid and to provide discounts for outpatient medicines purchased by certain public health service entities and hospitals serving a disproportionate share of low income or uninsured patients . against this backdrop , the united states enacted major health care reform legislation in 2010 ( the patient protection and affordable care act ) , which began to be implemented in 2010. various insurance market reforms have advanced and state and federal insurance exchanges were launched in 2014. by the end of the decade , the law is expected to expand access to health care to about 32 million americans who did not previously have insurance coverage . with respect to the effect of the law on the pharmaceutical industry , the law increased the mandated medicaid rebate from 15.1 % to 23.1 % , expanded the rebate to medicaid managed care utilization , and increased the types of entities eligible for the federal 340b drug discount program . the law also requires pharmaceutical manufacturers to pay a 50 % point of service discount to medicare part d beneficiaries when they are in the medicare part d coverage gap ( i.e. , the so-called โ donut hole โ ) . approximately $ 550 million , $ 430 million and $ 280 million was recorded by merck as a reduction to revenue in 2015 , 2014 and 2013 , respectively , related to the donut hole provision . also , pharmaceutical manufacturers are now required to pay an annual non-tax deductible health care reform fee .
| in addition , on october 1 , 2014 , the company divested its mcc business including the prescription rights to claritin and afrin . the sales decline in 2015 attributable to these divestitures was approximately $ 1.9 billion of which $ 1.5 billion related to the consumer care segment and $ 400 million related to the pharmaceutical segment . also , in 2014 , the company sold the u.s. marketing rights to saphris , an antipsychotic indicated for the treatment of schizophrenia and bipolar i disorder in adults , which resulted in revenue of $ 232 million . additionally , the company 's relationship with azlp terminated on june 30 , 2014 ; therefore , effective july 1 , 2014 , the company no longer records supply sales to azlp . these supply sales were $ 463 million in 2014 through the termination date and were reflected in the alliances segment . sales in the united states were $ 17.5 billion in 2015 , an increase of 3 % compared with $ 17.1 billion in 2014 . the increase was driven primarily by the acquisition of cubist , as well as higher sales of keytruda , gardasil/gardasil 9 , januvia/janumet , zetia , a cholesterol modifying medicine , and higher third-party manufacturing sales . these increases were partially offset by the 2014 divestiture of mcc , the termination of the company 's relationship with azlp in 2014 , revenue recognized in 2014 in connection with the sale of the u.s. marketing rights to saphris , as well as lower sales in 2015 of pneumovax 23 and nasonex . international sales were $ 22.0 billion in 2015 , a decline of 13 % compared with $ 25.2 billion in 2014 . foreign exchange unfavorably affected international sales performance by 11 % in 2015 . excluding the unfavorable effect of foreign exchange , the sales decrease reflects the divestiture of mcc , as well as lower sales in the pharmaceutical segment , largely reflecting declines in europe and japan , partially offset by growth in the emerging markets . sales in europe declined 19 % in 2015
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we expect that annual gross profit margins for 2014 will be 53.8 % , slightly ahead of the adjusted 53.7 % achieved in 2013. selling , general and administrative expenses sg & a expenses are comprised of five categories : selling ; occupancy ; delivery and certain warehousing costs ; advertising and administrative . selling expenses primarily are comprised of compensation of sales associates and sales support staff , and fees paid to credit card and third-party finance companies . occupancy costs include rents , depreciation charges , insurance and property taxes , repairs and maintenance expense and utility costs . delivery costs include personnel , fuel costs , and depreciation and rental charges for rolling stock . warehouse costs include supplies , depreciation and rental charges for equipment . advertising expenses are primarily media production and space , direct mail costs , market research expenses , employee compensation and agency fees . administrative expenses are comprised of compensation costs for store personnel exclusive of sales associates , information systems , executive , accounting , merchandising , advertising , supply chain , real estate and human resource departments . 17 year-to-year comparisons our sg & a costs increased $ 19.8 million or 6.0 % for 2013 compared to 2012. this change was driven by our 11.3 % increase in sales . sg & a costs increased $ 13.0 million or 4.1 % for 2012 compared to 2011. the change was largely due to greater occupancy expense , increased advertising and marketing spending , higher delivery costs and greater administrative expenses . total sg & a costs , as a percentage of net sales were 46.7 % for 2013 as compared to 49.1 % for 2012 and 50.9 % for 2011. selling expenses generally vary with sales volume . the amounts paid for bank card charges depends upon how many customers choose that payment option . the cost of our third-party financing offers will vary based on usage and the types of credit programs we offer and those selected by our customers . these costs remained relatively flat as a percentage of net sales over the past three years . occupancy costs increased $ 2.2 million in 2013 over 2012 primarily due to higher depreciation expense resulting from new stores opened in 2012 and existing store renovations . occupancy costs decreased $ 1.2 million in 2012 from 2011 as rent and utility expenses declined . our bright inspirations project has also caused some reductions in repairs and maintenance which was offset by increased depreciation . we expect occupancy costs will increase slightly in 2014 as new store openings are primarily late in the year . delivery expense increased only 4.2 % in 2013 over 2012 versus the 11.3 % increase in sales due to efficiencies and a higher average ticket . delivery costs in 2012 were relatively flat compared to 2011 despite a 7.9 % increase in sales due to reductions in insurance costs offset by increases in salaries . total advertising and marketing costs as a percentage of sales were 6.0 % for 2013 , 6.5 % for 2012 and 6.9 % for 2011. we increased our spending $ 1.2 million in 2013 and $ 0.8 million in 2012. our focus continues to be on television branding messages and electronic advertising that highlight havertys fashionable products and service . administrative costs increased $ 7.4 million or 9.7 % for 2013 compared to 2012. the change was driven by an increase in incentive and compensation expense and higher health insurance costs . administrative costs increased $ 4.8 million or 6.8 % in 2012 from 2011 primarily due to higher incentive compensation , salaries , stock-based compensation expense and retirement benefits . 2014 outlook the fixed and discretionary type expenses within sg & a for the full year of 2014 are expected to be approximately $ 232 million to $ 234 million , up approximately 4.1 % to 5.0 % over those same costs in 2013. these expenses are expected to be incurred at a slightly higher rate in the second half of the year . the main increases in this category are expected to be for advertising expenses , personnel costs , and new store occupancy expense . variable costs within sg & a are expected to be 17.0 % to 17.2 % as a percent of sales for 2014. we expect that total sg & a expenses for 2014 will be slightly lower than 2013 levels as a percentage of net sales if we are able to leverage our fixed costs with increased sales . provision for income taxes our effective tax rate was 38.5 , 36.6 % and ( 235.9 ) % for 2013 , 2012 and 2011 , respectively . refer to note 7 of the notes to the consolidated financial statements for a reconciliation of our income tax expense to the federal income tax rate . our 2013 rate varies from the 35 % u.s. federal statutory rate primarily due to state income taxes . 18 our 2012 rate included a benefit from income taxes of $ 0.7 million related to the change in our uncertain tax positions . this benefit was partially offset by changes in our receivables and state net operating loss carryforwards of $ 0.3 million . our 2011 rate included a benefit from income taxes of $ 14.1 million related to the release of almost all of the valuation allowance against our net deferred tax assets . the $ 14.1 million benefit related to the release includes approximately $ 7.7 million that was originally charged to accumulated other comprehensive income for pension liabilities but due to the prohibition against โ backward tracing โ the release is included in the continuing operations provision . our 2011 rate also includes a $ 0.7 million unfavorable impact of a change in treatment of certain state port credits by the state of georgia . story_separator_special_tag these credits were almost completely reserved in our valuation allowance as are the remaining credits . during 2011 we also finalized the net operating loss carryback and amended returns for the tax years 2005 through 2008. we adjusted the related receivables for refunds of tax and interest and amounts available for federal and state net operating loss carryforwards . this resulted in additional expense of $ 0.4 million . liquidity and capital resources overview of liquidity our primary cash requirements include working capital needs , contractual obligations , benefit plan contributions , income tax obligations and capital expenditures . we have funded these requirements exclusively through cash generated from operations and have not used our credit facility since 2008. we believe funds generated from our expected results of operations and available cash and cash equivalents will be sufficient to fund our primary obligations and complete projects that we have underway or currently contemplate for the next fiscal and foreseeable future years . at december 31 , 2013 , our cash and cash equivalents balance was $ 83.2 million an increase of $ 29.6 million compared to december 31 , 2012. this increase in cash primarily resulted from strong operating results and improved working capital requirements offset by purchases of property and equipment . additional discussion of our cash flow results , including the comparison of 2013 activity to 2012 , is set forth in the analysis of cash flows section . at december 31 , 2013 , our outstanding indebtedness was $ 17.2 million in lease obligations required to be recorded on our financial statements . we had no amounts outstanding and $ 43.8 million available under our revolving credit facility . capital expenditures our primary capital requirements have been focused on our stores and the development of both proprietary and purchased information systems . our capital expenditures were $ 20.2 million in 2013 , $ 4.8 million less than in 2012. our future capital requirements will depend in large part on the number of and timing for new stores we open within a given year , the investments we make to the improvement and maintenance of our existing stores , and our investment in distribution improvements and new information systems to support our key strategies . in 2014 , we anticipate that our capital expenditures will be approximately $ 35.0 million , refer to our store expansion and capital expenditures discussion below . 19 analysis of cash flows the following table illustrates the main components of our cash flows ( in thousands ) : replace_table_token_9_th cash flows from operating activities . during 2013 , net cash provided by operating activities was $ 55.9 million . our cash provided by operating activities was mainly the result of pre-tax income generated during 2013. cash from net income , net of depreciation and amortization and stock-based compensation expense , along with cash provided by working capital , was partially reduced by pension plan contributions . pension plan contributions in 2013 included a $ 4.2 million discretionary contribution made to improve the funded status of the plan and as part of our broader pension de-risking strategy . the primary components of the changes in working capital are listed below : decrease in inventories of $ 5.4 million , mainly due to timing of sales and replenishment . decrease in other liabilities of $ 9.0 million , and increase in other assets of $ 9.9 million mainly due to the shift from a $ 6.8 million pension plan liability to a $ 9.4 million pension asset . decrease in accounts payable of $ 6.4 million . during 2012 , net cash provided by operating activities was $ 52.2 million . we generated net income of $ 14.9 million during the year , and depreciation and amortization totaled $ 19.4 million . working capital increased and the major components of the change are listed below . increase in customer deposits of $ 6.4 million as the level of our special order business increased and deliveries at the end of 2012 were hampered by product availability . increase in accounts payable of $ 7.0 million , offset by increased inventory levels of $ 3.5 million . these increases were primarily due to our higher level of purchases in advance of the chinese new year and in response to our increased sales activity . decrease in other liabilities of $ 3.5 million as the pension plan liability decreased $ 4.3 million . during 2011 , net cash provided by operating activities was $ 19.1 million . we had net income of $ 15.5 million and depreciation and amortization of $ 18.2 million which were reduced by deferred income tax benefit of $ 7.9 million . the primary change in working capital was a $ 3.5 million increase in prepaid expenses . cash flows used in investing activities . net cash used in investing activities was $ 20.1 million , $ 24.8 million and $ 24.2 million for 2013 , 2012 and 2011 , respectively . in each of these years , the amounts of cash used in investing activities consisted principally of capital expenditures related to store construction and improvements and information technology projects , refer to our store expansion and capital expenditures discussion below . during 2013 , we invested in our distribution system for future expansion and added capacity to our internal cloud architecture to support our sales systems and video communications . the increase in cash flows used in investing activities from 2011 to 2012 was primarily the result of additional capital spending in 2012 offset by the initial outlay of $ 6.8 million to restricted cash as insurance collateral during 2011. during 2012 , we completed information technology projects replacing our core network that controls the communication between our stores and data centers and invested in cloud infrastructure . during 2011 , we completed information technology projects in the e-commerce and finance areas . 20 cash flows used in financing activities .
| the following outlines our sales and comp-store sales increases and decreases for the periods indicated . ( amounts and percentages may not always add to totals due to rounding . ) december 31 , 2013 2012 2011 net sales comp-store sales net sales comp-store sales net sales comp-store sales period ended dollars in millions % increase ( decrease ) over prior period % increase ( decrease ) over prior period dollars in millions % increase ( decrease ) over prior period % increase ( decrease ) over prior period dollars in millions % increase ( decrease ) over prior period % increase ( decrease ) over prior period q1 $ 186.1 13.8 % 11.5 % $ 163.6 6.1 % 5.7 % $ 154.2 ( 1.2 ) % ( 0.6 ) % q2 171.1 12.9 11.2 151.5 5.9 5.6 143.1 ( 1.4 ) ( 1.4 ) q3 192.7 11.6 11.8 172.7 11.1 < font
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except for the quarterly period ended march 31 , 2011 and a small number of earlier periods in which we generated net income due primarily to the recognition into revenue of amounts received under collaboration agreements , we have not been profitable . as of december 31 , 2011 , we had an accumulated deficit of $ 226.9 million . we may incur losses in future periods as our clinical-stage and preclinical product candidates advance into later-stage development and as we progress our programs , invest in additional product opportunities and grow our business . drug development , including clinical trials in particular , is time-consuming , expensive and may never yield a product that will generate revenue . as a clinical-stage company , our revenues , expenses and results of operations are likely to fluctuate significantly from quarter to quarter and year to year . we believe that period-to-period comparisons of our results of operations should not be relied upon as indicative of our future performance . revenue in january 2010 , we received a $ 200.0 million upfront payment under our tc-5214 agreement with astrazeneca , which we recorded as deferred revenue and are recognizing into revenue on a straight-line basis over the estimated development period for tc-5214 to a potential submission of an nda to the fda . as of december 31 , 2011 , $ 54.5 million of the upfront payment remained to be recognized into revenue . pursuant to an april 2010 amendment to our cognitive disorders agreement with astrazeneca related to an expansion of the development program for tc-5619 , we received an $ 11.0 million payment in may 2010 , which we recorded as deferred revenue and recognized into revenue on a straight-line basis over the estimated period of our research and development obligations for tc-5619 under the agreement . we completed our research and development obligations for tc-5619 in the second quarter of 2011. pursuant to a september 2010 amendment to our cognitive disorders agreement with astrazeneca related to a clinical trial of azd3480 in mild to moderate alzheimer 's disease , we received a $ 500,000 payment in the fourth quarter of 2010 and cumulative payments of $ 5.5 million in the second half of 2011 , all of which we recorded as deferred revenue and are recognizing into revenue on a straight-line basis over the estimated period of our obligations with respect to the study . as of december 31 , 2011 , we had received $ 61.6 million in aggregate upfront fees and milestone payments under our cognitive disorders agreement with astrazeneca and recognized an additional $ 26.5 million in collaboration research and development revenue for research services that we provided in the preclinical research collaboration conducted under that agreement . we immediately recognized an aggregate of $ 32.6 million of the amounts received under the agreement , which was for achievement of milestone events , because each event met the conditions required for immediate recognition under our revenue recognition policy . we deferred recognition of an aggregate of $ 29.0 million of the amounts received under the agreement and are recognizing , or in some cases have fully recognized , these deferred amounts into revenue over the periods discussed in note 12 to our 71 audited financial statements for the year ended december 31 , 2011 included in this annual report . as of december 31 , 2011 , $ 6.5 million of amounts received under our cognitive disorders agreement with astrazeneca remained to be recognized into revenue for future periods . we also received $ 45.0 million in aggregate payments under our now terminated product development and commercialization agreement and a related stock purchase agreement with glaxosmithkline . we immediately recognized an aggregate of $ 4.0 million of the amounts received under the agreement , which was for achievement of milestone events , because each event met the conditions required for immediate recognition under our revenue recognition policy . we deferred recognition of $ 29.5 million of the amounts received under the agreement and were recognizing it into revenue over the period discussed in note 12 to our audited financial statements for the year ended december 31 , 2011 included in this annual report . as a result of our receipt in february 2011 of notice of termination of the agreement , we recognized the remaining unrecognized deferred amount , $ 18.4 million , into revenue for the first quarter of 2011. we recorded $ 11.5 million of the amounts received under the agreement , which reflected the fair value of shares of our common stock sold to glaxosmithkline in 2007 , as capital in excess of par value . under our tc-5214 agreement with astrazeneca , we are eligible to receive additional payments of over $ 1.0 billion if development , regulatory , first commercial sale and specified sales related milestone events for tc-5214 are achieved and stepped double-digit royalties on any future tc-5214 product sales . under our cognitive disorders agreement with astrazeneca , we are eligible to receive additional payments of up to $ 145.0 million if development , regulatory and first commercial sale milestone events for azd3480 are achieved for alzheimer 's disease . if azd3480 is developed for a target indication under the agreement in addition to alzheimer 's disease , we would also be eligible to receive payments of up to $ 52.0 million for each such indication , if development , regulatory , first commercial sale and first detail milestone events are achieved . we are also eligible to receive stepped double-digit royalties on any future azd3480 product sales for any indication . in addition , under our cognitive disorders agreement with astrazeneca , we are eligible to receive payments of up to $ 73.0 million , if development , regulatory and first commercial sale milestones are achieved for azd1446 for alzheimer 's disease , as well as stepped royalties on any future azd1446 product sales for any indication . story_separator_special_tag if azd1446 is developed for a target indication under the agreement in addition to alzheimer 's disease , we would also be eligible to receive payments of up to $ 35.0 million for each such indication , if development , regulatory , first commercial sale and first detail milestone events are achieved . our tc-5214 agreement with astrazeneca can be terminated by astrazeneca in whole or in part at various times and under various circumstances as discussed above under the caption ยbusinessยstrategic alliances and collaborationsยastrazeneca abยtc-5214ยterminationย in item 1 of part i of this annual report . our cognitive disorders agreement with astrazeneca can be terminated by astrazeneca for an uncured material breach by us or upon 90 days notice given at any time . we acquired rights to inversine , which is our only product to have been approved by the fda for marketing , in august 2002. effective september 30 , 2009 , we discontinued the commercialization of inversine . sales of inversine generated net revenue of $ 473,000 for the year ended december 31 , 2009. from time to time we seek and are awarded grants or perform work under grants awarded to third-party collaborators from which we derive revenue . during the third quarter of 2011 , we were awarded a third grant from the michael j. fox foundation for parkinson 's research , or mjff , and the second to fund preclinical research involving the use of compounds that modulate nnrs to address levodopa-induced dyskinesias . based on the terms of the grant , we received $ 250,000 upon inception of the grant term and expect to receive an additional $ 250,000 in the first half of 2012. in addition , as of december 31 , 2011 , we are a named subcontractor under a grant awarded to the california institute of technology by the national institute on drug abuse , or nida , part of the national institutes of health , to fund research on innovative nnr-based approaches to the 72 development of therapies for smoking cessation . funding for awards under federal grant programs is subject to the availability of funds as determined annually in the federal appropriations process . research and development expenses since our inception , we have focused our activities on our drug discovery and development programs . we record research and development expenses as they are incurred . research and development expenses represented approximately 89 % , 89 % and 61 % of our total operating expenses for the years ended december 31 , 2011 , 2010 , and 2009 , respectively . for 2009 , license fees of $ 16.4 million , which are not included in research and development expenses , represented 25 % of our total operating expenses . there was no license fees expense for the 2011 and 2010 periods . research and development expenses include costs associated with : the employment of personnel involved in our drug discovery , research and development activities ; research and development facilities , equipment and supplies ; clinical trials , including fees paid to contract research organizations to monitor and oversee some of our trials ; the conduct of research activities under the preclinical research collaboration that we conducted with astrazeneca from january 2006 to january 2010 ; the screening , identification and optimization of product candidates ; formulation and chemical development ; production of clinical trial materials , including fees paid to contract manufacturers ; preclinical animal studies , including the costs to engage third-party research organizations ; quality assurance activities ; compliance with fda regulatory requirements ; consulting , license and sponsored research fees paid to third parties ; the development and enhancement of our drug discovery technologies that we refer to as pentad ; depreciation of capital assets used to develop our products ; and stock options granted to personnel in research and development functions . in particular , research and development expenses include 20 % of the costs of the ongoing development program for tc-5214 , as provided in our tc-5214 agreement with astrazeneca . we utilize our research and development personnel and infrastructure resources across several programs . we currently have clinical , preclinical and discovery-stage programs , and many of our costs are not specifically attributable to a single program . instead , these costs are directed to broadly applicable research efforts . accordingly , we can not state precisely our total costs incurred on a program-by-program basis . 73 we have not received fda or foreign regulatory marketing approval for any of our product candidates . our current and future expenditures on preclinical and clinical development programs are subject to numerous uncertainties in timing and cost to completion . we or a collaborator of ours tests compounds in numerous preclinical studies for safety , toxicology and efficacy . we or a collaborator of ours then conducts clinical trials for those product candidates that are determined to be the most promising . if we do not establish an alliance or collaboration in which our collaborator assumes responsibility for funding the development of a particular product candidate , we fund these trials ourselves . as we or a collaborator of ours obtains results from clinical trials , we or the collaborator may elect to discontinue or delay trials for some product candidates in order to focus resources on more promising product candidates . completion of clinical trials by us or a collaborator of ours may take several years or more , and the length of time generally varies substantially according to the type , complexity , novelty and intended use of a product candidate .
| we expect that the amount of our milestone-based revenue will continue to vary from period to period . research and development expenses year ended december 31 , 2011 2010 change ( in thousands ) research and development expenses $ 95,215 $ 64,546 $ 30,669 research and development expenses for the year ended december 31 , 2011 increased by $ 30.7 million as compared to the year ended december 31 , 2010. the higher research and development expenses were principally attributable to : an increase of $ 27.3 million in costs incurred for third-party research and development services in connection with our clinical-stage product candidates , including costs for clinical trial activities , formulation activities , production of clinical trial materials and pharmacology , toxicology and other non-clinical studies , to $ 55.0 million for 2011 , from $ 27.6 million for 2010 ; this increase was principally due to our cost-sharing obligations with respect to tc-5214 as the phase 3 development program progressed , the conduct of a phase 2b clinical trial of azd3480 and the conduct of two phase 2 clinical trials of tc-6987 ; our costs incurred for third-party research and development services also included costs in connection with phase 2 clinical trials of tc-5619 ; an increase of $ 2.5 million in costs incurred for third-party research and development services in connection with preclinical programs , to $ 7.1 million for 2011 , from $ 4.6 million for 2010 ; and an increase of $ 2.3 million in other research and development operating costs , including stock-based compensation , salary and other compensation-related expenses for research and development activities and infrastructure costs , to $ 33.1 million for 2011 , from $ 30.8 million for 2010 ; this increase was principally attributable to $ 2.1 million of additional stock-based compensation expense , which was primarily due to a significantly higher weighted average fair value for stock options that vested during the 2011 period as compared to stock options that vested during the 2010 period .
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certain states have filed and been granted waivers allowing for minimum heath benefit cost ratios at levels below 80 % . if the actual health benefit cost ratios do not meet the minimum calculated for any state , rebates will be paid to those policyholders . celtic expects to pay minimal rebates based on its 2011 results . due to its complexity and lack of comprehensive interpretive guidance and implementation regulations , the ultimate impact of the acts on celtic is not yet fully known . the health benefit cost ratio minimum does not apply to other centene subsidiaries . membership from december 31 , 2009 to december 31 , 2011 , we increased our at-risk managed care membership by 24.5 % . the following table sets forth our membership by state for our managed care organizations : 20 replace_table_token_7_th the following table sets forth our membership by line of business : replace_table_token_8_th the following table provides information for other membership categories : replace_table_token_9_th from december 31 , 2010 to december 31 , 2011 our membership increased as a result of : ยท operations commenced in illinois , kentucky and mississippi ยท contract awards and geographic expansion in texas ยท expanded contract awards in arizona from december 31 , 2009 to december 31 , 2010 our membership changed as a result of : ยท acquisitions in florida and south carolina ยท continued conversion of non-risk membership from access to at-risk under sunshine state health plan in florida ยท decreased membership in texas and wisconsin resulting from reprocurements results of continuing operations the following discussion and analysis is based on our consolidated statements of operations , which reflect our results of operations for the years ended december 31 , 2011 , 2010 and 2009 , as prepared in accordance with generally accepted accounting principles in the united states . summarized comparative financial data for 2011 , 2010 and 2009 are as follows ( $ in millions ) : replace_table_token_10_th 21 overview revenues and revenue recognition our health plans generate revenues primarily from premiums we receive from the states in which we operate . we receive a fixed premium per member per month pursuant to our state contracts . we generally receive premium payments and recognize premium revenue during the month in which we are obligated to provide services to our members . in some instances , our base premiums are subject to an adjustment , or risk score , based on the acuity of our membership . generally , the risk score is determined by the state analyzing submissions of processed claims data to determine the acuity of our membership relative to the entire state 's membership . some contracts allow for additional premium associated with certain supplemental services provided such as maternity deliveries . revenues are recorded based on membership and eligibility data provided by the states , which is adjusted on a monthly basis by the states for retroactive additions or deletions to membership data . these eligibility adjustments are reflected in the period known . we continuously review and update those estimates as new information becomes available . it is possible that new information could require us to make additional adjustments , which could be significant , to these estimates . our specialty services generate revenues under contracts with state programs , healthcare organizations , and other commercial organizations , as well as from our own subsidiaries . revenues are recognized when the related services are provided or as ratably earned over the covered period of services . premium and service revenues collected in advance are recorded as unearned revenue . for performance-based contracts , we do not recognize revenue subject to refund until data is sufficient to measure performance . premium and service revenues due to us are recorded as premium and related receivables and are recorded net of an allowance based on historical trends and our management 's judgment on the collectibility of these accounts . as we generally receive payments during the month in which services are provided , the allowance is typically not significant in comparison to total revenues and does not have a material impact on the presentation of our financial condition or results of operations . some states enact premium taxes , similar assessments and provider and hospital pass-through payments , collectively , premium taxes , and these taxes are recorded as a component of revenues as well as operating expenses . we exclude premium taxes from our key ratios as we believe the premium tax is a pass-through of costs and not indicative of our operating performance . the centers for medicare and medicaid services ( cms ) deploys a risk adjustment model that retroactively apportions medicare premiums paid according to health severity and certain demographic factors . the model pays more for members whose medical history indicates they have certain medical conditions . under this risk adjustment methodology , cms calculates the risk adjusted premium payment using diagnosis data from hospital inpatient , hospital outpatient , physician treatment settings as well as prescription drug events . the company estimates the amount of risk adjustment based upon the diagnosis and pharmacy data submitted and expected to be submitted to cms and records revenues on a risk adjusted basis . operating expenses medical costs medical costs include payments to physicians , hospitals , and other providers for healthcare and specialty services claims . medical costs also include estimates of medical expenses incurred but not yet reported , or ibnr , and estimates of the cost to process unpaid claims . we use our judgment to determine the assumptions to be used in the calculation of the required ibnr estimate . story_separator_special_tag the assumptions we consider include , without limitation , claims receipt and payment experience ( and variations in that experience ) , changes in membership , provider billing practices , healthcare service utilization trends , cost trends , product mix , seasonality , prior authorization of medical services , benefit changes , known outbreaks of disease or increased incidence of illness such as influenza , provider contract changes , changes to medicaid fee schedules , and the incidence of high dollar or catastrophic claims . our development of the ibnr estimate is a continuous process which we monitor and refine on a monthly basis as claims receipts and payment information becomes available . as more complete information becomes available , we adjust the amount of the estimate , and include the changes in estimates in medical expense in the period in which the changes are identified . additionally , we contract with independent actuaries to review our estimates on a quarterly basis . the independent actuaries provide us with a review letter that includes the results of their analysis of our medical claims liability . we do not solely rely on their report to adjust our claims liability . we utilize their calculation of our claims liability only as additional information , together with management 's judgment , to determine the assumptions to be used in the calculation of our liability for medical costs . while we believe our ibnr estimate is appropriate , it is possible future events could require us to make significant adjustments for revisions to these estimates . accordingly , we can not assure you that healthcare claim costs will not materially differ from our estimates . results of operations depend on our ability to manage expenses associated with health benefits and to accurately predict costs incurred . the health benefits ratio , or hbr , represents medical costs as a percentage of premium revenues ( excluding premium taxes ) and reflects the direct relationship between the premium received and the medical services provided . during 2011 , we reclassified certain medical costs and general & administrative expenses to more closely align with the new national association of insurance commissioners ( naic ) definitions of medical costs . we have reclassified all periods presented to conform to the new presentation . the table below presents the impact of the reclassification on consolidated medical costs and hbr for the years ended december 31 , 2011 , 2010 and 2009. replace_table_token_11_th cost of services cost of services expense includes the pharmaceutical costs associated with our pharmacy benefit manager 's external revenues and certain direct costs to support the functions responsible for generation of our services revenues . these expenses consist of the salaries and wages of the professionals who provide the services and associated expenses . general and administrative expenses general and administrative expenses , or g & a , primarily reflect wages and benefits , including stock compensation expense , and other administrative costs associated with our health plans , specialty companies and centralized functions that support all of our business units . our major centralized functions are finance , information systems and claims processing . g & a expenses also include business expansion costs , such as wages and benefits for administrative personnel , contracting costs , and information technology buildouts , incurred prior to the commencement of a new contract or health plan . the g & a expense ratio represents g & a expenses as a percentage of premium and service revenues , and reflects the relationship between revenues earned and the costs necessary to earn those revenues . as mentioned above , during 2011 , we reclassified certain medical costs and g & a expenses to more closely align with the new naic definitions . we have reclassified all periods presented to conform to the new presentation of medical costs . the table below presents the impact of the reclassification on consolidated g & a expense and the g & a expense ratio for the years ended december 31 , 2011 , 2010 and 2009. replace_table_token_12_th 22 other income ( expense ) other income ( expense ) consists principally of investment income from cash and investments , earnings in equity method investments , and interest expense on debt . discontinued operations in november 2008 , we announced our intention to sell certain assets of uhp , our new jersey health plan . accordingly , the results of operations for uhp are reported as discontinued operations for all periods presented . we completed the sale in the first quarter of 2010. year ended december 31 , 2011 compared to year ended december 31 , 2010 revenues premium and service revenues increased 20.9 % in 2011 over 2010 as a result of membership growth discussed under the heading โ membership โ . the premium rates specified in our state contracts are generally updated on an annual basis through contract amendments . in 2011 , we received premium rate adjustments which yielded a net 0.9 % composite decrease across all of our markets . operating expenses medical costs the table below depicts the hbr for our external membership by member category : replace_table_token_13_th the consolidated hbr of 85.2 % for 2011 represented a 0.3 % decrease from the 2010 consolidated hbr of 85.5 % . the decrease is primarily due to lower levels of utilization and contract enhancements . general and administrative expenses the consolidated g & a expense ratio for the years ended december 31 , 2011 and 2010 was 11.3 % and 11.2 % , respectively . the increase in the ratio in 2011 primarily reflects increased business expansion costs to support new business in illinois , kentucky , louisiana and texas , partially offset by the leveraging of our expenses over higher revenues . investment and other income , net the following table summarizes the components of investment and other income , net ( $ in millions ) : replace_table_token_14_th investment income .
| general and administrative expenses the consolidated g & a expense ratio for the years ended december 31 , 2010 and 2009 was 11.2 % and 11.5 % , respectively . the decrease in the ratio in 2010 primarily reflects the leveraging of our expenses over higher revenues . investment and other income , net the following table summarizes the components of investment and other income , net ( $ in millions ) : replace_table_token_17_th investment income . the decrease in investment income in 2010 reflects the decline in market interest rates . net gain on sale of investments . as a result of tightening our investment criteria for municipal securities , we sold municipal securities resulting in net gains of $ 2.5 million during 2010. impairment of investment . during 2010 , we determined we had an other-than-temporary impairment of our cost method investment in casenet , llc , and recorded an impairment charge of $ 5.5 million , including $ 3.5 million of convertible promissory notes . gain on reserve primary fund distributions . in 2010 , we received distributions from the reserve primary fund of $ 5.7 million resulting in a gain of $ 3.3 million recorded for the distributions received in excess of our adjusted basis . interest expense . interest expense increased reflecting the borrowings on the loans associated with the construction of our corporate headquarters . the real estate development was placed in service in the third quarter 2010 and accordingly we ceased capitalizing interest on the project . the increase was partially offset by the reduction in debt outstanding under our revolving credit agreement as a result of the equity offering completed during the first quarter of 2010 . 24 income tax expense excluding the amounts attributable to noncontrolling interest , our effective tax rate in 2010 was 39.7 % compared to 36.2 % in 2009. the increase in 2010 was primarily driven by legislation enacted in may 2010 in the state of georgia which replaced the state income tax with a premium tax for medicaid managed care organizations effective
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66 starting in may 2020 , we began to return to more normalized operations and clinical support as local restrictions were reduced , but tightened them again with the resurgence of covid-19 in november 2020. the majority of our employees who are not related to manufacturing and order fulfillment are currently on a telecommunication work arrangement and have generally been able to successfully work remotely . beginning in march 2020 , we curtailed certain operating expense due to limited visibility on the extent and duration of the impact from covid-19 . we took preemptive steps to manage spending , including implementing hiring restrictions , eliminating discretionary spending , reducing executive salaries , reducing capital expenditures , reducing non-essential marketing expenses , and delaying clinical research projects . we returned to more normalized spending levels in the fourth quarter with returning revenue growth , refinancing of our debt , and raising of additional equity . the timing , extent and continuation of any further increase in procedures , and any corresponding increase in sales of our products , and whether there could be a future decrease in the current level of procedures as a result of the covid-19 pandemic or otherwise , remain uncertain and are subject to a variety of factors , including : further increases in covid-19 cases in various locations that would result in more hospitalizations and a corresponding decrease in elective procedures in such impacted locations . surgeons and hospitals postponing elective procedures as a result of reduced availability of physicians or space to treat patients , different treatment prioritizations , increased cost pressures and burdens on the overall healthcare infrastructure . patients electing to defer or avoid elective procedures due to concerns about being exposed to covid-19 in hospital settings , loss of employer-sponsored health insurance related to the high levels of unemployment in the u.s. or other reasons . hospitals reserving more space for potential covid-19 patients , especially as the number of covid-19 cases spikes , limiting the space allocated to inpatient and outpatient elective procedures . additional restrictions on access to customers , hospitals , labs and other medical facilities for sales activities , physician training and case support if they have been deemed to be โ non-essential โ personnel by those facilities or applicable local regulations . the existence and further duration of the covid-19 pandemic may also further exacerbate certain risks as described in โ item 1a - risk factors โ . recently , the u.s. and many other countries have experienced increasing trends of covid-19 infections and hospitalizations . the covid-19 pandemic is continuing globally , and we are unable to predict how the covid-19 pandemic will impact procedure volumes or product sales in the future , or the extent , duration or recurrence of the covid-19 pandemic in any location . we are , therefore , unable to predict the impact of the covid-19 pandemic , and such could have a material adverse effect on our results of operations , financial condition and capital resources . factors affecting results of operations and key performance indicators we monitor certain key performance indicators that we believe provide us and our investors indications of conditions that may affect results of our operations . our revenue growth rate and commercial progress is impacted by , among other things , our key performance indicators , including our ability to leverage our sales force , increase surgeon activity and training , engage key opinion leaders , and leverage broad coverage . leverage our sales force we have made significant investments in our sales force since our initial public offering in 2018. we have built a valuable sales team , and we believe they are the key to the recovery that follows the pandemic . as such , we have made it a top priority to support and retain our sales force through this challenging period . we limited new sales force hiring in the second and third quarter of 2020 due to uncertainty from the covid-19 pandemic and focused on sales force productivity during this period , but resumed hiring of salespeople in the fourth quarter of 2020 based upon our favorable financial position and opportunity for future revenue growth . as of december 31 , 2020 , our u.s. sales force consisted of 64 territory sales managers and 58 clinical support specialists directly employed by us and 41 third-party distributors , compared to 56 territory sales managers and 51 clinical support specialists directly employed by us and 37 third-party distributors as of december 31 , 2019. as of december 31 , 2020 , our international sales force consisted of 20 sales representatives directly employed by us and 31 exclusive third-party distributors , compared to 19 sales representatives directly employed by us and 27 exclusive third-party distributors as of december 31 , 2019 . 67 increase surgeon activity and training our medical affairs team works closely with our sales team to increase surgeon activity and training . surgeon activity includes both the number of surgeons performing ifuse procedures as well as the number of procedures performed per surgeon . as of december 31 , 2020 and 2019 , in the u.s. , more than 1,600 surgeon and 1,400 surgeons , respectively , have been trained on ifuse and have treated at least one patient . outside the u.s. , as of december 31 , 2020 , more than 600 surgeons have been trained on ifuse and have treated at least one patient . we grew our active surgeon base to 588 surgeons as of december 31 , 2020 , compared to 539 active surgeons as of december 31 , 2019. we define an active surgeon to be a surgeon who has performed at least one case in the last three months . we will continue to pursue the remainder of the approximately 7,500 target surgeons in the u.s. , as well as international surgeons , for training in the future . the covid-19 outbreak challenged our traditional method of hands-on cadaveric and dry-lab training . story_separator_special_tag therefore , in addition to utilizing a virtual education series for surgeons and mid-level practitioners for training activities , we began using the si-bone simulator ; a portable , radiation-free , haptics and computer-based simulator for training purposes . starting in july 2020 , we deployed four simulators in the u.s. and one in europe . the simulators were used in approximately 45 % of new surgeon training courses in the second half of 2020. we have placed an order for 20 additional simulators to increase the percentage and number of surgeons trained and retrained using the simulator in the u.s. and europe . engage key opinion leaders our bedrock technique is used in the treatment of adult spinal deformity . we introduced this technique in june 2019 for use in the fusion of the sacroiliac joints in conjunction with a multi-segment spinal fusion , or long construct , procedure . the bedrock technique utilizes our proprietary ifuse implants , with one implant placed across each sacroiliac joint ( for a total of two implants per case ) using a posterior approach , through the sacrum , across the sacroiliac joint , and into the ilium . the bedrock technique differs from our traditional ifuse procedure , whereby three ifuse implants are placed across one sacroiliac joint via a lateral transarticular approach through the ilium and into the sacrum . the bedrock technique is performed to increase stability at the base of a long construct . biomechanical testing has shown that ifuse implants placed in this position reduce sacroiliac joint motion by approximately 30 % in conjunction with a long construct . we received ce mark clearance for the promotion of the bedrock technique in europe and we launched the promotion of this technique in select european markets . we conduct training courses in several academic centers in the u.s. and engage key opinion leaders to support our development efforts . interest in the bedrock technique among deformity surgeons , including many key opinion leaders , has provided our sales representatives with access to important academic medical centers in the u.s. this enables our representatives to train a broader group of spine surgeons , including residents and fellows at these centers , on both the bedrock technique and minimally invasive sacroiliac fusion . in 2020 , we have conducted training courses at over 50 academic centers in the u.s. , where more than 200 surgical residents and fellows have been trained . leverage broad coverage we made significant progress in both the number of covered lives and the medicare physician fee for surgeons performing minimally invasive sacroiliac fusion in the u.s. as of december 31 , 2020 , u.s. payors that account for 311.6 million u.s. covered lives reimburse for ifuse , with private payors accounting for 195.8 million of these covered lives . as of december 31 , 2019 , u.s. payors covering 282.7 million lives reimbursed for ifuse , of which 147.9 million were covered by private payors . as of december 31 , 2020 , 37 u.s. payors have issued positive coverage policies exclusive to ifuse for sacroiliac joint fusion because of the clinical evidence , compared to 32 exclusive coverage policies as of december 31 , 2019. further , as of december 31 , 2020 and 2019 , an additional 21 and 20 , respectively , private payors cover ifuse and other products for sacroiliac joint fusion . the 2020 covered lives include humana , the fifth largest commercial health plan in the u.s. with over 12 million members , which adopted an exclusive coverage policy in december and aetna , the third largest commercial health plan in the u.s. with over 22 million members , which adopted a coverage policy in may 2020. currently , covered lives counts do not include anthem , which covers minimally invasive sacroiliac fusion procedures in the event of pelvic girdle trauma only . we track the number of u.s. covered lives , or individuals whose healthcare is paid for by a private commercial or governmental payor that routinely reimburses for minimally invasive sacroiliac fusion , as a proxy for availability of the procedure within the u.s. healthcare payment system . we believe that the full impact of each coverage decision grows over time as surgeons gain confidence that they will receive reimbursement for the majority of their diagnosed patients . 68 components of results of operations revenue we generate most of our revenue from sales of ifuse . revenue from sales of ifuse fluctuate based on volume of cases ( procedures performed ) , discounts , mix of international and u.s. sales , and the number of implants used for a particular patient . similar to other orthopedic companies , our case volume can vary from quarter to quarter due to a variety of factors including reimbursement , sales force changes , physician activities , and seasonality . in addition , our revenue is impacted by changes in average selling price as we respond to the competitive landscape and price differences at different medical facilities , such as hospitals and ascs . further , revenue results can differ based upon the mix of business between u.s. and international sales and mix of our products either delivered at the point of implantation at the hospital or other medical facilities or delivered through distributors or to hospitals where the products were ordered in advance of the procedure . our revenue from international sales is impacted by fluctuations in foreign currency exchange rates between the u.s. dollar ( our reporting currency ) and the local currency . the covid-19 pandemic reduced our expected number of cases . as the pandemic continued in the u.s. and europe , it had a significant impact on our case volumes beginning mid-march 2020. the largest impact was felt in april 2020 , where revenue declined by 84 % from the prior year .
| gross profit increased $ 4.0 million for the year ended december 31 , 2020 compared to the year ended december 31 , 2019 primarily driven by higher revenue , partly offset by higher cost of goods sold . g ross margin decreased to 88 % for the year ended december 31 , 2020 as compared to 90 % the year ended december 31 , 2019 primarily due to certain period costs of $ 0.2 million charged directly to cost of operations and increases in inventory write-downs of $ 0.8 million . certain period costs were expensed as incurred during the second quarter of 2020 because our operations ran at suboptimal capacity due to lower case volumes as a result of the covid-19 pandemic . gross margin was also impacted by higher employee related costs and inventory management to support the growth of the business . operating expenses : replace_table_token_4_th sales and marketing expenses . the increase in sales and marketing expenses for the year ended december 31 , 2020 as compared to the year ended december 31 , 2019 was primarily due to an increase of $ 9.7 million in employee related costs and stock-based compensation expense driven by increased headcount . the increase was partly offset by decreases in travel and other sales and marketing related expenses of $ 4.2 million due to the covid-19 pandemic . research and development expenses . the increase in research and development expenses for the year ended december 31 , 2020 as compared to the year ended december 31 , 2019 was primarily due to increases in employee related costs and stock-based compensation expense of $ 1.7 million driven by increased headcount , as well as increases in other research and development expenses of $ 0.5 million primarily due to clinical study and research and development activities . general and administrative expenses . the decrease in general and administrative expenses for the year ended december 31 , 2020 as compared to the year ended december 31 , 2019 was
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in those circumstances when customer specified acceptance criteria exist , revenue is deferred until customer acceptance if we can not demonstrate that the system meets those specifications prior to shipment . for any contracts with multiple elements ( i.e. , training , installation , additional parts , etc . ) we allocate revenue among the deliverables primarily based upon objective and reliable evidence of fair value of each element in the arrangement . if objective and reliable evidence of fair value of any element is not available , we use an estimated selling price for purposes of allocating the total arrangement consideration among the elements . in addition , judgments are required in evaluating the credit worthiness of our customers . credit is not extended to customers and revenue is not recognized until we have determined that collectability is reasonably assured . allowance for doubtful accounts . our policy is to maintain allowances for estimated losses resulting from the inability of our customers to make required payments . credit limits are established through a process of reviewing the financial history and stability of each customer . where appropriate , we obtain credit rating reports and financial statements of the customer when determining or modifying their credit limits . we regularly evaluate the collectability of our trade receivable balances based on a combination of factors . when a customer 's account balance becomes past due , we initiate dialogue with the customer to determine the cause . if it is determined that the customer will be unable to meet its financial obligation to us , such as in the case of a bankruptcy filing , deterioration in the customer 's operating results or financial position or other material events impacting their business , we record a specific allowance to reduce the related receivable to the amount we expect to recover given all information presently available . actual write-offs during the past three years have not been material to our results of operations . we also record an allowance for all other customers based on certain other factors including the length of time the receivables are past due and historical collection experience with individual customers . as of december 31 , 2014 , our accounts receivable balance of $ 354.7 million is reported net of allowances for doubtful accounts of $ 8.0 million . we believe our reported allowances at december 31 , 2014 , are adequate . if the financial conditions of those customers were to deteriorate , however , resulting in their inability to make payments , we may need to record additional allowances that would result in additional selling , general and administrative expenses being recorded for the period in which such determination is made . inventory . our policy is to record inventory write-downs when conditions exist that indicate that our inventories are likely to be in excess of anticipated demand or are obsolete based upon our assumptions about future demand for our products and market conditions . we regularly evaluate the ability to realize the value of our inventories based on a combination of factors including the following : historical usage rates , forecasted sales or usage , product end of life dates , estimated current and future market values and new product introductions . purchasing requirements and alternative usages are evaluated within these processes to mitigate inventory exposure . when recorded , our write-downs are intended to reduce the carrying value of our inventories to their net realizable value and establish a new cost basis . as of december 31 , 2014 , our inventories of $ 320.6 million are stated net of inventory write-downs . if actual demand for our products deteriorates or market conditions are less favorable than those that we project , additional inventory write-downs may be required in the future . goodwill . goodwill represents the excess purchase price of an acquired enterprise or assets over the estimated fair value of identifiable net assets acquired . we assess goodwill for potential impairment at the reporting unit level during the third quarter of each year , or whenever events or circumstances indicate that the carrying value of these assets exceeds their fair value . we may assess qualitative factors to make this determination , or bypass such a qualitative assessment and proceed directly to testing goodwill for impairment using a two-step process . qualitative factors we may consider include , but are not limited to , macroeconomic conditions , industry conditions , the competitive environment , changes in the market for our products and services , regulatory and political developments and entity specific factors such as strategies and financial performance . if there are indicators that goodwill has been impaired we proceed to a two-step impairment test , whereby the first step is comparing the fair value of a reporting unit with its carrying amount , including goodwill . if the fair value of the reporting unit exceeds the carrying value , goodwill is not impaired and no further testing is performed . the second step is performed if the carrying value of a reporting unit exceeds its fair value . if the carrying value of a reporting unit 's goodwill exceeds its implied fair value , an impairment loss equal to the difference is recorded . our impairment test in the current year did not indicate an impairment of goodwill in any of our reporting units . 31 product warranties . our products are sold with warranty provisions that require us to remedy deficiencies in quality or performance of our products over a specified period of time , generally twelve to twenty-four months , at no cost to our customers . our policy is to record warranty liabilities at levels that represent our estimate of the costs that will be incurred to fulfill those warranty requirements at the time that revenue is recognized . story_separator_special_tag we believe that our recorded liability of $ 16.2 million at december 31 , 2014 is adequate to cover our future cost of materials , labor and overhead for the servicing of our products sold through that date . if actual product failures or material or service delivery costs differ from our estimates , our warranty liability would need to be revised accordingly . contingencies . we are subject to the possibility of loss contingencies arising in the normal course of business . we consider the likelihood of loss or impairment of an asset or the incurrence of a liability , as well as our ability to reasonably estimate the amount of loss in determining loss contingencies . an estimated loss is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount can be reasonably estimated . we regularly evaluate current information available to us to determine whether such accruals should be adjusted . income taxes . we account for income taxes using the asset and liability method , which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of the assets and liabilities measured using the enacted tax rates in effect in the years in which the differences are expected to reverse . valuation allowances against deferred tax assets are recorded when a determination is made that the deferred tax assets are not more likely than not to be realized in the future . in making that determination , on a jurisdiction by jurisdiction basis , we estimate our future taxable income based upon historical operating results and external market data . future levels of taxable income are dependent upon , but not limited to , general economic conditions , competitive pressures and other factors beyond our control . as of december 31 , 2014 , we have determined that a valuation allowance against our deferred tax assets of $ 13.3 million is required . if we should determine that we may be unable to realize our deferred tax assets to the extent reported , an adjustment to the deferred tax assets would be recorded in the period such determination is made . 32 story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; font-style : italic ; '' > restructuring expenses . during the years ended december 31 , 2014 , 2013 and 2012 , we recorded net pre-tax restructuring expenses totaling $ 17.0 million , $ 27.5 million and $ 2.0 million , respectively . of the restructuring expenses recorded in 2014 , $ 16.4 million was recorded in operating expenses and $ 0.6 million was recorded in costs of goods sold . of the restructuring expenses recorded in 2013 , $ 25.8 million was recorded in operating expenses and $ 1.7 million was included in costs of goods sold . in the fourth quarter of 2013 , we initiated a realignment plan that included closing six not-to-scale sites in the united states and europe and a transfer of those operations to larger facilities . we also consolidated our optics and laser manufacturing businesses to better realize the benefits of vertical integration in these areas . the total costs expected to be incurred related to the realignment plan is approximately $ 45 million and we expect to complete the majority of the actions and recognize the remaining expenses of approximately $ 0.7 million during the year ending december 31 , 2015. in 2012 , we also recorded restructuring expenses associated with the relocation of one of our manufacturing facilities in europe to an existing facility in the united states . interest expense . interest expense totaled $ 14.6 million , $ 14.1 million and $ 11.7 million for the years ended december 31 , 2014 , 2013 and 2012 , respectively . interest expense is primarily attributable to the $ 250 million aggregate principal amount of 3.75 percent senior unsecured notes due september 1 , 2016 that were issued in august 2011 and the amortization of the costs related to the issuance of the notes and the $ 150 million term loan that was drawn on april 5 , 2013. income taxes . our income tax provision was $ 49.3 million , $ 52.0 million and $ 66.6 million in 2014 , 2013 and 2012 , respectively . the effective tax rates for 2014 , 2013 and 2012 were 19.7 percent , 22.7 percent and 22.8 percent , respectively . the mix in taxable income between our united states and international operations has a significant impact on our annual income tax provision and effective tax rates . our effective tax rate is lower than the united states federal tax rate of 35 percent because of lower foreign tax rates , the effect of foreign , federal and state tax credits and other discrete items such as the release of previously recorded tax reserves related to tax positions that are no longer required due to closure of statute or audit settlements and amended tax filings . the decrease in the effective tax rate from 2013 to 2014 was primarily due to a larger amount of favorable discrete items recognized in 2014. we expect the effective tax rate for 2015 to be approximately 24 percent excluding discrete items . at december 31 , 2014 , we had united states tax net operating loss carry-forwards totaling approximately $ 16.9 million which expire between 2018 and 2031 . in addition , we have various state net operating loss carry-forwards totaling approximately $ 49.6 million which expire between 2015 and 2033 . the federal and state net operating losses were primarily generated by icx technologies , inc. prior to being acquired by us in 2010. finally , we have various foreign net operating loss carry-forwards totaling approximately $ 74.5 million which expire between 2018 and 2033 . tax benefits as described above are recorded as assets when the benefits are more likely than not to be recognized .
| revenue from the united states government customers declined by $ 18.6 million from 2012 to 2013. international revenue in 2014 totaled $ 766.7 million , representing 50.1 percent of revenue . this compares with international revenue in 2013 which totaled $ 740.7 million , representing 49.5 percent of revenue , and $ 687.5 million in 2012 , representing 48.9 percent of revenue . while the sales mix between united states and international sales may fluctuate from year to year , we expect revenue from customers outside the united states to continue to comprise a significant portion of our total revenue on a long-term basis . cost of goods sold . cost of goods sold for the year ended december 31 , 2014 and 2013 was $ 780.3 million and $ 759.4 million , respectively . the increase is primarily due to the increase in revenues year over year as discussed above and changes in product mix . for the years ended december 31 , 2014 and 2013 , cost of goods sold included $ 0.6 million and $ 1.7 million , respectively , of inventory write downs related to our restructuring activities . cost of goods sold in 2013 was $ 759.4 million , compared to cost of goods sold of $ 670.2 million in 2012 . the year over year increase in cost of goods sold primarily relates to the higher year over year revenues and changes in product mix . cost of goods sold includes materials , labor and overhead costs incurred in the manufacturing of products and services sold in the period as well as warranty costs . material costs include raw materials , purchased components and sub-assemblies , outside processing and inbound freight costs . labor and overhead costs consist of direct and indirect manufacturing costs , including wages and fringe benefits , operating supplies , depreciation and amortization , occupancy costs , and purchasing , receiving and inspection costs . gross profit . gross profit for the year ended december 31 , 2014 was $ 750.4 million compared to $
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operating income for the rigid closed top segment increased from $ 130 million ( 9 % of net sales ) in fiscal 2013 to $ 132 million ( 9 % of net sales ) in fiscal 2014. the increase is attributed to a $ 6 million decline in the relationship of net selling price to raw material costs , $ 1 million attributed to negative product mix , $ 3 million increase in business integration expenses and $ 1 million loss from businesses acquired in the last twelve months offset by $ 1 million decrease in depreciation and amortization , a $ 7 million improvement in operating performance in manufacturing and a $ 5 million improvement in selling , general and administrative expenses . operating income for the engineered materials segment increased from $ 116 million ( 8 % of net sales ) in fiscal 2013 to $ 125 million ( 9 % of net sales ) in fiscal 2014. this increase is primarily attributed to a $ 19 million improvement in manufacturing operating performance , $ 7 million decline in restructuring and business integration expenses and a $ 4 million decline in selling , general and administrative expenses partially offset by $ 14 million of raw material cost inflation in excess of net selling prices , $ 2 million from exited business and a $ 5 million increase in depreciation and amortization expense . operating income for the flexible packaging segment increased from $ 17 million ( 2 % of net sales ) in fiscal 2013 to $ 25 million ( 3 % of net sales ) in fiscal 2014. this increase is primarily attributed to $ 10 million benefit from businesses acquired in the last twelve months , $ 5 million gain in the relationship of net selling price to raw material costs , $ 4 million improvement in operating performance in manufacturing and a $ 2 million decline in depreciation and amortization expense partially offset by $ 13 million increase in business integration expense . debt extinguishment . debt extinguishment decreased from $ 64 million in fiscal 2013 to $ 35 million in fiscal 2014. the decrease is primarily attributed to the various debt extinguishment costs that resulted from our incremental term loan restructuring and use of the proceeds from our initial public offering in fiscal 2013 compared to the debt extinguishment costs related to the discharge of the outstanding 9ยฝ % second priority senior secured notes in fiscal 2014. other income . other income remained flat at $ 7 million in fiscal 2013 and fiscal 2014 primarily due to the change in the fair value of derivative instruments in fiscal 2013 offset by gains recognized on asset disposals and an adjustment to the tax receivable agreement obligation in fiscal 2014. interest expense . interest expense decreased from $ 244 million in fiscal 2013 to $ 221 million in fiscal 2014 primarily as the result of the various debt extinguishments and refinancings completed in the last twenty four months . income tax expense . we recorded an income tax expense of $ 4 million in fiscal 2014 , compared to $ 28 million in fiscal 2013. the effective tax rate is impacted by the relative impact of discrete items and certain international entities for which a full valuation allowance is recognized and $ 20 million of federal and state research and development tax credits recognized in fiscal 2014. discussion of results of operations for fiscal 2013 compared to fiscal 2012 net sales . net sales decreased from $ 4,766 million in fiscal 2012 to $ 4,647 million in fiscal 2013. this decrease is primarily attributed to lower selling prices of 1 % and a volume decline of 2 % related to soft customer demand , year-over-year adverse change in weather and reductions in raw material content partially offset by acquisition volume related to stopaq and prime label and volume gains in certain of our product lines . the following discussion in this section provides a comparison of net sales by business segment . 18 replace_table_token_5_th net sales in the rigid open top business decreased from $ 1,229 million in fiscal 2012 to $ 1,127 million in fiscal 2013 as a result of net selling price decreases of 3 % , a volume decline of 2 % and product realignment of 3 % . the volume decline is primarily related to soft customer demand and year-over-year adverse change in weather . net sales in the rigid closed top business decreased from $ 1,438 million in fiscal 2012 to $ 1,387 million in fiscal 2013 as a result of net selling price decreases of 2 % and a volume decline of 2 % . the volume decline is primarily attributed to general market softness and a reduction in raw material content . the engineered materials business net sales increased from $ 1,362 million in fiscal 2012 to $ 1,397 million in fiscal 2013. product realignment of 3 % , net selling price increases of 1 % and acquisition volume related to stopaq were partially offset by 2 % volume declines attributed to soft customer demand . net sales in the flexible packaging business decreased from $ 737 million in fiscal 2012 to $ 736 million in fiscal 2013 as a result of a 2 % volume decline attributed to factors discussed above partially offset by acquisition volume related to our prime label acquisition . operating income . story_separator_special_tag operating income increased from $ 325 million ( 7 % of net sales ) in fiscal 2012 to $ 386 million ( 8 % of net sales ) in fiscal 2013. this increase is primarily attributed to $ 5 million from the relationship of net selling price to raw material costs , $ 12 million decrease in depreciation expense excluding the impact from acquisitions , $ 8 million decrease in amortization expense excluding the impact from acquisitions , $ 8 million decrease in selling , general and administrative expenses , $ 30 million decrease in business integration , $ 3 million from acquisitions and a $ 11 million decrease in non-cash impairment charges related to exited businesses partially offset by $ 1 million decline in operating performance in manufacturing and $ 15 million from sales volume declines described above . the following discussion in this section provides a comparison of operating income by business segment . replace_table_token_6_th operating income for the rigid open top business decreased from $ 159 million ( 13 % of net sales ) in fiscal 2012 to $ 123 million ( 11 % of net sales ) in fiscal 2013. this decrease is primarily attributed to a $ 8 million decline in the relationship of net selling price to raw material costs , $ 7 million from sales volume declines described above , $ 11 million decline in operating performance in manufacturing , $ 4 million increase of selling , general and administrative expenses primarily attributed to costs associated with new product innovation , $ 5 million increase in business integration expenses and $ 1 million increase in depreciation and amortization expense . operating income for the rigid closed top business increased from $ 95 million ( 7 % of net sales ) in fiscal 2012 to $ 130 million ( 9 % of net sales ) in fiscal 2013. this increase is primarily attributed to a $ 24 million decline in business integration expenses , $ 1 million improvement in the relationship of net selling price to raw material costs , $ 6 million reduction of depreciation and amortization expense , $ 2 million of improved operating performance in manufacturing and $ 6 million decrease in selling , general and administrative expenses partially offset $ 4 million from sales volume declines described above . operating income for the engineered materials business increased from $ 70 million ( 5 % of net sales ) in fiscal 2012 to $ 116 million ( 8 % of net sales ) in fiscal 2013. this increase is primarily attributed to a $ 11 million decrease in non-cash impairment charges related to exited businesses , $ 3 million from acquisitions , $ 9 million improvement in the relationship of net selling price to raw material costs , $ 9 million of improved operating performance in manufacturing , $ 7 million decrease in selling , general and administrative expenses , $ 5 million decrease in depreciation and amortization expense excluding the impact from acquisitions and a $ 5 million decrease in business integration expenses partially offset by $ 3 million from sales volume declines described above . operating income for the flexible packaging business improved from $ 1 million in fiscal 2012 to $ 17 million ( 2 % of net sales ) in fiscal 2013. this improvement is primarily attributed to a $ 6 million reduction of business integration expense , $ 10 million reduction of depreciation and amortization expense and a $ 3 million improvement in the relationship of net selling price to raw material costs partially offset by $ 1 million increase of selling , general and administrative expenses , $ 1 million decline in operating performance in manufacturing and $ 1 million from sales volume declines described above . 19 debt extinguishment . debt extinguishment was $ 64 million during fiscal 2013 as a result of loss on extinguishment of debt attributed to $ 37 million of call premium and penalties , $ 19 million of deferred financing fees and $ 8 million of debt discount related to the debt extinguishment that resulted from our incremental term loan capital and the use of the proceeds from our initial public offering . other income , net . other income was $ 7 million in fiscal 2013 and fiscal 2012 , respectively . these gains are attributed to the fair value adjustment for our interest rate swaps . interest expense , net . interest expense decreased from $ 328 million in fiscal 2012 to $ 244 million in fiscal 2013 primarily as the result of the interest savings that resulted from our incremental term loan restructure and initial public offering , which proceeds were used to pay off indebtedness . income tax expense . fiscal 2013 , we recorded an income tax expense of $ 28 million or an effective tax rate of 33 % compared to an income tax expense of $ 2 million or an effective tax rate of 50 % in fiscal 2012. the effective tax rate is impacted by the relative impact of discrete items and certain international entities for which a full valuation allowance is recognized . income tax matters the company had unused united states federal operating loss carryforwards to offset future taxable income of $ 601 million as of fiscal 2014. as of fiscal year-end 2014 , the company had state and foreign net operating loss carryforwards of $ 803 million and $ 106 million , respectively , which will be available to offset future taxable income . if not used , the federal net operating loss carryforwards will expire in future years beginning 2025 through 2031. amt credit carryforwards totaling $ 9 million are available to the company indefinitely to reduce future years ' federal income taxes .
| we seek to improve our overall profitability by implementing cost reduction programs associated with our manufacturing , selling and general and administrative expenses . 15 recent developments 2014 cost reduction plan in november 2013 , the company initiated a cost reduction plan designed to deliver approximately $ 27 million of cost savings and improved equipment utilization . this plan resulted in several plant rationalizations . as a result of these plant rationalizations the company has incurred over $ 55 million of costs during fiscal 2014 associated with facility consolidation , including severance and termination benefits , other costs associated with exiting facilities and non-cash asset impairment charges . term loan refinancing in january 2014 , the company entered into an incremental assumption agreement to increase the commitments under the company 's existing term loan credit agreement by $ 1.125 billion . the company borrowed loans in an aggregate principal amount equal to the full amount of the commitments on such date . the incremental term loan bears interest at libor plus 2.75 % per annum with a libor floor of 1.00 % , matures in january 2021 and is subject to customary amortization . the proceeds from the incremental term loan , in addition to existing liquidity , were used to satisfy the outstanding term loan facility that was to mature in april 2015. the company recognized a $ 2 million loss on extinguishment of debt related to this refinancing . 5ยฝ % second priority senior secured notes in may 2014 , the company issued $ 500 million of 5ยฝ % second priority senior secured notes due 2022. interest on the 5ยฝ % second priority senior secured notes is due semi-annually on may 15 and november 15. proceeds from the issuance , in addition to existing liquidity , were used to satisfy and discharge all of the outstanding 9ยฝ % second priority senior secured notes . the company recognized a $ 33 million loss on extinguishment of debt related to this debt issuance . secondary public offerings in february
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maci ยฎ ( autologous cultured chondrocytes on porcine collagen membrane ) is an autologous cellularized scaffold product indicated for the repair of symptomatic , single or multiple full-thickness cartilage defects of the knee with or without bone involvement in adults that was approved by the fda on december 13 , 2016. the first shipment and implantation of maci occurred on january 31 , 2017. at the end of the second quarter of 2017 , we removed carticel ยฎ ( autologous cultured chondrocytes ) , an earlier generation aci product , from the market . we also market epicel ยฎ ( cultured epidermal autografts ) , a permanent skin replacement humanitarian use device ( hud ) for the treatment of adult and pediatric patients with deep-dermal or full-thickness burns comprising greater than or equal to 30 percent of total body surface area ( tbsa ) . manufacturing we have a cell-manufacturing facility in cambridge , massachusetts which is used for u.s. manufacturing and distribution of maci and epicel . throughout 2016 and early 2017 , we also operated a centralized cell manufacturing facility in ann arbor , michigan . the ann arbor facility previously supported the open label extension portion of the ixcell-dcm clinical trial conducted in the united states and canada . product portfolio our approved and marketed products include two approved autologous cell therapy products : maci , a third generation autologous implant for the repair of symptomatic , full-thickness cartilage defects of the knee in adult patients and epicel , a permanent skin replacement for full thickness burns in adults and pediatrics with greater than or equal to 30 % of tbsa , both of which are currently marketed in the u.s. we also own carticel which is no longer marketed in the u.s. until 2017 , our active product candidate portfolio included ixmyelocel-t , a patient-specific multicellular therapy for the treatment of advanced heart failure due to dilated cardiomyopathy , or dcm . we have no current plans to continue the development of ixmyelocel-t. 48 maci and carticel carticel , an earlier generation aci product for the treatment and repair of cartilage defects in the knee , was the first fda-approved autologous cartilage repair product . carticel was replaced at the end of the second quarter of 2017 by maci , which was approved on december 13 , 2016 by the fda . maci is a third generation autologous implant for the repair of symptomatic , single or multiple full-thickness cartilage defects of the knee with or without bone involvement in adults . the first shipment and implantation of maci occurred on january 31 , 2017 , and we stopped manufacturing and marketing carticel at the end of the second quarter in 2017. in the u.s. , the physician target audience which repairs cartilage defects is very concentrated and is comprised of a group of physicians who self-identify as or have the formal specialty of sports medicine physicians . we believe this target audience is approximately 3,500 physicians . in addition to these physicians there is a population of 5,000 to 8,000 general orthopedic surgeons who treat cartilage injuries , although at a much lower average volume relative to the sports medicine physicians . we expanded our field force from 40 to 48 representatives in 2018. most private payers have a medical policy that allows treatment with maci with all of the top 30 largest commercial payers having a formal medical policy for maci or aci in general . for those private payers , which have not yet approved a medical policy for maci , for medically appropriate cases , we can often obtain approval on a case by case basis . in the year ended december 31 , 2018 , net revenues were $ 67.7 million for maci . epicel epicel is a permanent skin replacement for full thickness burns greater than or equal to 30 % of tbsa . epicel is regulated by the center for biologics evaluation and research , or cber of the u.s. food and drug administration , or fda under medical device authorities , and is the only fda-approved autologous epidermal product available for large total surface area burns . epicel was designated as a hud in 1998 and a humanitarian device exception ( hde ) application for the product was submitted in 1999. huds are devices that are intended for diseases or conditions that affect fewer than 8,000 individuals annually in the u.s. under an hde approval , a hud can not be sold for an amount that exceeds the cost of research and development , fabrication and distribution unless certain conditions are met . a hud is eligible to be sold for profit after receiving hde approval if the device meets certain eligibility criteria , including where the device is intended for the treatment of a disease or condition that occurs in pediatric patients and such device is labeled for use in pediatric patients . if the fda determines that a hud meets the eligibility criteria , the hud is permitted to be sold for profit as long as the number of devices distributed in any calendar year does not exceed the annual distribution number ( adn ) . the adn is defined as the number of devices reasonably needed to treat a population of 8,000 individuals per year in the u.s. on february 18 , 2016 , the fda approved our hde supplement to revise the labeled indications of use to specifically include pediatric patients and to add pediatric labeling . the revised product label also now specifies that the probable benefit of epicel , mainly related to survival , was demonstrated in two epicel clinical experience databases and a physician-sponsored study comparing outcomes in patients with massive burns treated with epicel relative to standard care . story_separator_special_tag due to the change in the label to specifically include use in pediatric patients , epicel is no longer subject to the hde profit restrictions . in conjunction with adding the pediatric labeling and meeting the pediatric eligibility criteria , the fda has determined the adn number for epicel is 360,400 which is approximately 45 times larger than the volume of grafts sold in 2018. we currently have a 5-person field force . in the year ended december 31 , 2018 , net revenues were $ 23.1 million for epicel . ixmyelocel-t our preapproval stage portfolio includes ixmyelocel-t , a unique multicellular therapy derived from an adult patient 's own bone marrow which utilizes our proprietary , highly automated and scalable manufacturing system . this multicellular therapy was developed for the treatment of advanced heart failure due to dcm . ixmyelocel-t has been granted a u.s. orphan drug designation by the fda for the treatment of dcm . we completed enrolling and treating patients in our completed phase 2b ixcell-dcm study in february , 2015. patients were followed for 12 months for the primary efficacy endpoint of major cardiac adverse events , or mace . on march 10 , 2016 , we announced the trial had met its primary endpoint of reduction in clinical cardiac events and that the incidence of adverse events , including serious adverse events , in patients treated with ixmyelocel-t was comparable to patients in the placebo group . patients were then followed for an additional 12 months for safety . because the trial met the primary endpoint , patients who received placebo or were randomized to ixmyelocel-t in the double-blind portion of the trial but did not receive ixmyelocel-t were offered the option to receive ixmyelocel-t. we successfully treated the last patients in february 2017 , and the last follow-up visit occurred approximately one 49 year later . in addition , we have conducted clinical studies for the treatment of critical limb ischemia , and an ixmyelocel-t investigator-initiated clinical study was conducted for the treatment of craniofacial reconstruction . on september 29 , 2017 , the fda indicated we would be required to conduct at least one additional phase 3 clinical study to support a bla for ixmyelocel-t. given the expense required to conduct further development and our focus on growing our existing commercial products , at this time we have no current plans to initiate or fund a phase 3 trial on our own . story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > since the acquisition in 2014 of the ctrm business of sanofi , our primary focus has been to invest in our existing commercial business with the goal of growing revenue . in june 2018 , we sold 5,750,000 shares of our common stock in an underwritten public offering at a price of $ 13.00 per share . we received proceeds of $ 70.1 million , net of $ 4.7 million of underwriters ' discount and issuance costs consisting primarily of legal and accounting fees . we recorded these proceeds as a common stock issuance . we currently intend to use the net proceeds from this offering primarily for general corporate purposes , as well as to expand our business by in-licensing or acquiring , as the case may be , product candidates , technologies , other assets , commercial products or businesses which would be complementary to our existing commercial franchises or our advanced cell therapy platform ; however , we have no current commitments or obligations to do so . we have raised significant funds in order to complete our product development programs , and complete clinical trials needed to market and commercialize our products . to date , we have financed our operations primarily through public and private sales of our equity securities . our cash and cash equivalents totaled $ 18.3 million and short term investments totaled $ 64.6 million as of december 31 , 2018 . the $ 0.4 million of cash used by operations was a result of an $ 8.1 million net loss , offset by noncash charges including 52 $ 7.2 million in stock compensation expense , $ 2.5 million in warrant fair value fluctuations and $ 1.4 million in depreciation and amortization expense . working capital requirements increased due to a $ 5.2 million increase in accounts receivable , and $ 1.3 million increase in prepaid and other current assets as a result of the increase in sales volume , slightly offset by an increase of $ 0.9 million and $ 1.5 million to our accounts payable and accrued expenses , respectively , related to the timing of payments . our cash totaled $ 26.9 million at december 31 , 2017 . the primary uses of cash included $ 13.2 million for our operations and working capital requirements . this use of funds was attributed largely to our operating loss due to an increase in expenditures for sales and marketing initiatives and investment in research and development activities in 2017 , reduced by noncash charges including $ 2.7 million in stock compensation expense and $ 1.6 million in depreciation and amortization expense . working capital requirements increased due to $ 1.4 million in accounts payable primarily related to timing of payments and a $ 1.2 million increase in accounts receivable as a result in the increase of days sales outstanding related to the change in reimbursement and patient support service providers . the change in cash used for investing activities in 2018 is the result of $ 66.5 million in short term investments purchases offset by $ 2.2 million of maturities and property plant and equipment purchases of $ 2.7 million primarily for manufacturing upgrades and leasehold improvements through december 31 , 2018 .
| over the last four years aci ( maci and carticel prior to its replacement ) sales volumes from the first through the fourth quarter have on average represented 20 % , 24 % , 22 % and 35 % respectively , of total annual volumes . maci orders are stronger in the fourth quarter due to a number of factors including insurance copay limits and the time of year patients prefer to start rehabilitation . epicel revenue is also subject to seasonal fluctuations mostly associated with the use of heating elements during the colder months , with stronger sales occurring in the winter months of the first and fourth quarters , and weaker sales occurring in the hot summer months of the third quarter . however , in any single year , this trend can be absent due to the extreme variability inherent with epicel 's patient volume . over the last four years the percentage of annual product orders for epicel as on average been 28 % , 25 % , 21 % and 27 % from the first to the fourth quarters . 50 gross profit and gross profit ratio replace_table_token_4_th gross profit increased for the years ended december 31 , 2018 compared to 2017 as well as for the year ended december 31 , 2017 compared to 2016 , in each case due primarily to an increase in maci ( and formerly carticel ) and epicel sales combined with our highly fixed manufacturing cost structure which consists mainly of labor and facility costs that do not materially fluctuate with volume increases . research and development costs replace_table_token_5_th the following table summarizes the approximate allocation of cost for our research and development projects : replace_table_token_6_th research and development expenses for the year ended december 31 , 2018 were $ 13.6 million compared to $ 12.9 million for the year ended december 31 , 2017 . these expenses include research costs associated with manufacturing process improvement activities , the ongoing maci pediatric trial , pharmacovigilance and other reporting and compliance requirements , as well as medical affairs and external grants . the increase for aci and epicel costs was primarily driven by increased employee stock-based compensation expenses . expenses related to dilated cardiomyopathy are
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signatures title ( s ) date john fieldly president and chief executive officer march 14 , 2019 john fieldly ( principal executive officer ) chief financial officer and director march 14 , 2019 edwin f. negron-carballo ( principal financial and accounting officer ) edwin f. negron-carballo kevin harrington director march 14 , 2019 kevin harrington hal kravitz director march 14 , 2019 hal kravitz tony lau director march 14 , 2019 tony lau thomas e. lynch director march 14 , 2019 thomas e. lynch william h. milmoe director march 14 , 2019 william h. milmoe 34 index to consolidated financial statements page report of independent registered public accounting firm f-2 consolidated balance sheets as of december 31 , 2018 and 2017 f-3 consolidated statements of operations for the years ended december 31 , 2018 and 2017 f-4 consolidated statements of comprehensive income for the years ended december 31 , 2018 and 2017 f-5 consolidated statements of changes in stockholders ' equity for the years ended december 31 , 2018 and 2017 f-6 consolidated statements of cash flows for the years ended december 31 , 2018 and 2017 f-7 notes to consolidated financial statements f-8 report of independent registered public accounting firm to the board of directors and stockholders of celsius holdings , inc. opinions on the financial statements and internal control over financial reporting we have audited the accompanying consolidated balance sheets of celsius holdings , inc. ( the company ) as of december 31 , 2018 and 2017 , and the related consolidated statements of operations , comprehensive income , stockholders ' equity , and cash flows for each of the years in the two-year period ended december 31 , 2018 , and the related notes ( collectively referred to as the consolidated financial statements ) . we also have audited the company 's internal control over financial reporting as of december 31 , 2018 , based on criteria established in internal controlโintegrated framework ( 2013 ) issued by the committee of sponsoring organizations of the treadway commission ( coso ) . in our opinion , the consolidated financial statements referred to above present fairly , in all material respects , the financial position of the company as of december 31 , 2018 and 2017 and the results of its operations and its cash flows for each of the years in the two-year period ended december 31 , 2018 , in conformity with accounting principles generally accepted in the united states of america . also , in our opinion , the company maintained , in all material respects , effective internal control over financial reporting as of december 31 , 2018 , based on criteria established in internal controlโintegrated framework ( 2013 ) issued by coso . basis for opinion the company 's management is responsible for these consolidated financial statements , for maintaining effective internal control over financial reporting , and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying management 's report on internal control over financial reporting . our responsibility is to express an opinion on the company 's consolidated financial statements and an opinion on the story_separator_special_tag you should read the following discussion in conjunction with the audited financial statements and the corresponding notes , the unaudited financial statements and the corresponding notes included elsewhere in this information statement . this item 7 contains forward-looking statements . the matters discussed in these forward-looking statements are subject to risk , uncertainties , and other factors that could cause actual results to differ materially from those made , projected or implied in the forward-looking statements . please refer to โ item 1a . risk factors โ for a discussion of the uncertainties , risks and assumptions associated with these statements . story_separator_special_tag expense . 17 liquidity and capital resources as of december 31 , 2018 , and december 31 , 2017 , we had cash of approximately $ 7.7 million and $ 14.2 million , respectively and working capital of approximately $ 20.2 million and $ 20.6 million , respectively . cash used in operations during the years ended december 31 , 2018 and 2017 , totaled approximately $ 12.1 million and $ 8.4 million , respectively , reflecting increases in inventories on hand , accounts receivable and investments in sales and marketing programs as well as human resources initiatives . in addition to cash flow from operations , our primary sources of working capital have been private placements of our securities and our credit facilities with cd financial , llc ( โ cd financial โ ) , an affiliate of carl desantis , a principal shareholder of the company , as well as charmnew limited and grieg international limited . we originally entered into a loan and security agreement with cd financial in july 2010 , which provided us with a line of credit to fund operations . as amended in connection with a private investment transaction consummated in april 2015 , the loan and security agreement provided celsius with a revolving line of credit pursuant to which celsius can borrow up to an aggregate maximum of $ 4.5 million from time to time until maturity in january 2020. the credit facility requires quarterly cash payments of interest only at the rate of five percent ( 5 % ) per annum until maturity and is secured by a pledge of substantially all the company 's assets . the company entered into convertible loan agreements ( the โ loan agreements โ ) with its affiliates charmnew limited ( โ charmnew โ ) and grieg international limited ( โ grieg โ ) on december 12 , 2018 , and with its affiliate cd financial on december 14 , 2018 , providing for aggregate loans to the company in principal amounts of us $ 3,000,000 , us $ 2,000,000 and us $ 5,000,000. in connection with the loan agreements , the company executed and delivered convertible promissory notes ( the โ notes story_separator_special_tag signatures title ( s ) date john fieldly president and chief executive officer march 14 , 2019 john fieldly ( principal executive officer ) chief financial officer and director march 14 , 2019 edwin f. negron-carballo ( principal financial and accounting officer ) edwin f. negron-carballo kevin harrington director march 14 , 2019 kevin harrington hal kravitz director march 14 , 2019 hal kravitz tony lau director march 14 , 2019 tony lau thomas e. lynch director march 14 , 2019 thomas e. lynch william h. milmoe director march 14 , 2019 william h. milmoe 34 index to consolidated financial statements page report of independent registered public accounting firm f-2 consolidated balance sheets as of december 31 , 2018 and 2017 f-3 consolidated statements of operations for the years ended december 31 , 2018 and 2017 f-4 consolidated statements of comprehensive income for the years ended december 31 , 2018 and 2017 f-5 consolidated statements of changes in stockholders ' equity for the years ended december 31 , 2018 and 2017 f-6 consolidated statements of cash flows for the years ended december 31 , 2018 and 2017 f-7 notes to consolidated financial statements f-8 report of independent registered public accounting firm to the board of directors and stockholders of celsius holdings , inc. opinions on the financial statements and internal control over financial reporting we have audited the accompanying consolidated balance sheets of celsius holdings , inc. ( the company ) as of december 31 , 2018 and 2017 , and the related consolidated statements of operations , comprehensive income , stockholders ' equity , and cash flows for each of the years in the two-year period ended december 31 , 2018 , and the related notes ( collectively referred to as the consolidated financial statements ) . we also have audited the company 's internal control over financial reporting as of december 31 , 2018 , based on criteria established in internal controlโintegrated framework ( 2013 ) issued by the committee of sponsoring organizations of the treadway commission ( coso ) . in our opinion , the consolidated financial statements referred to above present fairly , in all material respects , the financial position of the company as of december 31 , 2018 and 2017 and the results of its operations and its cash flows for each of the years in the two-year period ended december 31 , 2018 , in conformity with accounting principles generally accepted in the united states of america . also , in our opinion , the company maintained , in all material respects , effective internal control over financial reporting as of december 31 , 2018 , based on criteria established in internal controlโintegrated framework ( 2013 ) issued by coso . basis for opinion the company 's management is responsible for these consolidated financial statements , for maintaining effective internal control over financial reporting , and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying management 's report on internal control over financial reporting . our responsibility is to express an opinion on the company 's consolidated financial statements and an opinion on the story_separator_special_tag you should read the following discussion in conjunction with the audited financial statements and the corresponding notes , the unaudited financial statements and the corresponding notes included elsewhere in this information statement . this item 7 contains forward-looking statements . the matters discussed in these forward-looking statements are subject to risk , uncertainties , and other factors that could cause actual results to differ materially from those made , projected or implied in the forward-looking statements . please refer to โ item 1a . risk factors โ for a discussion of the uncertainties , risks and assumptions associated with these statements . story_separator_special_tag expense . 17 liquidity and capital resources as of december 31 , 2018 , and december 31 , 2017 , we had cash of approximately $ 7.7 million and $ 14.2 million , respectively and working capital of approximately $ 20.2 million and $ 20.6 million , respectively . cash used in operations during the years ended december 31 , 2018 and 2017 , totaled approximately $ 12.1 million and $ 8.4 million , respectively , reflecting increases in inventories on hand , accounts receivable and investments in sales and marketing programs as well as human resources initiatives . in addition to cash flow from operations , our primary sources of working capital have been private placements of our securities and our credit facilities with cd financial , llc ( โ cd financial โ ) , an affiliate of carl desantis , a principal shareholder of the company , as well as charmnew limited and grieg international limited . we originally entered into a loan and security agreement with cd financial in july 2010 , which provided us with a line of credit to fund operations . as amended in connection with a private investment transaction consummated in april 2015 , the loan and security agreement provided celsius with a revolving line of credit pursuant to which celsius can borrow up to an aggregate maximum of $ 4.5 million from time to time until maturity in january 2020. the credit facility requires quarterly cash payments of interest only at the rate of five percent ( 5 % ) per annum until maturity and is secured by a pledge of substantially all the company 's assets . the company entered into convertible loan agreements ( the โ loan agreements โ ) with its affiliates charmnew limited ( โ charmnew โ ) and grieg international limited ( โ grieg โ ) on december 12 , 2018 , and with its affiliate cd financial on december 14 , 2018 , providing for aggregate loans to the company in principal amounts of us $ 3,000,000 , us $ 2,000,000 and us $ 5,000,000. in connection with the loan agreements , the company executed and delivered convertible promissory notes ( the โ notes
| sales and marketing expenses sales and marketing expenses for the year ended december 31 , 2018 , were approximately $ 21.2 million , an increase of $ 4.6 million , or 28 % from $ 16.6 million for the year ended december 31 , 2017. the increase is due primarily to incremental in investments in sales and marketing programs which totaled $ 14.6 million in 2018 , with focus on expansion and the launch of products into china and hong kong which accounted for approximately $ 7.1 million . the increase in sales and marketing expenses from 2017 to 2018 also reflected increased warehouse costs of $ 394,000 , broker costs of $ 422,000 and increases in human resource investments of $ 1.1 million respectively . as a result of the royalty license and repayment of investment agreement entered into effective january 1 , 2019 with qifeng , our distribution partner in china. , we anticipate that selling in marketing expenses in china will decrease in subsequent periods . general and administrative expenses general and administrative expenses for the year ended december 31 , 2018 were approximately $ 10.5 million , an increase of $ 3.6 million , or 52 % , from $ 6.9 million for the year ended december 31 , 2017. the increase was primarily due to higher stock-based compensation of $ 2.1 million and other general administration expenses of $ 1.5 million , mainly related the settlement of a lawsuit with a former distributor of approximately $ 1.0 million . other expense total other expense increased by approximately $ 405,000 for year ended december 31 , 2018 to $ 566,000 from $ 161,000 for the year ended december 31 , 2017 , mainly related to the recognition of a loss on debt extinguishment of $ 377,000 and amortization of discounts on notes payable of $ 28,000. net loss as a result of all the above , for the year ended december 31 , 2018 , celsius had a net loss of $ 11.2 million and after giving effect to preferred stock dividends of $ 213,133 , a net loss of $ 11.4
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asu 2016-09 will be effective for the company for fiscal years beginning after december 15 , 2016 , and interim periods within those fiscal years . early adoption is permitted in any interim or annual period . the company has adopted asu 2016-09 in the context of how the company accounts for stock forfeitures , which is reflected in the company 's financial statements . the adoption had no impact since we were already using a 0 % forfeiture rate . 23 in march 2016 , the fasb issued asu no . 2016-05 โ derivatives and hedging ( topic 815 ) : effect of derivative contract novations on existing hedge accounting relationships โ ( โ asu 2016-05 โ ) . asu 2016-05 addresses the impact on hedge accounting due to a change in a counterparty to a derivative instrument that has been designated as a hedging instrument under topic 815. the amendments in this update apply to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under topic 815. the amendments in this update clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under topic 815 does not , in and of itself , require dedesignation of that hedging relationship provided that all other hedge accounting criteria ( including those in paragraphs 815-20-35-14 through 35-18 ) continue to be met . for public business entities , the amendments in this update are effective for financial statements issued for fiscal years beginning after december 15 , 2016 , and interim periods within those fiscal years . the company evaluated asu 2016-05 in the context of our hedge accounting and concluded that it will not have a material impact on the company 's financial statements upon adoption . in february 2016 , the fasb issued asu no . 2016-02 โ leases โ ( โ asu 2016-02 โ ) . the new standard creates topic 842 , leases , in fasb accounting standards codification ( fasb asc ) and supersedes fasb asc 840 , leases . asu 2016-02 requires a lessee to recognize the assets and liabilities that arise from leases ( operating and finance ) . however , for leases with a term of 12 months or less , a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities . the main difference between the existing guidance on accounting for leases and the new standard is that operating leases will now be recorded in the statement of financial position as assets and liabilities . the new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases and operating leases . asu 2016-02 is expected to impact the company 's consolidated financial statements as the company has certain operating land lease arrangements for which it is the lessee . current gaap requires only capital ( finance ) leases to be recognized in the statement of financial position and amounts related to operating leases largely are reflected in the financial statements as rent expense on the income statement and in disclosures to the financial statements . asu 2016-02 is effective for annual reporting periods ( including interim periods within those periods ) beginning after december 15 , 2018. early adoption is permitted . the company is in the process of determining the impact that the implementation of asu 2016-02 will have on the company 's financial statements . we anticipate there will be an immaterial impact for the leases in which the company is the lessor and or the lessee . in april 2015 , the fasb issued asu no . 2015-03 โ interest โ imputation of interest ( subtopic 835-30 ) : simplifying the presentation of debt issuance costs โ ( โ asu 2015-03 โ ) . the objective of asu 2015-03 is to identify , evaluate , and improve areas of gaap for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements . to simplify presentation of debt issuance costs , the amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability , consistent with debt discounts . the recognition and measurement guidance for debt issuance costs are not affected by the amendments . asu 2015-03 is effective for annual reporting periods ( including interim periods within those periods ) beginning after december 15 , 2015. early adoption is permitted . the company has adopted asu 2015-03 and determined the resulting impact on the statements is a reclassification of certain deferred financing costs from other assets to each respective balance sheet debt account . in may 2014 , with subsequent updates issued in august 2015 and march , april and may 2016 , the fasb issued asu no . 2014-09 โ revenue from contracts with customers ( topic 606 ) โ ( โ asu 2014-09 โ ) . asu 2014-09 was developed to enable financial statement users to better understand the nature , amount , timing and uncertainty of revenue and cash flows arising from contracts with customers . the update 's core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services . companies are to use a five-step contract review model to ensure revenue is recognized , measured and disclosed in accordance with this principle . asu 2014-09 , as updated , is effective for fiscal years and interim periods beginning after december 15 , 2017. the company is in the process of engaging a professional services firm to assist in the implementation of asu 2014-09 and has not currently selected a transition method . story_separator_special_tag in addition we are in the process of determining the impact that the implementation of asu 2014-09 , as updated , will have on the company 's financial statements and it is considered likely the implementation will change the company 's disclosures . 24 critical accounting policies our accounting policies are determined in accordance with gaap . the preparation of our financial statements requires us to make estimates and assumptions that are subjective in nature and , as a result , our actual results could differ materially from our estimates . set forth below are the more critical accounting policies that require management judgment and estimates in the preparation of our consolidated financial statements . this summary should be read in conjunction with the more complete discussion of our accounting policies and procedures included in note 2 to our consolidated financial statements . revenue recognition we lease real estate to our tenants under long-term net leases which we account for as operating leases . under this method , leases that have fixed and determinable rent increases are recognized on a straight-line basis over the lease term . rental increases based upon changes in the consumer price indexes , or other variable factors , are recognized only after changes in such factors have occurred and are then applied according to the lease agreements . certain leases also provide for additional rent based on tenants ' sales volumes . these rents are recognized when determinable by us after the tenant exceeds a sales breakpoint . contractually obligated reimbursements from tenants for recoverable real estate taxes and operating expenses are generally included in operating costs reimbursement in the period when such expenses are recorded . real estate investments we record the acquisition of real estate at cost , including acquisition and closing costs . for properties developed by us , all direct and indirect costs related to planning , development and construction , including interest , real estate taxes and other miscellaneous costs incurred during the construction period , are capitalized for financial reporting purposes and recorded as property under development until construction has been completed . accounting for acquisitions of real estate the acquisition of property for investment purposes is typically accounted for as an asset acquisition . we allocate the purchase price to land , building and identified intangible assets and liabilities , based in each case on their relative estimated fair values and without giving rise to goodwill . intangible assets and liabilities represent the value of in-place leases and above- or below-market leases . in making estimates of fair values , we may use a number of sources , including data provided by independent third parties , as well as information obtained by the company as a result our due diligence , including expected future cash flows of the property and various characteristics of the markets where the property is located . depreciation our real estate portfolio is depreciated using the straight-line method over the estimated remaining useful life of the properties , which generally ranges from 30 to 40 years for buildings and 10 to 20 years for improvements . impairments we review our real estate investments periodically for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable . events or circumstances that may occur include , but are not limited to , significant changes in real estate market conditions or our ability to re-lease or sell properties that are vacant or become vacant . management determines whether an impairment in value has occurred by comparing the estimated future cash flows ( undiscounted and without interest charges ) , including the residual value of the real estate , with the carrying cost of the individual asset . an asset is considered impaired if its carrying value exceeds its estimated undiscounted cash flows and an impairment charge is recorded in the amount by which the carrying value of the asset exceeds its estimated fair value . story_separator_special_tag text-align : left '' > 26 percentage rents remained generally consistent with prior periods . operating cost reimbursements increased $ 1.5 million , or 38 % , to $ 5.3 million in 2015 , compared to $ 3.8 million in 2014. operating cost reimbursements increased due to higher levels of recoverable property operating expenses , including real estate taxes , acquisition , disposition , and development activity . our portfolio recovery rate increased to 91 % in 2015 compared to 86 % in 2014. other income remained generally consistent with prior periods . real estate taxes increased $ 1.2 million , or 45 % , to $ 4.0 million in 2015 , compared to $ 2.8 million in 2014. the increase is due to the ownership of additional properties in 2015 compared to 2014 for which we remit real estate taxes and are subsequently reimbursed by tenants . property operating expenses increased $ 0.1 million , or 5 % , to $ 1.8 million in 2015 , compared to $ 1.7 million in 2014. the increase is primarily due to the ownership of additional properties in 2015 compared to 2014 which contributed to higher property maintenance , utilities and insurance expenses . our tenants subsequently reimbursed us for the majority of these expenses . land lease payments increased $ 0.1 million , or 29 % , to $ 0.6 million in 2015 , compared to $ 0.5 million for 2014. the increase is the result of additional properties acquired in 2015 compared to 2014 that are subject to a land leases . general and administrative expenses increased $ 0.4 million , to $ 7.0 million in 2015 , compared to $ 6.6 million in 2014. the increase is primarily due to an increase in the number of employees resulting in an increased employee cost of $ 0.2 million and a net increase in other expenses of $ 0.1 million .
| property operating expenses increased $ 0.7 million , or 40 % , to $ 2.5 million in 2016 , compared to $ 1.8 million in 2015. the increase is primarily due to the ownership of additional properties in 2016 compared to 2015 which contributed to higher property maintenance , utilities and insurance expenses . our tenants subsequently reimbursed us for the majority of these expenses . land lease payments increased $ 0.1 million , or 8 % , to $ 0.7 million in 2016 , compared to $ 0.6 million in 2015. the increase is the result of the full year impact of additional properties acquired in 2015 that are subject to land leases . general and administrative expenses increased $ 1.0 million , or 15 % , to $ 8.0 million in 2016 , compared to $ 7.0 million in 2015. the increase is primarily the result of increased employee count and associated professional costs . general and administrative expenses as a percentage of total revenue decreased to 8.8 % for 2016 from 10.0 % in 2015. depreciation and amortization increased $ 6.9 million , or 42 % , to $ 23.4 million in 2016 , compared to $ 16.5 million in 2015. the increase was primarily the result of the acquisition of 82 properties in 2016 and 73 properties in 2015. we recorded no impairment charges during 2016 or 2015 , respectively . interest expense increased $ 3.0 million , or 25 % , to $ 15.3 million in 2016 , from $ 12.3 million in 2015. the increase in interest expense is primarily a result of additional debt issuance in 2016 , including the $ 40.0 million unsecured term loan facility we entered into in july 2016 and $ 60.0 million senior unsecured notes issued in july 2016 , which were offset by the repayment of the $ 8.6 million portfolio mortgage loan in march 2016. we recognized a net gain on sale of properties of $ 10.0 million in 2016 , including ( i )
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the acquisition of octane is expected to strengthen and diversify our brand portfolio , broaden our distribution and deepen our talent pool . octane 's business is anticipated to be highly complementary to our existing business from both product and channel perspectives and to create numerous revenue synergies for us . discontinued operations results from discontinued operations relate to the disposal of our former commercial business , which was completed in april 2011. we reached substantial completion of asset liquidation at december 31 , 2012. although there was no revenue related to the commercial business in 2015 , 2014 or 2013 , we continue to have legal and accounting expenses as we work with authorities on final deregistration of each international entity , and product liability and other legal expenses associated with product previously sold into the commercial channel . critical accounting policies and estimates the preparation of financial statements in conformity with generally accepted accounting principles requires estimates and assumptions that affect the reported amounts of assets and liabilities , revenues and expenses , and related disclosures of contingent assets and liabilities in the consolidated financial statements . an accounting estimate is considered to be critical if it meets both of the following criteria : ( i ) the estimate requires assumptions about matters that are highly uncertain at the time the accounting estimate is made , and ( ii ) different estimates reasonably could have been used , or changes in the estimate that are reasonably likely to occur from period to period may have a material impact on the presentation of our financial condition , changes in financial condition or results of operations . our critical accounting policies and estimates are discussed below . we have not made any material changes in the methodologies we use in our critical accounting estimates during the past three fiscal years . if our assumptions or estimates change in future periods , the impact on our financial position and operating results could be material . revenue recognition direct and retail product sales and shipping revenues are recorded when products are shipped and title passes to customers . in most instances , retail sales to customers are made pursuant to a sales contract that provides for transfer of both title and risk of loss to the customer upon our delivery to the carrier . for direct sales , revenue is generally recognized when product is shipped . revenue is recognized net of applicable sales incentives , such as promotional discounts , rebates and return allowances . we estimate the revenue impact of incentive programs based on the planned duration of the program and historical experience . sales discounts and allowances product sales and shipping revenues are reported net of promotional discounts and return allowances . we estimate the revenue impact of retail sales incentive programs based on the planned duration of the program and historical experience . if the amount of sales incentives is reasonably estimable , the impact of such incentives is recorded at the later of the time the customer is notified of the sales incentive or the time of the sale . we estimate our liability for product returns based on historical experience and record the expected obligation as a reduction of revenue . if actual return costs differ from previous estimates , the amount of the liability and corresponding revenue are adjusted in the period in which such costs occur . 18 our calculations of amounts owed for sales discounts and allowances contain uncertainties because they require management to make assumptions in interim periods and to apply judgment regarding a number of factors , including estimated future customer inventory purchases and returns . goodwill and other long-term assets valuation we evaluate our indefinite-lived intangible assets and goodwill for potential impairment annually or when events or circumstances indicate their carrying value may be impaired . definite-lived intangible assets , including acquired trade names , customer relationships , patents and patent rights , and other long-lived assets , primarily property , plant and equipment , are evaluated for impairment when events or circumstances indicate the carrying value may be impaired . no goodwill or other long-term asset impairment charges were recognized in 2015 , 2014 or 2013 . our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment in order to estimate future cash flows and asset fair values . our judgments regarding potential impairment are based on a number of factors including : the timing and amount of anticipated cash flows ; market conditions ; relative levels of risk ; the cost of capital ; terminal values ; royalty rates ; and the allocation of revenues , expenses and assets and liabilities to business segments . each of these factors can significantly affect the value of our goodwill or other long-term assets and , thereby , could have a material adverse effect on our financial position and results of operations . product warranty obligations our products carry defined warranties for defects in materials or workmanship . our product warranties generally obligate us to pay for the cost of replacement parts , cost of shipping the parts to our customers and , in certain instances , service labor costs . at the time of sale , we record a liability for the estimated costs of fulfilling future warranty claims . the estimated warranty costs are recorded as a component of cost of sales , based on historical warranty claim experience and available product quality data . if necessary , we adjust our liability for specific warranty matters when they become known and are reasonably estimable . our estimates of warranty expenses are based on significant judgment , and the frequency and cost of warranty claims are subject to variation . warranty expenses are affected by the performance of new products , significant manufacturing or design defects not discovered until after the product is delivered to the customer , product failure rates and variances in expected repair costs . story_separator_special_tag litigation and loss contingencies from time to time , we may be involved in claims , lawsuits and other proceedings . such matters involve uncertainty as to the eventual outcomes and any losses or gains we may ultimately realize when one or more future events occur or fail to occur . we record expenses for litigation and loss contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated . we estimate the probability of such losses based on the advice of internal and external counsel , outcomes from similar litigation , status of the lawsuits ( including settlement initiatives ) , legislative developments and other factors . due to the numerous variables associated with these judgments and assumptions , both the precision and reliability of the resulting estimates of the related loss contingencies are subject to substantial uncertainties . we regularly monitor our estimated exposure to these contingencies and , as additional information becomes known , we may change our estimates accordingly . deferred tax assets - valuation allowance we account for income taxes based on the asset and liability method , whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities . deferred tax assets and liabilities are measured using the enacted tax rates that are expected to be in effect when the temporary differences are expected to be included , as income or expense , in the applicable tax return . the effect of a change in tax rates on our deferred tax assets and liabilities is recognized in the period of the enactment . we have recorded a valuation allowance to reduce our deferred income tax assets to the amount we believe is more likely than not to be realized . each quarter , we assess the total weight of positive and negative evidence including cumulative income or loss for the past three years and forecasted taxable income and re-evaluate whether any adjustments or release of all or any portion of valuation allowance is appropriate . as a result of this evaluation , in 2014 , we determined that a portion of the existing valuation allowance against state net operating loss deferred tax assets was no longer necessary . accordingly , an income tax benefit of $ 1.2 million was recorded in the fourth quarter of 2014 related to the reduction of our existing valuation allowance . further , in the fourth quarter of 2015 , after re-evaluating the potential realization of the remainder of our deferred income tax assets , we concluded that , as of december 31 , 2015 , the existing valuation allowance against the foreign tax credit deferred tax assets , as well as substantially all of the remaining state net operating loss deferred tax assets , were no longer necessary . as such , an income tax benefit of $ 2.4 million was recorded in the fourth quarter of 2015 related to the reduction of our existing valuation allowance . 19 as of december 31 , 2015 we have a valuation allowance against net deferred income tax assets of $ 0.9 million . if our assumptions change and we determine we will be able to realize these deferred income tax assets , the tax benefits related to any reversal of the valuation allowance will be accounted for in the period in which we make such determination . likewise , should we determine that we would not be able to realize our deferred income tax assets in the future , an adjustment to the valuation allowance to reserve for the deferred income tax assets would increase expense in the period such determination was made . unrecognized tax benefits significant judgments are required in determining tax provisions and evaluating tax positions . such judgments require us to interpret existing tax law and other published guidance as applied to our circumstances . if our financial results or other relevant facts change , thereby impacting the likelihood of realizing the tax benefit of an uncertain tax position , significant judgment would be applied in determining the effect of the change . a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained based on the technical merits of the position upon examination , including resolutions of any related appeals or litigation . 20 story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > royalty income 5,631 5,365 266 5.0 % $ 274,447 $ 218,803 $ 55,644 25.4 % ( 1 ) cardio products include : treadclimber ยฎ , max trainer ยฎ , treadmills , exercise bikes and ellipticals . ( 2 ) strength products include : home gyms , selectorized dumbbells , kettlebell weights and accessories . net sales and cost of sales direct the 28.5 % increases in year-over-year direct net sales for both 2015 compared to 2014 and 2014 compared to 2013 were primarily related to a 31.4 % and 39.5 % increase , respectively , in direct sales of our cardio products that were due primarily to growth of the max trainer ยฎ , partially offset by declines in the treadclimber ยฎ and strength products . the business also benefited from higher u.s. consumer credit approval rates in both years . the increases in direct net sales of cardio products in 2015 compared to 2014 , and in 2014 compared to 2013 , were partially offset by a 2.1 % and a 29.7 % decline , respectively , in direct net sales of strength products , primarily rod-based home gyms . the declines in sales of rod-based home gyms were attributable , in part , to the reduction of advertising for these products over time , as management determined that television advertising spending on this mature product category was generating suboptimal returns .
| results of operations the discussion that follows should be read in conjunction with our consolidated financial statements and the related notes in this report . all comparisons to prior year results are in reference to continuing operations only in each period , unless otherwise indicated . results of operations information was as follows ( in thousands ) : replace_table_token_3_th replace_table_token_4_th 21 results of operations information by segment was as follows ( in thousands ) : replace_table_token_5_th replace_table_token_6_th 22 the following tables compare the net sales of our major product lines within each business segment ( in thousands ) : replace_table_token_7_th year ended december 31 , 2014 2013 change % change direct net sales : cardio products ( 1 ) $ 160,249 $ 114,846 $ 45,403 39.5 % strength products ( 2 ) 15,344 21,817 ( 6,473 ) ( 29.7 ) % 175,593 136,663 38,930 28.5 % retail net sales : cardio products ( 1 ) 56,262 36,692 19,570 53.3 % strength products ( 2 ) 36,961 40,083 ( 3,122 ) ( 7.8 ) % 93,223 76,775 16,448 21.4 % < font
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the contractual terms of the agreements generally provide for payments of upfront license fees over an extended period of time . revenue from such license fees is recognized when payments become due and payable as long as all other revenue recognition criteria are met , while revenue from royalties is recognized when reported . we enter into ip licensing agreements that generally provide licensees the right to incorporate our ip components into their products pursuant to terms and conditions that vary by licensee . revenue earned under these agreements is classified as licensing and services revenue . our ip licensing agreements generally include multiple elements , which may include one or more off-the-shelf or customized ip licenses bundled with support services covering a fixed period of time , generally one year . if the different elements of a multiple-element arrangement qualify as separate units of accounting , we allocate the total arrangement consideration to each element based on relative selling price . amounts allocated to off-the-shelf ip licenses are recognized at the time of sale provided the other conditions for revenue recognition have been met . amounts allocated to the support services are deferred and recognized on a straight-line basis over the support period , generally one year . certain licensing agreements provide for royalty payments based on agreed-upon royalty rates , which may be fixed or variable depending on the terms of the agreement . the amount of revenue we recognize is based on a specified time period or on the agreed-upon royalty rate multiplied by the number of units shipped by the customer . from time to time , we enter into ip licensing agreements that involve significant modification , customization or engineering services . revenues derived from these contracts are accounted for using the percentage-of-completion method or completed contract method . the completed contract method is used for contracts where there is a risk of final acceptance by the customer or for short-term contracts . hdmi royalty revenue is determined by a contractual allocation formula agreed to by the members of the hdmi consortium . evidence of an arrangement , as to hdmi royalty revenue , is deemed complete when all of the members of the hdmi consortium agree on the royalty sharing formula . fair value of financial instruments we invest in various financial instruments including corporate and government bonds , notes , and commercial paper . we were also invested in auction rate securities until june 2014. we value these instruments at their fair value and monitor our portfolio for impairment on a periodic basis . in the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other than temporary , we record an impairment charge and establish a new carrying value . we assess other-than-temporary impairment of marketable securities in accordance with financial accounting standards board ( โ fasb โ ) accounting standards codification ( โ asc โ ) 820 , โ fair value measurements. โ the framework under the provisions of asc 820 establishes three levels of inputs that may be used to measure fair value . each level of input has different levels of subjectivity and difficulty involved in determining fair value . level 1 instruments are characterized generally by quoted prices for identical assets or liabilities in active markets . therefore , determining fair value for level 1 instruments generally does not require significant management judgment , and the estimation is not difficult . level 2 instruments include inputs other than level 1 that are observable , either directly or indirectly , such as quoted prices for similar assets or liabilities ; quoted prices for identical instruments in markets that are not active ; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities . level 3 instruments include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities . our auction rate securities were classified as level 3 instruments . management used a combination of the market and income approach to derive the fair value of auction rate securities , which included third party valuation results , investment broker provided market information and available information on the credit quality of the underlying collateral . as a result , the determination of fair value for level 3 instruments requires significant management judgment and subjectivity . our level 3 instruments were classified as long-term marketable securities on our consolidated balance sheets 31 and were entirely made up of auction rate securities that consisted of student loan asset-backed notes . during fiscal 2014 we sold all of our level 3 instruments , which consisted entirely of auction rate securities . inventory inventories are recorded at the lower of actual cost determined on a first-in-first-out basis or market . we establish provisions for inventory if it is obsolete or we hold quantities which are in excess of projected customer demand . the creation of such provisions results in a write-down of inventory to net realizable value and a charge to cost of products sold . property and equipment property and equipment are stated at cost . depreciation and amortization are computed using the straight-line method for financial reporting purposes over the estimated useful lives of the related assets , generally three to five years for equipment and software , one to three years for tooling and thirty years for buildings . upon disposal of property and equipment , the accounts are relieved of the costs and related accumulated depreciation and amortization , and resulting gains or losses are reflected in the consolidated statements of operations for recognized gains and losses , or in the consolidated balance sheets for deferred gains and losses . repair and maintenance costs are expensed as incurred . impairment of long-lived assets long-lived assets , including amortizable intangible assets , are carried on our financial statements based on their cost less accumulated depreciation or amortization . story_separator_special_tag we monitor the carrying value of our long-lived assets for potential impairment and test the recoverability of such assets whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable . these events or changes in circumstances , including management decisions pertaining to such assets , are referred to as impairment indicators . if an impairment indicator occurs , we perform a test of recoverability by comparing the carrying value of the asset group to its undiscounted expected future cash flows . if the carrying values are in excess of undiscounted expected future cash flows , we measure any impairment by comparing the fair value of the asset group to its carrying value . fair value is generally determined by considering ( i ) internally developed discounted projected cash flow analysis of the asset group ; ( ii ) actual third-party valuations ; and or ( iii ) information available regarding the current market for similar asset groups . if the fair value of the asset group is determined to be less than the carrying amount of the asset group , an impairment in the amount of the difference is recorded in the period that the impairment indicator occurs and is included in our consolidated statements of operations . estimating future cash flows requires significant judgment and projections may vary from the cash flows eventually realized , which could impact our ability to accurately assess whether an asset has been impaired . valuation of goodwill goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized . we review goodwill for impairment annually during the fourth quarter and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable . when evaluating whether goodwill is impaired , we make a qualitative assessment to determine if it is more likely than not that the reporting unit 's fair value is less than the carrying amount . if the qualitative assessment determines that it is more likely than not that the fair value is less than the carrying amount , the fair value of the reporting unit is compared with its carrying value ( including goodwill ) . if the fair value of the reporting unit is less than its carrying value , an indication of goodwill impairment exists for the reporting unit and we must measure the impairment loss . the impairment loss , if any , is recognized for any excess of the carrying amount of the reporting unit 's goodwill over the implied fair value of the goodwill . the implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to purchase price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill . fair value of the reporting unit is determined using a discounted cash flow analysis . if the fair value of the reporting unit exceeds its carrying value , no further impairment analysis is needed . for purposes of testing goodwill for impairment , the company operates as two reporting units : the core lattice ( `` core '' ) business , which includes intellectual property and semiconductor devices , and qterics , a discrete software-as-a-service business unit in the lattice legal entity structure . although these two operating segments constitute two reportable segments , we combine qterics with our core business and report them together as one reportable segment due to the immaterial nature of the qterics segment . restructuring charges expenses associated with exit or disposal activities are recognized when incurred under asc 420 , โ exit or disposal cost obligations โ for everything but severance . however , because we have a history of paying severance benefits , the cost of severance benefits associated with a restructuring charge is recorded when such costs are probable and the amount can be reasonably estimated in accordance with asc 712 , โ compensation - nonretirement postemployment benefits. โ when leased facilities are vacated , an amount equal to the total future lease obligations from the date of vacating the premises through the expiration of the lease , net of estimated sublease income , is recorded as a part of restructuring charges . 32 accounting for income taxes our provision for income tax is comprised of our current tax liability and changes in deferred tax assets and liabilities . deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements using enacted tax rates and laws that will be in effect when the difference is expected to reverse . valuation allowances are provided to reduce deferred tax assets to an amount that in management 's judgment is more-likely-than-not to be recoverable against future taxable income . at january 2 , 2016 , u.s. income taxes were not provided on approximately $ 3.2 million of the undistributed earnings of our chinese subsidiary as we intend to reinvest these earnings indefinitely . if these earnings were distributed to the u.s. in the form of dividends or otherwise , these earnings would be subject to chinese withholding taxes and would be subject to additional u.s. income taxes but offset by net operating loss carryforwards which have been fully reserved . our income tax calculations are based on application of the respective u.s. federal , state or foreign tax law . our tax filings , however , are subject to audit by the relevant tax authorities . accordingly , we recognize tax liabilities based upon our estimate of whether , and the extent to which , additional taxes will be due when such estimates are more-likely-than-not to be sustained . an uncertain income tax position will not be recognized if it has less than a 50 % likelihood of being sustained .
| in fiscal 2014 , revenue growth in asia was due primarily to strong volume growth of products in the communications end market , driven largely by demand to support the telecommunications infrastructure build out in china in the first half of 2014. we believe the asia pacific region will remain the primary source of our revenue due to relatively more favorable business conditions in asia and a continuing trend towards the migration of manufacturing by north american and european customers to the asia pacific region . revenue decreased 6 % in europe in fiscal 2015 primarily due to the finalizing of a specific program at a large communications customer and a decrease in volume at an industrial customer . revenue increased 24 % in europe in fiscal 2014 on generally improving macroeconomic conditions and increased demand from customers in the industrial and communications end markets . americas revenue increased 4 % in fiscal 2015 due to the addition of silicon image which contributed revenue both in devices and licensing and services enough to offset a decline in programmable products revenue in the region . revenue from americas increased 2 % in fiscal 2014 due to increased sales volumes of late life-cycle products in the industrial end market , largely in the fourth quarter of 2014. revenue from foreign sales as a percentage of total revenue was 92 % , 92 % , and 91 % for fiscal 2015 , 2014 and 2013 , respectively . revenue by distributors our largest customers are often distributors and sales through distributors have historically made up a significant portion of our total revenue . revenue attributable to the resale of products by our primary sell-through distributors was as follows : replace_table_token_9_th revenue from sell-through distributors as a percent of total revenue has been flat over the three-year period from fiscal 2015 through fiscal 2013 . 36 gross margin the composition of our gross margin , including as a percentage of revenue , for fiscal years 2015 , 2014 and 2013 was as follows : replace_table_token_10_th gross margin and product gross margin , as a percentage of revenue , declined 2.1 and 6.4 percentage points , respectively , from fiscal 2014 to fiscal 2015 , primarily due to purchase accounting adjustments ( now substantially completed ) from the acquisition of silicon image in march 2015 associated with the sell-through of acquired inventory and deferred revenue combined with a degradation of product mix . the
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10 % annually . . the following table shows the evaluation of the company 's long-term financial goals . replace_table_token_18_th ( 1 ) non-gaap calculations are provided , when applicable . refer to gaap to non-gaap reconciliation table for details . ( 2 ) targets will be re-evaluated and adjusted as appropriate . 33 strategic developments the company took the following actions to support our corporate strategy and the long-term financial goals shown above . โ organic l oan and lease growth for the year was 15.2 % . this exceeded the company 's target organic growth rate of 10-12 % . a portion of this growth was in the c & i category . as of december 31 , 2017 , this segment of the portfolio accounted for 38 % of total loans and leases . the company has also grown cre loans , with that segment now representing 44 % of the portfolio as of december 31 , 2017. the strong organic loan and lease growth has continued to help move the loan and lease to total asset ratio upward to 74 % , from 73 % in the prior year and 69 % two years ago . the company has reached the targeted loan and lease to total asset ratio in the range of 73 % - 78 % . going forward , the company will strive to maintain the ratio in this range . โ the company intends to continue to participate in a prudent manner as an acquirer in the consolidation taking place in our markets to further boost roaa and improve the company 's efficiency ratio . in the fourth quarter of 2017 , the company acquired guaranty bank , headquartered in cedar rapids , iowa . see note 2 of the consolidated financial statements for additional details . โ the company continue s to focus on reducing the npas to total assets ratio . the ratio of npas to total assets decreased slightly from 0.82 % at december 31 , 2016 to 0.81 % at december 31 , 2017. the company remains committed to improving asset quality in 2018 . โ management continue s to focus on reducing the company 's reliance on wholesale funding . the restructuring executed in 2016 ( as described in notes 10 and 11 of the consolidated financial statements ) further reduced the company 's reliance on long-term wholesale funding . these prepayments , along with the addition of csb and guaranty bank , which have very strong core funding bases with minimal wholesale borrowings , assisted in lowering the company 's reliance on wholesale funding as a percentage of assets down to 10 % as of december 31 , 2017. management will focus on growing core deposits as a means for funding loan and lease growth and maintaining a reliance on wholesale funding at less than 15 % of total assets . โ correspondent banking continues to be a core line of business for the company . the company is competitively positioned with experienced staff , software systems and processes to continue growing in the three states currently served โ iowa , illinois and wisconsin . the company acts as the correspondent bank for 187 downstream banks with total noninterest bearing deposits of $ 260.9 million and total interest bearing deposits of $ 236.5 million as of december 31 , 2017. this line of business provides a strong source of noninterest bearing and interest bearing deposits , fee income , high-quality loan participations and bank stock loans . โ sba and usda lending is a specialty lending area on which the company has focused . once these loans are originated , the government-guaranteed portion of the loan can be sold to the secondary market for premiums . the company aims to continue to make this a more consistent source of noninterest income . โ as a result of the historically low interest rate environment , the company is focused on executing interest rate swaps on select commercial loans . the interest rate swaps allow the commercial borrowers to pay a fixed interest rate while the company receives a variable interest rate as well as an upfront fee dependent on the pricing . management believes that these swaps help position the company more favorably for rising rate environments . the company will continue to review opportunities to execute these swaps at all of its subsidiary banks , as the circumstances are appropriate for the borrower and the company . โ wealth management is another core line of business for the company and includes a full range of products , including trust services , brokerage and investment advisory services , asset management , estate planning and financial planning . as of december 31 , 2017 the company had $ 2.6 billion of total financial assets in trust ( and related ) accounts and $ 971 million of total financial assets in brokerage ( and related ) accounts . continued growth in assets under management will help to drive trust and investment advisory fees . the company offers trust and investment advisory services to the correspondent banks that it serves . as management focuses on growing fee income , expanding market share will continue to be a primary strategy . 34 gaap to non-gaap reconciliations the following table presents certain non-gaap financial measures related to the โ tce/ta ratio โ , โ core net income โ , โ core net income attributable to qcr holdings , inc. common stockholders โ , โ core eps โ , โ core roaa โ , โ nim ( tey ) โ and โ efficiency ratio โ . story_separator_special_tag in compliance with applicable rules of the sec , all non-gaap measures are reconciled to the most directly comparable gaap measure , as follows : โ tce/ta ratio ( non-gaap ) is reconciled to stockholders ' equity and total assets โ core net income , core net income attributable to qcr holdings , inc. common stockholders , core eps and core roaa ( all non-gaap measures ) are reconciled to net income โ nim ( tey ) ( non-gaap ) is reconciled to nim โ efficiency ratio ( non-gaap ) is reconciled to noninterest expense , net interest income and noninterest income the tce/ta non-gaap ratio has been a focus for investors and management believes that this ratio may assist investors in analyzing the company 's capital position without regard to the effects of intangible assets . the table below also includes several โ core โ non-gaap measurements of financial performance . the company 's management believes that these measures are important to investors as they exclude non-recurring income and expense items ; therefore , they provide a better comparison for analysis and may provide a better indicator of future results . nim ( tey ) is a financial measure that the company 's management utilizes to take into account the tax benefit associated with certain loans and securities . it is standard industry practice to measure net interest margin using tax-equivalent measures . the efficiency ratio is a ratio that management utilizes to compare the company to peers . both are also standard in the banking industry and widely utilized by investors . non-gaap financial measures have inherent limitations , are not required to be uniformly applied , and are not audited . although these non-gaap financial measures are frequently used by investors to evaluate a company , they have limitations as analytical tools and should not be considered in isolation , or as a substitute for analyses of results as reported under gaap . replace_table_token_19_th 35 replace_table_token_20_th 36 replace_table_token_21_th * nonrecurring items ( after-tax ) are calculated using an estimated effective tax rate of 35 % . 37 net interest income and margin ( tax equivalent basis ) ( non-gaap ) net interest income , on a tax equivalent basis , grew $ 24.7 million , or 25 % , in 2017. net interest income improved due to several factors : โ the acquisition of csb , whose strong net interest margin has significantly contributed to the company 's results ; โ organic loan and lease growth was strong throughout the year . average gross loans/leases grew 28 % in 2017 ( including the acquisition of guaranty bank ) ; and โ the company 's strategy to grow the company 's portfolio of tax exempt municipal securities . this has contributed to the 24 basis point increase in the investment securities yield in 2017. a comparison of yields , spreads and margins from 2016 to 2017 shows the following ( on a tax equivalent basis ) : โ the average yield on inte rest-earning assets increased 17 basis points from 4.20 % to 4.37 % . โ the average cost of interest-bearing liabilities increased 16 basis points from 0.65 % to 0.81 % . โ the net interest spread improved 1 basis point from 3.55 % to 3.56 % . โ the nim improved 3 basis points from 3.75 % to 3.78 % . net interest income , on a tax equivalent basis , grew $ 19.4 million , or 24 % , in 2016 compared to 2015. net interest income improved due to several factors : โ the acquisition of csb resulted in an additional $ 10.2 million for the period ending december 31 , 2016 ; โ the company 's strategy to redeploy funds from the taxable securities portfolio into higher yielding loans and leases ; โ organic loan and lease growth was strong throughout the year . average gross loans/leases grew 19.6 % in 2016 ( including the acquisition of csb ) ; and โ continued balance sheet restructuring , as further described in notes 10 and 11 to the consolidated financial statements . a comparison of yields , spreads and margins from 2015 to 2016 shows the following ( on a tax equivalent basis ) : โ the average yield on inte rest-earning assets increased 26 basis points from 3.94 % to 4.20 % . โ the average cost of interest-bearing liabilities decreased 16 basis points from 0.81 % to 0.65 % . โ the net interest spread improved 42 basis points from 3.13 % to 3.55 % . โ the nim improved 38 basis points from 3.37 % to 3.75 % . the company 's management closely monitors and manages nim . from a profitability standpoint , an important challenge for the company 's subsidiary banks and leasing company is the improvement of their net interest margins . management continually addresses this issue with pricing and other balance sheet management strategies . the improvement in nim in 2017 and 2016 was partially the result of the acquisition of csb . csb 's margin will fluctuate based on the amortization and accretion of purchase accounting adjustments , most notably the discount on the acquired loan portfolio . this benefit can fluctuate based on prepayments of both pci and performing loans . as loans prepay , the associated discount/premium is accelerated . t he company continues to place an emphasis on shifting its balance sheet mix . with a stated goal of maintaining loans/leases as a percentage of assets in a range of 73 % -78 % , the company funded its loan/lease growth with a mixture of core deposits and cash from the investment securities portfolio . cash from called securities and the targeted sales of securities was redeployed into the loan portfolio , resulting in a significant increase in yield , while minimizing any extension of duration . additionally , the company recognized net gains on these sales due to the previous rate environment .
| the company intends to continue to grow quality loans and leases as well as diversify the securities portfolio to maximize yield while minimizing credit and interest rate risk . i nterest expense comparing 201 7 to 2016 , interest expense increased $ 7.5 million , or 63 % , year-over-year . average interest-bearing liabilities increased 32 % in 2017. the acquisition of csb occurred in the third quarter of 2016 , therefore 2017 was the first full year that csb was included in the company 's financial results which contributed to the increase in interest expense and average interest-bearing liabilities . guaranty bank , acquired in the fourth quarter of 2017 , also contributed to the increase in interest expense and average interest-bearing liabilities . the company 's cost of funds increased because the company has rate sensitive deposits that have repriced with the increase in certain market rates . comparing 201 6 to 2015 , interest expense declined $ 1.8 million , or 13 % , year-over-year . average interest-bearing liabilities increased 9 % in 2016. the company was successful in continuing to manage down its cost of funds through continued growth in noninterest bearing deposit accounts ( average noninterest bearing balances grew 11 % in 2016 , primarily due to successful growth in the correspondent banking area ) and continued shift of funding from high-cost borrowings to deposits and or low-cost borrowings . average interest bearing deposits increased 26 % , while average borrowings decreased 37 % during 2016. the company 's management intends to continue to shift the mix of funding from wholesale funds to core deposits , including noninterest-bearing deposits . continuing this trend is expected to strengthen the company 's franchise value , reduce funding costs , and increase fee income opportunities through deposit service charges . 42 p rovision for loan/lease losses the provision is established based on a number of factors , including the company 's historical loss experience , delinquencies and charge-off trends , the local and national economy and the risk associated with the loans/leases in the portfolio as described in more detail in the โ critical accounting policies โ section . the company 's provision totaled
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we also had a strong increase in units sold which was offset by a reduction in the average ticket . in fiscal 2016 , home fashions performed better than apparel but both recorded strong same store sales growth . geographically , in the u.s. , sales were strong in virtually all regions , with the southeast reporting the highest same store sales growth . in canada , same store sales increases were well above the consolidated average while tjx international was slightly below the consolidated average . we define same store sales to be sales of those stores that have been in operation for all or a portion of two consecutive fiscal years , or in other words , stores that are starting their third fiscal year of operation . the sales of our e-commerce businesses , meaning sierra trading post ( including stores ) , tjmaxx.com and tkmaxx.com , are not included in same store sales . we classify a store as a new store until it meets the same store sales criteria . the recently acquired trade secret stores will be included in same store sales when they meet the above definition . we determine which stores are included in the same store sales calculation at the beginning of a fiscal year and the classification remains constant throughout that year , unless a store is closed . we calculate same store sales results by comparing the current and prior year weekly periods that are most closely aligned . relocated stores and stores that have increased in size are generally classified in the same way as the original store , and we believe that the impact of these stores on the consolidated same store percentage is immaterial . same store sales of our foreign segments are calculated by translating the current year 's same store sales of our foreign segments at the same exchange rates used in the prior year . this removes the effect of changes in currency exchange rates , which we believe is a more accurate measure of segment operating performance . we define customer traffic to be the number of transactions in stores included in the same store sales calculation and define average ticket to be the average retail price of the units sold . we define average transaction or average basket to be the average dollar value of transactions included in the same store sales calculation . the following table sets forth our consolidated operating results as a percentage of net sales : replace_table_token_9_th * figures may not foot due to rounding . 26 impact of foreign currency exchange rates : our operating results are affected by foreign currency exchange rates as a result of changes in the value of the u.s. dollar in relation to other currencies . two ways in which foreign currency exchange rates affect our reported results are as follows : ย translation of foreign operating results into u.s. dollars : in our financial statements , we translate the operations of tjx canada and tjx international from local currencies into u.s. dollars using currency rates in effect at different points in time . significant changes in foreign exchange rates between comparable prior periods can result in meaningful variations in consolidated net sales , net income and earnings per share growth as well as the net sales and operating results of these segments . currency translation generally does not affect operating margins as a percentage of net sales , or affects them only slightly , as sales and expenses of the foreign operations are translated at approximately the same rates within a given period . ย inventory-related derivatives : we routinely enter into inventory-related hedging instruments to mitigate the impact on earnings of changes in foreign currency exchange rates on merchandise purchases denominated in currencies other than the local currencies of our divisions , principally tjx canada and tjx international . as we have not elected ยhedge accountingย for these instruments as defined by u.s. generally accepted accounting principles ( gaap ) , we record a mark-to-market gain or loss on the derivative instruments in our results of operations at the end of each reporting period . in subsequent periods , the income statement impact of the mark-to-market adjustment is effectively offset when the inventory being hedged is received and paid for . while these effects occur every reporting period , they are of much greater magnitude when there are sudden and significant changes in currency exchange rates during a short period of time . the mark-to-market adjustment on these derivatives does not affect net sales , but it does affect the cost of sales , operating margins and earnings we report . we refer to the impact of the above two items throughout our discussion as ยforeign currency.ย this does not include the impact currency exchange rates can have on various transactions that are denominated in a currency other than an operating division 's local currency . when discussing the impact on our results of the effect of currency exchange rates on such transactions we refer to it as ยtransactional foreign exchange.ย cost of sales , including buying and occupancy costs : cost of sales , including buying and occupancy costs , as a percentage of net sales was 71.0 % in fiscal 2017 compared to 71.2 % in fiscal 2016 and 71.5 % in fiscal 2015. the improvement in this expense ratio was driven by an increase in our profit margin on merchandise sold ( merchandise margin ) along with leverage on buying and occupancy costs as a result of the 5 % same store sales increase . together these two items benefitted the fiscal 2017 expense ratio by approximately 0.5 percentage points . merchandise margin improved despite the continued pressure transactional foreign exchange had on the cost of merchandise at our foreign segments this year versus the prior year . story_separator_special_tag although not as significant as in fiscal 2016 , the change in exchange rates continued to impact the cost of merchandise that was denominated in currencies other than our foreign segments ' local currency , primarily the u.s. dollar . these improvements were partially offset by higher supply chain costs and the negative impact of the mark to market of inventory derivatives . the improvement in the fiscal 2016 expense ratio as compared to fiscal 2015 was driven by leverage on buying and occupancy costs as a result of the 5 % same store sales increase along with an increase in merchandise margin . similar to fiscal 2017 , together these two items benefitted the fiscal 2016 expense ratio by approximately 0.5 percentage points . merchandise margin improved despite the negative impact transactional foreign exchange had on the cost of merchandise for tjx canada and europe for fiscal 2016 versus fiscal 2015. the change in exchange rates increased the cost of merchandise purchased by tjx canada and europe that were denominated in currencies other than the divisions ' respective local currency , primarily the u.s. dollar . this expense ratio was also negatively impacted by increased freight and distribution costs associated with moving more units through our supply chain and the mark to market of inventory derivatives . selling , general and administrative expenses : selling , general and administrative expenses as a percentage of net sales were 17.4 % in fiscal 2017 , 16.8 % in fiscal 2016 and 16.1 % in fiscal 2015. the increase in this ratio in fiscal 2017 was primarily due to a combination of higher employee payroll costs , due to wage 27 increases , investments to support our growth and supply chain costs , partially offset by the favorable impact of reduced contributions to the tjx charitable foundations in fiscal 2017. similar to fiscal 2017 , the increase in this ratio in fiscal 2016 was primarily due to a combination of higher employee payroll costs , due to our wage initiative and an increase in supply chain costs , along with our incremental investments . in addition the fiscal 2016 expense ratio was unfavorably impacted by higher contributions to tjx 's charitable foundations in fiscal 2016 as compared to the prior year . loss on early extinguishment of debt : on september 12 , 2016 we issued $ 1.0 billion of 2.25 % ten year notes . we used a portion of the proceeds to redeem our $ 375 million 6.95 % notes on october 12 , 2016 , prior to their scheduled maturity of april 15 , 2019. we recorded a pre-tax loss on the early extinguishment of debt of $ 51.8 million . pension settlement charge : during the fiscal 2017 third quarter , we offered eligible former tjx associates , who had not yet commenced receiving their qualified pension plan benefit , an opportunity to receive a lump sum payout of their vested pension benefit . on october 21 , 2016 , tjx 's qualified pension plan paid $ 103.2 million from pension plan assets to those who accepted this offer . this transaction had no cash impact on tjx , but did result in a non-cash pre-tax settlement charge of $ 31.2 million . interest expense , net : the components of interest expense , net for the last three fiscal years are summarized below : replace_table_token_10_th the decrease in net interest expense for fiscal 2017 is due to additional interest income as a result of an increase in investments as well as an increase in interest rates . the increase in net interest expense for fiscal 2016 reflects interest expense in fiscal 2016 on the financing lease obligation related to tjx canada 's new home office of $ 3.7 million . the increase in net interest expense also reflects a reduction in capitalized interest costs and interest income in fiscal 2016 as compared to fiscal 2015. income taxes : our effective annual income tax rate was 38.3 % in fiscal 2017 , 37.7 % in fiscal 2016 and 37.6 % in fiscal 2015. the increase in the fiscal 2017 income tax rate was due to the jurisdictional mix of income and the valuation allowance on foreign net operating losses . in addition , the fiscal 2016 effective income tax rates benefitted from a reduction in our reserve for uncertain tax positions related to our adoption of the new tangible property regulations . the increase in the fiscal 2016 effective income tax rate , as compared to fiscal 2015 , was primarily due to the jurisdictional mix of income and the valuation allowance on foreign net operating losses . net income and diluted earnings per share : net income was $ 2.3 billion in fiscal 2017 , a 1 % increase over $ 2.3 billion in fiscal 2016 , which in turn was a 3 % increase over $ 2.2 billion in fiscal 2015. diluted earnings per share were $ 3.46 in fiscal 2017 , $ 3.33 in fiscal 2016 and $ 3.15 in fiscal 2015. the third quarter charges from the loss on early extinguishment of debt and the pension settlement , collectively reduced fiscal 2017 net income by $ 50.0 million , or $ 0.07 per share . foreign currency exchange rates also affected the comparability of our results . foreign currency exchange rates had a $ 0.07 negative impact on earnings per share in fiscal 2017 when compared to fiscal 2016 , and a $ 0.09 negative impact in fiscal 2016 when compared to fiscal 2015. our stock repurchase programs , which reduce our weighted average diluted shares outstanding , benefited our earnings per share growth by approximately 3 % in each fiscal year . we repurchased 22.3 million shares of our stock at a cost of $ 1.7 billion in fiscal 2017 , 26.5 million shares of our stock at a cost of $ 1.8 billion in fiscal 2016 and 27.7 million shares of our stock at a cost of $ 1.7 billion in fiscal 2015 .
| the positive cash flow impact of the change in inventory and accounts payable in 2017 was due to lower inventory levels at fiscal 2017 year end and increased payments in fiscal 2016 due to merchandise received late in the fourth quarter of fiscal 2015 that was paid for in fiscal 2016. the change in accrued expenses and other liabilities favorably impacted cash flows by $ 536 million in fiscal 2017 versus a favorable impact of $ 353 million in fiscal 2016. this favorable impact of $ 183 million in year-over-year cash flows from operations was driven primarily by increased liabilities for deferred compensation , gift cards and deferred revenue , sales taxes and income taxes payable . fiscal 2016 cash flow from operations was reduced by $ 23 million for the cost to acquire favorable lease rights . operating cash flows for fiscal 2016 decreased by $ 71 million compared to fiscal 2015. net income adjusted for the non-cash impact of depreciation and deferred income tax provision , provided cash of $ 2,926 million in fiscal 2016 compared to $ 2,906 million in fiscal 2015 , an increase of $ 20 million . the change in merchandise inventory , net of the related change in accounts payable , resulted in a use of cash of $ 290 million in fiscal 2016 , compared to a use of cash of $ 47 million in fiscal 2015 , negatively impacting year-over-year cash flows by $ 243 million . the cash flow impact of the change in inventory and accounts payable was primarily due to an increase in packaway inventory at the end of fiscal 2016 as compared to the prior year as well as the impact of merchandise received late in the fourth quarter of fiscal 2015 that was paid for in fiscal 2016. the change in accrued expenses and other liabilities favorably impacted cash flows by $ 353 million in fiscal 2016 versus a favorable impact of $ 166 million in
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amounts that have been invoiced are initially recorded as unearned revenue . the majority of our consulting engagements are billed on a time and materials basis , and revenues are typically recognized over time as the services are performed . in some cases , we supplement our consulting teams by subcontracting resources from our service partners and deploying them on customer engagements . as our professional services organization and the workday-related consulting practices of our partner firms continue to develop , we expect the partners to increasingly contract directly with our subscription customers . as a result of this trend , and the increase of our subscription services revenues , we expect professional services revenues as a percentage of total revenues to decline over time . costs and expenses costs of subscription services revenues . costs of subscription services revenues consist primarily of employee-related expenses related to hosting our applications and providing customer support , the costs of data center capacity , and depreciation of computer equipment and software . costs of professional services revenues . costs of professional services revenues consist primarily of employee-related expenses associated with these services , the cost of subcontractors and travel . product development . product development expenses consist primarily of employee-related costs . we continue to focus our product development efforts on adding new features and applications , increasing the functionality and enhancing the ease of use of our cloud applications . sales and marketing . sales and marketing expenses consist primarily of employee-related costs , sales commissions , marketing programs , and travel . marketing programs consist of advertising , events , corporate communications , brand building and product marketing activities . sales commissions are considered incremental costs of obtaining a contract with a customer and are deferred and amortized . sales commissions for initial contracts are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be five years . sales commissions for renewal contracts are deferred and then amortized on a straight-line basis over the related contractual renewal period . general and administrative . general and administrative expenses consist of employee-related costs for finance and accounting , legal , human resources , information systems personnel , professional fees , and other corporate expenses . story_separator_special_tag style= '' line-height:120 % ; padding-top:16px ; text-indent:18px ; font-size:10pt ; '' > costs of subscription services gaap operating expenses in costs of subscription services were $ 273 million for fiscal 2018 , compared to $ 213 million for fiscal 2017 , an increase of $ 60 million , or 28 % . the increase was primarily due to increases of $ 23 million in depreciation expense related to our data centers , $ 22 million in employee-related costs driven by higher headcount , and $ 10 million in facility and it-related expenses . gaap operating expenses in costs of subscription services were $ 213 million for fiscal 2017 , compared to $ 150 million for fiscal 2016 , an increase of $ 63 million , or 42 % . the increase was primarily due to increases of $ 30 million in employee-related costs driven by higher headcount , $ 12 million in service contracts expense to expand data center capacity , $ 12 million in depreciation expense related to our data centers , and $ 6 million in facility and it-related expenses . non-gaap operating expenses in costs of subscription services were $ 240 million for fiscal 2018 , compared to $ 192 million for fiscal 2017 , an increase of $ 48 million , or 25 % . the increase was primarily due to increases of $ 17 million in depreciation expense related to our data centers , $ 16 million in employee-related costs driven by higher headcount , and $ 10 million in facility and it-related expenses . non-gaap operating expenses in costs of subscription services were $ 192 million for fiscal 2017 , compared to $ 137 million for fiscal 2016 , an increase of $ 55 million , or 40 % . the increase was primarily due to increases of $ 21 million in employee-related costs driven by higher headcount , $ 12 million in service contracts expense to expand data center capacity , $ 12 million in depreciation expense related to our data centers , and $ 6 million in facility and it-related expenses . we expect that gaap and non-gaap operating expenses in costs of subscription services will continue to increase in absolute dollars as we improve and expand our data center capacity and operations . 29 costs of professional services gaap operating expenses in costs of professional services were $ 356 million for fiscal 2018 , compared to $ 270 million for fiscal 2017 , an increase of $ 86 million , or 32 % . the increase was primarily due to increases of $ 70 million to staff our deployment and integration engagements . gaap operating expenses in costs of professional services were $ 270 million for fiscal 2017 , compared to $ 225 million for fiscal 2016 , an increase of $ 45 million , or 20 % . the increase was primarily due to increases of $ 45 million to staff our deployment and integration engagements . non-gaap operating expenses in costs of professional services were $ 316 million for fiscal 2018 , compared to $ 242 million for fiscal 2017 , an increase of $ 74 million , or 31 % . the increase was primarily due to increases of $ 59 million to staff our deployment and integration engagements . non-gaap operating expenses in costs of professional services were $ 242 million for fiscal 2017 , compared to $ 204 million for fiscal 2016 , an increase of $ 38 million , or 19 % . the increase was primarily due to increases of $ 38 million to staff our deployment and integration engagements . story_separator_special_tag going forward , we expect gaap and non-gaap costs of professional services as a percentage of total revenues to continue to decline as we increasingly rely on our service partners to deploy our applications and as the number of our customers continues to grow . for fiscal 2019 , we anticipate gaap and non-gaap professional services margins to be lower than fiscal 2018 as we invest in programs to ensure ongoing customer success . product development gaap operating expenses in product development were $ 911 million for fiscal 2018 , compared to $ 681 million for fiscal 2017 , an increase of $ 230 million , or 34 % . the increase was primarily due to increases of $ 180 million in employee-related costs due to higher headcount , $ 34 million in facility and it-related expenses , and $ 15 million in third-party costs for hardware maintenance and data center capacity . gaap operating expenses in product development were $ 681 million for fiscal 2017 , compared to $ 470 million for fiscal 2016 , an increase of $ 211 million , or 45 % . the increase was primarily due to increases of $ 166 million in employee-related costs due to higher headcount , $ 24 million in facility and it-related expenses , $ 10 million in amortization expense for our acquisition-related intangible assets , and $ 6 million in third-party costs for hardware maintenance and data center capacity . non-gaap operating expenses in product development were $ 658 million for fiscal 2018 , compared to $ 495 million for fiscal 2017 , an increase of $ 163 million , or 33 % . the increase was primarily due to increases of $ 113 million in employee-related costs due to higher headcount , $ 34 million in facility and it-related expenses , and $ 15 million in third-party costs for hardware maintenance and data center capacity . non-gaap operating expenses in product development were $ 495 million for fiscal 2017 , compared to $ 353 million for fiscal 2016 , an increase of $ 142 million , or 40 % . the increase was primarily due to increases of $ 108 million in employee-related costs due to higher headcount , $ 24 million in facility and it-related expenses , and $ 6 million in third-party costs for hardware maintenance and data center capacity . we expect that gaap and non-gaap product development expenses will continue to increase in absolute dollars as we improve and extend our applications and develop new technologies . sales and marketing gaap operating expenses in sales and marketing were $ 683 million for fiscal 2018 , compared to $ 565 million for fiscal 2017 , an increase of $ 118 million , or 21 % . the increase was primarily due to increases of $ 87 million in employee-related costs due to higher headcount and higher commissionable sales volume , $ 14 million in advertising , marketing and event costs , and $ 11 million in facility and it-related expenses . gaap operating expenses in sales and marketing were $ 565 million for fiscal 2017 , compared to $ 414 million for fiscal 2016 , an increase of $ 151 million , or 36 % . the increase was primarily due to increases of $ 121 million in employee-related costs due to higher headcount and higher commissionable sales volume , $ 12 million in advertising , marketing and event costs , $ 10 million in facility and it-related expenses , and $ 7 million in travel . non-gaap operating expenses in sales and marketing were $ 578 million for fiscal 2018 , compared to $ 476 million for fiscal 2017 , an increase of $ 102 million , or 21 % . the increase was primarily due to increases of $ 71 million in employee-related costs due to higher headcount and higher commissionable sales volume , $ 14 million in advertising , marketing and event costs , and $ 11 million in facility and it-related expenses . 30 non-gaap operating expenses in sales and marketing were $ 476 million for fiscal 2017 , compared to $ 360 million for fiscal 2016 , an increase of $ 116 million , or 32 % . the increase was primarily due to increases of $ 85 million in employee-related costs due to higher headcount and higher commissionable sales volume , $ 12 million in advertising , marketing and event costs , $ 10 million in facility and it-related expenses , and $ 7 million in travel . we expect that gaap and non-gaap sales and marketing expenses will continue to increase in absolute dollars as we continue to invest in the expansion of our domestic and international selling and marketing activities to build brand awareness and attract new customers . general and administrative gaap operating expenses in general and administrative were $ 223 million for fiscal 2018 , compared to $ 198 million for fiscal 2017 , an increase of $ 25 million , or 13 % . the increase was primarily due to $ 20 million in higher employee-related costs due to higher headcount , and $ 3 million in higher professional services costs including consulting , legal , and audit . gaap operating expenses in general and administrative were $ 198 million for fiscal 2017 , compared to $ 149 million for fiscal 2016 , an increase of $ 49 million , or 33 % . the increase was primarily due to $ 41 million in higher employee-related costs due to higher headcount , and $ 8 million in higher professional services costs including consulting , legal , and audit . non-gaap operating expenses in general and administrative were $ 135 million for fiscal 2018 , compared to $ 117 million for fiscal 2017 , an increase of $ 18 million , or 15 % . the increase was primarily due to $ 14 million in higher employee-related costs due to higher headcount , and $ 3 million in higher professional services costs including consulting , legal , and audit .
| the increase in professional services revenues was due primarily to the addition of new customers and a greater number of customers requesting deployment and integration services . operating expenses gaap operating expenses were $ 2.4 billion for fiscal 2018 , compared to $ 1.9 billion for fiscal 2017 , an increase of $ 0.5 billion , or 27 % . the increase was primarily due to increases of $ 0.4 billion in employee-related costs driven by higher headcount and $ 0.1 billion in expenses related to facilities , it , depreciation , amortization , and service contracts to expand data center capacity . gaap operating expenses were $ 1.9 billion for fiscal 2017 , compared to $ 1.4 billion for fiscal 2016 , an increase of $ 0.5 billion , or 37 % . the increase was primarily due to increases of $ 0.4 billion in employee-related costs driven by higher headcount and $ 0.1 billion in expenses related to facilities , it , depreciation , amortization , and service contracts to expand data center capacity . we use the non-gaap financial measure of non-gaap operating expenses to understand and compare operating results across accounting periods , for internal budgeting and forecasting purposes , for short- and long-term operating plans , and to evaluate our financial performance and the ability of operations to generate cash . we believe that non-gaap operating expenses reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business , as they exclude expenses that are not reflective of ongoing operating results . we also believe that non-gaap operating expenses provide useful information to investors and others in understanding and evaluating our operating results and prospects in the same manner as management and in comparing financial results across accounting periods and to those of peer companies . non-gaap operating expenses are calculated by excluding share-based compensation expenses , and certain other expenses , which consist of employer payroll tax-related items on employee stock transactions and
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in addition , compared to 2019 we experienced increases of $ 85 thousand in audit fees related to the audit of the company 's financial statements for the year ended december 31 , 2019 , which was required in connection with our september 2020 form 10 filing , $ 52 thousand in other expenses in connection with the form 10 filing , including fees paid to third parties for completing the electronic filings , $ 30 thousand in employee bonuses corresponding to the increase in product sales , and $ 71 thousand in additional insurance expense as a result of adjusting our coverage limits after a review of our current policies conducted last year as well as new insurance policies that we purchased to cover ecochain . these increases were partially offset by a $ 188 thousand decrease in spending on travel for customer visits and trade shows due to covid-19 restrictions in place since march 2020 and a decrease of $ 140 thousand in salary and benefits due to not replacing a sales employee that left the company in march 2020. like most companies , we are evaluating our position with respect to travel and considering how to optimize the use of a virtual environment going forward , but we do expect at least some travel related to in-person meetings with clients and potential clients to resume once it is considered safe to do so . as a result , based on current information about the status of the pandemic and the related vaccination effort , we expect travel-related spending to increase from current levels beginning in the third quarter of 2021 , although the actual time that travel will resume , and the amount thereof , will be subject to a number of uncertainties related to the course of the pandemic over the next several months . in addition , due to travel restrictions during 2020 our other primary salesperson was able to cover the work of the open sales position during the past year , and while the other sales position remained open during 2020 , we did not actively pursue retaining a replacement . that will no longer be the case , however , once travel is deemed safe as we expect our salespersons to conduct in-person meetings with clients and potential clients as had been the case prior to the onset of the pandemic , although the level of travel may not be as high as it was prior to the pandemic . once travel restrictions are lifted , we intend to retain a salesperson to replace the one that left , so we expect employee salaries and benefits will be higher in 2021 and for the foreseeable future than they were in 2020. we also expect a 17.0 % to 20.0 % increase in insurance expense in 2021 , primarily related to insurance policies for ecochain 's business . the company also expects selling , general and administrative expenses to continue to increase in 2021 and generally going forward as a result of its resumption of filing periodic reports , annual proxy statements , and other filings with the sec following the effectiveness of its form 10 registration statement in november . operating income : operating income increased to $ 1.5 million for the year ended december 31 , 2020 from $ 259 thousand during the prior year . this $ 1.2 million improvement was the result of the factors noted above , that is , the increased sales , specifically delivering the majority of the pbs units for the u.s. air force and the improvement in the profit margin , partially offset by increased selling , general and administrative expenses . 29 other income : other income for the year ended december 31 , 2020 was $ 104 thousand and was primarily related to income from the sale of ecochain 's excess equipment and interest income on operating cash balances . other income for the year ended december 31 , 2109 was $ 36 thousand and was primarily related to the disposal of the tensile product line and related royalty payments and interest income on operating cash balances . income tax benefit : income tax benefit for the year ended december 31 , 2020 was $ 392 thousand and was primarily related to the increase of the tax asset based on projected future taxable earnings , giving the company the ability to use prior tax losses . our effective income tax rate for the year ended december 31 , 2020 was ( 25 ) % . income tax benefit for the year ended december 31 , 2019 was $ 28 thousand and was primarily a result of a $ 33 thousand income tax benefit due to a refund associated with the repeal of the federal alternative minimum tax for c corporations . our effective income tax rate for the year ended december 31 , 2019 was ( 9 ) % . net income : net income for the year ended december 31 , 2020 was $ 1.9 million compared to net income of $ 323 thousand in 2019. these improvements were the result of the factors noted above , that is , the increased sales and improvement in the profit margin in each period , partially offset by increases in general and administrative expenses , cost of product revenue , and cost of cryptocurrency revenue . liquidity and capital resources several key indicators of our liquidity are summarized in the following table : replace_table_token_3_th the company has historically incurred significant losses primarily due to its past efforts to fund direct methanol fuel cell product development and commercialization programs and had a consolidated accumulated deficit of approximately $ 117.8 million as of december 31 , 2020. as of december 31 , 2020 , the company had working capital of approximately $ 3.1 million , no debt , no outstanding commitments for capital expenditures and approximately $ 2.6 million of cash available to fund its operations . story_separator_special_tag based on business developments , including changes in production levels , staffing requirements , and network infrastructure improvements , we may require additional capital equipment in the foreseeable future . with respect to mti and mti instruments , we expect to spend a total of approximately $ 300 thousand on computer equipment and software and $ 1.6 million on research and development during 2021. as we have done historically , we expect to finance these expenditures and continue funding their operations from our current cash position and our projected 2021 cash flows pursuant to management 's plans . if necessary , we may also seek to supplement our resources by increasing credit facilities to fund operational working capital and capital expenditure requirements . any additional financing , if required , may not be available to us on acceptable terms or at all . as discussed elsewhere in this annual report on form 10-k , the company expects to use the net proceeds of our pending common stock offering to fund ecochain 's acquisition and development of two additional mining facilities . the company also expects to look for acquisition opportunities that meet certain strategic requirements of the company , which we expect will be funded by the proceeds of the offering and or bank financing to the extent available on acceptable terms . while it can not be assured , management believes that , due in part to our current working capital level and projected cash requirements for operations and capital expenditures , its current available cash of approximately $ 2.6 million , and its projected 2021 cash flow pursuant to management 's plans , the company will have adequate resources to fund operations and capital expenditures for the year ending december 31 , 2021 and through at least the end of the first quarter of 2022. if our revenue estimates are off either in timing or amount , or if cash generated from operations is insufficient to satisfy the company 's operational working capital and capital expenditure requirements , however , the company may need to implement additional steps to ensure liquidity including , but not limited to , the deferral of planned capital spending and or delaying existing or pending product development initiatives , or the company may be required to obtain credit facilities or other loans , if available , to fund these initiatives . the company has no other formal commitments for funding its future needs at this time and any additional financing we may require during the year ending december 31 , 2021 , may not be available to us on acceptable terms or at all . such steps , if required , could potentially have a material and adverse effect on our business , results of operations , and financial condition . 30 debt on may 7 , 2020 , in connection with receipt of a $ 3.3 million u.s. air force delivery order , mti instruments obtained a $ 300 thousand secured line of credit from pioneer bank . the line of credit may be drawn in the discretion of mti instruments and bears interest at a rate of prime +1 % per annum . accrued interest is due monthly , and principal is payable over a period of 30 days following the lender 's demand . the line of credit is secured by the assets of mti instruments and is guaranteed by the company . as of december 31 , 2020 , there were no amounts outstanding under the line of credit . we had no additional credit facilities available or debt outstanding at either december 31 , 2020 or december 31 , 2019. backlog , inventory and accounts receivable at december 31 , 2020 , the company 's order backlog was $ 555 thousand , compared to $ 721 thousand at december 31 , 2019. the decrease in backlog was primarily due to a few large orders placed in late 2019 in the capacitance line with deliveries in 2020. our inventory turnover ratios and average accounts receivable days outstanding for the years ended december 31 , 2020 and 2019 and their changes are as follows : replace_table_token_4_th the increase in inventory turns is due to the u.s air force contract driving increased inventory balances and a quicker turn to shipment . the average accounts receivable days ' outstanding decreased seven days during 2020 compared to the prior year due to the increased volume of sales to the u.s. air force during 2020 compared to 2019 , as the u.s. air force generally pays for its purchases within 15 days of delivery , compared to an average of approximately 30 days for non-government customers . off-balance sheet arrangements we have no off-balance sheet arrangements . critical accounting policies and significant judgments and estimates the prior 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 united states of america . note 2 of the consolidated financial statements included in this annual report on form 10-k includes a summary of our most significant accounting policies . the preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets , liabilities , revenue , expenses , and related disclosure of assets and liabilities . on an ongoing basis , we evaluate our estimates and judgments , including those related to revenue recognition , inventories , income taxes and share-based compensation . we base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances , the results of which form the basis for making judgments about the carrying 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 . periodically , our management reviews our critical accounting estimates with the audit committee of our board of directors .
| we may sell a significant amount of our products to one or a few customers for various short-term projects in one period and then have markedly decreased sales in following periods as these projects end or customers have the products they require for the foreseeable future . information regarding government contracts included in product revenue is as follows : replace_table_token_2_th ( 1 ) contract values represent maximum potential values at time of contract placement and may not be representative of actual results . ( 2 ) date represents expiration of contract , including the exercise of option extensions . we are in discussions with the u.s. air force regarding renewing their current contract , which is set to expire on june 30 , 2021. the company does not anticipate any issues with the renewal and expects to enter into a renewed contract with the u.s. air force on or prior to the expiration of the current contract . as a result , we do not expect that there will be any material impact on our results of operations , cash flows , liquidity , or financial condition as a result of the pending expiration of our current contract with the u.s. air force . cryptocurrency revenue : cryptocurrency revenue consists of revenue recognized from ecochain 's cryptocurrency mining facility . cryptocurrency revenue was $ 595 thousand , for the year ended december 31 , 2020. as discussed in `` item 1 , business , '' ecochain 's cryptocurrency mining facility did not begin operations until the second quarter of 2020 , and therefore there was no cryptocurrency revenue for the year ended december 31 , 2019. this revenue represents the cash received upon the daily sale of the various cryptocurrencies mined at ecochain 's mining facility during 2020. cost of product revenue ; gross margin : cost of product revenue includes the direct material and labor cost as well as an allocation of overhead costs that relate to the manufacturing of products we sell . cost of product revenue also includes the labor and material costs incurred for product maintenance , replacement parts and service under our contractual obligations . cost of product revenue for the year ended december 31 , 2020 increased by $
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the enterprise video content management software segment contributed a 2.9 percentage point favorable impact to the consolidated gross margin for 2013. partially offsetting this favorable gross margin impact were increased investments in service related resources to support growth in the customer base and expansion of service offerings for the enterprise video content management software segment . the decline in consolidated gross profit as a percentage of total revenues from 2011 to 2012 was primarily impacted by a lower volume of equipment sales in the disc publishing business , which typically generate higher margins than other disc publishing products . further , a reduced volume of producer equipment sales in 2012 led to lower production levels and a resulting 29 underabsorption of fixed manufacturing costs , negatively impacting gross profit as a percentage of revenues . partially offsetting the unfavorable impact in 2012 of a reduced volume of equipment sales in the disc publishing product line was the impact of the company incurring higher media prices and air freight costs in the first half of 2011 to secure alternative supply sources and to expedite shipments stemming from supply disruptions caused by the march 2011 earthquake and tsunami in japan . additionally , inclusive of the impact of amortization expense , the enterprise video content management software business contributed a 1.6 percentage point favorable impact to gross profit as a percentage of total revenues for 2012. enterprise video content management software margins in 2012 were favorably impacted by an increased volume and concentration of higher margin software license revenues relative to 2011. future gross profit margins will be impacted by the rate of growth of the company 's enterprise video content management software segment , which has historically generated higher gross margins than the company 's disc publishing segment . future gross margins will also continue to be affected by many other factors , including product mix , the timing of new product introductions , the timing of customer orders and related product deliveries , changes in material costs and supply sources , manufacturing volume , the growth rate of service-related revenues relative to associated service support costs and foreign currency exchange rate fluctuations . operating expenses . total operating expenses were $ 49.2 million in 2013 , compared to $ 78.4 million in 2012 and $ 37.6 million in 2011 . the $ 29.2 million decrease in operating expenses from 2012 to 2013 occurred primarily as a result of $ 29.5 million of non-cash charges incurred for the impairment of goodwill and intangible assets associated with the enterprise video content management software business in 2012. total research and development expenses were $ 12.2 million , $ 11.9 million and $ 7.3 million for the years ended december 31 , 2013 , 2012 and 2011 , respectively , representing 14.8 % , 14.9 % and 8.7 % of revenues , respectively . the $ 0.3 million increase in expenses from 2012 to 2013 reflects an increase in headcount and project spending to support software development for the enterprise video content management software business , partially offset by the impact of headcount reductions and reduced project spending in the disc publishing business . the $ 4.6 million rise in research and development expenses from 2011 to 2012 reflects an increase of $ 3.9 million to support a full year of software development associated with the enterprise video content management software business . the remaining increase over 2011 resulted primarily from engineering expenses incurred to support the release of the company 's follow-on producer and professional series disc publishing products late in the third quarter and fourth quarter of 2012. total selling , general and administrative expenses for the years ended december 31 , 2013 , 2012 and 2011 were $ 36.4 million , $ 36.0 million and $ 30.1 million , respectively , representing 44.2 % , 45.4 % and 36.0 % of revenues , respectively . the $ 0.4 million increase in expenses from 2012 to 2013 reflects continued investment to support the company 's enterprise video content management software business , including increased sales headcount and sales commissions stemming from an increase in revenues relative to the prior year and non-recurring severance costs . also contributing to the increase in expenses in 2013 relative to 2012 were higher incentive compensation expenses resulting from above target performance under employee short-term and long-term incentive plans . reduced sales and marketing headcount and marketing programs in the disc publishing business partially offset the impact of growth in other selling , general and administrative expenses . the $ 5.9 million increase in selling , general and administrative expenses from 2011 to 2012 primarily reflects the impact of a full year of expenses to support qumu 's enterprise video content management software business and also a higher level of expenses to support the introduction in the second quarter of the company 's internally developed secure online content delivery solution , contributing an additional $ 8.9 million to selling , general and administrative expenses . additionally , the company incurred a charge of approximately $ 0.4 million in the third quarter 2012 for the settlement of a patent infringement lawsuit associated with its disc publishing business . partially offsetting this charge and the expense growth driven by the enterprise video content management software business was the impact of incurring $ 1.7 million in expenses in 2011 for transaction costs associated with the acquisition of qumu inc. , expense reductions in disc publishing sales and marketing and the impact of currency fluctuations primarily in the company 's european operations , which reduced selling , general and administrative expenses in the disc publishing business by $ 0.6 million . during the year ended december 31 , 2012 , the company recorded a $ 22.2 million goodwill and $ 7.3 million intangible asset impairment charge associated with its enterprise video content management software segment . story_separator_special_tag the company concluded that certain indicators of impairment were present , as evidenced by a sustained decrease in the company 's stock price during the third quarter resulting in a market capitalization significantly below the carrying value of its net equity and a lower than planned rate of revenue growth through the third quarter of 2012 and forecasted for its enterprise video content management software segment . as a result , the company performed an interim impairment test of goodwill and long-lived assets . these charges , totaling $ 29.5 million , are included as a separate operating expense line item , โ goodwill and intangible asset impairment charge , โ in the company 's consolidated statements of operations . the company used the income approach , specifically the discounted cash flow method , in concluding the fair value of the enterprise video content management software reporting unit and associated amount of impairment 30 charges . the application of the income approach for both goodwill and intangibles requires management judgment for many of the inputs . amortization of purchased intangibles . operating expenses include $ 0.6 million , $ 1.0 million and $ 0.2 million in 2013 , 2012 and 2011 , respectively , for the amortization of intangible assets acquired as part of the company 's acquisition of qumu , inc. in october 2011. operating expenses in 2014 are expected to include approximately $ 0.6 million of amortization expense associated with purchased intangibles , exclusive of the portion classified in cost of revenue . other income , net . the company recognized interest income on cash and marketable securities of $ 0.03 million , $ 0.08 million and $ 0.20 million in 2013 , 2012 and 2011 , respectively . the year-over-year decline in interest income was the result of a reduction in average effective yields stemming from the company 's transition to lower yield investments , as well as an environment of generally lower interest rates . augmenting the impact of lower effective yields was a reduction in cash equivalent and marketable securities balances , largely impacted by the company 's use of approximately $ 39 million in cash to acquire qumu , inc. in october 2011. other income also included a net loss on foreign currency transactions of $ 0.2 million and $ 0.1 million in 2013 and 2012 , respectively . see โ liquidity and capital resources โ below for a discussion of changes in cash levels . income taxes . the provision for income taxes represents federal , state , and foreign income taxes or income tax benefit on income or loss . for the years ended december 31 , 2013 , 2012 and 2011 , income tax expense amounted to ( $ 0.1 ) million , $ 8.8 million and $ 2.0 million , respectively , representing ( 0.6 ) % , 22.1 % and 42.8 % of income or loss before income taxes , respectively . due to the valuation allowance on the company 's u.s. deferred tax assets , the net tax benefit in 2013 primarily reflects the impact of recording a tax benefit on losses incurred by the company 's subsidiary in europe . the effective tax rate in 2012 includes the impact of a discrete charge for the establishment in the third quarter of 2012 of a valuation allowance against the company 's u.s. deferred tax assets . the effective tax rate in 2011 reflects the impact of incurring nondeductible transaction expenses associated with the acquisition of qumu , inc. , partially offset by an increase in the federal research credit resulting from an increase in qualifying development projects , including those introduced as a result of the acquisition of qumu , inc. net income ( loss ) / net income ( loss ) per share . net income ( loss ) for the years ended december 31 , 2013 , 2012 and 2011 amounted to ( $ 9.7 ) million , ( $ 48.3 ) million and $ 2.8 million , representing ( 11.8 ) % , ( 60.8 ) % and 3.4 % of revenues , respectively . related net income ( loss ) per diluted share amounts were ( $ 1.12 ) in 2013 , ( $ 4.85 ) in 2012 and $ 0.29 in 2011 . segment operating results management evaluates segment performance based on revenue and operating income ( loss ) . the operating income ( loss ) for the company 's enterprise video content management software and disc publishing segments include all the direct costs of each business . beginning with the first quarter of fiscal 2013 , the measurement of operating income ( loss ) by segment includes an allocation of corporate expenses incurred to support each reportable segment . previously reported amounts included all corporate and other unallocated expenses in the disc publishing segment , a portion of which were incurred to support the enterprise video content management software segment . the company revised the amounts previously reported in 2012 as operating income ( loss ) by segment to align to the current period 's presentation . this realignment had no effect on previously reported consolidated net sales or consolidated operating income ( loss ) . given the timing of the company 's acquisition of qumu , inc. in october 2011 , and resulting inclusion of a partial year of financial results for that business , the company did not revise the amounts previously reported in 2011 to reflect an allocation of corporate expenses from the disc publishing to the enterprise video content management software segment .
| software license and appliance revenues increased by $ 2.9 million , or 68 % , reflecting expansion of the company 's customer base in both the u.s. and europe . software service revenue growth was highlighted by increased maintenance revenues on a growing base of installations and increased managed services and professional services revenues to support the growth in software license purchases from global customers . contracted commitments for the enterprise video content management software segment totaled $ 21.4 million and $ 19.7 million for 2013 and 2012 , respectively . the company 's contracted commitment backlog was $ 16.7 million at december 31 , 2013. the company defines contracted commitments as the dollar value of signed customer purchase commitments . 28 the $ 8.1 million increase in revenues generated by the enterprise video content management software business from 2011 to 2012 was driven by the inclusion of operations for the software business for a full year in 2012 compared to the post-acquisition period subsequent to october 10 , 2011 for the prior year , and also the closing and fulfillment of several large enterprise sales contracts in the last half of 2012. the increase in revenues consisted of $ 3.6 million in software licenses and appliances and $ 4.4 million in services , comprised of software maintenance contracts , subscription licenses and professional services . disc publishing . the $ 4.9 million decrease in disc publishing revenues from 2012 to 2013 consisted of a $ 6.5 million decline in equipment revenues , partially offset by a $ 1.6 million increase in recurring revenues . the decrease in disc publishing equipment revenues was driven by declines in sales volumes as well as a reduction in average selling prices on a global basis . the increase in recurring revenues was primarily driven by an increase in both the volume and average selling prices of consumables sales . the reduction in equipment revenues in 2013 was most significant in the company 's u.s. region and was impacted by large product refresh orders in 2012 that did not reoccur in 2013. additionally , some of the company 's
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in response to covid-19 , the federal reserve has made other provisions that could assist the bank in satisfying its liquidity needs , such as reducing our reserve requirement to zero , expanding access to the discount window through collateral pledging and extension of term borrowings . 31 table of contents story_separator_special_tag roman ' , sans-serif ; font-size:10pt ; font-weight:400 ; line-height:120 % '' > total interest expense increased 18.4 % to $ 16.1 million for the year ended december 31 , 2019 from $ 13.6 million for the year ended december 31 , 2018. the increase was primarily due to an increase in the volume of and average cost of funds of our interest-bearing liabilities to 1.85 % at december 31 , 2019 from 1.60 % at december 31 , 2018 , which was primarily the result of new client acquisition and our decision to increase the rate of interest paid on our non-maturity interest bearing deposits and our certificates of deposit while in a rising interest rate environment , and an increase in our fhlb borrowings . interest expense on our certificates of deposit for the years ended december 31 , 2019 and 2018 was $ 6.0 million and $ 5.3 million , respectively , with a cost of funds of 2.26 % and 1.70 % , on average balances of $ 265.9 million and $ 315.2 million , respectively . net interest margin one of the principal determinants of a bank 's income is its net interest income , which is the difference between ( i ) the interest that a bank earns on loans , investment securities and other interest earning assets , on the one hand , and ( ii ) its interest expense , which consists primarily of the interest it must pay to attract and retain deposits and the interest that it pays on borrowings and other interest-bearing liabilities , on the other hand . as a general rule , all other things being equal , the greater the difference or โ spread โ between the amount of our interest income and the amount of our interest expense , the greater will be our net income ; whereas , a decline in that difference or โ spread โ will generally result in a decline in our net income . a bank 's interest income and interest expense are affected by a number of factors , some of which are outside of its control , including national and local economic conditions and the monetary policies of the federal reserve board which affect interest rates , competition in the market place for loans and deposits , the demand for loans and the ability of borrowers to meet their loan payment obligations . net interest income , when expressed as a percentage of total average interest earning assets , is a banking organization 's โ net interest margin. โ as a result of the federal reserve board decreasing interest rates by 150 basis points during the first quarter of 2020 , we experienced a reduction in our net interest margin . the unfavorable impact of lower prevailing interest rates on our asset-sensitive balance sheet was evidenced in the year ended december 31 , 2020 as compared to the year ended december 31 , 2019. while we are unable to ascertain whether the federal reserve board will continue to decrease short-term interest rates in the future , we expect the unfavorable impact on our net interest margin will remain in the event that interest rates continue to fall . however , we believe the management of our deposit costs to correspond with declining interest rates would partially offset the contractual decrease in the yield on earning assets . the following tables set forth information regarding our average balance sheet , yields on interest earning assets , interest expense on interest-bearing liabilities , the interest rate spread and the interest rate margin for the years ended december 31 , 2020 , 2019 and 2018. average balances are calculated based on average daily balances . 33 table of contents replace_table_token_9_th ( 1 ) short-term investments consist of federal funds sold and interest bearing deposits that we maintain at other financial institutions . ( 2 ) stock consists of fhlb stock and federal reserve bank stock . ( 3 ) loans include the average balance of nonaccrual loans and loan fees . the allowance for loan and lease losses is included within the `` all other assets '' line item . the following table sets forth changes in interest income , including loan fees , and interest paid in each of the years ended december 31 , 2020 , 2019 and 2018 and the extent to which those changes were attributable to changes in ( i ) the volumes of or in the rates of interest earned on interest-earning assets and ( ii ) the volumes of or the rates of interest paid on our interest-bearing liabilities . 34 table of contents replace_table_token_10_th ( 1 ) short-term investments consist of federal funds sold and interest bearing deposits that we maintain at financial institutions . ( 2 ) stock consists of fhlb stock and federal reserve bank stock . provision for loan and lease losses we maintain reserves to provide for loan losses that occur in the ordinary course of the banking business . when it is determined that the payment in full of a loan has become unlikely , the carrying value of the loan is reduced ( โ written down โ ) to what management believes is its realizable value or , if it is determined that a loan no longer has any realizable value , the carrying value of the loan is written off in its entirety ( a loan โ charge-off โ ) . loan charge-offs and write-downs are charged against our allowance for loan and lease losses ( โ alll โ ) . the amount of the alll is increased periodically to replenish the alll after it has been reduced due to loan write-downs or charge-offs . story_separator_special_tag the alll also is increased or decreased periodically to reflect increases or decreases in the volume of outstanding loans and to take account of changes in the risk of probable loan losses due to financial performance of borrowers , the value of collateral securing non-performing loans or changing economic conditions . increases in the alll are made through a โ provision for loan and lease losses โ that is recorded as an expense in the statement of operations . increases in the alll are also recognized through the recovery of charged-off loans which are added back to the alll . as such , recoveries are a direct offset for a provision for loan and lease losses that would otherwise be needed to replenish or increase the alll . we employ economic models and data that conform to bank regulatory guidelines and reflect sound industry practices as well as our own historical loan loss experience to determine the sufficiency of the alll and any provisions needed to increase or replenish the alll . those determinations involve judgments and assumptions about current economic conditions and external events that can impact the ability of borrowers to meet their loan obligations . however , the duration and impact of these factors can not be determined with any certainty . as such , unanticipated changes in economic or market conditions , bank regulatory guidelines or the sound practices that are used to determine the sufficiency of the alll , could require us to record additional , and possibly significant , provisions to increase the alll . this would have the effect of reducing reportable income or , in the most extreme circumstance , creating a reportable loss . in addition , the federal reserve bank and the cdfpi , as an integral part of their regulatory oversight , periodically review the adequacy of our alll . these agencies may require us to make additional provisions for perceived potential loan losses , over and above the provisions that we have already made , the effect of which would be to reduce our income or increase any losses we might incur . we recorded a $ 9.1 million provision for loan and lease losses during the year ended december 31 , 2020 as a result of total net charge-offs of $ 5.2 million , an increase in classified and non-performing loans , and qualitative factor increases related to covid-19 during the year . during the year ended december 31 , 2019 , we recorded a provision for loan and lease losses of $ 9.2 million as a result of total net charge-offs of $ 9.0 million , an increase in classified and non-performing loans , and growth in our loan portfolio during the year . we recorded no provision for loan and lease losses during the year ended december 31 , 2018 primarily as a result of reserves for new loan growth being offset by a decline in the level of classified assets . see `` โ financial conditionโnonperforming assets and allowance for loan and lease losses `` below in this item 7 for additional information regarding the alll . 35 table of contents noninterest income the following table identifies the components of and the percentage changes in noninterest income in the years ended december 31 , 2020 , 2019 and 2018 : replace_table_token_11_th 2020 vs. 2019 noninterest income increased by $ 749 thousand , or 13.4 % , for the year ended december 31 , 2020 as compared to the year ended december 31 , 2019 , primarily as a result of : an increase of $ 1.4 million in deposit related fees , credit card fees and loan service fees during the year ended december 31 , 2020 as compared to the year ended december 31 , 2019 as the result of modifications to our loan and deposit fee structure ; and gain on sale of securities available for sale of $ 171 thousand during the year ended december 31 , 2020 compared to zero for the prior year ; partially offset by gain on sale of sba loans of $ 1.0 million during the year ended december 31 , 2019 as compared to gain on sale of $ 547 thousand during the year ended december 31 , 2020 ; and a decrease of $ 190 thousand in other noninterest income during the year ended december 31 , 2020 as compared to the same period in 2019 due to decreased credit card income in 2020 . 2019 vs. 2018 during the year ended december 31 , 2019 , noninterest income increased by $ 953 thousand , or 20.6 % , to $ 5.6 million from $ 4.6 million for the year ended december 31 , 2018 , primarily as a result of : net gain on sale of sba loans of $ 1.0 million during the year ended december 31 , 2019 as compared to no sba sales during the same period in 2018 ; and an increase of $ 233 thousand in deposit related fees , credit card fees and loan service fees during the year ended december 31 , 2019 as compared to the same period in 2018 ; partially offset by a decrease of $ 223 thousand in other non-interest income during the year ended december 31 , 2019 as compared to the same period in 2018 due to decreased foreign exchange and trade income in 2019 ; and a gain of $ 48 thousand on the sale of securities available for sale during the year ended december 31 , 2018 that did not occur in the same period in 2019 . 36 table of contents noninterest expense the following table sets forth the principal components and the amounts of , and the percentage changes in , noninterest expense in the years ended december 31 , 2020 , 2019 and 2018. replace_table_token_12_th ( 1 ) other operating expenses primarily consist of telephone , investor relations , promotional , regulatory expenses , and correspondent bank fees .
| the average securities balances decreased as a result of sales and maturities of , and payments on , securities throughout the year ended december 31 , 2020. the decrease in the average yield is the result of the federal reserve cutting interest rates by 150 basis points in the first quarter of 2020. interest income from our short-term investments , including our federal funds sold and interest-bearing deposits , was $ 1.0 million and $ 5.3 million for the year ended december 31 , 2020 and 2019 , respectively , yielding 0.33 % and 2.20 % on average balances of $ 286.4 million and $ 239.3 million , respectively . the increase in the average balance is the result of increased liquidity as a result of deposit growth . the decrease in the average yield is a result of the declining interest rate environment in the latter half of 2019 through early 2020. as a result , total interest income on investments decreased for the year ended december 31 , 2020 . 2019 vs. 2018 total interest income increased 5.0 % to $ 65.7 million for the year ended december 31 , 2019 from $ 62.5 million for the year ended december 31 , 2018. this increase is primarily due to an increase in interest income on loans and short term investments during the year ended december 31 , 2019 compared to the prior year due to an increase in average balances , as well as an increase in the average yields . during the years ended december 31 , 2019 and 2018 , interest income on loans was $ 59.3 million and $ 57.6 million , respectively , yielding 5.39 % and 5.38 % on average loan balances of $ 1.10 billion and $ 1.07 billion , respectively . the increase in the average loan balances is attributable to an increase in loan demand . the average yield on interest-earning assets was 4.77 % for the year ended december 31 , 2019 compared to 4.78 % for the year ended december 31 , 2018. during the years ended december 31 , 2019 and 2018 , interest income from our securities available-for-sale and stock , was $ 1.1 million and $ 1.2 million , respectively , yielding 2.90 % and 2.92 % on average balances of $ 36.7 million and $ 39.7 million , respectively . the
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in the normal course of our business , we , in an effort to help keep our shareholders and the public informed about our operations , may from time-to-time issue certain statements , either in writing or orally , that contains or may contain forward-looking statements . although we believe that the expectations reflected in such forward looking statements are reasonable , we can give no assurance that such expectations will prove to have been correct . generally , these statements relate to business plans or strategies , projected or anticipated benefits or other consequences of such plans or strategies , past and possible future , of acquisitions and projected or anticipated benefits from acquisitions made by or to be made by us , or projections involving anticipated revenues , earnings , levels of capital expenditures or other aspects of operating results . all phases of our operations are subject to a number of uncertainties , risks and other influences , many of which are outside of our control and any one of which , or a combination of which , could materially affect the results of our proposed operations and whether forward looking statements made by us ultimately prove to be accurate . such important factors ( โ important factors โ ) and other factors could cause actual results to differ materially from our expectations are disclosed in this report , including those factors discussed in โ item 1a . risk factors. โ all prior and subsequent written and oral forward looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the important factors described below that could cause actual results to differ materially from our expectations as set forth in any forward looking statement made by or on behalf of us . 20 overview paysign , inc. is a vertically integrated provider of innovative prepaid card programs and processing services for corporate , consumer and government applications . our payment solutions are utilized by our corporate customers as a means to increase customer loyalty , increase patient adherence rates , reduce administration costs and streamline operations . public sector organizations can utilize our payment solutions to disburse public benefits or for internal payments . we market our prepaid card solutions under our paysign brand . as we are a payment processor and prepaid card program manager , we derive our revenue from all stages of the prepaid card lifecycle . we provide a card processing platform consisting of proprietary systems and innovative software applications based on the unique needs of our clients . we have extended our processing business capabilities through our proprietary paysign platform . through the paysign platform , we provide a variety of services including transaction processing , cardholder enrollment , value loading , cardholder account management , reporting , and customer service . the paysign platform was built on modern cross-platform architecture and designed to be highly flexible , scalable and customizable . the platform has allowed the company to significantly expand its operational capabilities by facilitating our entry into new markets within the payments space through its flexibility and ease of customization . the paysign platform delivers cost benefits and revenue building opportunities to our partners . we have developed prepaid card programs for corporate incentive and rewards including , but not limited to , consumer rebates and rewards , donor compensation , healthcare reimbursement payments and pharmaceutical payment assistance . we have expanded our product offerings to include additional corporate incentive products and demand deposit accounts accessible with a debit card . in the future , we expect to further expand our product offerings into payroll cards , travel cards , and expense reimbursement cards . our cards are sponsored by our issuing bank partners . our revenues include fees generated from cardholder transactions , interchange , and card program management fees , including settlement income . revenue from cardholder transactions , interchange and card program management fees is recorded when the performance obligation is fulfilled . settlement income is recorded ratably throughout the program life cycle . we have two categories for our prepaid debit cards : corporate and consumer reloadable , and non-reloadable cards . reloadable cards : these types of cards may be generally classified as payroll or considered general purpose reloadable ( โ gpr โ ) cards . payroll cards are issued by an employer to an employee in order to allow the employee to access payroll amounts that are deposited into an account linked to their card . gpr cards can also be issued to a consumer at a retail location or mailed to a consumer after completing an on-line application . gpr cards can be reloaded multiple times with a consumer 's payroll , government benefit , a federal or state tax refund or through cash reload networks located at retail locations . reloadable cards are generally open loop cards as described below . non-reloadable cards : these are generally one-time use cards that are only active until the funds initially loaded to the card are spent . these types of cards are generally used as gift or incentive cards . normally these types of cards are used for purchase of goods or services at retail locations and can not be used to receive cash . both reloadable and non-reloadable may be open loop , closed loop or semi-closed loop . open loop cards can be used to receive cash at atm locations by pin ; or purchase goods or services by pin or signature at retail locations virtually anywhere that the network brand ( american express , discover , mastercard , visa , etc . ) is accepted . closed loop cards can only be used at a specific merchant . story_separator_special_tag semi-closed loop cards can be used at several merchants , such as all merchants at a specific shopping mall . the prepaid card market is one of the fastest growing segments of the payments industry in the u.s. this market has experienced significant growth in recent years due to consumers and merchants embracing improved technology , greater convenience , more product choices and greater flexibility . prepaid cards have also proven to be an attractive alternative to traditional bank accounts for certain segments of the population , particularly those without , or who could not qualify for , a checking or savings account . we manage all aspects of the debit card lifecycle , from managing the card design and approval processes with partners and networks , to production , packaging , distribution , and personalization . we also oversee inventory and security controls , renewals , lost and stolen card management and replacement . we deploy a fully staffed , in-house customer service department which utilizes bi-lingual customer service representatives , interactive voice response ( โ ivr โ ) , and two-way short message service ( โ sms โ ) messaging . 21 currently , we are focusing our marketing efforts on corporate incentive and expense prepaid card products , in various market verticals including but not limited to general corporate expense , healthcare related markets including co-pay assistance , clinical trials and donor compensation , loyalty rewards and incentive cards . as part of our continuing platform expansion process , we evaluate current and emerging technologies for applicability to our existing and future software platform . to this end , we engage with various hardware and software vendors in evaluation of various infrastructure components . where appropriate , we use third-party technology components in the development of our software applications and service offerings . third-party software may be used for highly specialized business functions , which we may not be able to develop internally within time and budget constraints . our principal target markets for processing services include prepaid card issuers , retail and private-label issuers , small third-party processors , and small and mid-size financial institutions in the united states and in emerging international markets . we have devoted more extensive resources to sales and marketing activities as we have added essential personnel to our marketing and sales team . we sell our products directly to customers in the u.s. but may work with a small number of resellers and third parties in international markets to identify , sell and support targeted opportunities . we have also identified opportunities in the european union and are pursuing those opportunities . in 2020 , we plan to continue to invest additional funds in technology improvements , sales and marketing , customer service , and regulatory compliance . we are considering raising capital to enable us to diversify into new market verticals . if we do not raise new capital , we believe that we will still be able to expand into new markets using internally generated funds , but our expansion will not be as rapid . 2019 year milestones ยท grew to approximately 3 million cardholders and approximately 300 card programs as of december 31 , 2019 . ยท year over year revenue growth of 48 % . ยท launched the paysign premier dda ( demand deposit account ) debit card during the third quarter . ยท added 7 new pharmaceutical programs . ยท expanded into new corporate incentive & loyalty pre-paid industry verticals . key metrics , performance indicators and non-gaap measures management reviews a number of metrics to help us monitor the performance of and identify trends affecting our business . we believe the following measures are the primary indicators of our quarterly and annual revenues : gross dollar volume loaded on cards โ represents the total dollar volume of funds loaded to all of our prepaid card programs . our gross dollar volume was $ 859 million and $ 621 million for the years ended december 31 , 2019 and 2018 , respectively . we use this metric to analyze the total amount of money moving into our prepaid card programs . conversion rate on gross dollar volume loaded on cards โ comprised of revenue , gross profit and net profit conversion rates of gross dollar volume loaded on cards . our revenue conversion rate for the years ended december 31 , 2019 and 2018 were 4.04 % or 404 basis points ( โ bps โ ) , and 3.77 % or 377 bps , respectively , of gross dollar volume loaded on cards . our gross profit conversion rate for the years ended december 31 , 2019 and 2018 were 2.24 % or 224 bps , and 1.83 % or 183 bps , respectively , of gross dollar volume loaded on cards . our net profit conversion rate for the years ended december 31 , 2019 and 2018 were 0.88 % or 88 bps , and 0.42 % or 42 bps , respectively , of gross dollar volume loaded on cards . the improvement in gross and net conversion rates was attributable to pharma revenue representing approximately 21 % of 2019 total revenue vs. approximately just 1 % in 2018 . 22 in addition , management reviews key performance indicators , such as revenue , gross profits , operational expense as a percent of revenues , and cardholder participation . in addition , we consider certain non-gaap ( or `` adjusted '' ) measures to be useful to management and investors evaluating our operating performance for the periods presented , and provide a tool for evaluating our ongoing operations , liquidity and management of assets .
| gross profit for the year ended december 31 , 2019 was $ 19,241,475 , an increase of $ 7,844,252 , or 69 % compared to the year ended december 31 , 2018 , when gross profit was $ 11,397,223. our overall gross margins were 56 % and 49 % during the fiscal years 2019 and 2018 which was consistent with our overall expectations . we anticipate full year gross margin for 2020 to be similar to full year 2019. growth in new products and the expansion into new industry verticals will be contributing factors to the slightly less predictability in this metric . 23 depreciation and amortization for the year ended december 31 , 2019 were $ 1,483,140 , an increase of $ 393,619 compared to the year ended december 31 , 2018 when depreciation and amortization were $ 1,089,521. the increase in depreciation and amortization was primarily due to continued capitalization of new technologies and enhancements to our platform which we expect to continue with further enhancements in the future . selling , general and administrative expenses ( โ sg & a โ ) for the year ended december 31 , 2019 were , $ 11,656,681 an increase of $ 3,821,607 compared to the year ended december 31 , 2018 , when selling , general and administrative expenses were $ 7,835,074. the increase in sg & a was primarily due to the increased staffing and the annualization of prior year hires , $ 2,501,198 , and increased stock-based compensation as inducement grants $ 1,161,668. in the fiscal year ended december 31 , 2019 , we recorded income from operations of $ 6,101,654 as compared to $ 2,472,628 in the fiscal year ended december 31 , 2018 , an increase of $ 3,629,026. other income ( expense ) for the year ended december 31 , 2019 was $ 441,116 , as compared to other income ( expense ) of $ 108,613 in year ended december 31 , 2018 , which represents an increase in net other income ( expense ) of $ 332,503 primarily related to an increase in interest income . our income tax benefit for the year ended december 31 , 2019 was $ 909,976 , as compared to $ -0- for
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31 ยท freight out expense increased by $ 1.7 million in fiscal year 2019 as compared to fiscal year 2018 , due to our increased sales and higher freight costs from freight service providers . ยท expenses related to information technology increased by $ 1.3 million in fiscal year 2019 as compared to fiscal year 2018 primarily due to increased cost to support our sales initiatives and to build more efficient and effective systems . we continually evaluate the credit worthiness of our existing customer receivable portfolio and provide an appropriate reserve based on this evaluation . we also evaluate the credit worthiness of prospective and current customers and make decisions regarding extension of credit terms to such customers based on this evaluation . accordingly , we recorded a provision for bad debts of $ 1,721,200 and $ 797,100 for fiscal year 2019 and fiscal year 2018 , respectively . interest , net . net interest expense increased from $ 429,100 in fiscal year 2018 to $ 853,800 in fiscal year 2019. the increase is primarily related to higher borrowing levels on our secured revolving credit facility . refer to note 6 the financial statements included as part of this annual report on form 10-k for additional information on our borrowings . income taxes , net income and diluted earnings per share . the effective tax rates in fiscal year 2019 and 2018 were 23.9 % and 30.5 % , respectively . the effective tax rate was lower for fiscal 2019 , primarily due to the tax cuts & jobs act which was signed into law in december 2017 ( the โ 2017 tax act โ ) and went into effect in the third quarter of fiscal 2018. as a result of the factors discussed above , net income and diluted earnings per share for fiscal year 2018 increased 6.7 % and 6.6 % , respectively , compared with fiscal year 2017. fiscal year 2018 compared to fiscal year 2017 revenues . revenue for fiscal year 2018 increased by 8.8 % as compared to fiscal year 2017. in the commercial segment , revenue increased by 16.3 % with growth in both markets . the public carriers market revenue for fiscal year 2018 increased by 40.3 % , as compared to fiscal year 2017 , due to increased spending among our tower owner and program manager customers , and also due in part to better execution of our selling strategy in this market . we increased sales with our current customers and cultivated new significant customer relationships . this revenue growth was echoed in our value-added resellers and integrators market , with growth of 8.4 % . the revenue growth within our commercial segment was partially offset by a 3.5 % decrease in our retail segment revenue for fiscal year 2018 as compared to fiscal year 2017. this decrease was due in part to consolidation of our customer base within the retail market and due to a shift in customer behavior where customers are keeping the same phone for longer periods of time , resulting in lower accessories purchases . gross profit . gross profit increased by 7.6 % in fiscal year 2018 as compared to fiscal year 2017. in the commercial segment , gross profit increased by 7.7 % . this increase was primarily driven by increases in our public carriers market of 21.9 % . we experienced margin compression within our public carriers market primarily due to a change in customer mix , with increased sales going to larger customers which required better pricing . gross profit within our value-added resellers and integrators market increased by 4.5 % in fiscal year 2018 as compared to fiscal year 2017. within the retail segment , gross profit increased by 7.4 % in fiscal year 2018 as compared to fiscal year 2017 , despite a decline in revenue . this increase in gross margin was a result of product mix and increased support from our suppliers . overall gross profit margin decreased slightly to 20.7 % in fiscal year 2018 , compared to 21.0 % in fiscal year 2017 , primarily due to changes in customer and product mix . our ongoing ability to earn revenues and gross profits from customers and suppliers looking to us for product and supply chain solutions is dependent upon a number of factors . the terms , and accordingly the factors , applicable to each relationship often differ . among these factors are the strength of the customer 's or supplier 's business , the supply and demand for the product or service , including price stability , changing customer or supplier requirements , and our ability to support the customer or supplier and to continually demonstrate that we can improve the way they do business . in addition , the agreements or arrangements on which our customer and supplier relationships are based are typically of limited duration , typically do not include any obligation in respect of any specific product purchase or sale and are terminable by either party upon several months or otherwise short notice . our customer relationships could also be affected by wireless carrier consolidation or global financial crisis . we account for inventory at the lower of cost or net realizable value and as a result write-offs/write-downs occur 32 due to damage , deterioration , obsolescence , changes in prices and other causes . these expenses have been less than 1 % of overall purchases for each of the last three fiscal years . selling , general , administrative and restructuring expenses . story_separator_special_tag total selling , general , administrative and restructuring expenses increased 2.8 % during fiscal year 2018 as compared to fiscal year 2017. total selling , general , administrative and restructuring expenses as a percentage of revenues decreased from 20.5 % in fiscal year 2017 to 19.4 % in fiscal year 2018. the following are descriptions of changes in significant components of selling , general , administrative and restructuring expenses : ยท performance bonus expense ( including both cash and equity plans ) increased by $ 3.0 million in fiscal year 2018 as compared to fiscal year 2017. our bonus programs are typically based on achieving annual performance targets . the relationship between expected performance and actual performance led to higher bonus accruals in fiscal 2018 , as compared to fiscal 2017 . ยท freight out expense increased by $ 0.7 million in fiscal year 2018 as compared to fiscal year 2017 , due to our increased sales . ยท expenses related to information technology increased by $ 0.7 million in fiscal year 2018 as compared to fiscal year 2017 primarily due to increased cost relating to tessco.com ยฎ improvements . ยท during fiscal year 2017 we incurred corporate support expenses including both recruiting and professional service fees relating to the transition to our new ceo . as the transition was completed during fiscal 2017 , corporate support expense decreased by $ 0.9 million in fiscal year 2018 as compared to fiscal year 2017. we continually evaluate the credit worthiness of our existing customer receivable portfolio and provide an appropriate reserve based on this evaluation . we also evaluate the credit worthiness of prospective and current customers and make decisions regarding extension of credit terms to such customers based on this evaluation . accordingly , we recorded a provision for bad debts of $ 797,100 and $ 674,200 for fiscal year 2018 and fiscal year 2017 , respectively . interest , net . net interest expense increased , from $ 58,600 in fiscal year 2017 to $ 429,100 in fiscal year 2018. the increase is primarily related to higher borrowing levels on our secured revolving credit facility . refer to note 6 to the financial statements included as part of this annual report on form 10-k for additional information on our borrowings . income taxes , net income and diluted earnings per share . the effective tax rates in fiscal year 2018 and 2017 were 30.5 % and 41.9 % , respectively . the effective tax rate was lower for fiscal 2018 , primarily due to the 2017 tax act that went into effect in the third quarter of fiscal 2018 , as well as a change in treatment of a deferred tax liability relating to our accounting for a key man life insurance policy . the 2017 tax act required fiscal year companies to blend their federal tax rates during our fiscal year 2018. our annual federal rate for fiscal 2018 was based on 9 months at the old rate of approximately 35 % rate and 3 months at the new 21 % rate . we were also able to take a benefit on our net deferred tax liabilities in fiscal 2018 , which now reflect the lower federal rate . see note 11 โ income taxes โ to the financial statements included as part of this annual report on form 10-k for additional information on the effect of the 2017 tax act and the change in treatment of the deferred tax liability . as a result of the factors discussed above , net income and diluted earnings per share for fiscal year 2018 increased 259.5 % and 258.8 % , respectively , compared with fiscal year 2017 . 33 liquidity and capital resources in summary , our cash flows were as follows : replace_table_token_5_th we generated $ 8.2 million of net cash from operating activities during fiscal year 2019. this inflow was driven by net income ( net of depreciation and amortization and non-cash stock compensation expense ) , an increase in accounts payable and a decrease in inventory , partially offset by an increase in accounts receivable . accounts payable increased due to strategic purchase of inventory during the fourth quarter with extended terms to support our public carriers business . inventory decreased due to an intentional reduction of overall inventory in line with our efforts to manage working capital . accounts receivable increased due to the timing of sales at the end of the fourth quarter of fiscal year 2019 as compared to the fourth quarter of fiscal year 2018. we used $ 9.2 million of net cash from operating activities during fiscal year 2018. this outflow was driven by increases in accounts receivable and inventory , partially offset by net income ( net of depreciation and amortization and non-cash stock compensation expense ) , and an increase in accounts payable . increasing sales to our public carrier customers required significant investments in inventory and at times has resulted in larger accounts receivable balances . accounts payable also increased in response to our higher inventory levels . both current and potential opportunities within our public carrier business have required an increase in working capital investments . as such , on october 19 , 2017 we entered into the amended and restated credit agreement , as discussed below , based upon our anticipated borrowing and cash needs . we generated $ 3.1 million of net cash from operating activities during fiscal year 2017. this inflow was driven by net income ( net of depreciation and amortization and non-cash stock compensation expense ) , an increase in accounts payable and a decrease in prepaid expenses and other current assets partially offset by an increase in accounts receivable and product inventory . accounts receivable increased due to higher sales in the fourth quarter of fiscal 2017 as compared to the fourth quarter of fiscal 2016. inventory and accounts payable increased as a result of strategic purchases combined with a general increase in base station infrastructure inventory for our public system operators , contractors , and program managers market .
| overall gross profit margin decreased to 20.0 % in fiscal year 2019 , compared to 20.7 % in fiscal year 2018 , primarily due to changes in customer mix , including the increase in lower margin sales in the public carrier market . our ongoing ability to earn revenues and gross profits from customers and suppliers looking to us for product and supply chain solutions is dependent upon a number of factors . the terms , and accordingly the factors , applicable to each relationship often differ . among these factors are the strength of the customer 's or supplier 's business , the supply and demand for the product or service , including price stability , changing customer or supplier requirements , and our ability to support the customer or supplier and to continually demonstrate that we can improve the way they do business . in addition , the agreements or arrangements on which our customer and supplier relationships are based are typically of limited duration , typically do not include any obligation in respect of any specific product purchase or sale and are terminable by either party upon several months or otherwise short notice . our customer relationships could also be affected by wireless carrier consolidation or global financial crisis . a significant portion of our products are manufactured in foreign countries , including mexico and china . on may 9 , 2019 , the united states government announced a 25 % tariff on a range of products from china that are exported to the u.s .. china thereafter announced a plan to impose tariffs on a wide range of american products in retaliation for such american tariffs . the imposition of tariffs on products that we import would increase the costs of those products and could adversely affect our gross profits and overall financial performance . we continue to monitor tariff developments and seek methods to mitigate their effect , but are still likely to incur additional costs resulting from any additional or continuing tariffs and our mitigation efforts . we account for inventory at the lower of cost or net realizable value and as a result
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periodically , we install and sell wi-fi and das networks to customers where we do not have service contracts or remaining obligations beyond the installation of those networks and we recognize build-out fees for such projects as revenue when the installation work is completed and the network has been accepted by the customer . minimum monthly access fees for usage of the das networks are non-cancellable and generally escalate on an annual basis . these minimum monthly access fees are recognized ratably over the term of the telecom operator agreement . the initial term of our contracts with telecom operators generally range from five to twenty years and the agreements generally contain renewal clauses . revenue from das network access fees in excess of the monthly minimums is recognized when earned . services provided to wholesale wi-fi partners generally contain several elements including : ( i ) a term license to use our software to access our wi-fi network , ( ii ) access fees for wi-fi network usage , and or ( iii ) professional services for software integration and customization and to maintain the wi-fi service . the term license , monthly minimum network access fees and professional services are billed on a monthly basis based upon predetermined fixed rates . once the term license for integration and customization are delivered , the fees from the arrangement are recognized ratably over the remaining term of the service arrangement . the initial term of the license agreements is generally between one to five years and the agreements generally contain renewal clauses . revenue for wi-fi network access fees in excess of the monthly minimum amounts is recognized when earned . all elements within existing service arrangements are generally delivered and earned concurrently throughout the term of the respective service arrangement . in instances where the minimum monthly wi-fi and das network access fees escalate over the term of the wholesale service arrangement , an unbilled receivable is recognized when performance is within our control and when we have reasonable assurance that the unbilled receivable balance will be collected . 33 we adopted the provisions of asu 2009-13 , revenue recognition ( topic 605 ) ยmultiple-deliverable revenue arrangements ( `` asu 2009-13 '' ) , on a prospective basis on january 1 , 2011. for multiple-deliverable arrangements entered into prior to january 1 , 2011 that are accounted for under financial accounting standards board ( `` fasb '' ) accounting standards codification ( `` asc '' ) 605-25 , revenue recognitionยmultiple-deliverable revenue arrangements , we defer recognition of revenue for the full arrangement and recognize all revenue ratably over the wholesale service period for wi-fi platform service arrangements and the term of the estimated customer relationship period for das arrangements , as we did not have evidence of fair value for the undelivered elements in the arrangement . for multiple-deliverable arrangements entered into or materially modified after january 1 , 2011 that are accounted for under asc 605-25 , we evaluate whether or not separate units of accounting exist and then allocate the arrangement consideration to all units of accounting based on the relative selling price method using estimated selling prices if vendor specific objective evidence and third-party evidence is not available . we recognize the revenue associated with the separate units of accounting upon completion of such services or ratably over the wholesale service period for wi-fi platform service arrangements and the term of the estimated customer relationship period for das arrangements . advertising revenue is generated from advertisements on our managed and operated or partner networks . in determining whether an arrangement exists , we ensure that a binding arrangement is in place , such as a standard insertion order or a fully executed customer-specific agreement . obligations pursuant to our advertising revenue arrangements typically include a minimum number of units or the satisfaction of certain performance criteria . advertising and other revenue is recognized when the services are performed . business combinations we allocate the total purchase price of a business combination to the assets acquired and the liabilities assumed based on their estimated fair values at the acquisition date , with the excess purchase price recorded as goodwill . an income , market or cost valuation method may be utilized to estimate the fair value of the assets acquired or liabilities assumed in a business combination . the income valuation method represents the present value of future cash flows over the life of the asset using ( i ) discrete financial forecasts , which rely on management 's estimates of revenue and operating expenses , ( ii ) long- term growth rates , ( iii ) an appropriate discount rate and ( iv ) an appropriate royalty rate , where applicable . the market valuation method uses prices paid for a reasonably similar asset by other purchasers in the market , with adjustments relating to any differences between the assets . the cost valuation method is based on the replacement cost of a comparable asset at prices at the time of the acquisition reduced for depreciation of the asset . goodwill goodwill represents the excess of purchase price over fair value of net assets acquired . goodwill is not amortized but instead is tested annually for impairment , or more frequently when events or changes in circumstances indicate that fair value of the reporting unit has been reduced to less than its carrying value . we perform our impairment test annually as of december 31 st . entities have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in asc 350 , intangiblesยgoodwill and other . if , after assessing qualitative factors , an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount , then performing the two-step impairment test is unnecessary . story_separator_special_tag if deemed necessary , a two-step test is used to identify the potential impairment and to measure the amount of goodwill impairment , if any . the first step is to compare the fair value of the reporting unit with its carrying amount , including goodwill . if the fair value of the reporting unit 34 exceeds its carrying amount , goodwill is considered not impaired ; otherwise , there is an indication that goodwill may be impaired and the amount of the loss , if any , is measured by performing step two . under step two , the impairment loss , if any , is measured by comparing the implied fair value of the reporting unit goodwill with the carrying amount of goodwill . at december 31 , 2015 and 2014 , we tested our goodwill for impairment using a market based approach and no impairment was identified as the fair value of our sole reporting unit was substantially in excess of its carrying amount . to date , we have not recorded any goodwill impairment charges . measuring recoverability of long-lived assets we perform an impairment review of long-lived assets held and used whenever events or changes in circumstances indicate that the carrying value may not be recoverable . factors we consider important that could trigger an impairment review include , but are not limited to , significant under-performance relative to projected future operating results , significant changes in the manner of our use of the acquired assets or our overall business and or product strategies and significant industry or economic trends . when we determine that the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of these indicators , we determine the recoverability by comparing the carrying amount of the asset to net future undiscounted cash flows that the asset is expected to generate or other indices of fair value . we would then recognize an impairment charge equal to the amount by which the carrying amount exceeds the fair market value of the asset . stock-based compensation stock-based compensation consists of stock options and restricted stock units ( `` rsus '' ) , which are granted to employees and non-employees . we recognize compensation expense equal to the grant date fair value on a straight-line basis , net of estimated and actual forfeitures , over the employee requisite service period . we recognize stock-based compensation expense for performance-based rsus when we believe that it is probable that the performance objectives will be met . the grant date fair value of our stock option awards is determined using the black-scholes option pricing model . income taxes income taxes are provided based on the liability method , which results in income tax assets and liabilities arising from temporary differences . temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years . the liability method requires the effect of tax rate changes on current and accumulated deferred income taxes to be reflected in the period in which the rate change was enacted . the liability method also requires that deferred tax assets be reduced by a valuation allowance unless it is more likely than not that the assets will be realized . we may recognize the tax benefit from uncertain tax positions only if it is at least more likely than not that the tax position will be sustained on examination by the taxing authorities , based on the technical merits of the position . the tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50 % likelihood of being realized upon settlement with the taxing authorities . we establish valuation allowances when necessary to reduce deferred tax assets to the amounts expected to be realized . we evaluate the need for , and the adequacy of , valuation allowances based on the expected realization of our deferred tax assets . the factors used to assess the likelihood of realization include historical earnings , our latest forecast of taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets . 35 our effective tax rates are primarily affected by changes in our valuation allowances , the amount of our taxable income or losses in the various taxing jurisdictions in which we operate , the amount of federal and state net operating losses and tax credits , the extent to which we can utilize these net operating loss carryforwards and tax credits and certain benefits related to stock option activity . recent accounting pronouncements information regarding recent accounting pronouncements is contained in note 2 `` significant accounting policies '' to the accompanying consolidated financial statements included in part ii , item 8 , which is incorporated herein by this reference . key business metrics in addition to monitoring traditional financial measures , we also monitor our operating performance using key performance indicators . in 2014 , we updated our presentation of revenue sources to differentiate our individual users based on the nature of the usersยretail users who purchase internet access at our managed and operated hotspots and select partner locations or military users who purchase internet access or iptv services for individual use on military bases . accordingly , we have disaggregated our subscribers between our retail and military users . we have also removed monthly churn , which was defined as the number of subscribers who canceled their subscriptions in a given month , expressed as a percentage of the average subscribers in that month , as a key performance indicator as we no longer view monthly churn as a key business metric . our key performance indicators follow : replace_table_token_9_th subscribers ย retail and subscribers ย military . this metric represents the number of paying customers who are on a month-to-month subscription plan at a given period end . connects .
| das revenue increased $ 8.2 million , or 21.4 % , in 2015 , as compared to 2014 , due to a $ 6.1 million increase from new build-out projects in our managed and operated locations , which includes a $ 1.0 million short-term build-out project that included the sale of equipment that was completed during 2015 , and a $ 2.1 million increase in access fees from our telecom operators . the increase in access fees resulted primarily from the new build-out projects that were completed and $ 0.4 million of one-time fees that were paid for early termination rights . retail . retail revenue decreased $ 8.6 million , or 21.3 % , in 2015 , as compared to 2014 , primarily due to a $ 6.7 million decrease in retail subscriber revenue , which was driven primarily by the decrease in retail subscribers in 2015 compared to 2014. the remaining decrease was due to a $ 1.9 million decrease in retail single-use revenue . wholesale ย wi-fi . wholesale wi-fi revenue increased $ 6.7 million , or 44.1 % , in 2015 , as compared to 2014 , primarily due to a $ 7.4 million increase in partner usage based fees , which was partially offset by a $ 0.7 million decrease in wi-fi build-out revenues related to a project that was completed in 2014. military . military revenue increased $ 15.4 million , or 343.6 % , in 2015 , as compared to 2014 primarily due to the increase in subscribers resulting from our build-out of wi-fi networks at military bases . advertising and other . advertising and other revenue decreased $ 1.4 million , or 6.8 % , in 2015 , as compared to 2014 , primarily due to a $ 1.9 million decrease in advertising sales at our managed and operated locations , which was partially offset by a $ 0.5 million increase in revenues from other service agreements . 42 costs and operating expenses replace_table_token_13_th network access . network access costs increased $ 3.6 million , or 6.0 % , in 2015 , as compared to 2014. the increase is primarily due to a $ 4.6 million increase in depreciation expense and a $ 3.6
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our products under development are monoclonal antibodies labeled with radioisotopes . we have one program with an antibody labeled with a beta emitter and several programs based on a proprietary patent protected platform technology called alpha particle immunotherapy or apit . our apit technology is based on attaching actinium 225 ( ac-225 ) or bismuth 213 ( bi-213 ) alpha emitting radioisotopes to monoclonal antibodies . alpha emitting radioisotopes are unstable chemical elements that decay by releasing alpha particles . alpha particles can kill any cell in whose immediate proximity they are released . monoclonal antibodies are genetically engineered proteins that target specifically certain cells , and can target cancer cells . it is crucial for the success of our drug candidates to contain monoclonal antibodies that can successfully seek cancer cells and can kill them with the attached isotope while not harming nearby normal cells . we do not have technology and operational capabilities to develop and manufacture such monoclonal antibodies and we therefore rely on collaboration with third parties to gain access to such monoclonal antibodies . we have secured rights to two monoclonal antibodies , hum195 ( lintuzumab ) , in 2003 through a collaborative licensing agreement with abbott laboratories and bc8 in 2012 with the fred hutchinson cancer research center . we expect to negotiate collaborative agreements with other potential partners that would provide us with access to additional monoclonal antibodies . establishing and maintaining such collaborative agreements is a key to our success as a company . under our own sponsorship as well as activity at fhcrc , we have four product candidates in active clinical trials : actimab-a ( hum195-ac-225 ) , iomab-b ( bc8-i-131 ) , bc8-y-90 and bc8-sa . at this time , the company is actively pursuing development of actimab-a and iomab-b while bc8-y-90 and bc8-sa are in physician sponsored clinical phase i trials at the fred hutchinson cancer research center.actimab-a is a combination of the monoclonal antibody we have in-licensed , lintuzumab ( hum195 ) , and the alpha emitting isotope actinium 225. actimab-a has shown promising results throughout preclinical development and an ongoing clinical trial started in 2006 in treating acute myeloid leukemia ( aml ) in the elderly . we have expanded the number of patients and number of clinical centers by commencing a new aml clinical trial which we have launched in 2012. this trial targets newly diagnosed aml patients over the age of 60. in order to conduct the trial we are engaged in funding , monitoring and quality assurance and control of the lintuzumab antibody ; procurement of actinium 225 isotope ; funding , monitoring and quality assurance and control of the drug candidate actimab-a manufacturing and organizing and monitoring clinical trials . we estimate that the direct costs to completion of both parts of the ongoing phase i/ii trial will be approximately us $ 7 million.iomab-b is a combination of the in-licensed monoclonal antibody bc8 and the beta emitting radioisotope iodine 131. this construct has been extensively tested in phase i and phase ii clinical trials in approximately 250 patients with different blood cancer indications who were in need of a hematopoietic stem cell transplantation ( hsct ) . iomab-b is used to condition the bone marrow of these patients by destroying blood cancer cells in their bone marrow and elsewhere thus allowing for a subsequent transplant containing healthy donor bone marrow stem cells . we have decided to develop this drug candidate by initially focusing on the patients over 50 with active acute myeloid leukemia in relapse and or refractory to existing treatments . our intention is to request the fda in 2013 to allow us to enter into a pivotal trial with iomab-b . we estimate the direct costs of such a trial to completion anticipated in 2015 will be approximately us $ 15-20 million . we have primarily management position employees and consultants who direct , organize and monitor the activities described above through contractors . much of the in vivo laboratory and clinical work contracted for by the company has been conducted at memorial sloan-kettering cancer center in new york . the company has also made clinical trial arrangements with other well known cancer centers . 31 our actimab-a drug candidate and its components are contract manufactured and maintained under our supervision by specialized contract manufacturers and suppliers in the u.s. , including isotex diagnostics , oak ridge national laboratory , pacific gmp , fischer bioservices , bioreliance and others . we are a development stage company and have never generated revenue . currently we do not have a stable recurring source of revenues sufficient to cover our operating costs . as of december 31 , 2012 , we had an accumulated deficit of $ 55 million . we incurred net losses of $ 8.4 million and $ 3.4 million in the years ending december 31 , 2012 and 2011 , respectively . emerging growth company we are an โ emerging growth company โ under the federal securities laws and will be subject to reduced public company reporting requirements . in addition , section 107 of the jobs act also provides that an โ emerging growth company โ can take advantage of the extended transition period provided in section 7 ( a ) ( 2 ) ( b ) of the securities act for complying with new or revised accounting standards . in other words , an โ emerging growth company โ can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies . we are choosing to take advantage of the extended transition period for complying with new or revised accounting standards . opportunities , challenges and risks the market for drugs for cancer treatment is a large market in need of novel products , in which successful products can command multibillion dollars in annual sales . story_separator_special_tag a number of large pharmaceutical and biotechnology company regularly acquire products in development , with preference given to products in phase ii or later clinical trials . these deals are typically structured to include an upfront payment that ranges from several million dollars to tens of million dollars or more and additional milestone payments tied to regulatory submissions and approvals and sales milestones . our goal is to develop our product candidates through phase ii clinical trials and enter into partnership agreements with one or more large pharmaceutical and or biotechnology companies . we believe our future success will be heavily dependent upon our ability to successfully conduct clinical trials and preclinical development of our drug candidates . this will in turn depend on our ability to continue our collaboration with memorial sloan-kettering cancer center and our clinical advisory board members plan to continue and expand other research and clinical trial collaborations . in addition , we will have to maintain sufficient supply of actinium 225 and successfully maintain and if and when needed replenish or obtain our reserves of monoclonal antibodies . we will have to maintain and improve manufacturing procedures we have developed for production of our drug candidates from the components that include the iodine 131 and actinium 225 isotopes , monoclonal antibodies and other materials . it is possible that despite our best efforts our clinical trials results may not meet regulatory requirements for approval . if our efforts are successful , we will be able to partner our development stage products on commercially favorable terms only if they enjoy appropriate patent coverage and or considerable know-how and other protection that ensures market exclusivity . for that reason we intend to continue our efforts to maintain existing and generate new intellectual property . intellectual property is a key factor in the success of our business as well as market exclusivity . to achieve the goals discussed above we intend to continue to invest in research and development at high and constantly increasing rates thus incurring further losses until one or more of our products are sufficiently developed to partner them to large pharmaceutical and biotechnology companies . 32 story_separator_special_tag equivalents held in financial institutions located outside of the united states as of december 31 , 2012 and 2011. we do not anticipate this practice will change in the future . the following tables sets forth selected cash flow information for the periods indicated : replace_table_token_1_th net cash used in operating activities was $ 5,212,710 for the year ended december 31 , 2012 compared to $ 517,592 used in operations for the same period in 2011. cash used in operations increased due to the increase in spending related to preparations and eventual launch and conduct of a multicenter trial and an increase in spending related to professional fees combined with an increase in payroll-related expenses . net cash provided by financing activities was $ 5,129,940 for the year ended december 31 , 2012 compared to $ 6,025,255 for the same period in 2011. in january 2012 , we sold 968,759 shares of our stock at $ 0.78 per share . in 2012 , we also sold 3,118,988 shares of our common stock at $ 1.65 per share . we raised funds through the sale of the company 's stock to finance the expansion of our research and development efforts . we have experienced cumulative losses of $ 55,743,463 from inception ( june 13 , 2000 ) through december 31 , 2012 , and have stockholders ' equity of $ 1,145,635 at december 31 , 2012. in addition , the company has not completed its efforts to establish a stable recurring source of revenues sufficient to cover its operating costs for the next twelve months . these factors raise substantial doubt regarding the company 's ability to continue as a going concern . 34 recent debt and equity offerings during 2011 , the company raised $ 6,184,967 by selling 7,891,141 shares of the company 's stock and warrants to purchase 19,972,785 shares of the company 's stock through an offering ( โ stock offering โ ) . a net amount of $ 5,379,367 was received by the company in 2011. the company paid laidlaw & company ( uk ) ltd. ( โ laidlaw & co. โ ) , the placement agent , total cash fees of $ 742,196 , which consisted of placement agent commission of $ 618,497 and expense reimbursement of $ 123,699. in addition , the company paid laidlaw & co. 's outside counsel , mccormick & o'brien pllc , $ 60,904 for its services as the placement agent 's legal counsel and signature bank $ 2,500 for the bank escrow fee . on december 27 , 2011 , the company completed a private offering of 8 % senior subordinated unsecured convertible promissory notes ( โ convertible notes โ ) in the amount of $ 900,000 and received net proceeds of $ 750,000. the convertible notes were issued at 83.33 % of the principal amount resulting in an original issue discount of $ 150,000. the convertible notes mature one year from the date of issuance . interest accrues at the rate of 8 % per year on the outstanding principal amount , accrued semi-annually and to be paid at maturity . on december 19 , 2012 , in connection with the share exchange , the convertible notes were converted into 1,252,550 share of common stock . during 2012 , the company raised $ 759,300 by selling 968,759 shares and warrants to purchase 242,190 shares of the company 's common stock under the company 's stock offering .
| the fair value of $ 144,463 , or $ 0.36 per share , was a noncash charge to general and administrative expenses for the year ended december 31 , 2012. in february 2012 , the company granted options to purchase 2,125,000 shares of common stock to its employees and consultants with a fair value of $ 531,913. in july 2012 , the company granted options to purchase 90,000 shares of common stock to its consultants with a fair value of $ 23,770. in august 2012 , the company granted options to purchase 2,875,000 shares of common stock to its employees and consultants with a fair value of $ 724,784. during the fourth quarter , the company granted options to purchase 1,085,000 shares of common stock to its employees and consultants with a fair value of $ 239,310. for the year ended december 31 , 2012 , the company recorded amortization of stock-based compensation of $ 266,172 as a noncash charge to general and administrative expenses . 33 the increase can also be attributed to additional professional fees of $ 549,383 related to the year-end audit , the quarterly review , legal fees , and management fees associated with the company going public . in addition to the professional fees incurred , we increased our personnel . as such , payroll-related expenses for the year ended december 31 , 2012 increased compared to the same period in 2011. interest expense interest expense increased by $ 924,233 for the year ended december 31 , 2012 compared to the year ended december 31 , 2011. the increase in interest expense is directly attributable to interest accrued on the convertible debt , amortization of the convertible debt discount and deferred financing costs related to the convertible debt . net loss net loss increased by $ 4,916,410 to $ 8,361,205 for the year ended december 31 , 2012 compared $ 3,444,795 for to the year ended december 31 , 2011. the increase was primarily due to additional costs incurred by the company in research and development
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rif is calculated as the sum total of the coverage percentage of each individual policy in our portfolio applied to the unpaid principal balance of such insured mortgage . rif is affected by iif and the ltv profile of our insured mortgages , with lower ltv loans generally having a lower coverage percentage and higher ltv loans having a higher coverage percentage . gross rif represents rif before consideration of reinsurance . net rif is gross rif net of ceded reinsurance . net premiums written and net premiums earned we set our premium rates on individual policies based on the risk characteristics of the underlying mortgage loans and borrowers , and in accordance with our filed rates and applicable rating rules . on june 4 , 2018 , we introduced a proprietary risk-based pricing platform , which we refer to as rate gps . rate gps considers a broad range of individual variables , including property type , type of loan product , borrower credit characteristics , and lender and market factors , and provides us with the ability to set and charge premium rates commensurate with the underlying risk of each loan that we insure . we introduced rate gps in june 2018 to replace our previous rate card pricing system . while most of our new business is priced through rate gps , we also continue to offer a rate card pricing option to a limited number of lender customers who require a rate card for operational reasons . we believe the introduction and utilization of rate gps provides us with a more granular and analytical approach to evaluating and pricing risk , and that this approach enhances our ability to continue building a high-quality mortgage insurance portfolio and delivering attractive risk-adjusted returns . premiums are generally fixed for the duration of our coverage of the underlying loans . net premiums written are equal to gross premiums written minus ceded premiums written under our reinsurance arrangements , less premium refunds . as a result , net premiums written are generally influenced by : niw ; premium rates and the mix of premium payment type , which are either single , monthly or annual premiums , as described below ; cancellation rates of our insurance policies , which are impacted by payments or prepayments on mortgages , refinancings ( which are affected by prevailing mortgage interest rates as compared to interest rates on loans underpinning our in force policies ) , levels of claim payments and home prices ; and cession of premiums under third-party reinsurance arrangements . premiums are paid either by the borrower ( bpmi ) or the lender ( lpmi ) in a single payment at origination ( single premium ) , on a monthly installment basis ( monthly premium ) or on an annual installment basis ( annual premium ) . our net premiums written will differ from our net premiums earned due to policy payment type . for single premiums , we receive a single premium payment at origination , which is earned over the estimated life of the policy . substantially all of our single premium policies in force as of 49 december 31 , 2019 were non-refundable under most cancellation scenarios . if non-refundable single premium policies are canceled , we immediately recognize the remaining unearned premium balances as earned premium revenue . monthly premiums are recognized in the month billed and when the coverage is effective . annual premiums are earned on a straight-line basis over the year of coverage . substantially all of our policies provide for either single or monthly premiums . the percentage of iif that remains on our books after any 12-month period is defined as our persistency rate . because our insurance premiums are earned over the life of a policy , higher persistency rates can have a significant impact on our net premiums earned and profitability . generally , faster speeds of mortgage prepayment lead to lower persistency . prepayment speeds and the relative mix of business between single and monthly premium policies also impact our profitability . our premium rates include certain assumptions regarding repayment or prepayment speeds of the mortgages underlying our policies . because premiums are paid at origination on single premium policies and our single premium policies are generally non-refundable on cancellation , assuming all other factors remain constant , if single premium loans are prepaid earlier than expected , our profitability on these loans is likely to increase and , if loans are repaid slower than expected , our profitability on these loans is likely to decrease . by contrast , if monthly premium loans are repaid earlier than anticipated , we do not earn any more premium with respect to those loans and , unless we replace the repaid monthly premium loan with a new loan at the same premium rate or higher , our revenue is likely to decline . effect of reinsurance on our results we utilize third-party reinsurance to actively manage our risk , ensure compliance with pmiers , state regulatory and other applicable capital requirements , and support the growth of our business . we currently have both quota share and excess-of-loss reinsurance agreements in place , which impact our results of operations and regulatory capital and pmiers asset positions . under a quota share reinsurance agreement , the reinsurer receives a premium in exchange for covering an agreed-upon portion of incurred losses . such a quota share arrangement reduces premiums written and earned and also reduces rif , providing capital relief to us and reducing our incurred claims in accordance with the terms of the reinsurance agreement . in addition , reinsurers typically pay ceding commissions as part of quota share transactions , which offset our acquisition and underwriting expenses . certain quota share agreements include profit commissions that are earned based on loss performance and serve to reduce ceded premiums . under an excess-of-loss agreement , typically we are responsible for losses up to an agreed-upon threshold and the reinsurer then provides coverage in excess of such threshold up to a maximum agreed-upon limit . story_separator_special_tag we expect to continue to evaluate reinsurance opportunities in the normal course of business . quota share reinsurance effective september 1 , 2016 , nmic entered into the 2016 qsr transaction with a syndicate of third-party reinsurers . under the terms of the 2016 qsr transaction , nmic cedes premiums written related to 25 % of the risk on eligible primary policies written for all periods through december 31 , 2017 and 100 % of the risk under our pool agreement with fannie mae , in exchange for reimbursement of ceded claims and claim expenses on covered policies , a 20 % ceding commission , and a profit commission of up to 60 % that varies directly and inversely with ceded claims . effective january 1 , 2018 , nmic entered into the 2018 qsr transaction with a syndicate of third-party reinsurers . under the 2018 qsr transaction , nmic cedes premiums earned related to 25 % of the risk on eligible policies written in 2018 and 20 % of the risk on eligible policies written in 2019 , in exchange for reimbursement of ceded claims and claim expenses on covered policies , a 20 % ceding commission , and a profit commission of up to 61 % that varies directly and inversely with ceded claims . under the terms of the qsr transactions , nmic may elect to selectively terminate its engagement with individual reinsurers on a run-off basis ( i.e. , reinsurers continue providing coverage on all risk ceded prior to the termination date , with no new cessions going forward ) or cut-off basis ( i.e. , the reinsurance arrangement is completely terminated with nmic recapturing all previously ceded risk ) under certain circumstances . such selective termination rights arise when , among other reasons , a reinsurer experiences a deterioration in its capital position below a prescribed threshold and or a reinsurer breaches ( and fails to cure ) its collateral posting obligations under the relevant agreement . effective april 1 , 2019 , nmic elected to terminate its engagement with one reinsurer under the 2016 qsr transaction on a cut-off basis . in connection with the termination , nmic recaptured approximately $ 500 million of previously ceded primary rif and stopped ceding new premiums written with respect to the recaptured risk . with this termination , ceded premiums written under the 2016 qsr transaction decreased from 25 % to 20.5 % on eligible policies . the termination had no effect on the cession of pool risk under the 2016 qsr transaction . excess-of-loss reinsurance nmic has secured aggregate excess-of-loss reinsurance coverage on defined portfolios of mortgage insurance policies written during discrete periods through a series of mortgage insurance-linked note offerings by the oaktown re vehicles . under 50 each agreement , nmic retains a first layer of aggregate loss exposure on covered policies and the respective oaktown re vehicle then provides second layer loss protection up to a defined reinsurance coverage amount . nmic then retains losses in excess of the respective reinsurance coverage amounts . nmic applies claims paid on covered policies against its first layer aggregate retained loss exposure under each excess-of-loss agreement . the respective reinsurance coverage amounts provided by the oaktown re vehicles decrease from the inception of each agreement over a 10-year period as the underlying insured mortgages are amortized or repaid , and or the mortgage insurance coverage is canceled . the following table presents the inception date , covered production period , initial and current reinsurance coverage amount , and initial and current first layer retained aggregate loss under each of the iln transactions . replace_table_token_4_th see item 8 , `` financial statements and supplementary data - notes to consolidated financial statements - note 6 , reinsurance `` for further discussion of these third-party reinsurance arrangements . portfolio data the following table presents primary and pool niw and iif as of the dates and for the periods indicated . unless otherwise noted , the tables below do not include the effects of our third-party reinsurance arrangements described above . replace_table_token_5_th for the year ended december 31 , 2019 , primary niw increased 65 % compared to the year ended december 31 , 2018 , due to growth in our monthly and single premium policy production tied to increased penetration of existing customer accounts and new customer account activations . for the year ended december 31 , 2018 , primary niw increased 26 % compared to the year ended december 31 , 2017 , due to growth in our monthly premium policy volume , partially offset by a decrease in our single premium policy production . for the year ended december 31 , 2019 , monthly premium polices accounted for 92 % of our niw , compared to 88 % and 81 % for the years ended december 31 , 2018 and 2017 , respectively . as of december 31 , 2019 , monthly premium policies accounted for 81 % of our primary iif , compared to 75 % at december 31 , 2018 and 69 % at december 31 , 2017 . we expect the break-down of monthly premium policies and single premium policies ( which we refer to as `` mix '' ) in our primary iif will continue to trend toward an increased monthly mix over time given the composition of our niw . total iif at december 31 , 2019 increased 36 % compared to december 31 , 2018 , which in turn increased 38 % compared to december 31 , 2017 , primarily due to the niw generated between such measurement dates , partially offset by the run-off of our in-force policies . our persistency rate decreased to 77 % at december 31 , 2019 from 87 % at december 31 , 2018 and 86 % at december 31 , 2017 , reflecting the impact of increased refinancing activity during the year ended december 31 , 2019 tied to record low interest rates . 51 the following table presents net premiums written and earned for the periods indicated .
| other revenues represent underwriting fee revenue from our subsidiary , nmis , which provides outsourced loan review services to mortgage loan originators . the growth in other revenues for the year ended december 31 , 2019 relates to an increase in nmis ' outsourced loan review volume . amounts recognized in other revenues generally correspond with amounts incurred as service expenses for outsourced loan review activities in the same periods . expenses we recognize insurance claims and claim expenses in connection with the loss experience of our insured portfolio and incur other underwriting and operating expenses , including employee compensation and benefits , policy acquisition costs , and technology , professional services and facilities expenses , in connection with the development and operation of our business . we also incur service expenses in connection with nmis ' outsourced loan review activities . insurance claims and claim expenses were $ 12.5 million , $ 5.5 million and $ 5.3 million for the years ended december 31 , 2019 , 2018 and 2017 , respectively . insurance claims and claim expenses increased $ 7.1 million for the year ended december 31 , 2019 , primarily due to an increase in new defaults tied to the growth in the number of policies in force and the aging of our earlier book years , and an increase in our average reserve per default from non-disaster zones , partially offset by cure activity on the beginning nod population . insurance claims and claim expenses increased $ 0.2 million in 2018 , primarily due to an increase in our average reserve per default tied to the aging of our nod population and composition of our default inventory between loans in disaster and non-disaster impacted areas , largely offset by a reduction in the total number of nods and related release of prior year reserves on cured defaults . underwriting and operating expenses were $ 126.6 million , $ 117.0 million and $ 106.4 million for the years ended december 31 , 2018 and 2017 , respectively . the sequential increase in
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we are pursuing new card accounts and wallet share gains with existing customers through investments in marketing and rewards as well as new features . we are also targeting growth in our private student and personal loans . as a result , we expect revenues to increase in 2016. other revenue is expected to decline in 2016 due to lower fee revenues driven by the exit of our mortgage origination business , continued decline in protection products revenue , and an increase in the credit card rewards rate . additionally , we continue to focus on capital deployment through organic growth in the business and through our quarterly dividends and share repurchase program . the total charge-off rate is expected to increase slightly in 2016 , assuming no material change in the macroeconomic environment . while the credit environment has been relatively stable , we added to the loan loss reserve in 2015 as we continue to grow receivables and recently originated loans season , which is currently expected to continue in 2016. during 2015 , higher expenses year over year were driven primarily by compliance costs , a portion of which were one-time . we continue to invest in areas supporting growth strategies and regulatory compliance , however , we expect total expenses in 2016 to be lower than 2015. we continue to leverage our proprietary network to support our card-issuing business . in third party payments , we expect intense competition in the payments industry to persist . this environment will likely continue to impact the revenue margins , transaction volume and business strategies . regulatory environment and developments in recent years , federal banking regulators have implemented and continue to propose new regulations and supervisory guidance under the dodd-frank wall street reform and consumer protection act ( the `` dodd-frank act '' ) and otherwise , and have been increasing their examination and enforcement action activities . the dodd-frank act regulates large systemically significant financial firms , including discover , through a variety of measures , including increased capital and liquidity requirements , limits on leverage and enhanced supervisory authority . the dodd-frank act contains comprehensive provisions governing the practices and oversight of financial institutions and other - 50 - participants in the financial markets . we expect regulators to continue taking formal enforcement actions against financial institutions in addition to addressing concerns through non-public supervisory actions or findings . the impact of the evolving regulatory environment on our business and operations depends upon a number of factors including supervisory priorities and actions , the actions of our competitors and other marketplace participants and the behavior of consumers . regulatory developments , findings and ratings could negatively impact our business strategies , require us to limit or change our business practices , limit our product offerings , invest more management time and resources in compliance efforts , limit the fees we can charge for services , or limit our ability to pursue certain business opportunities and obtain related required regulatory approvals . for additional information regarding bank regulatory limitations on acquisitions and investments , see `` business โ supervision and regulation โ acquisitions and investments . '' for more information on recent matters affecting discover , see note 20 : litigation and regulatory matters to our consolidated financial statements . regulatory developments also could impact our strategies , the value of our assets , or otherwise adversely affect our businesses . compliance expenditures have increased significantly for discover and other financial services firms , and we expect them to continue to increase as regulators remain focused on controls and operational processes . we may face additional compliance and regulatory risk to the extent that we enter into new business arrangements with third-party service providers , alternative payment providers or other industry participants . the additional expense , time and resources needed to comply with ongoing regulatory requirements may adversely impact our business and results of operations . consumer financial services the consumer financial protection bureau ( `` the cfpb '' ) regulates consumer financial products and services , as well as certain financial services providers , including discover . the cfpb is authorized to prevent โ unfair , deceptive or abusive acts or practices โ and ensure consistent enforcement of laws so that all consumers have access to markets for consumer financial products and services that are fair , transparent and competitive . the cfpb has rulemaking and interpretive authority under the dodd-frank act and other federal consumer financial services laws , as well as broad supervisory , examination and enforcement authority over large providers of consumer financial products and services , such as discover . under its rulemaking authority , the cfpb announced that it is considering rules that will limit the use of arbitration clauses . for more information , see note 20 : litigation and regulatory matters to our consolidated financial statements . several of our products , including credit cards , private student loans and home loans , are areas of focus of the cfpb . the cfpb collects detailed account level information from us about credit cards and other products , and is authorized to collect fines and require consumer restitution in the event of violations . in addition , the cfpb has an online complaint portal that shows the subject matter of consumers ' complaints about financial products , as well as the nature of financial services providers ' responses to each complaint , such as whether requested relief was provided . in june 2015 , the cfpb began publishing narratives of complaints made to the cfpb by consumers who opted to have their complaint narratives made public . the publication through the portal of unverified detailed consumer narratives could lead to reputational injury of financial institutions . the cfpb 's analysis of account data and complaints could inform future decisions with respect to regulatory , enforcement or examination focus , and influence consumers ' attitudes about doing business with discover . story_separator_special_tag credit cards pursuant to the credit card accountability responsibility and disclosure act of 2009 ( the `` card act '' ) , the cfpb recently concluded its bi-annual review of the consumer credit card market . the bi-annual review report provided additional guidance for credit card issuers and concluded that the card act reduced the overall cost of credit . the report discussed the use of new technology , including the movement of marketing and the opening of new accounts to digital channels . the cfpb also discussed debt collection practices and the complexity of card agreements and rewards programs . the cost and availability of credit , credit disclosures and consumer experience with debt collectors continue to be a focus of the cfpb . we anticipate that the cfpb will propose debt collection regulations that apply to our lending business in 2016. courts and legislators also have been focused on the debt collection practices of consumer financial services providers . the ultimate impact of this increased scrutiny is uncertain at this time . private student loans there continues to be significant legislative and regulatory focus on the private student loan market , including by the cfpb and the federal deposit insurance corporation ( the `` fdic '' ) . this regulatory focus has resulted in an increase - 51 - in supervisory examinations of discover related to private student loans . on july 22 , 2015 , the cfpb issued a consent order with respect to certain student loan servicing practices of discover bank , the student loan corporation and discover products , inc. see note 20 : litigation and regulatory matters to our consolidated financial statements for more information . the recent regulatory areas of focus include servicing and collection practices and other matters . on september 29 , 2015 , the cfpb issued a report , student loan servicing : analysis of public input and recommendations for reform , which analyzes public comments to the cfpb 's may 2015 request for information on student loan servicing and synthesizes public recommendations regarding certain student loan servicing practices . on october 1 , 2015 , the department of education issued its report , strengthening the student loan system to better protect all borrowers , which makes recommendations for student loan policy initiatives . in connection with these reports , the cfpb , department of education and the department of treasury issued a โ joint statement of principles on student loan servicing , โ setting forth regulatory principles to ensure that student loan servicing is consistent , accurate and actionable , accountable , and transparent . the enactment of new legislation or the adoption of new regulations or guidance may increase the complexity and expense of servicing student loans . legislators and regulators may take additional actions that impact the student loan market in the future , which could cause us to restructure our private student loan products in ways that we may not currently anticipate . mortgage lending in june 2015 , we announced the closure of our mortgage origination business acquired in 2012. we will continue to originate home equity loans through discover bank . the mortgage industry continues to be an area of supervisory focus and cfpb has stated that it will concentrate its examinations on the variety of mortgage-related topics including steering consumers to less favorable products , discrimination , abusive or unfair lending practices , predatory lending , origination disclosures , minimum mortgage underwriting standards , mortgage loan origination compensation and servicing practices . the cfpb has published several final rules impacting the mortgage industry , including rules related to ability-to-repay , mortgage servicing , the home mortgage disclosure act and integrated mortgage origination disclosures . payment networks the dodd-frank act contains several provisions impacting the debit card market , including network participation requirements and interchange fee limitations . the changing debit card environment , including competitor actions related to merchant and acquirer pricing and transaction routing strategies , has adversely affected and is expected to continue to adversely affect our pulse network 's business practices , network transaction volume , revenue and prospects for future growth . we continue to closely monitor competitor pricing strategies in order to assess their impact on our business and on competition in the marketplace . the u.s. department of justice is examining some of these competitor pricing strategies . in addition , pulse filed a lawsuit against visa in late 2014 with respect to these competitive concerns , which will significantly impact expenses for the payment services segment . in addition , the dodd-frank act 's network participation requirements impact pulse 's ability to enter into exclusivity arrangements , which affects pulse 's current business practices and may materially adversely affect its network transaction volume and revenue . increasing cybersecurity threats and incidents regarding unauthorized access to consumer information have resulted in a continued focus by congress and state legislators on legislation to address data security . in december 2015 , the president signed an omnibus spending package that included the cybersecurity act of 2015. the cybersecurity act establishes a framework to facilitate and encourage confidential sharing of cybersecurity information among private sector and federal government entities and provides liability shields for cybersecurity information sharing under the act . though the act is effective immediately , the attorney general and the department of homeland security secretary must release guidelines within 90 days to implement these provisions of the act . additionally , legislation has been proposed to address security breach notification . these developments could ultimately result in the imposition of requirements on discover or other card issuers , or networks that could increase costs or adversely affect the competitiveness of our credit card or debit card products . it is too early to know if the proposed legislation will become law or the impact of these developments on discover .
| additionally until its sale on october 1 , 2015 , this segment included the business operations of diners club italy , which primarily consisted of activity related to issuing diners club charge cards in that country . replace_table_token_4_th - 54 - replace_table_token_5_th ( 1 ) diners club volume is derived from data provided by licensees for diners club branded cards issued outside north america and is subject to subsequent revision or amendment . ( 2 ) represents gross proprietary sales volume on the discover network . ( 3 ) represents discover card activity related to net sales , balance transfers , cash advances and other activity . ( 4 ) represents discover card activity related to net sales . direct banking for the year ended december 31 , 2015 compared to the year ended december 31 , 2014 our direct banking segment reported pretax income of $ 3.5 billion for the year ended december 31 , 2015 as compared to pretax income of $ 3.6 billion for the year ended december 31 , 2014 . loan receivables totaled $ 72.4 billion at december 31 , 2015 , which was up from $ 69.9 billion at december 31 , 2014 , due to growth in credit card loans and other loan portfolios , partially offset by a decrease in purchased credit-impaired ( `` pci '' ) student loan balances . discover card sales volume was $ 118.4 billion for the year ended december 31 , 2015 , which was an increase of 2.5 % as compared to the year ended december 31 , 2014 . this volume growth was driven primarily by an increase in discretionary spending partially offset by the impact of lower gas prices . interest income rose over the prior year due to growth in credit card , personal and private student loans , partially offset by lower yields on personal loans , as well as a decrease in pci student loan balances . interest expense increased during the year ended december 31 , 2015
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our contracts are typically one year in length , but may be up to three years or longer in length . revenue is a function of the number of customers , the number of licenses or capacity purchased by each customer , the package to which each customer subscribes , the price of the package and renewal rates . revenue is generally recognized ratably over the contract term beginning on the commencement date of each contract , which is the date our platform is made available to customers . at the beginning of each subscription term we invoice our customers , typically in annual installments , but also monthly , quarterly , and semi-annually . amounts that have been invoiced for non-cancelable contracts are recorded in accounts receivable and unearned revenue . unearned revenue is subsequently recognized as revenue when transfer of control to a customer has occurred . cost of revenue cost of revenue consists primarily of employee-related costs , including personnel-related costs , which mainly consist of salaries and wages , and stock-based compensation expense . cost of revenue also includes fees associated with our knowledge network application provider arrangements , the nature of which may be unpaid , fixed , or variable , and are unpaid with many of our larger providers , as well as the costs associated with our data centers . in addition , cost of revenue includes depreciation expense , including with respect to certain capitalized software development costs incurred in connection with additional functionality to our platform . cost of revenue also includes operating and short-term lease expenses associated with our office spaces , which are allocated based on employee headcount . in addition , cost of revenue includes software expense , which relates to licenses , professional services , and other costs associated with software for use in the operations of our business , which is also allocated based on employee headcount . operating expenses sales and marketing expenses . sales and marketing expenses consist primarily of employee-related costs which are comprised of personnel-related costs and stock-based compensation expense . personnel-related costs mainly consist of salaries and wages and costs of obtaining revenue contracts . sales and marketing expenses also include operating and short-term lease expenses associated with our office spaces , as well as software expense , each of which are allocated based on employee headcount . in addition , sales and marketing expenses include costs related to advertising and conferences and brand awareness events . research and development expenses . research and development expenses consist primarily of employee-related costs which are comprised of personnel-related costs and stock-based compensation expense . personnel-related costs mainly consist of salaries and wages . capitalized software development costs related to additional functionality to our platform are excluded from research and development expenses as they are capitalized as a component of property and equipment , net and depreciated to cost of revenue over the term of their useful life . research and development expenses also include operating and short-term lease expenses associated with our office spaces , as well as software expense , each of which are allocated based on employee headcount . general and administrative expenses . general and administrative expenses consist primarily of employee-related costs which are comprised of personnel-related costs and stock-based compensation expense for our finance and accounting , human resources , information technology and legal support departments . personnel-related costs mainly consist of salaries and wages . general and administrative expenses also include operating and short-term lease expenses associated with our office spaces , as well as software expense , each of which are allocated based on employee headcount , and other professional related costs . 42 story_separator_special_tag new roman ' , sans-serif ; font-size:10pt ; font-weight:400 ; line-height:120 % '' > sales and marketing expense was $ 218.1 million for the fiscal year ended january 31 , 2020 , compared to $ 158.8 million for the fiscal year ended january 31 , 2019 , an increase of $ 59.2 million , or 37 % . the increase was primarily due to employee-related costs reflecting higher headcount , including a $ 30.7 million increase in personnel-related costs , which mainly consisted of salaries and wages and costs to obtain revenue contracts , and a $ 8.9 million increase in stock-based compensation expense . in addition , there was a $ 5.7 million increase in operating and short-term lease expenses , mainly as a result of our new operating lease arrangements for office space , including in new york , ny . research and development expense was $ 49.4 million for the fiscal year ended january 31 , 2020 , compared to $ 36.1 million for the fiscal year ended january 31 , 2019 , an increase of $ 13.3 million , or 37 % . the increase was primarily due to employee-related costs reflecting higher headcount , including a $ 5.8 million increase in personnel-related costs , which mainly consisted of salaries and wages , and a $ 4.7 million increase in stock-based compensation expense . in addition , there was a $ 1.5 million increase in operating and short-term lease expenses , mainly as a result of our new operating lease arrangements for office space , including in new york , ny . general and administrative expense was $ 77.2 million for the fiscal year ended january 31 , 2020 , compared to $ 51.6 million for the fiscal year ended january 31 , 2019 , an increase of $ 25.7 million , or 50 % . the increase was primarily due to employee-related costs reflecting higher headcount , including a $ 9.5 million increase in personnel-related costs , which mainly consisted of salaries and wages , and a $ 8.7 million increase in stock-based compensation expense , which included a $ 3.6 million one-time rsu cancellation-related expense . in addition , there was a $ 1.9 million increase in operating and short-term lease expenses , mainly as a result of our new operating lease arrangements for office space , including in new york , ny . story_separator_special_tag net loss net loss was $ 94.7 million , $ 121.5 million , and $ 74.8 million for the fiscal years ended january 31 , 2021 , 2020 , and 2019. non-gaap net loss in addition to our financial results determined in accordance with gaap , we believe that non-gaap net loss is useful in evaluating our operating performance and our business . non-gaap net loss is a financial measure that is not calculated in accordance with gaap . we define non-gaap net loss as our gaap net loss as adjusted to exclude the effects of stock-based compensation expense . we believe non-gaap net loss provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of our results of operations . we also believe non-gaap net loss is useful in evaluating our operating performance compared to that of other companies in our industry , as it eliminates the effects of stock-based compensation , which may vary for reasons unrelated to overall operating performance . we use non-gaap net loss in conjunction with traditional gaap net loss as part of our overall assessment of our performance , including the preparation of our annual operating budget and quarterly forecasts , and to evaluate the effectiveness of our business strategies . our definition may differ from the definitions used by other companies and therefore comparability may be limited . in 45 addition , other companies may not publish this or similar metrics . thus , our non-gaap net loss should be considered in addition to , not as a substitute for , nor superior to or in isolation from , measures prepared in accordance with gaap . non-gaap net loss may be limited in its usefulness because it does not present the full economic effect of our use of stock-based compensation . we compensate for these limitations by providing a reconciliation of non-gaap net loss to the most closely related gaap financial measure . we encourage investors and others to review our financial information in its entirety , not to rely on any single financial measure and to view non-gaap net loss in conjunction with gaap net loss . the following table provides a reconciliation of gaap net loss to non-gaap net loss : replace_table_token_11_th dollar-based net retention rate we believe that our ability to retain our customers and expand the revenue they generate for us over time is an important component of our growth strategy and reflects the long term value of our customer relationships . we assess our performance in this respect using a metric we refer to as our dollar-based net retention rate . our dollar-based net retention rate was 102 % , 106 % , and 110 % for the fiscal years ended january 31 , 2021 , 2020 and 2019 , respectively . the decline in the net retention rate in the fiscal year ended january 31 , 2021 reflects challenges in expanding our relationships with existing customers and to a lesser extent customer retention . we believe our ability to retain and expand relationships with existing customers , and consequently improve our net retention rate , has been and may continue to be negatively impacted by the effects of covid-19 on our customers . see `` โoverview โ covid-19 update '' and `` risk factors '' for the impact of covid-19 on our business . we calculate this metric for a particular period by first establishing a cohort of the enterprise , mid-size , and third-party reseller customers , who had active contracts at the end of each month of the same period in the prior year . we divide the single month revenue from each of those customer cohorts for the applicable month in the current year by the single month revenue of that same customer cohort for the corresponding month in the prior year . we then determine the dollar-based weighted average of each of the monthly rates , and this average represents the dollar-based net retention rate for the period . as a result , if a customer , in particular an enterprise customer , elects to upgrade , downgrade or cancel its subscription , the full impact on dollar-based net retention rate is realized over the subsequent twelve months , thereby mitigating the immediate effect in the quarter when such election was made . we only consider revenue from our enterprise , mid-size , and third-party reseller customers when calculating this metric since small business customers have limited licenses , experience inherently high turnover , and continue to decline as a percentage of total revenue . 46 quarterly results of operations the following tables set forth our unaudited quarterly statements of operations data for each of the eight quarters in the periods ended january 31 , 2021 and 2020 , respectively . the information for each of these quarters has been prepared on the same basis as the audited annual consolidated financial statements included elsewhere in this annual report on form 10-k and , in the opinion of management , includes all adjustments , which consist only of normal recurring adjustments , necessary for the fair presentation of the results of operations for these periods in accordance with gaap . this data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this annual report on form 10-k. these quarterly operating results are not necessarily indicative of our operating results for a full year or any future period . replace_table_token_12_th quarterly trends historically , a higher proportion of new subscription and renewal agreements have occurred within the fourth quarter of the fiscal year , which contributes to driving our revenue recognized for the following fiscal year . we believe that this results from the procurement , budgeting , and deployment cycles of many of our customers , particularly our enterprise customers . at the beginning of each subscription term we invoice our customers , typically in annual installments , but also monthly , quarterly , and semi-annually .
| gross margin was 75.6 % for the fiscal year ended january 31 , 2021 , compared to 74.2 % for the fiscal year ended january 31 , 2020 as reflected in the discussion above . operating expenses replace_table_token_8_th sales and marketing expense was $ 228.4 million for the fiscal year ended january 31 , 2021 , compared to $ 218.1 million for the fiscal year ended january 31 , 2020 , an increase of $ 10.3 million , or 5 % . the increase was primarily due to a $ 23.6 million increase in personnel-related costs , reflecting higher headcount , which mainly consisted of salaries and wages and costs to obtain revenue contracts , a $ 2.8 million increase in software expense , a $ 1.4 million increase in operating and short-term lease expenses , a $ 1.3 million increase in depreciation expense , and a $ 1.2 million increase in stock-based compensation expense . these increases were partially offset by reductions in light of the covid-19 pandemic and leveraging costs , including a $ 10.8 million decrease in employee travel and a $ 7.6 million decrease in conferences and events . research and development expense was $ 58.1 million for the fiscal year ended january 31 , 2021 , compared to $ 49.4 million for the fiscal year ended january 31 , 2020 , an increase of $ 8.7 million , or 18 % . the increase was primarily due to a $ 3.9 million increase in stock-based compensation expense , a $ 3.0 million increase in personnel-related costs , reflecting higher headcount , which mainly consisted of salaries and wages , and a $ 0.8 million increase in software expense . general and administrative expense was $ 76.0 million for the fiscal year ended january 31 , 2021 , relatively consistent compared to $ 77.2 million for the fiscal year ended january 31 , 2020 , as decreases of $ 2.1 million in stock-based compensation expense and $ 2.0 million in employee travel , were generally offset by a $ 1.3 million increase in the allowance for doubtful accounts and a $ 0.8 million increase in
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comparison of year ended december 31 , 2011 to year ended december 31 , 2010 the following table illustrates the key operating metrics for the years ended december 31 , 2011 and 2010 for our nine wholly-owned properties ( ยactual propertiesย ) . replace_table_token_10_th revenue . total revenue for the year ended december 31 , 2011 was approximately $ 81.2 million , an increase of approximately $ 3.8 million or 4.9 % from total revenue for the year ended december 31 , 2010 of approximately $ 77.4 million . increases in revenue at the hilton wilmington riverside , the sheraton louisville riverside and the crowne plaza tampa westshore offset slight decreases in revenue at the holiday inn laurel west and the doubletree by hilton brownstone ย university . room revenues at our properties for the year ended december 31 , 2011 increased approximately $ 3.1 million or 5.8 % to approximately $ 56.2 million compared to room revenues for the year ended december 31 , 2010 of approximately $ 53.1 million . the increase in room revenue was mostly attributable to increases in occupancy at our recently renovated properties in jeffersonville , indiana ; hampton , virginia ; and tampa , florida . 44 food and beverage revenues at our properties for the year ended december 31 , 2011 increased approximately $ 0.6 million or 2.9 % to approximately $ 20.5 million compared to food and beverage revenues for the year ended december 31 , 2010 of approximately $ 19.9 million . most of the increase in food and beverage revenue was attributable to increased revenues at the crowne plaza tampa westshore and the hilton wilmington riverside . other operating revenues for the year ended december 31 , 2011 increased approximately $ 0.1 million or 2.6 % to approximately $ 4.5 million compared to other operating revenues for the year ended december 31 , 2010 of approximately $ 4.4 million . higher guaranteed no-show fees offset decreases in pay-per-view movie revenue . hotel operating expenses . hotel operating expenses , which consist of room expenses , food and beverage expenses , other direct expenses , indirect expenses , and management fees , increased approximately $ 2.7 million or 4.6 % for the year ended december 31 , 2011 to approximately $ 61.8 million compared to hotel operating expenses for the year ended december 31 , 2010 of approximately $ 59.1 million . increases in expenses that vary directly with increases in revenue , such as food and beverage expense , management fees and franchise fees , accounted for approximately half the increase in hotel operating expenses . rooms expense at our properties for the year ended december 31 , 2011 increased approximately $ 0.7 million or 5.0 % to approximately $ 15.8 million compared to rooms expense of approximately $ 15.1 million for the year ended december 31 , 2010. the increase in rooms expense was directly related to the 5.8 % increase in room revenue . food and beverage expenses at our properties for the year ended december 31 , 2011 increased approximately $ 0.4 million or 2.8 % to approximately $ 13.6 million compared to food and beverage expense of approximately $ 13.2 million for the year ended december 31 , 2010. the increase in food and beverage expense was generally attributable to the 2.9 % increase in food and beverage revenue . indirect expenses at our properties for the year ended december 31 , 2011 increased approximately $ 1.8 million or 5.9 % to approximately $ 31.8 million compared to indirect expenses of approximately $ 30.0 million for the year ended december 31 , 2010. sales and marketing costs , franchise fees , utilities , repairs and maintenance , insurance , management fees , real and personal property taxes as well as general and administrative costs at the property level are included in indirect expenses . most of the increase in indirect expenses related to expenses that increase proportionally with increases in occupancy and or revenue , including management fees , franchise fees and energy costs . depreciation and amortization . depreciation and amortization for the year ended december 31 , 2011 increased approximately $ 0.2 million or 2.3 % to approximately $ 8.7 million compared to depreciation and amortization expense of approximately $ 8.5 million for the year ended december 31 , 2010. corporate general and administrative . corporate general and administrative expenses for the year ended december 31 , 2011 increased approximately $ 0.6 million or 18.8 % to approximately $ 4.0 million compared to corporate general and administrative expenses of approximately $ 3.4 million for the year ended december 31 , 2010 due mostly to the charge in the third quarter for fees related to our aborted stock offering . interest expense . interest expense for the year ended december 31 , 2011 increased approximately $ 0.8 million or 7.9 % to approximately $ 10.8 million compared to approximately $ 10.0 million of interest expense for the year ended december 31 , 2010. the increase was the combined result of a lower effective interest rate on our line of credit in the period prior to the june 2010 amendment to the credit agreement as well as higher interest costs in the current period associated with the april 2011 issuance of preferred stock . equity income ( loss ) in joint venture . equity loss in the joint venture was approximately $ 60.1 thousand for the year ended december 31 , 2011 compared to equity income in the joint venture of approximately $ 17.0 45 thousand for the year ended december 31 , 2010 and represents our 25.0 % share of the net income of the crowne plaza hollywood beach resort . a 228.4 % increase in net operating income was offset by higher interest expense and unrealized losses on hedging activities . story_separator_special_tag for the year ended december 31 , 2011 , the crowne plaza hollywood beach resort reported occupancy of 79.4 % , adr of $ 133.29 and revpar of $ 105.82. this compares with results reported by the hotel for the year ended december 31 , 2010 of occupancy of 80.0 % , adr of $ 120.73 and revpar of $ 96.53. unrealized loss on warrant derivative . the company recognized an unrealized loss of approximately $ 1.3 million on the value of the warrant derivative issued in april 2011 to the purchasers of redeemable preferred stock . the loss predominantly was attributable to the modification to the warrant agreement in december 2011 whereby the exercise price will be adjusted for any and all dividends declared and paid after december 31 , 2011. income tax provision . the income tax provision for the year ended december 31 , 2011 increased approximately $ 0.7 million or 321.6 % to approximately $ 0.9 million compared to approximately $ 0.2 million for the year ended december 31 , 2010. the income tax provision is primarily derived from the operations of our trs lessee . our trs lessee realized greater operating income for the year ended december 31 , 2011 compared to the year ended december 31 , 2010. net loss . net loss attributable to the company for the year ended december 31 , 2011 increased approximately $ 2.4 million to approximately $ 4.8 million compared to net loss attributable to the company of approximately $ 2.4 million for the year ended december 31 , 2010 as a result of the operating results discussed above . sources and uses of cash operating activities . our principal source of cash to meet our operating requirements , including distributions to unit holders and stockholders as well as repayments of indebtedness , is the operations of our hotels . cash flow provided by operating activities for the year ended december 31 , 2012 was approximately $ 9.0 million . we expect that cash on hand and the net cash provided by operations will be adequate to fund the company 's operating requirements , monthly and quarterly scheduled payments of principal and interest ( excluding any balloon payments due upon maturity of a debt ) and the payment of dividends in accordance with federal income tax laws which require us to make annual distributions to our stockholders of at least 90.0 % of our reit taxable income , excluding net capital gains . investing activities . approximately $ 2.9 million was spent during the year ended december 31 , 2011 on renovations and capital improvements . financing activities . on march 5 , 2012 , we obtained a mortgage on the hilton philadelphia airport for $ 30.0 million and used the proceeds to extinguish the credit facility and repay a portion of the outstanding indebtedness on the $ 10.0 million loan agreement with essex equity high income joint investment vehicle , llc ( the ยnote agreementย or ยbridge financingย ) . on june 18 , 2012 , we obtained a mortgage on the crowne plaza tampa westshore for $ 14.0 million and used the proceeds to repay the outstanding indebtedness on the bridge financing and to redeem approximately 11,514 shares of preferred stock . on july 10 , 2012 , we obtained a $ 14.3 million mortgage with fifth third bank on the crowne plaza jacksonville riverfront in jacksonville , florida and used the proceeds to repay the outstanding indebtedness on the property and to pay transaction costs . during the year ended december 31 , 2012 , we paid approximately $ 2.5 million of scheduled principal payments toward the mortgages on our properties . 46 during the year ended december 31 , 2012 , we also paid approximately $ 1.1 million in deferred financing costs in relation to the mortgages discussed above . capital expenditures we anticipate that our need for recurring capital expenditures for the replacement and refurbishment of furniture , fixtures and equipment over the next 12 to 24 months will approximate historical norms for our properties and the industry . historically , we have aimed to maintain overall capital expenditures , except for those required by our franchisors as a condition to a franchise license or license renewal , at 4.0 % of gross revenue . we expect capital expenditures for the replacement or refurbishment of furniture , fixtures and equipment at our properties will be funded by our replacement reserve accounts , other than costs that we incur to make capital improvements required by our franchisors . reserve accounts are escrowed accounts with funds deposited monthly and reserved for capital improvements or expenditures with respect to all of our hotels . we currently deposit an amount equal to 4.0 % of gross revenue for the hilton savannah desoto , the hilton wilmington riverside , the crowne plaza hampton marina and the sheraton louisville riverside as well as 4.0 % of room revenues for the hilton philadelphia airport on a monthly basis . liquidity and capital resources as of december 31 , 2012 , we had cash and cash equivalents of approximately $ 10.3 million , of which approximately $ 3.1 million was in restricted reserve accounts as well as real estate tax and insurance escrows . we expect that our cash on hand combined with our cash flow from our hotels should be adequate to fund continuing operations , recurring capital expenditures for the refurbishment and replacement of furniture , fixtures and equipment , monthly and quarterly scheduled payments of principal and interest ( excluding any balloon payments due upon maturity of a debt ) and dividends on the preferred stock . on march 5 , 2012 , we obtained a $ 30.0 million mortgage with td bank , n.a . on the hilton philadelphia airport . the mortgage bears interest at a rate of 30-day libor plus additional interest of 3.0 % per annum and provides for payments of principal and interest on a monthly basis under a 25-year amortization schedule .
| million or 1.2 % to approximately $ 4.6 million compared to other operating revenues for the year ended december 31 , 2011 of approximately $ 4.5 million . higher guaranteed no-show fees and garage revenue offset a decrease in the payments received in respect of the expired shell island sublease . hotel operating expenses . hotel operating expenses , which consist of room expenses , food and beverage expenses , other direct expenses , indirect expenses , and management fees , increased approximately $ 2.5 million or 4.1 % for the year ended december 31 , 2012 to approximately $ 64.3 million compared to hotel operating expenses for the year ended december 31 , 2011 of approximately $ 61.8 million . increases in expenses that vary directly with increases in revenue , such as food and beverage expense , management fees and franchise fees , accounted for more than two-thirds of the increase in hotel operating expenses . rooms expense at our properties for the year ended december 31 , 2012 increased approximately $ 0.8 million or 4.9 % to approximately $ 16.6 million compared to rooms expense of approximately $ 15.8 million for the year ended december 31 , 2011. the increase in rooms expense was directly related to the 8.3 % increase in room revenue . food and beverage expenses at our properties for the year ended december 31 , 2012 increased approximately $ 0.7 million or 4.9 % to approximately $ 14.3 million compared to food and beverage expense of approximately $ 13.6 million for the year ended december 31 , 2011. the increase in food and beverage expense was generally attributable to the 7.2 % increase in food and beverage revenue . indirect expenses at our properties for the year ended december 31 , 2012 increased approximately $ 1.1 million or 3.6 % to approximately $ 32.9 million compared to indirect expenses of approximately $ 31.8 million for the year ended december 31 , 2011. sales and marketing costs ,
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15 critical accounting policies management 's discussion and analysis of financial condition and results of operations discusses the company 's consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states of america , as discussed in note 3 in the accompanying consolidated financial statements . the preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period . on an on-going basis , management evaluates its estimates and judgments , including those related to income taxes , inventory , property and equipment and costs in excess of assets acquired and other intangible assets . management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . management believes the following critical accounting policies , among others , affect its more significant judgments and estimates used in the preparation of its consolidated financial statements . taxes the company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities . the company regularly reviews its deferred tax assets for recoverability and has historically established valuation allowances based on its taxable income , projected future taxable income , and the expected timing of the reversals of existing temporary differences . if the company operates at a loss or is unable to generate sufficient future taxable income , or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible , the company could be required to establish a valuation allowance against all or a significant portion of our deferred tax assets resulting in a substantial increase in our effective tax rate or reduction in benefit rate and a material adverse impact on our operating results . this could be mitigated by the reversal of future taxable temporary differences in property , plant and equipment that could create taxable income to help utilize the deferred tax assets . management determined that a valuation allowance should be recorded against the net deferred tax assets of $ 906,000 at december 31 , 2003. should management conclude that these deferred tax assets are realizable in the future , the valuation allowance will be reversed to the extent of such realizability . the company is also subject to examination of its income , sales and local use tax returns by the irs and various other tax authorities . the company periodically assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provisions and related accruals . inventory the company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions . if actual future demand or market conditions are less favorable than those projected by management , additional inventory write-downs may be required . 16 property and equipment property and equipment is stated at cost . major replacements and improvements are capitalized . when assets are sold , retired or otherwise disposed of , the cost and related accumulated depreciation are eliminated from the accounts and the gain or loss is recognized . repair and maintenance costs , unless they increase the life or utility of the equipment , are charged to expense as incurred . vending machines are depreciated using the straight-line method over estimated useful lives ranging from three to ten years , which may be different from actual machine utilization experience . valuation of long-lived and intangible assets and costs in excess of assets acquired the company performs a fair value assessment of identifiable intangibles and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable . costs in excess of assets acquired are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable . factors considered important that could trigger an impairment review include significant underperformance relative to expected historical or projected future operating results , changes in the manner of our use of the acquired assets and the strategy for our overall business and negative industry or economic trends . when the company determines that the carrying value of costs in excess of assets acquired and other intangible assets may not be recoverable based upon the existence of one or more of the above indicators of impairment , the company measures any impairment based on the projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in the company 's current business model . in 2002 , sfas no . 142 , ยgoodwill and other intangible assetsย became effective and as a result , the company ceased to amortize approximately $ 33.3 million of costs in excess of assets acquired . the company recorded approximately $ 2.0 million of amortization related to these assets during 2001 and would have amortized approximately $ 2.0 during 2002. currently the company has $ 74.4 million of costs in excess of assets acquired . in lieu of amortization , the company performs an annual impairment review of the costs in excess of assets acquired . the company has not recorded an impairment charge upon completion of previous impairment reviews . however , there can be no assurance that at the time of future reviews an impairment charge will not be required , which may be material . story_separator_special_tag liquidity and capital resources the company 's primary sources of liquidity and capital resources historically have been cash flows from operations , borrowings under the company 's credit facilities , issuances of its equity and debt securities and equity contributions from its parent company . these sources of cash flows have been offset by cash used for acquisitions , investment in amusement vending equipment and payment of long-term borrowings . net cash provided by operating activities was $ 14.5 million , $ 5.2 million and $ 15.8 million in 2003 , 2002 and 2001 , respectively . the increase in 2003 net cash provided by operating activities results primarily from an increase in trade accounts payable and accrued expenses . the company anticipates that cash will continue to be provided by operations as additional machines and other amusement devices are placed in service . cash required in the future is expected to be funded by existing cash and cash provided by operations and borrowings under the company 's credit facility . net cash used in investing activities was $ 51.2 million , $ 12.1 million and $ 7.6 million in 2003 , 2002 and 2001 , respectively . capital expenditures amounted to $ 14.5 million , $ 8.0 million and $ 4.9 million in 2003 , 2002 and 2001 , respectively , of which $ 13.0 million , $ 7.3 million and $ 4.0 million were used for the acquisition of amusement vending equipment . the acquisition of franchisees and others used $ 34.1 million , $ 1.5 million and $ 273,000 in 2003 , 2002 and 2001 , respectively . net cash provided by financing activities was $ 37.1 million in 2003 and $ 7.0 million in 2002. net cash used in financing activities was $ 7.0 million in 2001. financing activities consisted primarily of borrowings and payments on the company 's credit facility and purchase of common stock in conjunction with the acquisition by acmi holdings , inc. , equity contributions from acmi holdings , inc. and the repayment of the company 's previous credit facility and other debt obligations . 17 the company amended and restated its senior secured credit facility on april 15 , 2003 , in conjunction with the acquisition of folz . the amended senior secured credit facility is comprised of a $ 12.0 million revolving credit facility and provides for up to $ 70.0 million of term debt . the $ 70.0 million term debt facility is comprised of a $ 26.3 million term loan a , a $ 37.2 million term loan b , a $ 2.7 million term loan c and a $ 3.8 million term loan d. as of december 31 , 2003 , there was $ 66.7 million of total term loans outstanding . as of december 31 , 2003 , there was $ 8.0 million borrowed , $ 1.2 million utilized by letters of credit , and $ 2.8 million available under the revolving credit facility . the revolving credit facility expires on march 31 , 2007. under the term loan facilities , the company is required to make quarterly principal installments that increase in amount until the march 31 , 2008 termination of the facilities . the revolving facility and the term loans bear interest at a floating rate at the company 's option , equal to either libor plus the applicable margin or a base rate that is equal to the higher of the prime rate or the federal funds rate plus one-half percent plus the applicable margin . the effective rate of interest on the credit facility at december 31 , 2003 was 6.4 % . the credit agreement governing the company 's senior secured credit facility requires certain financial ratios to be met and places restrictions on , among other things , the incurrence of additional debt financing and certain payments to the company 's parent company . the company was in compliance with such financial ratios and restrictions at december 31 , 2003. on february 13 , 2004 , the company completed amendment no . 1 to its amended and restated credit agreement . among other things , amendment no . 1 provided for an $ 8.5 million expansion of the term loan facility under the senior secured credit facility . in connection with the expansion of the term loan commitment , the company converted $ 8.5 million of the then outstanding revolving credit facility to term debt . the revolving credit facility commitment remained $ 12 million after the above transactions . in february 2002 and april 2003 , the company issued $ 25.0 million and $ 6.5 million , respectively , of senior subordinated notes due in 2009. interest on these notes is payable on a quarterly basis at the rate of 17 % per annum ; provided however , the minimum cash interest on these notes is 13 % with the balance of interest payable in the form of additional payment in kind notes . included in the $ 33.5 million of senior subordinated notes outstanding at december 31 , 2003 is $ 2.0 million of payment by in kind notes issued in lieu of interest . the note agreement provides that certain financial ratios be met and places restrictions on , among other things , the incurrence of additional senior subordinated indebtedness and certain restricted payments . the company was in compliance with such financial ratios and restrictions at december 31 , 2003. the company uses variable rate debt to finance its operations . these debt obligations expose the company to variability in interest payments due to changes in interest rates . if interest rates increase , interest expense increases . conversely , if interest rates decrease , interest expense also decreases . management believes it is prudent to limit the variability of a portion of its interest payments , as well as the company is obligated under terms of its debt agreements to limit the variability of a portion of its interest payments .
| gross profit on franchise and other revenue in 2003 increased to $ 1.2 million , or 27.7 % of franchise and other revenue compared to $ 1.2 million or 50.7 % in 2002. the decrease in gross margin percentage is a result of the increase in sales of amusement vending equipment to third parties , which occur at a lower gross margin percentage . operating expense general and administrative expenses ( including depreciation and amortization ) were 18.0 % of revenue , which is 0.6 percentage points lower than in 2002. general and administrative expenses for the year ended december 31 , 2002 include transaction related costs of approximately $ 2.2 million . the increase in general and administrative expenses for the year ended december 31 , 2003 as compared to 2002 , excluding the acmi holdings , inc. acquisition transaction expenses , was primarily due to the addition of personnel and facilities to support the acquired operations , additional personnel and facilities in the sales and marketing , logistics and support areas to better manage the company 's current and expected future operations and costs incurred to integrate acquired operations . restructuring charge in june 2003 , the company recorded a restructuring charge associated with the termination of certain administrative and sales employees that resulted from reorganizing certain functions after the acquisition of folz . as of december 31 , 2003 , $ 181,000 had 13 been charged against the $ 320,000 restructuring accrual . the restructuring accrual is included in other accrued expenses in the accompanying consolidated balance sheet . operating earnings operating earnings in 2003 were $ 11.8 million or 5.9 % of total revenue as compared to operating earnings of $ 7.8 million in 2002 or 5.4 % of total revenue . the 2002 operating results included $ 2.2 million of acmi holdings , inc. transaction related costs and the $ 1.7 million loss on debt refinancing . interest expense , net interest expense increased $ 3.0 million to $ 13.8 million in 2003 as compared to 2002. the company 's interest expense is directly related to a higher level of borrowings after the folz and other acquisitions during the second quarter of 2003 and changes in the underlying interest rates . net earnings
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fiscal 2016 results included the impact of restructuring and strategic charges primarily related to outside services , severance costs and proxy solicitation costs of $ 19 million after-tax , or $ 0.15 per diluted share , partially offset by a $ 0.03 tax benefit related to the disposition of the boston proper dtc business . liquidity and capital resources overview we believe that our existing cash and marketable securities balances , cash generated from operations , available credit facilities and potential future borrowings will be sufficient to fund capital expenditures , working capital needs , dividend payments , potential share repurchases , commitments and other liquidity requirements associated with our operations for the foreseeable future . furthermore , while it is our intention to repurchase our stock and pay a quarterly cash dividend in the future , any determination to repurchase additional shares of our stock or pay future dividends will be made by the board of directors and will depend on our stock price , future earnings , financial condition and other factors considered by the board . our ongoing capital requirements will continue to be primarily for enhancing and expanding our omni-channel capabilities , including expanded , relocated and remodeled stores ; and information technology . operating activities net cash provided by operating activities in fiscal 2017 was $ 167 million , a decrease of approximately $ 64 million from fiscal 2016 . this decrease primarily results from the settlement of prior year accruals for outside services and severance , the timing of tax payments and the impact of a decrease in the incentive compensation accrual , partially offset by the timing of vendor payments . net cash provided by operating activities in fiscal 2016 was $ 231 million , an increase of approximately $ 34 million from fiscal 2015. this increase primarily reflected the change in working capital and an increase in net income compared to prior year when adjusted for non-cash impairment charges and the deferred tax benefit related to the exit of boston proper . the change in working capital is primarily due to a decrease in income tax receivable . investing activities net cash used in investing activities for fiscal 2017 was $ 58 million compared to $ 32 million for fiscal 2016 . the change in net cash used in investing activities primarily reflects a $ 10 million net increase in marketable securities related to the investment of cash from operations in fiscal 2017 and the impact of $ 16 million in proceeds from the sale of land in fiscal 2016 . 23 net cash used in investing activities for fiscal 2016 was $ 32 million compared to $ 0.5 million provided by investing activities for fiscal 2015. the fiscal 2016 results reflect net purchases of property and equipment totaling $ 48 million , offset by proceeds from the sale of land of $ 16 million . fiscal 2015 results included net purchases of property and equipment totaling $ 85 million , offset by a $ 76 million net decrease in marketable securities related to share repurchases and proceeds from the sale of boston proper . financing activities net cash used in financing activities for fiscal 2017 was $ 91 million compared to $ 147 million in fiscal 2016 . the decrease in net cash used in financing activities primarily reflects a $ 69 million decline in share repurchases in fiscal 2017 compared to fiscal 2016 , partially offset by higher payments on borrowings under our credit agreement in fiscal 2017 . in fiscal 2017 , we paid four cash dividends at $ 0.0825 per share on our common stock , totaling $ 43 million , and received approximately $ 2 million in proceeds from issuing approximately 2 million shares related to employee stock ownership plans and stock option exercises . net cash used in financing activities for fiscal 2016 was $ 147 million compared to $ 240 million in fiscal 2015. the fiscal 2016 decrease in net cash used in financing activities primarily reflects a decrease of $ 201 million in share repurchases in fiscal 2016 compared to fiscal 2015 , partially offset by net borrowings of $ 93 million under our credit agreement in fiscal 2015. in fiscal 2016 , we paid four cash dividends at $ 0.08 per share on our common stock , totaling $ 42 million and received $ 4 million in proceeds from issuing approximately 2 million shares related to employee stock ownership plans and stock option exercises . store and franchise activity during fiscal 2017 , we had 41 net store closures , consisting of 15 chico 's stores , 21 whbm stores and 5 soma stores . in fiscal 2018 , we anticipate approximately 50 net store closures . we continuously evaluate the appropriate new store growth rate and closures in light of economic conditions and may adjust the growth rate and closures as conditions require or as opportunities arise . as of february 3 , 2018 , the company 's franchise operations consisted of 94 retail locations in mexico . contractual obligations the following table summarizes our contractual obligations at february 3 , 2018 : replace_table_token_12_th as of february 3 , 2018 , our contractual obligations consisted of : 1 ) amounts outstanding under operating leases , 2 ) open purchase orders for inventory and other operating expenses , in the normal course of business , 3 ) contractual commitments for fiscal 2018 capital expenditures and 4 ) long-term debt obligations . until formal resolutions are reached between us and the relevant taxing authorities , we are unable to estimate a final determination related to our uncertain tax positions and therefore , we have excluded the uncertain tax positions , totaling approximately $ 2 million at february 3 , 2018 from the above table . 24 credit facility on may 4 , 2015 , we entered into a credit agreement ( the โ credit agreement โ ) among the company , jpmorgan chase bank , n.a . as administrative agent , bank of america , n.a. story_separator_special_tag , as syndication agent and other lenders . our obligations under the credit agreement are guaranteed by certain of our material u.s. subsidiaries . the credit agreement provides for a term loan commitment in the amount of $ 100.0 million , of which $ 100.0 million was drawn at closing , and matures on may 4 , 2020. the credit agreement also provides for a $ 100.0 million revolving credit facility , of which $ 24.0 million was drawn at closing and was repaid in the second quarter of 2015. the credit agreement has borrowing options which accrue interest by reference , at our election , at either an adjusted eurodollar rate tied to libor or an alternate base rate plus an interest rate margin , as defined in the credit agreement . the credit agreement also requires us to maintain certain maximum leverage ratio ( as defined in the credit agreement ) of no more than 3.50 to 1.00 until july 31 , 2018 , and 3.25 to 1.00 after july 31 , 2018 , and a minimum fixed coverage charge of not less than 1.20 to 1.00. as of february 3 , 2018 , the company was in compliance with all financial covenant requirements of the credit agreement . for a more detailed description of the interest rate options and the financial covenants , please see note 8. on may 4 , 2015 , in connection with our entry into the credit agreement , we repaid and terminated , with no prepayment penalties , the $ 124.0 million outstanding obligation under our 2011 revolving credit facility . we used the proceeds from the initial draw of the term loan and revolving credit facility of the credit agreement to repay such obligations . as of february 3 , 2018 , $ 68.6 million in net borrowings under the term loan were outstanding under the credit agreement , and are reflected as $ 15.0 million in current debt and $ 53.6 million in long-term debt in the accompanying consolidated balance sheet . off-balance sheet arrangements at february 3 , 2018 and january 28 , 2017 , we did not have any relationship with unconsolidated entities or financial partnerships for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes . critical accounting policies the discussion and analysis of our consolidated financial condition and results of operations are based upon the consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states . the preparation of consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , revenue and expenses , and related disclosure of contingent assets and liabilities . we base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . management has discussed the development and selection of these critical accounting policies and estimates with the audit committee of our board of directors , and believes the following assumptions and estimates are significant to reporting our consolidated results of operations and financial position . inventory valuation and shrinkage we identify potentially excess and slow-moving inventories by evaluating inventory aging , turn rates and inventory levels in conjunction with our overall sales trend . further , inventory realization exposure is identified through analysis of gross margins and markdowns in combination with changes in current business trends . we record excess and slow-moving inventories at net realizable value and may liquidate certain slow-moving inventory through third parties . historically , the variation of those estimates to actual results is immaterial and material variation is not expected in the future . we estimate our expected shrinkage of inventories between our physical inventory counts by using average store shrinkage experience rates , which are updated on a regular basis . historically , the variation of those estimates to actual results is immaterial and material variation is not expected in the future . 25 revenue recognition retail sales by our stores are recorded at the point of sale and are net of estimated customer returns , sales discounts under rewards programs and company issued coupons , promotional discounts and employee discounts . for sales from our websites and catalogs , revenue is recognized at the time we estimate the customer receives the product , which is typically within a few days of shipment . amounts related to shipping and handling costs billed to customers are recorded in net sales and the related shipping and handling costs are recorded in cost of goods sold in the accompanying consolidated statements of income . amounts paid by customers to cover shipping and handling costs are immaterial . we sell gift cards in stores , on our e-commerce website and through third parties . our gift cards do not have expiration dates . we account for gift cards by recognizing a liability at the time the gift card is sold . the liability is relieved and revenue is recognized for gift cards upon redemption . in addition , we recognize revenue for the amount of gift cards expected to go unredeemed ( commonly referred to as gift card breakage ) under the redemption recognition method . this method records gift card breakage as revenue on a proportional basis over the redemption period based on our historical gift card breakage rate . we determine the gift card breakage rate based on our historical redemption patterns . we recognize revenue on the remaining unredeemed gift cards based on determining that the likelihood of the gift card being redeemed is remote and that there is no legal obligation to remit the unredeemed gift cards to relevant jurisdictions . soma offers a points based loyalty program in which customers earn points based on purchases .
| cost of goods sold/gross margin the following table depicts cost of goods sold and gross margin in dollars and gross margin as a percentage of net sales for fiscal 2017 , 2016 and 2015 : replace_table_token_10_th for fiscal 2017 , gross margin was $ 865 million , or 37.9 % , compared to $ 947 million , or 38.2 % , in fiscal 2016 . this 30 basis point decrease from fiscal 2016 primarily reflects a deleverage of occupancy costs as a percent of sales , partially offset by an improvement in merchandise margin and a decrease in incentive compensation . for fiscal 2016 , gross margin was $ 947 million , or 38.2 % , compared to $ 1,027 million , or 38.6 % , in fiscal 2015. when excluding boston proper from fiscal 2015 , gross margin decreased 60 basis points in fiscal 2016 compared to gross margin of $ 1,000 million , or 38.8 % , in fiscal 2015. this 60 basis point decrease from the fiscal 2015 adjusted gross margin rate primarily reflects deleverage of occupancy costs and incentive compensation , partially offset by an improvement in merchandise margin . 21 selling , general and administrative expenses the following table depicts selling , general and administrative expenses ( `` sg & a '' ) , which includes store and direct operating expenses , marketing expenses and nssc expenses , in dollars and as a percentage of net sales for fiscal 2017 , 2016 and 2015 : replace_table_token_11_th for fiscal 2017 , sg & a were $ 720 million , or 31.5 % , compared to $ 775 million , or 31.2 % , in fiscal 2016 . this $ 56 million decrease , or 7.2 % decline , primarily reflects a reduction in store-related costs and marketing spend , partially offset by the impact of the fifty-third week . for fiscal 2016 , sg & a were $ 775 million , or 31.2 % , compared to $ 879 million , or 33.0 % , in fiscal 2015. when excluding boston proper from fiscal 2015 , sg & a decreased $ 56 million , or 110 basis points , compared to $ 831 million , or 32.3 % , in fiscal 2015. this decrease is primarily
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we generated operating cash flow of $ 828.8 million during fiscal 2011 , primarily due to the increase in our net income , an increase in accounts payable and fluctuations in other working capital balances . we used available cash and borrowings to repurchase 9.9 million shares of our common stock under our stock repurchase program at a cost of $ 609.7 million . other subsequent to fiscal 2011 , in january 2012 we issued $ 300 million of senior unsecured notes , due in 2022 , with an interest rate of 4.50 % . business update in fiscal 2011 , we increased our focus on differentiating advance from our competition through our commitment to exceptional service which is reflected in our new customer promise โ 'service is our best part ยฎ ' โ and the simplification of our previous four key strategies into two strategies โ service leadership and superior availability . superior availability centers around product availability and maximizing the speed , reliability and efficiency of our supply chain . service leadership leverages our product availability in addition to more consistent execution to strengthen our integrated operating approach of serving our diy and commercial customers whether in our stores or on-line . through these two key strategies , we believe we can continue to build on the initiatives discussed below and produce favorable financial results over the long-term . our commercial sales , as a percentage of total sales , increased to 37 % for fiscal 2011 as compared to 34 % in fiscal 2010 . since 2008 we completed incremental investments in additional parts professionals , delivery trucks and drivers in a significant number of our aap stores with commercial programs . we decelerated the pace of these investments during fiscal 2011 to focus and achieve better execution in those areas we believe have a direct impact on customer satisfaction for both our commercial and diy customers such as labor scheduling , training , commercial delivery speed and accuracy and increased advertising . our e-commerce operations continue to supplement our store sales growth through an increase in diy sales from our advanceautoparts.com website and more recently through the added capability for our commercial customers to order product on-line . on an ongoing basis , we closely monitor independent customer satisfaction scores for both commercial and diy customers as a measure of customer service and product availability . our commercial and diy sales and total gross profit have benefited from our added parts availability and merchandising initiatives . we continue to expand our supply chain network to increase our ability to get the right product to our customers in a timely manner . we upgraded the inventory levels in 814 of our stores during fiscal 2011 and added 68 stores to our hub store network during fiscal 2011 bringing the total number of hubs to 294. our hub stores stock a wider selection and greater supply of inventory and provide same-day delivery to our other stores or customers in their respective areas . we plan to open our ninth aap distribution center in remington , indiana during the third quarter of fiscal 2012. this new facility will provide productivity improvements resulting from the added capacity and a more advanced distribution system . we continue to increase the amount of product we source globally , which we believe will improve our gross profit across numerous product categories and allow us to more quickly source the products our customers need . 21 we anticipate that the pace of our growth in commercial will continue to exceed the pace of our diy growth . the continued growth in our commercial sales emphasizes our focus on an integrated service model and our goal of achieving a 50/50 mix of commercial and diy sales . we believe our current initiatives are key for our long-term sales growth and improvement in our gross profit rate . combined with our focus on balancing support and discretionary expenses with the additional cost of investments in our key strategies , we are committed to achieving our longer-term growth and profitability goals . automotive aftermarket industry the automotive aftermarket industry remains strong despite volatility in the overall economic environment . favorable industry dynamics include : increase in number and average age of vehicles ; lower new car sales versus the ten-year average ; long-term expectation that miles driven will increase based on historical trends ; and fragmented commercial market . conversely , there are a number of factors which are negatively affecting the automotive aftermarket industry and include : higher gas prices ; near-term downward trend in miles driven ; and overall reduction in discretionary spending on elective maintenance and other accessories . given the uncertainty in the economic environment , we have adjusted our operations and financial plans without compromising our core strategic investments over the long-term . we believe that the execution of the various initiatives under our key strategies will allow us to continue to increase our share of the total automotive aftermarket with a higher growth potential driven by the more fragmented commercial market . store development by segment the following table sets forth the total number of new , closed and relocated stores and stores with commercial delivery programs during fiscal 2011 , 2010 and 2009 by segment . we lease approximately 80 % of our aap stores . we lease 100 % of our ai stores . all of our ai stores have commercial delivery programs . replace_table_token_12_th during fiscal 2012 , we anticipate adding 110 to 120 aap stores and 10 to 20 ai stores and closing approximately 10 total stores . 22 components of statement of operations net sales net sales consist primarily of merchandise sales from our retail store locations to both our diy and commercial customers and sales from our e-commerce website . our total sales growth is comprised of both comparable store sales and new store sales . story_separator_special_tag we calculate comparable store sales based on the change in store sales starting once a store has been opened for 13 complete accounting periods ( approximately one year ) and by including e-commerce sales . we include sales from relocated stores in comparable store sales from the original date of opening . cost of sales our cost of sales consists of merchandise costs , net of incentives under vendor programs ; inventory shrinkage , defective merchandise and warranty costs ; and warehouse and distribution expenses . gross profit as a percentage of net sales may be affected by ( i ) variations in our product mix , ( ii ) price changes in response to competitive factors and fluctuations in merchandise costs , ( iii ) vendor programs , ( iv ) inventory shrinkage , ( v ) defective merchandise and warranty costs and ( vi ) warehouse and distribution costs . we seek to minimize fluctuations in merchandise costs and instability of supply by entering into long-term purchasing agreements , without minimum purchase volume requirements , when we believe it is advantageous . our gross profit may not be comparable to those of our competitors due to differences in industry practice regarding the classification of certain costs . see note 2 to our consolidated financial statements elsewhere in this report for additional discussion of these costs . selling , general and administrative expenses sg & a expenses consist of store payroll , store occupancy ( including rent and depreciation ) , advertising expenses , commercial delivery expenses , other store expenses and general and administrative expenses , including salaries and related benefits of store support center team members , share-based compensation expense , store support center administrative office expenses , data processing , professional expenses , self-insurance costs , closed store expense , impairment charges , if any , and other related expenses . see note 2 to our consolidated financial statements for additional discussion of these costs . consolidated results of operations the following table sets forth certain of our operating data expressed as a percentage of net sales for the periods indicated . replace_table_token_13_th 23 fiscal 2011 compared to fiscal 2010 net sales net sales for fiscal 2011 were $ 6,170.5 million , an increase of $ 245.3 million , or 4.1 % , over net sales for fiscal 2010 . this growth was primarily due to an increase in comparable store sales and sales from aap and ai stores opened within the last year . aap produced sales of $ 5,884.9 million , an increase of $ 193.8 million , or 3.4 % , over fiscal 2010 . the aap comparable store sales increase of 1.9 % was driven by an increase in average sales per customer . ai produced sales of $ 301.1 million , an increase of $ 51.6 million , or 20.7 % , over fiscal 2010 . replace_table_token_14_th gross profit gross profit for fiscal 2011 was $ 3,069.3 million , or 49.7 % of net sales , as compared to $ 2,961.3 million , or 50.0 % of net sales , in fiscal 2010 , a decrease of 24 basis points . this decrease in gross profit as a percentage of net sales was driven by increased shrink expense , supply chain deleverage due to investments in hubs and higher fuel costs and commodity price inflation partially offset by improved merchandising and pricing capabilities ( such as global sourcing and price optimization ) and improved parts availability . sg & a expenses sg & a expenses for fiscal 2011 were $ 2,404.6 million , or 39.0 % of net sales , as compared to $ 2,376.4 million , or 40.1 % of net sales , for fiscal 2010 , a decrease of 114 basis points . this decrease as a percentage of net sales was primarily due to reduced incentive compensation as a result of lower comparable store sales growth compared to the prior year , store labor leverage resulting from productivity improvements driven by our new variable customer driven labor model , occupancy cost leverage and a decrease in administrative expenses partially offset by increased strategic investments and advertising . these investments included spending in the e-commerce and commercial areas of our business in support of our service leadership and superior availability strategies . operating income operating income for fiscal 2011 was $ 664.6 million , representing 10.8 % of net sales , as compared to $ 584.9 million , or 9.9 % of net sales , for fiscal 2010 , an increase of 90 basis points . this increase was due to a lower sg & a rate partially offset by a slightly lower gross profit rate . aap produced operating income of $ 653.1 million , or 11.1 % of net sales , for fiscal 2011 as compared to $ 580.4 million , or 10.2 % of net sales , for fiscal 2010 . ai generated operating income for fiscal 2011 of $ 11.5 million as compared to $ 4.5 million for fiscal 2010 . ai 's operating income increased during fiscal 2011 primarily due to the leverage of sg & a as a result of its improved comparable store sales and decelerated pace of new store openings in fiscal 2011 . interest expense interest expense for fiscal 2011 was $ 30.9 million , or 0.5 % of net sales , as compared to $ 26.9 million , or 0.5 % of net sales , in fiscal 2010 . the increase in interest expense is primarily a result of the amortization of the previously recorded losses in accumulated other comprehensive loss over the remaining life of our interest rate swaps and higher average borrowings outstanding during fiscal 2011 compared to fiscal 2010 . the interest rate swaps were associated with bank debt which we repaid near the beginning of our second quarter of fiscal 2010 . income taxes income tax expense for fiscal 2011 was $ 238.6 million , as compared to $ 211.0 million for fiscal 2010 .
| during fiscal 2011 , we opened 95 aap stores and 9 ai stores , remodeled 15 aap and 3 ai stores and relocated 7 aap and 3 ai stores . our future capital requirements will depend in large part on the number of and timing for new stores we open within a given year and the investments we make in information technology and supply chain networks . we anticipate adding 110 to 120 aap stores and 10 to 20 ai stores and closing approximately 10 total stores during fiscal 2012 . we also plan to make continued investments in the maintenance of our existing stores and additional investments in our supply chain , information technology and other capabilities to support our key strategies . in fiscal 2012 , we anticipate that our capital expenditures will be approximately $ 275.0 million to $ 300.0 million . these investments will be primarily driven by new store development , investments in our existing store base and investments under our superior availability and service leadership strategies , including supply chain and new systems . these expenditures include a new warehouse management system and costs associated with the completion of our remington , in distribution center scheduled to open in the third quarter of 2012. stock repurchase program our stock repurchase program allows us to repurchase our common stock on the open market or in privately negotiated transactions from time to time in accordance with the requirements of the sec . during fiscal 2011 , we repurchased 9.9 million shares of our common stock at an aggregate cost of $ 609.7 million , or an average price of $ 61.51 per share . at december 31 , 2011 , we had $ 200.0 million remaining under our $ 300.0 million stock repurchase program authorized by our board of directors on august 9 , 2011. additionally , during fiscal 2011 , we repurchased 0.1 million shares of our common stock at an aggregate cost
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33 index to financial statements business environment commodity prices rose significantly during 2017 , compared with 2016. the discount for the u.s. crude oil benchmark west texas intermediate ( wti ) versus the international benchmark brent widened over much of 2017 , initially related to extended production cuts by the organization of the petroleum exporting countries ( opec ) and certain non-opec countries , but further widened with hurricane harvey and logistical issues at the cushing , oklahoma , trading hub . over the course of 2017 , commodity prices had both favorable and unfavorable impacts on our businesses that vary by segment . net income in the midstream segment , which includes our 50 percent equity investment in dcp midstream , is closely linked to natural gas liquids ( ngl ) prices , natural gas prices and crude oil prices . average natural gas prices increased in 2017 , compared with 2016 , due to higher demand and low production in early 2017. in the fourth quarter of 2017 , natural gas prices gained momentum with colder temperatures and increased residential and commercial heating demand . total u.s. natural gas production also increased through the fourth quarter of 2017 , largely from dry gas in the marcellus play and associated gas from the permian basin . ngl prices improved throughout 2017 due to international demand . the chemicals segment consists of our 50 percent equity investment in cpchem . the chemicals and plastics industry is mainly a commodity-based industry where the margins for key products are based on supply and demand , as well as cost factors . during 2017 , the chemicals and plastics industry continued to benefit from feedstock cost advantages associated with manufacturing ethylene in regions of the world with significant ngl production . the price of crude oil is rising faster than ngl prices and thus the petrochemicals industry continues to experience lower ethylene cash costs in regions of the world where ethylene manufacturing is based upon ngl rather than crude oil-derived feedstocks . in particular , companies with north american ethane-based crackers have benefited and have captured a somewhat higher polyethylene chain margin . the ethylene-to-polyethylene chain margins expanded in 2017 because of the crude oil price recovery after the significant decline in oil prices that began in 2014. our refining segment results are driven by several factors , including refining margins , cost control , refinery throughput , feedstock costs , product yields and turnaround activity . industry crack spread indicators , the difference between market prices for refined products and crude oil , are used to estimate refining margins . during 2017 , the u.s. 3:2:1 crack spread ( three barrels of crude oil producing two barrels of gasoline and one barrel of diesel ) strengthened across all quarters , compared with 2016 , largely attributable to higher product demand and lower product inventories in the last half of 2017 due to hurricane harvey . northwest european crack spreads on average increased in 2017 , compared with 2016 , also due to higher demand . results for our m & s segment depend largely on marketing fuel margins , lubricant margins , and other specialty product margins . while m & s margins are primarily driven by market factors , largely determined by the relationship between supply and demand , marketing fuel margins , in particular , are influenced by the trend in spot prices for refined products . generally speaking , a downward trend of spot prices has a favorable impact on marketing fuel margins , while an upward trend of spot prices has an unfavorable impact on marketing fuel margins . spot prices moved upward in 2017 , following the increase in crude oil prices . 34 index to financial statements results of operations basis of presentation during the fourth quarter of 2017 , the segment performance measure used by our chief executive officer to assess performance and allocate resources was changed from โ net income attributable to phillips 66 โ to โ net income. โ this change reflects the recognition that management does not differentiate between those earnings attributable to phillips 66 and those attributable to noncontrolling interests when making operating and resource allocation decisions impacting segment performance . prior period segment information has been recast to conform to the current presentation . story_separator_special_tag style= '' line-height:120 % ; font-size:10pt ; '' > index to financial statements segment results midstream replace_table_token_10_th replace_table_token_11_th * pipelines represent the sum of volumes transported through each separately tariffed pipeline segment , including our share of equity volumes from yellowstone pipe line company and lake charles pipe line company . * * excludes dcp midstream . * * * represents 100 percent of dcp midstream 's volumes . dollars per gallon weighted-average ngl price * dcp midstream $ 0.62 0.46 0.45 * based on index prices from the mont belvieu and conway market hubs that are weighted by ngl component and location mix . the midstream segment provides crude oil and refined products transportation , terminaling and processing services , as well as natural gas , ngl and liquefied petroleum gas ( lpg ) transportation , storage , processing and marketing services , mainly in the united states . this segment includes our master limited partnership ( mlp ) , phillips 66 partners , as well as our 50 percent equity investment in dcp midstream , which includes the operations of its mlp , dcp midstream , lp ( dcp partners ) . 2017 vs. 2016 net income from the midstream segment increased $ 184 million in 2017 , compared with 2016 , due to improved results across all business lines . transportation net income increased $ 65 million in 2017 , compared with 2016 . the improvement was mainly driven by increased equity in earnings from affiliates , including our joint ventures that own the bakken pipeline , which started commercial operations in june 2017 , as well as rockies express pipeline llc ( rex ) due to our share of a favorable breach of contract settlement claim . these increases were partially offset by higher operating costs . story_separator_special_tag 38 index to financial statements net income from our ngl and other business increased $ 41 million in 2017 , compared with 2016 . the increase reflects a full year of operations at the freeport lpg export terminal , the contribution of mslp to phillips 66 partners in october 2017 , and higher equity earnings from dcp sand hills pipeline , llc ( sand hills ) , partially offset by lower realized margins . net income from our investment in dcp midstream improved $ 78 million in 2017 , compared with 2016 . the increase was primarily due to improved margins driven by higher average ngl and natural gas prices , and improved results from dcp midstream 's hedging program . see the โ business environment and executive overview โ section for information on market factors impacting 2017 results . 2016 vs. 2015 net income from the midstream segment increased $ 206 million in 2016 , compared with 2015. the increase was primarily due to improved results from dcp midstream , partially offset by lower net income from our transportation and ngl and other businesses . transportation net income decreased $ 24 million in 2016 , compared with 2015. lower net income primarily resulted from higher operating costs and increased depreciation expense due to growth projects . these items were partially offset by higher revenues from increased throughput volumes and higher tariffs . net income from our ngl and other business decreased $ 61 million in 2016 , compared with 2015. the decrease was primarily driven by lower realized margins , as well as increased depreciation and operating expenses associated with the sweeny fractionator and , late in the year , the freeport lpg export terminal . these items were partially offset by higher fractionated volumes , reflecting the operation of the sweeny fractionator for a full year in 2016 , and the benefit of the first liquefied petroleum gas cargos exported from the freeport lpg export terminal in late 2016. improved results from our investment in dcp midstream increased our net income by $ 291 million in 2016 , compared with 2015. in 2015 , dcp midstream recorded goodwill and other asset impairments , which reduced our net income by $ 232 million . in addition , favorable contract restructuring efforts , improved asset performance , higher equity in earnings from dcp midstream 's equity affiliates , lower operating costs and higher ngl prices contributed to better results in 2016. these improvements were partially offset by lower natural gas and crude oil prices . 39 index to financial statements chemicals replace_table_token_12_th the chemicals segment consists of our 50 percent interest in cpchem , which we account for under the equity method . cpchem uses ngl and other feedstocks to produce petrochemicals . these products are then marketed and sold or used as feedstocks to produce plastics and other chemicals . we structure our reporting of cpchem 's operations around two primary business segments : olefins and polyolefins ( o & p ) and specialties , aromatics and styrenics ( sa & s ) . the o & p business segment produces and markets ethylene and other olefin products . ethylene produced is primarily consumed within cpchem for the production of polyethylene , normal alpha olefins and polyethylene pipe . the sa & s business segment manufactures and markets aromatics and styrenics products , such as benzene , styrene , paraxylene and cyclohexane , as well as polystyrene . sa & s also manufactures and or markets a variety of specialty chemical products . unless otherwise noted , amounts referenced below reflect our net 50 percent interest in cpchem . 2017 vs. 2016 net income from the chemicals segment decreased $ 58 million in 2017 , compared with 2016 . the decrease was primarily driven by higher costs and lower volumes due to hurricane harvey , as well as lower margins . these items were partially offset by lower impairment charges , higher equity in earnings from an o & p affiliate due to lower turnaround costs and a gain on the sale of cpchem 's k-resin ยฎ styrene-butadiene copolymers business . cpchem recognized impairment charges of $ 127 million and $ 177 million in 2017 and 2016 , respectively , due to lower demand and margin factors . as a result of these impairments , net income of the chemicals segment was reduced by $ 39 million and $ 89 million in 2017 and 2016 , respectively . as a result of hurricane harvey , cpchem 's cedar bayou facility in baytown , texas , experienced severe flooding , which caused it to shut down operations in the third quarter of 2017. this facility restarted in phases during the fourth quarter of 2017. cpchem 's u.s. gulf coast petrochemicals project , which consists of an ethane cracker at cedar bayou and two polyethylene units at old ocean , texas , was also impacted by the flooding . cpchem achieved mechanical completion of its ethane cracker at the cedar bayou facility in december 2017 , and is expected to complete commissioning of the ethane cracker in the first quarter of 2018 , with a transition to full production in the second quarter of 2018. see the โ business environment and executive overview โ section for information on market factors impacting cpchem 's results . 40 index to financial statements 2016 vs. 2015 net income from the chemicals segment decreased $ 379 million in 2016 , compared with 2015. the decrease in net income was primarily due to lower realized margins from the o & p business , driven by a decline in sales prices for polyethylene and normal alpha olefins ( nao ) and higher feedstock costs , as well as impacts from increased turnaround activity . lower equity earnings from cpchem 's equity affiliates and lower sa & s volumes further reduced net income in 2016. in addition , cpchem recognized a $ 177 million impairment in 2016 due to lower demand and margin factors affecting an equity affiliate , which resulted in an $ 89 million after-tax reduction in our equity earnings from cpchem .
| equity in earnings of affiliates increased 22 percent in 2017 , primarily resulting from higher equity in earnings from dcp midstream and other affiliates in our midstream segment , as well as wrb , partially offset by lower results from cpchem . equity in earnings from our midstream segment increased $ 270 million due to improved results from dcp midstream , primarily driven by improved margins , as well as higher equity in earnings from our transportation affiliates , including our joint ventures that own the bakken pipeline , which started commercial operations in june 2017. equity in earnings of wrb increased $ 207 million , primarily due to higher market crack spreads , partially offset by lower feedstock advantage . equity in earnings of cpchem decreased $ 120 million , primarily due to hurricane-related costs and downtime . other income increased $ 447 million in 2017 . we recognized a noncash , pre-tax gain of $ 423 million in february 2017 related to the consolidation of mslp . see note 5โbusiness combinations , in the notes to consolidated financial statements , for additional information . operating expenses increased 10 percent in 2017 . this increase was mainly due to the consolidation of a transportation joint venture in december 2016 , as well as higher refining turnaround expenses and utility costs , pension settlement expense , and costs associated with a full year of operations at the freeport lpg export terminal . these increases were partially offset by lower costs due to the sale of the whitegate refinery in 2016. depreciation and amortization increased 13 percent in 2017 due to the freeport lpg export terminal beginning operations in late 2016 , as well as other assets placed in service in 2017. interest and debt expense increased 30 percent in 2017 . this increase was primarily due to lower capitalized interest from the completion of major projects , including the startup of the freeport lpg export terminal in late 2016 , as well as higher average debt principal balances . 36 index to financial statements income tax expense ( benefit ) was a benefit in 2017 , compared with expense in 2016 , primarily due to the $ 2,735 million
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there continues to be legislative and regulatory focus on the private student loan market , including by some state legislatures and state attorneys general . recent areas of focus have included servicing , payments and collection practices , which have resulted in an increase in supervisory examinations of discover related to private student loans . legislative focus on student loans has resulted in the enactment of student loan servicing laws in several states , and consideration of new licensing , servicing , reporting and regulatory oversight requirements for student loan servicers . such legislation , regulation or guidance may increase the complexity and expense of servicing student loans and impact the entire student loan market , which could cause us to change our private student loan products or servicing practices in ways that we may not currently anticipate . payment networks the dodd-frank act contains several provisions impacting the debit card market , including network participation requirements and interchange fee limitations . the changing debit card environment , including competitor actions related to merchant and acquirer pricing and transaction routing strategies , has adversely affected , and is expected to continue to adversely affect , our pulse network 's business practices , network transaction volume , revenue and prospects for future growth . we continue to closely monitor competitor pricing and technology development strategies in order to assess their impact on our business and on competition in the marketplace . following an inquiry by the u.s. department of justice into some of these competitor pricing strategies , pulse filed a lawsuit against visa in late 2014 with respect to these competitive concerns . the court granted summary judgment in favor of visa on august 31 , 2018. pulse filed an appeal on january 17 , 2019. visa also faces ongoing merchant litigation as it relates to the underlying anticompetitive behavior that is the subject of pulse 's case against visa . in addition , the dodd-frank act 's network participation requirements impact pulse 's ability to enter into exclusivity arrangements , which affects pulse 's current business practices and may materially adversely affect its network transaction volume and revenue . - 48 - banking capital discover financial services and discover bank are subject to regulatory capital requirements that became effective january 1 , 2015 under final rules issued by the federal reserve and the federal deposit insurance corporation ( โ fdic โ ) to implement the provisions under the basel committee 's december 2010 framework ( referred to as โ basel iii โ ) . the final capital rules ( `` basel iii rules '' ) require minimum risk-based capital and leverage ratios and define what constitutes capital for purposes of calculating those ratios . in addition , the basel iii rules establish a capital conservation buffer ( โ ccb โ ) above the regulatory minimum capital requirements , which must consist entirely of common equity tier 1 ( `` cet1 '' ) capital and result in higher required minimum ratios by at least 2.5 % . the new ccb requirement became effective january 2016 ; however , the buffer threshold amounts have been subject to a gradual phase-in period . the full 2.5 % buffer requirement is fully phased-in as of january 2019. a banking organization is subject to limitations on paying dividends , engaging in share repurchases and paying discretionary bonuses if its capital level falls below any of the minimum capital requirements , taking into account the applicable ccb thresholds . based on our current capital composition and levels and business plans , we are and expect to continue to be in compliance with the requirements for the foreseeable future . for additional information , see `` โ liquidity and capital resources โ capital . '' on april 10 , 2018 , the federal reserve issued a notice of proposed rulemaking that would significantly revise the regulatory capital and stress testing frameworks for mid-sized bank holding companies such as discover financial services by , among other things , imposing new โ stress buffer โ requirements and revising certain assumptions used in supervisory stress tests . the proposal is intended to make regulatory capital requirements more forward-looking , risk-sensitive and firm-specific by linking them to the annual ccar stress testing and capital plan review process . the timing and substance of any final rulemaking is uncertain at this time . on december 21 , 2018 , federal banking agencies adopted a joint final rule that will , among other things , give bank holding companies and banks , including discover and its bank subsidiaries , the option to phase in the regulatory capital impacts of implementing the current expected credit loss ( `` cecl '' ) approach over a three-year transition period . recognition would be on a straight-line basis ( i.e. , 25 % in year one , 50 % in year two , 75 % in year three and 100 % thereafter ) . the final rule will become effective on april 1 , 2019 , although public companies such as discover are not required to implement cecl until 2020. separately on december 21 , 2018 , the federal reserve announced that it will not incorporate cecl into its supervisory stress tests until at least 2022 to reduce uncertainty , allow for better capital planning at affected firms and allow the federal reserve to gather additional information on the impact of cecl . the federal reserve will still require banking institutions subject to dodd-frank act company-run stress test requirements to incorporate cecl into their internal stress testing processes beginning in 2020. for more information on cecl and how it may affect discover , see note 1 : background and basis of presentation to our consolidated financial statements . liquidity we are currently subject to the u.s. liquidity coverage ratio rule issued by federal banking regulators . this quantitative requirement is designed to promote the short-term resilience of the liquidity risk profile of large and internationally active banking organizations in the united states . story_separator_special_tag the rule requires covered banks to maintain an amount of high-quality liquid assets sufficient to cover projected net cash outflows during a prospective 30-day calendar period under an acute , hypothetical liquidity stress scenario . given our current asset size , we are subject to a modified liquidity coverage ratio requirement , which requires a lower level of high-quality liquid assets to meet the minimum ratio requirement due to adjustments to the net cash outflow amount . t he federal reserve issued a proposal on october 31 , 2018 that would exempt bank holding companies with less than $ 250 billion in assets and less than $ 75 billion in certain other exposures from the liquidity coverage ratio rule . the timing and substance of any final rulemaking is unknown . - 49 - results of operations the discussion below provides a summary of our results of operations for the year ended december 31 , 2018 compared to our results of operations for the year ended december 31 , 2017 and year ended december 31 , 2016 . the discussion also provides information about our loan receivables as of december 31 , 2018 compared to december 31 , 2017 and december 31 , 2016 . segments we manage our business activities in two segments , direct banking and payment services , based on the products and services provided . for a detailed description of the operations of each segment , as well as the allocation conventions used in our business segment reporting , see note 22 : segment disclosures to our consolidated financial statements . replace_table_token_4_th - 50 - replace_table_token_5_th ( 1 ) diners club volume is derived from data provided by licensees for diners club branded cards issued outside north america and is subject to subsequent revision or amendment . ( 2 ) represents gross proprietary sales volume on the discover network . ( 3 ) represents discover card activity related to net sales , balance transfers , cash advances and other activity . ( 4 ) represents discover card activity related to net sales . direct banking for the year ended december 31 , 2018 compared to the year ended december 31 , 2017 our direct banking segment reported pretax income of $ 3.4 billion for the years ended december 31 , 2018 and 2017 . net interest income increased for the year ended december 31 , 2018 as compared to the year ended december 31 , 2017 prim arily driven by loan growth and higher yields on credit card loans , partially offset by higher funding costs . interest income increased over the prior year due to continued loan growth and yield expansion resulting from prime rate increases . interest expense increased during the year primarily due to higher market rates and a larger funding base . for the year ended december 31 , 2018 , the provision for loan loss dollars increased as compared to the year ended december 31 , 2017 primarily due to higher levels of net charge-offs , partially offset by a lower reserve build . for a detailed discussion on provision for loan losses , see โ โ loan quality โ provision and allowance for loan losses. โ total other income increased for the year ended december 31 , 2018 as compared to the year ended december 31 , 2017 primarily due to higher discount and interchange revenue and loan fee income . the increase in discount and interchange revenue is partially offset by higher rewards , both of which were primarily the result of higher sales volume . loan fee income increased primarily as the result of an increase in late fees due to a higher number of delinquent accounts . total other expense increased for the year ended december 31 , 2018 as compared to the year ended december 31 , 2017 primarily due to higher employee compensation and benefits , marketing and business development costs , other expenses and information processing and communications . employee compensation and benefits increased due to additional headcount for business growth and technological capabilities , as well as higher average salaries . the increase in marketing and business development costs was primarily due to higher acquisition costs and brand advertising targeting loan and deposit growth . the increase in other expense was largely driven by an increase in incentives supporting global merchant acceptance . information processing and communications increased as the result of higher investments in infrastructure and analytic capabilities . - 51 - discover card sales volume was $ 139.0 billion for the year ended december 31 , 2018 , which was an increase of 7.9 % as compared to the year ended december 31 , 2017 . this volume growth was driven primarily by growth in active cardmembers . for the year ended december 31 , 2017 compared to the year ended december 31 , 2016 our direct banking segment reported pretax income of $ 3.4 billion for the year ended december 31 , 2017 as compared to $ 3.5 billion for the year ended december 31 , 2016 . net interest income increased for the year ended december 31 , 2017 as compared to the year ended december 31 , 2016 primarily driven by loan growth and higher yields on credit card loans , partially offset by higher funding costs . the increase in credit card yields was primarily due to prime rate increases and a higher portion of revolving card receivables , partially offset by the portfolio mix and higher interest charge-offs . interest income increased during the year ended december 31 , 2017 as compared to the year ended december 31 , 2016 due to loan growth and higher yields . interest expense increased during the year ended december 31 , 2017 as compared to the year ended december 31 , 2016 primarily due to increased borrowings to fund asset growth , higher market rates and a change in funding mix .
| billion in 2017 , up 12 % from 2016 . - 46 - during 2017 , the effective tax rate increased 6.2 percentage points , primarily driven by a one-time adjustment of $ 179 million as a result of the tax cuts and jobs act of 2017 ( โ tcja โ ) . outlook we continue to focus on disciplined capital deployment through profitable organic loan growth and execution of our capital plan . our marketing strategy remains focused on expanding wallet share with existing customers and adding new accounts to achieve continued loan growth in 2019. total expenses are expected to increase in 2019 as we continue to invest in business growth and technology , including the deployment of advanced analytics and automation . we expect the rewards rate to modestly increase in 2019 largely resulting from the ongoing shift in product mix to the discover it platform . the total net charge-off rate in 2019 is expected to increase in comparison to the prior year and we expect to add to the loan loss reserve due to the seasoning of continued loan growth and supply-driven credit normalization . we expect net interest margin in 2019 to remain relatively flat . in our payments segment , we will continue to pursue new ways to drive volume growth in a competitive environment . we continue to leverage our network to support our card-issuing business . regulatory environment and developments federal banking regulators continue to propose and implement new regulations and supervisory guidance , including under the dodd-frank wall street reform and consumer protection act ( the `` dodd-frank act '' ) , and modify their examination and enforcement priorities . the dodd-frank act created a framework for regulation of large systemically significant financial firms , including discover , through a variety of measures , including increased capital and liquidity requirements and limits on leverage and enhanced supervisory authority . the impact of the evolving regulatory environment on our business and operations
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in march 2015 , holders of 589,510 series b warrants exercised their warrants for cash , and we received approximately $ 3.8 million in gross proceeds . in conjunction with these exercises , we issued the same number of series c warrants to purchase common stock at an exercise price of $ 6.25 per share which are exercisable through march 4 , 2020. in april 2015 , we filed a registration statement to offer and exchange to the remaining series b warrant holders to cash exercise their existing warrants and receive a series c warrant . we also received approximately $ 0.2 million from holders of series a warrants who exercised their warrants for cash during the three months ended march 31 , 2015. on july 24 , 2015 , we entered into the aspire purchase agreement with aspire capital fund , llc , which provides that , upon the terms and subject to the conditions and limitations set forth therein , aspire capital is committed to purchase up to an aggregate of $ 10.0 million in value of shares of our common stock over the 24-month term of the purchase agreement ( see note 7 ) . during the year ended december 31 , 2015 , we issued an aggregate of 506,585 shares of common stock to aspire capital in exchange for approximately $ 1.4 million . on october 12 , 2015 , we entered into the sabby purchase agreement with funds managed by sabby management , llc , to purchase up to $ 10 million of series a convertible preferred stock , or preferred stock , together with related series d warrants to purchase shares of our common stock . the sale of the preferred stock was set to take place in two separate closings . on october 15 , 2015 , the date of the first closing , we received proceeds of approximately $ 4.1 million , net of $ 0.4 million in estimated expenses . on january 8 , 2016 , the date of the second closing , we received proceeds of approximately $ 5 million , net of $ 0.5 million in estimated expenses . during the year ended december 31 , 2015 we received $ 0.3 million from the exercise of stock options . management believes that the company has sufficient capital resources to sustain operations through at least the next twelve months . as of december 31 , 2015 , we had an accumulated deficit of $ 86 million , primarily as a result of research and development and general and administrative expenses . while we may in the future generate revenue from a variety of sources , potentially including sales of our neonatology products , therapeutic products , other diagnostic products , license fees , milestone payments , and research and development payments in connection with potential future strategic partnerships , we have , to date , generated revenue only from the 2013 license agreement pertaining to serenz and a minimal amount of revenue from our neonatology products . the gsk agreement terminated in june 2014 , and we may not generate future licensing revenue . we may never be successful in commercializing our neonatology products , therapeutic products or in developing additional products . accordingly , we expect to incur significant losses from operations for the foreseeable future , and there can be no assurance that we will ever generate significant revenue or profits . we may also apply our research and development efforts to additional products based on our sensalyze technology platform , a portfolio of proprietary methods and algorithms which enables cosense and can be applied to detect a variety of analytes in exhaled breath . prior to 2010 , our efforts were primarily focused on development of therapeutics . we have previously obtained ce mark certification in the e.u . for serenz , an as-needed treatment for ar that has shown statistically significant improvements in ar symptoms in randomized , controlled phase 2 clinical trials completed by us . we outlicensed serenz to gsk in 2013 , realizing revenue in the form of a non-refundable up-front payment of $ 3.0 million . in june 2014 , the agreement terminated and gsk returned the licensed rights to serenz back to us . we recently reactivated the ce mark certification for serenz . we plan to move forward with pilot sales of serenz to pharmacies in the e.u . during the second quarter of 2016 to gather commercial feedback in preparation of a possible full launch of serenz later in 2016. financial overview summary we have not generated net income from operations to date , and , at december 31 , 2015 and december 31 , 2014 , we had an accumulated deficit of approximately $ 86 million and $ 70 million , respectively , primarily as a result of research and development and general and administrative expenses . we may never be successful in commercializing our neonatology products , including cosense , therapeutic products or in developing additional products . accordingly , we expect to incur significant losses from operations for the foreseeable future , and there can be no assurance that we will ever generate significant revenue or profits . 63 revenue recognition we apply the provisions of financial accounting standards board , or fasb , accounting standards codification , or asc , topic 605 , revenue recognition , to recognize revenue . we begin recognizing revenue when persuasive evidence of an arrangement exists , such as a contract or purchase order , delivery has occurred , no significant obligations with regard to implementation or integration exist , the fee is fixed or determinable , and collectability is reasonably assured . research and development expenses research and development costs are expensed as incurred . research and development costs consist primarily of salaries and benefits , consultant fees , prototype expenses , certain facility costs and other costs associated with clinical trials , net of reimbursed amounts . story_separator_special_tag costs to acquire technologies to be used in research and development that have not reached technological feasibility , and have no alternative future use , are expensed to research and development costs when incurred . sales and marketing expenses sales and marketing expenses consist principally of personnel-related costs , professional fees for consulting expenses , and other expenses associated with commercial activities . we anticipate these expenses will increase significantly in future periods , reflecting the increased level of sales and marketing activity necessary for the commercial launch of cosense . general and administrative expenses general and administrative expenses consist principally of personnel-related costs , professional fees for legal , consulting , audit and tax services , insurance , rent , and other general operating expenses not otherwise included in research and development . we anticipate general and administrative expenses will increase in future periods , reflecting an expanding infrastructure , other administrative expenses and increased professional fees associated with being a public reporting company . other income ( expense ) , net other income ( expense ) , net is primarily comprised of changes in the fair value of the series a , series b and series c stock warrant liabilities . critical accounting policies and significant judgments and estimates our management 's discussion and analysis of financial condition and results of operations are based upon our audited financial statements , which have been prepared in accordance with gaap . the preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , revenues and expenses . on an on-going basis , we evaluate our critical accounting policies and estimates . we base our estimates on historical experience and on various other assumptions that we believe to be reasonable in 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 and conditions . our significant accounting policies are more fully described in note 2 to our audited financial statements contained herein . series b warrants we account for the series b warrants issued in connection with our ipo in accordance with the guidance in accounting standards codification ( asc ) 815-40. the warrants have a cashless exercise provision that allows for exercise of the warrants at any time between four and fifteen months after issuance , on a cashless basis for a number of common shares that increases as the market price of our common stock decreases , and exercisable at a discount to the price of our common stock at the time . the terms of the series b warrants do not explicitly limit the potential number of shares , thereby the exercise of the b warrants could result in our obligation to deliver potentially unlimited number of shares upon settlement . as such , share settlement in not within our control and as provided under asc 815-40 , the warrants do not meet the criteria for equity treatment and are recorded as a liability . accordingly , we classified the series b warrants as liabilities at their fair market value at the date of the ipo and will re-measure the warrants at each balance sheet date until they are exercised or they expire . any change in the fair value is recognized as other income ( expense ) in our statement of operations . the fair value of the warrant liability was determined using a monte carlo simulation model . this model is dependent upon several variables such as the warrant 's term , exercise price , current stock price , risk-free interest rate estimated over the expected term , estimated volatility of our stock over the term of warrant and the estimated market price of our stock during the cashless exercise period . the risk-free rate is based on u.s. treasury securities with similar maturities as the expected terms of the warrants . the volatility is estimated based on blending the volatility rates for a number of similar publicly-traded companies . 64 in addition to the series b warrants , we issued series a warrants in connection with our ipo , have other warrants issued prior to the ipo in connection with convertible debt and have other warrants classified as part of our permanent equity . under asc 815-40-35 , we have adopted a sequencing policy that reclassifies contracts from equity to assets or liabilities for those with the latest inception date first . we have taken the position that the series a warrants issued in the ipo have an earlier inception date than the series b warrants issued as part of our ipo , and accordingly are treated as an equity instrument . future issuance of securities will be evaluated as to reclassification as a liability under our sequencing policy of latest inception date first until either all of the series b warrants are settled or expire . in accordance with the guidance under asc 815-40-25 , we have evaluated that we have a sufficient number of authorized and unissued shares as december 31 , 2015 , to settle all existing commitments . series d warrants we account for the series d warrants in accordance with the guidance in asc 815 derivatives and hedging . the warrants contain standard anti-dilution provisions for stock dividends , stock splits , subdivisions , combinations and similar types of recapitalization events . they also contain a cashless exercise feature that provides for their net share settlement at the option of the holder in the event that there is no effective registration statement covering the continuous offer and sale of the warrants and underlying shares . we are required to comply with certain requirements to cause or maintain the effectiveness of a registration statement for the offer and sale of these securities . such change in control events include tender offers or hostile takeovers , which are not within our sole control as the issuer of these warrants .
| interest expense , net interest expense for the year ended december 31 , 2015 decreased $ 4.1 million as compared to the year ended december 31 , 2014. interest expense during 2014 was due to the outstanding debt balance of $ 18 million from the 2010-2014 convertible notes that converted at the time of the ipo in november 2014. other expense other expense in the year ended december 31 , 2015 decreased $ 0.2 million as compared to the year ended december 31 , 2014. of the $ 3.7 million expense in 2015 , $ 0.2 million was due to the value of the commitment shares of common stock 68 issued to aspire capital and $ 3.1 million was due to the issuance of the series c warrants which were treated as an inducement . the change in the fair value of the warrants decreased from $ 3.9 million in 2014 to $ 0.5 million in 2015. liquidity and capital resources since our inception and through november 18 , 2014 , we have financed our operations primarily through private placements of our equity securities and debt financing . on november 18 , 2014 , we completed our ipo , pursuant to which we issued 1,650,000 units ( each unit consisting of one share of common stock , one series a warrant and one series b warrant ) and received net proceeds of approximately $ 8.0 million , after deducting underwriting discounts and commissions and ipo related expenses . in march 2015 , holders of 589,510 series b warrants exercised their warrants for cash , and we received approximately $ 3.8 million in gross proceeds . in conjunction with these exercises , we issued the same number of series c warrants to purchase common stock at an exercise price of $ 6.25 per share which are exercisable through march 4 , 2020. in april 2015 , we filed a registration statement to offer and exchange to the remaining series b warrant holders to cash exercise their existing warrants and receive a series c warrant . we also received approximately $ 0.2 million from holders of series a warrants who exercised their warrants for cash during the three months ended march 31 , 2015. on july 24 , 2015 , we
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in january 2011 , the company entered into a letter agreement with gilbert v. levin and m. karen levin pursuant to which the company agreed to make a one time lump sum payment of $ 450,000 to the levins in full satisfaction of the company 's obligation to make a series of continuing payments to the levins relating to their prior employment by the company . per the terms of the agreement , gilbert v. levin resigned as a member of the board of directors of the company on january 13 , 2011. the company 's estimated liability to the levins at december 31 , 2010 , and prior to the above agreement was approximately $ 695,000. the $ 450,000 lump sum payment was made on january 31 , 2011 , and the company recognized the $ 245,000 difference as a gain on settlement of obligations in january 2011. income tax ( expense ) benefit the 2011 income tax expense and the 2010 income tax benefit was directly related to the above mentioned u.s. government grants in the other income discussion . sales backlog the company 's backlog as of december 31 , 2011 and 2010 ( consisting solely of backlog from the health sciences business ) was approximately $ 317,000 and $ 308,000 , respectively . the company bills for its consulting services primarily on a time and expense basis and these amounts represent estimated contract values . further , the company 's consulting contracts are generally terminable or subject to postponement or delay at any time by clients . as a result , backlog at any particular time is not a reliable indicator of revenues for any future periods . 20 critical accounting estimates the preparation of financial statements in conformity with accounting principles generally accepted in the united states of america requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of the contingent assets and liabilities at the date of the financial statements and revenue and expenses for the period reported . estimates are based upon historical experience and various other assumptions that are believed to be reasonable under the circumstances . these estimates are evaluated periodically and form the basis for making judgments regarding the carrying values of assets and liabilities and the reported amount of revenue and expenses . actual results may differ substantially from these estimates . spherix 's critical accounting policies are those it believes are the most important in determining its financial condition and results , and require significant subjective judgment by management as a result of inherent uncertainties . a summary of the company 's significant accounting policies is set out in the notes to the consolidated financial statements . such policies are discussed below . accounting for taxes and valuation allowances we currently have significant deferred tax assets , resulting from net operating loss carry forwards . these deferred tax assets may reduce taxable income in future periods . based on the company 's losses and its accumulated deficit , the company has provided a full valuation allowance against the net deferred tax asset . cumulative losses weigh heavily in the overall assessment of valuation allowances . we expect to continue to maintain a full valuation allowance on future tax benefits until an appropriate level of profitability is sustained , or we are able to develop tax strategies that would enable us to conclude that it is more likely than not that a portion of our deferred tax assets would be realizable . new accounting pronouncements in may 2011 , the fasb issued a new accounting standard on fair value measurements that clarifies the application of existing guidance and disclosure requirements , changes certain fair value measurement principles and requires additional disclosures about fair value measurements . we are required to adopt this standard in the first quarter of 2012. we do not expect this adoption to have a material impact on our financial statements . in june 2011 , the fasb issued a new accounting standard on the presentation of comprehensive income . the new standard requires the presentation of comprehensive income , the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements . the new standard also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented . in december 2011 , the fasb deferred the effective date for amendments to the presentation of reclassifications of items out of accumulated other comprehensive income , while still requiring entities to adopt the other requirements . we are required to adopt this standard as of the beginning of 2013. we do not expect this adoption to have a material impact on our financial statements . 21 liquidity and capital resources we expect to continue to incur substantial development costs in our biospherics segment in the next several years , without substantial corresponding revenue , and we will continue to incur ongoing administrative and other expenses , including public company expenses . we intend to finance our activities through : ยท the remaining proceeds of our equity offerings ; and ยท additional funds we will seek to raise through the sale of additional stock in the future . working capital was $ 4.6 million at december 31 , 2011 , including $ 4.9 million cash on hand . management believes that this cash on hand , combined with the $ 1.1 million of net proceeds of the february 2012 offering , provide us with sufficient cash to sustain operations for 2012. we expect that we will need to expend approximately $ 5 million over the next twelve ( 12 ) months to support our currently planned development operations . this estimate assumes ( i ) no further significant expenditures story_separator_special_tag in january 2011 , the company entered into a letter agreement with gilbert v. levin and m. karen levin pursuant to which the company agreed to make a one time lump sum payment of $ 450,000 to the levins in full satisfaction of the company 's obligation to make a series of continuing payments to the levins relating to their prior employment by the company . per the terms of the agreement , gilbert v. levin resigned as a member of the board of directors of the company on january 13 , 2011. the company 's estimated liability to the levins at december 31 , 2010 , and prior to the above agreement was approximately $ 695,000. the $ 450,000 lump sum payment was made on january 31 , 2011 , and the company recognized the $ 245,000 difference as a gain on settlement of obligations in january 2011. income tax ( expense ) benefit the 2011 income tax expense and the 2010 income tax benefit was directly related to the above mentioned u.s. government grants in the other income discussion . sales backlog the company 's backlog as of december 31 , 2011 and 2010 ( consisting solely of backlog from the health sciences business ) was approximately $ 317,000 and $ 308,000 , respectively . the company bills for its consulting services primarily on a time and expense basis and these amounts represent estimated contract values . further , the company 's consulting contracts are generally terminable or subject to postponement or delay at any time by clients . as a result , backlog at any particular time is not a reliable indicator of revenues for any future periods . 20 critical accounting estimates the preparation of financial statements in conformity with accounting principles generally accepted in the united states of america requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of the contingent assets and liabilities at the date of the financial statements and revenue and expenses for the period reported . estimates are based upon historical experience and various other assumptions that are believed to be reasonable under the circumstances . these estimates are evaluated periodically and form the basis for making judgments regarding the carrying values of assets and liabilities and the reported amount of revenue and expenses . actual results may differ substantially from these estimates . spherix 's critical accounting policies are those it believes are the most important in determining its financial condition and results , and require significant subjective judgment by management as a result of inherent uncertainties . a summary of the company 's significant accounting policies is set out in the notes to the consolidated financial statements . such policies are discussed below . accounting for taxes and valuation allowances we currently have significant deferred tax assets , resulting from net operating loss carry forwards . these deferred tax assets may reduce taxable income in future periods . based on the company 's losses and its accumulated deficit , the company has provided a full valuation allowance against the net deferred tax asset . cumulative losses weigh heavily in the overall assessment of valuation allowances . we expect to continue to maintain a full valuation allowance on future tax benefits until an appropriate level of profitability is sustained , or we are able to develop tax strategies that would enable us to conclude that it is more likely than not that a portion of our deferred tax assets would be realizable . new accounting pronouncements in may 2011 , the fasb issued a new accounting standard on fair value measurements that clarifies the application of existing guidance and disclosure requirements , changes certain fair value measurement principles and requires additional disclosures about fair value measurements . we are required to adopt this standard in the first quarter of 2012. we do not expect this adoption to have a material impact on our financial statements . in june 2011 , the fasb issued a new accounting standard on the presentation of comprehensive income . the new standard requires the presentation of comprehensive income , the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements . the new standard also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented . in december 2011 , the fasb deferred the effective date for amendments to the presentation of reclassifications of items out of accumulated other comprehensive income , while still requiring entities to adopt the other requirements . we are required to adopt this standard as of the beginning of 2013. we do not expect this adoption to have a material impact on our financial statements . 21 liquidity and capital resources we expect to continue to incur substantial development costs in our biospherics segment in the next several years , without substantial corresponding revenue , and we will continue to incur ongoing administrative and other expenses , including public company expenses . we intend to finance our activities through : ยท the remaining proceeds of our equity offerings ; and ยท additional funds we will seek to raise through the sale of additional stock in the future . working capital was $ 4.6 million at december 31 , 2011 , including $ 4.9 million cash on hand . management believes that this cash on hand , combined with the $ 1.1 million of net proceeds of the february 2012 offering , provide us with sufficient cash to sustain operations for 2012. we expect that we will need to expend approximately $ 5 million over the next twelve ( 12 ) months to support our currently planned development operations . this estimate assumes ( i ) no further significant expenditures
| orphan drug status by the fda is usually applied to products where the number of patients in the united states in the given disease category is typically less than 200,000. the european medicines agency adopted a similar system termed ยthe regulation of orphan medicinal products.ย these orphan drug indications typically require more modest investment in the development stages , followed by a quicker regulatory path to approval . we have incurred negative cash flow from operations each of the most recent fiscal years . we anticipate incurring negative cash flows from operating activities for the foreseeable future . we have spent , and expect to continue to spend , substantial amounts in connection with implementing our business strategy , including our product development efforts . 18 results of operationsย2011 compared with 2010 revenue and direct costs revenue and direct contract costs are primarily related to the company 's health sciences business . the consulting business generally provides services on either a fixed-price basis or a ยtime and expensesย basis , charging hourly rates for each staff member involved in a project , based on his or her skills and experience . engagement agreements typically provide for monthly billing and payment within thirty ( 30 ) days of receipt , and permit clients to terminate engagements at any time . the health sciences consulting staff also provides support for our r & d activities and the decrease in direct costs of $ 130,000 between years reflects an increase in the staff 's time devoted to developing study protocols and other support for the company 's r & d activities ( see research and development below ) . this shift in resources accounted for approximately half of the $ 612,000 decrease in revenue between years . lower effective rates on 2011 contracts in comparison to 2010 contracts accounted for the rest of the decrease in revenue between years as a result of changing demand in the market for health science based consulting services . during 2011 and 2010 , health sciences provided services to 20 and 23 companies , respectively . no substantial revenue is expected from the biospherics segment until the company is
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the second and fourth calendar quarters typically produce the highest revenues for the year . in addition , our revenues tend to fluctuate between years , consistent with , among other things , increased advertising expenditures in even-numbered years by political candidates , political parties and special interest groups . this political spending typically is heaviest during the fourth quarter . 28 emergence from chapter 11 for information about our emergence from chapter 11 see item 1 `` business - emergence from chapter 11 '' and the notes to the accompanying audited consolidated financial statements included elsewhere in this annual report . 29 advertising revenue our primary source of revenue is the sale of advertising time . our sales of advertising time are primarily affected by the demand from local , regional and national advertisers , which also impacts the advertising rates we charge . advertising demand and rates are based primarily on the ability to attract audiences in the demographic groups targeted by such advertisers , as measured principally by various ratings agencies on a periodic basis . we endeavor to provide compelling programming and form connections between our on-air talent and listeners in order to develop strong listener loyalty , and we believe that the diversification of our formats and programs , including non-music formats and proprietary content , helps to insulate us from the effects of changes in the musical tastes of the public with respect to any particular format . we strive to maximize revenue by managing our on-air inventory of advertising time and adjusting prices based on supply and demand . the optimal number of advertisements available for sale depends on the programming format of a particular radio program . each program has a general target level of on-air inventory available for advertising . this target level of advertising inventory may vary at different times of the day but tends to remain stable over time . we seek to broaden our base of advertisers in each of our markets by providing a wide array of audience demographic segments across each cluster of stations , thereby providing potential advertisers with an effective means to reach a targeted demographic group . our advertising contracts are generally short-term . we generate most of our revenue from local and regional advertising , which is sold primarily by a station 's sales staff . in addition to local and regional advertising revenues , we monetize our available inventory in both national spot and network sales marketplaces using our national platform . to effectively deliver network advertising for our customers , we distribute content and programming through third party affiliates in order to reach a broader national audience . typically , in exchange for the right to broadcast radio network programming , third party affiliates remit a portion of their advertising time to us , which is then aggregated into packages focused on specific demographic groups and sold by us to our advertiser clients that want to reach those demographic groups on a national basis . in the broadcasting industry , we sometimes utilize trade or barter agreements that exchange advertising time for goods or services such as travel or lodging , instead of for cash . trade revenue totaled $ 26.5 million , $ 18.9 million , $ 40.1 million and $ 37.7 million for the successor company from period june 4 , 2018 through december 31 , 2018 , the predecessor company period from january 1 , 2018 through june 3 , 2018 and the predecessor company years ended december 31 , 2017 and 2016 , respectively . we continually evaluate opportunities to increase revenues through new platforms , including technology-based initiatives . as a result of those revenue increasing opportunities , our operating results in any period may be affected by the incurrence of advertising and promotion expenses that typically do not have an effect on revenue generation until future periods , if at all . in addition , as part of this evaluation we also from time to time reorganize and discontinue certain redundant and or unprofitable content vehicles across our platform which we expect will impact our broadcast revenues in the future . to date inflation has not had a material effect on our revenues or results of operations , although no assurances can be provided that material inflation in the future would not materially adversely affect us . non-gaap financial measure from time to time we utilize certain financial measures that are not prepared or calculated in accordance with gaap to assess our financial performance and profitability . consolidated adjusted earnings before interest , taxes , depreciation , and amortization ( โ adjusted ebitda โ ) and segment adjusted ebitda are the financial metrics by which management and the chief operating decision maker allocate resources of the company and analyze the performance of the company as a whole and each of our reportable segments , respectively . management also uses this measure to determine the contribution of our core operations to the funding of our corporate resources utilized to manage our operations and our non-operating expenses including debt service and acquisitions . in addition , consolidated adjusted ebitda is a key metric for purposes of calculating and determining our compliance with certain covenants contained in our credit agreement . in determining adjusted ebitda , we exclude from net income items not related to core operations and those that are non-cash including : interest , taxes , depreciation , amortization , stock-based compensation expense , gain or loss on the exchange , sale , or disposal of any assets or stations , early extinguishment of debt , local marketing agreement fees , expenses relating to acquisitions , divestitures , restructuring costs , reorganization items and non-cash impairments of assets , if any . 30 management believes that adjusted ebitda , although not a measure that is calculated in accordance with gaap , is commonly employed by the investment community as a measure for determining the market value of a media company and comparing the operational and financial performance among media companies . story_separator_special_tag management has also observed that adjusted ebitda is routinely utilized to evaluate and negotiate the potential purchase price for media companies . given the relevance to our overall value , management believes that investors consider the metric to be extremely useful . adjusted ebitda should not be considered in isolation or as a substitute for net income ( loss ) , operating income , cash flows from operating activities or any other measure for determining our operating performance or liquidity that is calculated in accordance with gaap . in addition , adjusted ebitda may be defined or calculated differently by other companies , and comparability may be limited . 31 story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > local marketing agreements are those agreements under which we program a radio station on behalf of another party . during the quarter ended march 31 , 2018 , the company and merlin media , llc ( โ merlin โ ) amended their local marketing agreement under which the company programmed two fm radio stations owned by merlin . the company ceased programming one of the stations ( โ wlup โ ) on march 9 , 2018. on june 15 , 2018 , the company purchased the other station ( โ wkqx โ ) and certain intellectual property for $ 18.0 million in cash . corporate expenses , including stock-based compensation expense and acquisition-related and restructuring costs corporate expenses consist primarily of compensation and related costs for our executive , accounting , finance , human resources , information technology and legal personnel , and fees for professional services . professional services are principally comprised of audit , consulting and outside legal services . corporate expenses also include restructuring expenses and stock- 33 based compensation expense . corporate expenses for the successor and predecessor company year ended december 31 , 2018 compared to the predecessor company year ended december 31 , 2017 decreased primarily as a result of a decrease in professional fees and corporate employee costs . reorganization items , net during the predecessor company period from january 1 , 2018 through june 3 , 2018 , we recorded costs related to our chapter 11 cases . reorganization items incurred as a result of the chapter 11 cases are presented separately in the accompanying consolidated statements of operations and were as follows ( dollars in thousands ) : replace_table_token_7_th ( a ) liabilities subject to compromise have been , or will be settled in accordance with the plan . ( b ) revaluation of certain assets and liabilities upon the adoption of fresh start accounting . ( c ) legal , financial advisory and other professional costs directly associated with the reorganization process . ( d ) the carrying value of certain claims were adjusted to the estimated value of the claim that will be allowed by the bankruptcy court . ( e ) non-cash expenses to record estimated allowed claim amounts related to rejected executory contracts . ( f ) federal communications commission filing and united states trustee fees directly associated with the reorganization process and the write-off of predecessor director and officer insurance policies . interest expense total interest expense for the successor and predecessor company year ended december 31 , 2018 is not comparable to that of the predecessor company year ended december 31 , 2017 as we did not pay certain interest expenses during the predecessor company period from january 1 , 2018 through june 3 , 2018. during that period we made adequate protection payments on the predecessor term loan in lieu of interest payments . in accordance with asc 852 , we recognized the adequate protection payments as reductions in the principal balance of the predecessor term loan . we did not make any interest payments on the 7.75 % senior notes . during the successor company period from june 4 , 2018 through december 31 , 2018 , we recorded interest expense of approximately $ 50.0 million on $ 1.3 billion in outstanding debt at an average interest rate of approximately 6.7 % . during the predecessor company year ended december 31 , 2017 , we recorded and paid interest expense in accordance with the provisions of the then outstanding debt agreements prior to the petition date . 34 replace_table_token_8_th * * calculation is not meaningful . other ( expense ) income , net during the successor and predecessor company year ended december 31 , 2018 , we recorded a non-cash charge of $ 3.2 million to write off our investment in nextradio . there were no similar charges for the predecessor company year ended december 31 , 2017. income tax benefit we recorded an income tax benefit on continuing operations of $ 12.4 million for the successor company period from june 4 , 2018 through december 31 , 2018 and income tax benefit of $ 176.9 million for the predecessor company period from january 1 , 2018 through june 3 , 2018 as compared to a $ 163.7 million benefit during the predecessor company year ended december 31 , 2017. the tax benefits recorded in the successor and predecessor company year ended december 31 , 2018 were primarily the result of the bankruptcy emergence , reorganization charges and related tax elections , while the tax benefit recorded in the predecessor company year ended december 31 , 2017 was primarily the result of pre-tax losses , the effect of a corporate tax rate change pursuant to tax reform , and the establishment of a valuation allowance related to our net operating loss deferred tax assets . adjusted ebitda as a result of the factors described above , adjusted ebitda for the successor and predecessor company year ended december 31 , 2018 compared to the predecessor company year ended december 31 , 2017 increased . for a discussion of adjusted ebitda by segment and a comparison by segment of the successor and predecessor company year ended december 31 , 2018 to the predecessor company year ended december 31 , 2017 , see the discussion under `` segment results of operations . ''
| 2018 successor company period june 4 , 2018 through december 31 , 2018 and predecessor company period january 1 , 2018 through june 3 , 2018 ( `` successor and predecessor company year ended december 31 , 2018 '' ) compared to predecessor company year ended december 31 , 2017 net revenue net revenue for the successor and predecessor company year ended december 31 , 2018 compared to net revenue for the predecessor company year ended december 31 , 2017 increased because of increases in national advertising revenue , digital advertising revenue and cyclical political revenue , partially offset by a decline in local broadcast advertising revenue within our radio markets and the loss of approximately $ 2.4 million in revenue from united states traffic networks ( โ ustn โ ) . for a discussion of net revenue by segment and a comparison by segment of the successor and predecessor company year ended december 31 , 2018 and the predecessor company year ended december 31 , 2017 , see the discussion under โ segment results of operations โ . content costs content costs consist of all costs related to the licensing , acquisition and development of our programming . content costs for the successor and predecessor company year ended december 31 , 2018 compared to the predecessor company year ended december 31 , 2017 decreased primarily as a result of the termination or renegotiation of certain contractual agreements , in some cases in connection with the filing of the chapter 11 cases and a decrease in employee costs partially offset by an increase in digital costs associated with higher digital revenue during 2018. selling , general & administrative expenses selling , general and administrative expenses consist of expenses related to our sales efforts and distribution of our content across our platform and overhead in our markets . selling , general and administrative expenses for the successor and predecessor company year ended december 31 , 2018 compared to the predecessor company year ended december 31 , 2017 was essentially flat primarily as a result of lower sales commissions associated with lower broadcast revenue and the impact of our implementation of asc 606 as
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the average payday loan amount is approximately $ 435 and the term is generally less than 30 days , averaging about 16 days . we typically charge a fee of 15 % to 22 % of the loan amount . in 117 of our u.s. financial services stores and three u.s. pawn stores , we make installment loans subject to state law . these installment loans carry a term of four to seven months , with a series of equal installment payments including principal amortization , due monthly , semi-monthly or on the customers ' paydays . total interest and fees on these loans vary in accordance with state law and loan terms , but over the entire loan term , total approximately 45 % to 130 % of the original principal amount of the loan . we began offering installment loans rather than payday loans in colorado in august 2010 , in wisconsin in january 2011 and in missouri in june 2011. installment loan principal amounts range from $ 100 to $ 3,000 , but average approximately $ 530. at september 30 , 2011 , 397 of our u.s. financial services stores and 44 of our u.s. pawn stores offered auto title loans or , in texas , credit services to assist customers in obtaining auto title loans from unaffiliated lenders . auto title loans are 30-day loans secured by the titles to customers ' automobiles . loan principal amounts range from $ 100 to $ 10,000 , but average about $ 810. we earn a fee of 12.5 % to 25 % of auto title loan amounts . acquisitions in the fiscal year ended september 30 , 2010 , we acquired 16 pawn stores located in the chicago metropolitan area , central and south florida , corpus christi , texas and las vegas , nevada for approximately $ 21.8 million in cash . in the year ended september 30 , 2011 , we acquired 40 pawn stores located in the chicago metropolitan area , georgia , central and south florida , iowa , wisconsin , utah and the mexican states of hidalgo and tlaxcala for approximately $ 66.2 million in cash and the issuance of approximately 0.2 million shares of ezcorp stock valued at $ 7.3 million . all stores were acquired as part of our continuing strategy to acquire pawn stores to enhance and diversify our earnings . the results of all acquired stores have been consolidated with our results since their acquisition . in april 2011 we also acquired the trademark and licensing rights of cash converters in canada , including rights to receive fees from 13 stores operated by franchisees in canada . 29 other included in the current year-to-date period results is a pre-tax administrative expense charge of $ 10.9 million related to the october 2010 retirement of our former chief executive officer , including $ 3.4 million attributable to a cash payment and $ 7.5 million attributable to the vesting of restricted stock . the current year-to-date period income tax expense reflects a $ 3.8 million tax benefit related to this charge . critical accounting policies and estimates management 's discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states . the preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets , liabilities , revenues and expenses , and related disclosure of contingent assets and liabilities . on an on-going basis , we evaluate our estimates and judgments , including those related to revenue recognition , inventory , loan loss allowances , long-lived and intangible assets , income taxes , contingencies and litigation . we base our estimates on historical experience , observable trends and various other assumptions that we believe to be reasonable under the circumstances . we use this information to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . actual results may differ from the estimates under different assumptions or conditions . we believe the following critical accounting policies and estimates could have a significant impact on our results of operations . you should refer to note a of our consolidated financial statements for a more complete review of other accounting policies and estimates used in the preparation of our consolidated financial statements . pawn loan and sales revenue recognition : we record pawn service charges using the interest method for all pawn loans we believe to be collectible . we base our estimate of collectible loans on several factors , including recent redemption rates , historical trends in redemption rates and the amount of loans due in the following two months . unexpected variations in any of these factors could change our estimate of collectible loans , affecting our earnings and financial condition . if a pawn loan is not repaid , we value the forfeited collateral ( inventory ) at the lower of cost ( pawn loan principal ) or market value of the property . we record sales revenue and the related cost when this inventory is sold , or when we receive the final payment on a layaway sale . sales tax collected upon the sale of inventory is excluded from the amount recognized as sales and instead recorded as a liability in ยaccounts payable and other accrued expensesย on our balance sheets until remitted to the appropriate governmental authorities . signature loan credit service fee revenue recognition : we earn credit service fees when we assist customers in obtaining signature loans from unaffiliated lenders . we initially defer recognition of the fees we expect to collect , net of direct expenses , and recognize that deferred net amount over the life of the related loans . story_separator_special_tag we reserve the percentage of credit service fees we expect not to collect . accrued fees related to defaulted loans reduce credit service fee revenue upon loan default , and increase credit service fee revenue upon collection . signature loan credit service fee revenue is included in ยsignature loan feesย on our statements of operations . signature loan credit service bad debt : we issue letters of credit to enhance the creditworthiness of our customers seeking signature loans from unaffiliated lenders . the letters of credit assure the lenders that if borrowers default on the loans , we will pay the lenders , upon demand , the principal , accrued interest and late fees owed to the lenders by the borrowers plus any insufficient funds fees . although amounts paid under letters of credit may be collected later , we charge those amounts to signature loan bad debt upon default . we record recoveries under the letters of credit as a reduction of bad debt at the time of collection . after attempting collection of bad debts internally , we occasionally sell them to an unaffiliated company as another method of recovery , and record the proceeds from such sales as a reduction of bad debt at the time of the sale . the majority of our credit service customers obtain short-term signature loans with a single maturity date . these short-term loans , with maturity dates averaging about 16 days , are considered defaulted if they have not been repaid or renewed by the maturity date . other credit service customers obtain installment loans with a series of payments due over as much as a seven-month period . if one payment of an installment loan is delinquent , that one payment is 30 considered defaulted . if more than one installment payment is delinquent at any time , the entire loan is considered defaulted . allowance for losses on signature loan credit services : we provide an allowance for losses we expect to incur under letters of credit for brokered signature loans that have not yet matured . the allowance is based on recent loan default experience adjusted for seasonal variations . it includes all amounts we expect to pay to the unaffiliated lenders upon loan default , including loan principal , accrued interest and insufficient funds fees , net of the amounts we expect to collect from borrowers ( collectively , ยexpected loc lossesย ) . changes in the allowance are charged to signature loan bad debt . we include the balance of expected loc losses in ยaccounts payable and other accrued expensesย on our balance sheets . based on the expected loss and collection percentages , we also provide an allowance for the signature loan credit service fees we expect not to collect , and charge changes in this allowance to signature loan fee revenue . signature loan revenue recognition : we accrue fees in accordance with state and provincial laws on the percentage of signature loans ( payday loans and installment loans ) we have made that we believe to be collectible . accrued fees related to defaulted loans reduce fee revenue upon loan default , and increase fee revenue upon collection . signature loan bad debt : we consider a payday loan defaulted if it has not been repaid or renewed by the maturity date . if one payment of an installment loan is delinquent , that one payment is considered defaulted . if more than one installment payment is delinquent at any time , the entire installment loan is considered defaulted . although defaulted loans may be collected later , we charge the loan principal to signature loan bad debt upon default , leaving only active loans in the reported balance . we record collections of principal as a reduction of signature loan bad debt when collected . after attempting collection of bad debts internally , we occasionally sell them to an unaffiliated company as another method of recovery and record the proceeds from such sales as a reduction of bad debt at the time of sale . signature loan allowance for losses : we provide an allowance for losses on signature loans that have not yet matured and related fees receivable , based on recent loan default experience adjusted for seasonal variations . we charge any changes in the principal valuation allowance to signature loan bad debt . we record changes in the fee receivable valuation allowance to signature loan fee revenue . auto title loan credit service fee revenue recognition : we earn auto title credit service fees when we assist customers in obtaining auto title loans from unaffiliated lenders . we recognize the fee revenue ratably over the life of the loan , and reserve the percentage of fees we expect not to collect . auto title loan credit service fee revenue is included in ยauto title loan feesย on our statements of operations . bad debt and allowance for losses on auto title loan credit services : we issue letters of credit to enhance the creditworthiness of our customers seeking auto title loans from unaffiliated lenders . the letters of credit assure the lenders that if borrowers default on the loans , we will pay the lenders , upon demand , all amounts owed to the lenders by the borrowers plus any late fees . through a charge to auto title loan bad debt , we provide an allowance for losses we expect to incur under letters of credit for brokered auto title loans , and record actual charge-offs against this allowance . the allowance includes all amounts we expect to pay to the unaffiliated lenders upon loan default , including principal , accrued interest and late fees , net of the amounts we expect to collect from borrowers or through the sale of repossessed vehicles .
| as part of these acquisitions , we began operations in three new states ; iowa , utah and wisconsin , bringing the total number of states in which we have pawn operations to 16 at september 30 , 2011. our current year u.s. pawn service charge revenue increased 19 % , or $ 29.7 million , from the prior year to $ 184.2 million . same store pawn service charges increased $ 18.4 million , or 12 % , with new and acquired stores net of closed stores contributing $ 11.3 million . the same store improvement was due to a higher average same store pawn loan balance coupled with higher yield . the yield improved primarily due to a slightly higher loan redemption rate as we continued to focus on loan values and better qualifying customers to determine those that prefer to sell their merchandise rather than use it as collateral for a loan . inventory purchases represented 30 % of all inventory additions during the year . the current year merchandise sales gross profit increased $ 14.8 million , or 16 % , from the prior year to $ 109.4 million . this was due to a $ 13.0 million , or 6 % , increase in same store sales , a $ 17.2 million increase in sales from new and acquired stores net of closed stores , and a 0.8 percentage point improvement in gross margins . 33 gross profit on jewelry scrapping sales increased $ 15.4 million , or 26 % , from the prior year to $ 74.5 million . jewelry scrapping revenues increased $ 31.6 million , or 19 % , due to a 28 % increase in proceeds realized per gram of gold jewelry scrapped partially offset by a 9 % decrease in gold volume . same store jewelry scrapping sales increased $ 15.7 million , or 10 % , and new and acquired stores contributed $ 15.9 million . jewelry scrapping sales include the sale of approximately $ 8.1 million of loose diamonds removed from scrap jewelry in the current year and $ 3.2 million in the prior year . as a result of the higher average
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we have also provided organic net sales , a non-gaap measure that excludes the impact of businesses purchased or exited in the prior 12 months , because we believe it permits investors to better understand the performance of our historical business without the impact of recent acquisitions or dispositions . additionally , we have provided a comparison of our free cash flow , a non-gaap measure which may be used as an assessment of liquidity and which we use internally to evaluate our operating performance . we define free cash flow as net cash provided by operations less capital expenditures . free cash flow does not represent cash available only for discretionary expenditures , since we have mandatory debt service requirements and other contractual and non-discretionary expenditures . from time to time in the future , there may be other items that we may exclude if we believe that doing so is consistent with the goal of providing useful information to investors and management . the non-gaap adjustments made reflect the following : ( 1 ) during the fourth quarter of fiscal 2016 and fiscal 2015 , we recognized non-cash impairment charges in our pet segment of $ 1.8 million and $ 7.3 million , respectively , related to the impairment of intangible assets caused by increased competition and declining volume of sales . these impairments are included within intangible asset impairment . ( 2 ) during fiscal 2016 , we recorded a $ 2.4 million gain in our pet segment from the sale of a manufacturing plant resulting from rationalizing our facilities to reduce excess capacity . this adjustment was recorded as part of selling , general and administrative costs . ( 3 ) during the first quarter of fiscal 2016 , we redeemed our 2018 notes and issued senior notes due november 2023. as a result of the bond redemption , we incurred incremental expenses of $ 14.3 million , comprised of a call premium payment of $ 8.3 million , a $ 2.7 million payment of overlapping interest expense for 30 days and a $ 3.3 million non-cash charge for the write off of unamortized deferred financing costs and discount related to the 2018 notes . these amounts are included in interest expense in the consolidated statements of operations . ( 4 ) during the fourth quarter of fiscal 2016 , we recognized a non-cash impairment charge of $ 16.6 million related to our investment in two joint ventures as a result of changes in marketplace conditions , which impacted the expected cash flows and recoverability of the investment . the impairment is included within other income ( expense ) . ( 5 ) during fiscal 2014 , we recorded a $ 16.9 million charge in our garden segment ( โ garden charge โ ) . during fiscal 2013 , we introduced two new garden products . despite support from our retailers and substantial marketing spend , the new products did not sell through as expected , and we recorded an $ 11.2 million charge to operating income relating to the new products . despite a concerted effort to improve consumer takeaway of the products through product , packaging and placement changes , as well as aggressive promotions , we continued to experience weak consumer sales of the products in their second season . late in the third quarter of fiscal 2014 , major retailers indicated that they would not support the products going forward . consequently , we made the decision to discontinue the two products at the end of the 2014 garden season . as a result , we recorded a $ 16.9 million charge to operating income in the quarter ended june 28 , 2014 to write off the remaining inventory of these products and to account for product returns , promotional allowances and other costs related to the discontinuance of the products . the $ 16.9 million charge to operating income is composed of a $ 7.0 million reduction of revenue included within net sales and $ 9.9 million included within cost of goods sold . 29 replace_table_token_7_th 30 replace_table_token_8_th 31 gaap to non-gaap reconciliation ( in thousands , except per share amounts ) for the year ended september other income ( expense ) reconciliation 2016 2015 2014 gaap other income ( expense ) $ ( 17,013 ) n/a n/a impact from non-gaap adjustment ( 4 ) 16,572 non-gaap other income ( expense ) $ ( 441 ) net income and diluted net income per share reconciliation gaap net income attributable to central garden & pet $ 44,514 $ 31,971 $ 8,084 total non-gaap adjustments ( 1 ) ( 2 ) ( 3 ) ( 4 ) 30,376 7,272 12,033 tax effects of non-gaap adjustments ( 10,492 ) ( 2,618 ) ( 4,352 ) total net income impact from non-gaap adjustments 19,884 4,654 7,681 non-gaap net income attributable to central garden & pet $ 64,398 $ 36,625 $ 16,485 gaap diluted net income per share $ 0.87 $ 0.64 $ 0.18 non-gaap diluted net income per share $ 1.26 $ 0.74 $ 0.33 shares used in gaap and non-gaap diluted net earnings per share calculation 51,075 49,638 49,397 organic net sales reconciliation we have provided organic net sales , a non-gaap measure that excludes the impact of acquisitions and dispositions , because we believe it permits investors to better understand the performance of our historical business . we define organic net sales as net sales from our historical business derived by excluding the net sales from businesses acquired or exited in the preceding 12 months . after an acquired business has been part of our consolidated results for 12 months , the change in net sales thereafter is considered part of the increase or decrease in organic net sales . story_separator_special_tag replace_table_token_9_th 32 results of operations ( gaap ) the following table sets forth , for the periods indicated , the relative percentages that certain income and expense items bear to net sales : replace_table_token_10_th fiscal 2016 compared to fiscal 2015 net sales net sales for fiscal 2016 increased $ 178.3 million , or 10.8 % , to $ 1,829.0 million from $ 1,650.7 million in fiscal 2015 . our branded product sales increased $ 127.8 million , and sales of other manufacturers ' products increased $ 50.5 million . branded product sales include products we produce under central brand names and products we produce under third party brands . sales of our branded products represented 78.9 % of our total sales in fiscal 2016 compared with 79.7 % in fiscal 2015 . private label sales represented less than 10 % of our consolidated net sales . the following table indicates each class of similar products which represented approximately 10 % or more of our consolidated net sales in the fiscal years presented ( in millions ) : replace_table_token_11_th ( 1 ) the product category was less than 10 % of our consolidated net sales in the respective period . our pet segment 's net sales for fiscal 2016 increased $ 187.3 million , or 20.9 % , to $ 1,081.8 million from $ 894.5 million in fiscal 2015 . pet branded product sales increased $ 168.6 million from fiscal 2015 . two recent acquisitions in the dog & cat category , accounted for approximately $ 133.3 million of the increase . organic sales growth of $ 54.0 million , or 6.0 % was volume-based and primarily driven by a $ 13.4 million increase in our dog & cat category and an $ 18.7 million increase in sales of other manufacturers ' products benefiting from expanded distribution . our garden segment 's net sales for fiscal 2016 decreased $ 9.0 million , or 1.2 % , to $ 747.2 million from $ 756.2 million in fiscal 2015 . garden branded product sales decreased $ 40.8 million due primarily to a $ 28.2 million decrease due to our exit from the holiday decor business in january 2016 , a $ 12.7 million decrease in our controls and fertilizer category due primarily to our exit from a private label relationship in the fertilizer category and an $ 8.6 million decrease in wild bird feed due primarily to lower prices precipitated by lower raw material costs . these decreases were partially offset by an $ 18.0 million increase in grass seed due primarily to the comparison to a weather related weak fiscal 2015. sales of other manufacturers ' 33 products increased approximately $ 31.8 million compared to fiscal 2015 due primarily to increased distribution to existing customers . gross profit gross profit for fiscal 2016 increased $ 65.0 million , or 13.3 % , to $ 553.0 million from $ 488.0 million in fiscal 2015 . both our operating segments contributed to the increase in gross profit , primarily the pet segment . gross margin increased 60 basis points to 30.2 % in fiscal 2016 from 29.6 % in fiscal 2015 . while our gross profit increase was primarily in the pet segment , our gross margin increase was due to an improved garden segment margin , partially offset by a lower gross margin in the pet segment . in the pet segment , gross profit increased in fiscal 2016 due to a $ 187.3 million increase in sales . although increased sales from our recently acquired businesses favorably impacted our gross profit , as expected , they had a negative impact on our gross margin , as these businesses historically have lower gross margins than our historical segment average . the gross margin in our pet segment would have improved absent the impact of the recent acquisitions compared to fiscal 2015 due primarily to the positive impact of increased sales in our professional business . gross profit in our garden segment increased due to gross margin improvement which was partially offset by a $ 9.0 million decrease in net sales . the gross margin improvement was due primarily to increased grass seed sales , a favorable product mix change in our grass seed and controls and fertilizer businesses and our exit from the holiday decor business . selling , general and administrative selling , general and administrative expenses increased $ 32.6 million , or 8.4 % , from $ 389.3 million in fiscal 2015 to $ 421.9 million in fiscal 2016 . as a percentage of net sales , selling , general and administrative expenses decreased from 23.6 % in fiscal 2015 to 23.1 % in fiscal 2016 . the increase in selling , general and administrative expenses was due to increases in both selling and delivery expense and warehouse and administrative expense . corporate expenses are included within administrative expense and relate to the costs of unallocated executive , administrative , finance , legal , human resource , and information technology functions . selling and delivery expense increased $ 17.8 million , or 8.5 % , from $ 210.2 million in fiscal 2015 to $ 228.0 million in fiscal 2016 and as a percentage of net sales decreased from 12.7 % in fiscal 2015 to 12.5 % in fiscal 2016 . the expense increase was principally in our pet segment due primarily to two recent acquisitions , increased selling and marketing expense in our animal health category and increased delivery expenses in our distribution business to support its sales gains . warehouse and administrative expense increased $ 14.8 million , or 8.2 % , from $ 179.1 million in fiscal 2015 to $ 193.9 million in fiscal 2016 . as a percentage of net sales , warehouse and administrative expense decreased from 10.9 % in fiscal 2015 to 10.6 % in fiscal 2016 .
| recent developments leadership george c. roeth became our president and chief executive officer effective june 1 , 2016. mr. roeth has been a director of central since 2015. investment impairment during the fourth quarter of fiscal 2016 , we recognized a non-cash impairment charge of $ 16.6 million related to our investment in two joint ventures as a result of changes in marketplace conditions , which impacted the expected cash flows and recoverability of the investment . the impairment is included within other income ( expense ) . debt refinancing note offering - in november 2015 , we issued $ 400 million aggregate principal amount of 6.125 % senior notes due november 2023 ( the โ 2023 notes โ ) . the 2023 notes are unconditionally guaranteed on a senior basis by each of our existing and future domestic restricted subsidiaries which are borrowers under or guarantors of our senior secured revolving credit facility . we used the net proceeds from the offering , together with available cash , to redeem our outstanding 8.25 % senior subordinated notes due march 1 , 2018 ( the โ 2018 notes โ ) and pay fees and expenses related to the offering . as a result of our redemption of the 2018 notes , we incurred incremental interest expense of $ 14.3 million in our fiscal 2016 first quarter , 27 comprised of approximately $ 8.3 million related to the payment of the call premium , a one-time payment of overlapping interest expense for 30 days of approximately $ 2.7 million and a $ 3.3 million non-cash charge for the write-off of unamortized financing costs in interest expense . we expect our annual interest expense on the 2023 notes going forward to be approximately $ 8.5 million less than under the 2018 notes . asset-based loan facility amendment - in april 2016 , we entered into an amended and restated credit agreement which provides up to a $ 400 million principal amount senior secured asset-based revolving credit facility , with up to an additional $ 200 million principal amount available with the consent of the
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the shares were sold at a weighted average price of $ 25.21 per share for gross proceeds of approximately $ 1.6 million before fees of approximately $ 26,000. during the year ended december 31 , 2018 , the company issued and sold 318,206 shares of series a preferred stock under the preferred series a atm program . the shares were sold at a weighted average price of $ 25.37 per share for gross proceeds of approximately $ 8.1 million before fees of approximately $ 127,000. the net proceeds were used for general corporate purposes , including investment in rmbs . on june 4 , 2018 , the company issued and sold 2,750,000 shares of its common stock . the underwriters subsequently exercised their option to purchase an additional 338,857 shares for total proceeds of approximately $ 53.8 million after underwriting discounts and commissions but before expenses of approximately $ 265,000. all of the net proceeds were invested in rmbs . in august 2018 , the company initiated an at-the-market offering program ( the ยcommon stock atm programย ) pursuant to which it may offer through one or more sales agents and sell from time to time up to $ 50 million of its common stock at prices prevailing at the time , subject to volume and other regulatory limitations . during the year ended december 31 , 2019 , the company issued and sold 225,646 shares of common stock under the common stock atm program . the shares were sold at a weighted average price of $ 17.40 per share for gross proceeds of approximately $ 3.9 million before fees of approximately $ 79,000. during the year ended december 31 , 2018 , the company issued and sold 833,593 shares of common stock under the common stock atm program . the shares were sold at a weighted average price of $ 18.84 per share for gross proceeds of approximately $ 15.7 million before fees of approximately $ 314,000. the net proceeds were used for general corporate purposes , including investment in rmbs . on february 11 , 2019 , we issued and sold 1,800,000 shares of our series b preferred stock . the underwriters subsequently exercised their option to purchase an additional 200,000 shares for total proceeds of approximately $ 48.4 million after underwriting discounts and commissions but before expenses of approximately $ 285,000. the net proceeds from the series b preferred stock offering were invested in rmbs and msrs . in september 2019 , we initiated a share repurchase program that allows for the repurchase of up to an aggregate of $ 10.0 million of our common stock . shares may be repurchased from time to time through privately negotiated transactions or open market transactions , pursuant to a trading plan in accordance with rules 10b5-1 and 10b-18 under the securities exchange act of 1934 , as amended ( the ยexchange actย ) , or by any combination of such methods . the manner , price , number and timing of share repurchases are subject to a variety of factors , including market conditions and applicable sec rules . the share repurchase program does not require the purchase of any minimum number of shares , and , subject to sec rules , purchases may be commenced or suspended at any time without prior notice . unless sooner terminated or extended , the share repurchase program expires on september 3 , 2020. in the period from the program 's inception through december 31 , 2019 , the company repurchased 235,950 shares of its common stock pursuant to the repurchase program for approximately $ 3.5 million . a significant portion of the paydowns of the rmbs acquired as a result of these equity offerings have been or will be deployed into the acquisition of msrs . the company may also sell certain of these rmbs and deploy the net proceeds from such sales to the extent necessary to fund the purchase price of msrs . this management 's discussion and analysis of results of operations and financial condition omits discussion and comparison of results of operations and financial condition for the year ended december 31 , 2017. that discussion and comparison is included under the heading ยitem 7. management 's discussion and analysis of results of operations and financial conditionย in our annual report on form 10-k for the year ended december 31 , 2018 . 37 factors impacting our operating results our income is generated primarily by the net spread between the income we earn on our assets and the cost of our financing and hedging activities as well as the amortization of any purchase premiums or the accretion of discounts . our net income includes the actual interest payments we receive on our rmbs , the net servicing fees we receive on our msrs and the accretion/amortization of any purchase discounts/premiums . changes in various factors such as market interest rates , prepayment speeds , estimated future cash flows , servicing costs and credit quality could affect the amount of premium to be amortized or discount to be accreted into interest income for a given period . prepayment speeds vary according to the type of investment , conditions in the financial markets , competition and other factors , none of which can be predicted with any certainty . our operating results may also be affected by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers whose mortgage loans underlay the msrs held by aurora or the non-agency rmbs held in our portfolio . set forth below is the positive gross spread between the yield on rmbs and our costs of funding those assets at the end of each of the quarters indicated below : average net yield spread at period end replace_table_token_4_th the average cost of funds also includes the benefits of related swaps . changes in the market value of our assets we hold our servicing related assets as long-term investments . story_separator_special_tag our original excess msrs were , and our msrs are , carried at their fair value with changes in their fair value recorded in other income or loss in our consolidated statements of income ( loss ) . those values may be affected by events or headlines that are outside of our control , such as events impacting the u.s. or global economy generally or the u.s. residential market specifically , and events or headlines impacting the parties with which we do business . see ยitem 1a . risk factors โ risks related to our business.ย our rmbs are carried at their fair value , as available-for-sale in accordance with asc 320 , investments โ debt and equity securities , with changes in fair value recorded through accumulated other comprehensive income ( loss ) , a component of stockholders ' equity . as a result , we do not expect that changes in the market value of our rmbs will normally impact our operating results , but such changes will affect our book value . however , at least on a quarterly basis , we assess both our ability and intent to continue to hold our rmbs as long-term investments . as part of this process , we monitor our rmbs for other-than-temporary impairment . a change in our ability and or intent to continue to hold any of our rmbs could result in our recognizing an impairment charge or realizing losses while holding these assets . impact of changes in market interest rates on our assets the value of our assets may be affected by prepayment rates on mortgage loans . prepayment speed is the measurement of how quickly borrowers pay down the upb of their loans or how quickly loans are otherwise liquidated or charged off . generally , in a declining interest rate environment , prepayment speeds tend to increase . conversely , in an increasing interest rate environment , prepayment speeds tend to decrease . when we acquire 38 servicing related assets or rmbs , we anticipate that the underlying mortgage loans will prepay at a projected rate generating an expected cash flow ( in the case of servicing related assets ) and yield . if we purchase assets at a premium to par value and borrowers prepay their mortgage loans faster than expected , the corresponding prepayments on our assets may reduce the expected yield on such assets because we will have to amortize the related premium on an accelerated basis . in addition , we will have to reinvest the greater amounts of prepayments in that lower rate environment , thereby affecting future yields on our assets . if we purchase assets at a discount to par value , and borrowers prepay their mortgage loans slower than expected , the decrease in corresponding prepayments may reduce the expected yield on assets because we will not be able to accrete the related discount as quickly as originally anticipated . if prepayment speeds are significantly greater than expected , the fair value of the servicing related assets could be less than their fair value as previously reported on our consolidated balance sheets . such a reduction in the fair value of the servicing related assets would have a negative impact on our book value . furthermore , a significant increase in prepayment speeds could materially reduce the ultimate cash flows we receive from the servicing related assets , and we could receive substantially less than what we paid for such assets . we do not utilize derivatives to hedge against changes in the fair value of the servicing related assets . our balance sheet , results of operations and cash flows are susceptible to significant volatility due to changes in the fair value of , or cash flows from , the servicing related assets as interest rates change . a slower than anticipated rate of prepayment due to an increase in market interest rates also will cause the life of the related rmbs to extend beyond that which was projected . as a result , we would have an asset with a lower yield than current investments for a longer period of time . in addition , if we have hedged our interest rate risk , extension may cause the security to be outstanding longer than the related hedge , thereby reducing the protection intended to be provided by the hedge . voluntary and involuntary prepayment rates may be affected by a number of factors including , but not limited to , the availability of mortgage credit , the relative economic vitality of , or natural disasters affecting , the area in which the related properties are located , the servicing of the mortgage loans , possible changes in tax laws , other opportunities for investment , homeowner mobility and other economic , social , geographic , demographic and legal factors , none of which can be predicted with any certainty . we attempt to reduce the exposure of our msrs to voluntary prepayments through the structuring of recapture agreements with aurora 's subservicers . in june 2016 , aurora entered into a joint marketing recapture agreement with freedom mortgage . pursuant to this agreement , freedom mortgage attempts to refinance certain mortgage loans underlying aurora 's msr portfolio subserviced by freedom mortgage . if a loan is refinanced , aurora will pay freedom mortgage a fee for its origination services . freedom mortgage will be entitled to sell the loan for its own benefit and will transfer the related msr to aurora . the agreement had an initial term of one year , subject to automatic renewals of one year each . see ยitem 8. consolidated financial statements and supplementary dataโnote 7. transactions with affiliates and affiliated entities.ย in the year ended december 31 , 2019 , aurora received msrs with an aggregate upb of approximately $ 4.4 million and paid fees of approximately $ 5,200 to freedom mortgage under this joint marketing recapture agreement .
| change in fair value of investments in servicing related assets the fair value of our investments in servicing related assets for the years ended december 31 , 2019 and 2018 decreased by approximately $ 106.8 million and $ 3.6 million , respectively , primarily due to changes in valuation inputs or assumptions . change in fair value of derivatives the fair value of derivatives for the years ended december 31 , 2019 and 2018 decreased by approximately $ 10.9 million and increased by approximately $ 3.5 million , respectively , primarily due to changes in interest rates and the composition of our derivatives relative to the prior year . general and administrative expense general and administrative expense for the years ended december 31 , 2019 and 2018 increased by approximately $ 706,000 and $ 124,000 , respectively , as compared to the prior year . each increase was primarily due to costs associated with sarbanes-oxley compliance and the growth of aurora . management fees to affiliate management fees for the years ended december 31 , 2019 and 2018 increased by approximately $ 1.8 million and $ 1.6 million , respectively , from the preceding year-end . each such increase was due to the sale of our capital stock during the applicable year and the resulting increase in stockholders ' equity , which is the basis for the calculation of the management fee that we pay to the manager . net income allocated to noncontrolling interests in operating partnership net income allocated to noncontrolling interests in the operating partnership , which are ltip-op units owned by our directors and officers and by certain individuals who provide services to us through the manager , represented approximately 1.6 % and 1.3 % of net income for the years ended december 31 , 2019 and 2018 , respectively . each annual increase relative to the prior year was due primarily to the issuance and sale of additional shares of our capital stock during the applicable year . 46 for the period indicated below , our accumulated other comprehensive income ( loss ) changed as a result of the indicated gains and losses ( dollars in thousands ) : accumulated other comprehensive income ( loss ) year ended
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all active leases at january 31 , 2020 were for a term of less than one year . seismic equipment held for lease is carried at cost , net of accumulated depreciation . we acquire some marine lease pool equipment from our marine technology products segment . these assets are carried in our lease pool at the cost to our marine technology products segment , less accumulated depreciation . from time to time , we sell lease pool equipment . these sales are transacted when we have equipment for which we do not have near term needs in our leasing business or which is otherwise considered excess . additionally , when equipment that has been leased to a customer is lost or destroyed , the customer is charged for such equipment at amounts specified in the underlying lease agreement . our results of operations can experience fluctuations in activity levels due to a number of factors outside of our control . these factors include budgetary or financial concerns , difficulties in obtaining licenses or permits , security problems , labor or political issues , inclement weather , and global pandemics . see item 1a- โ risk factors. โ business outlook the covid-19 pandemic has created significant uncertainty in the global economy which could have an adverse effect on the company 's business , financial position , results of operations and liquidity . the time frame for which disruptions related to the pandemic will continue is uncertain as is the magnitude of any adverse impacts . we were required to temporarily shut-down our facilities in malaysia and singapore on march 17 and april 7 , respectively . although both locations have now reopened for limited operations , they are not yet operating at full capacity . the malaysia facility was reopened at april 21 with approximately 50 % of its normal staff . we are allowed to operate in singapore to receive and make shipments , but no production operations are currently allowed . the shut-down in singapore is currently projected to continue through the month of may . our other facilities have been allowed to operate , although at reduced efficiencies as certain employees have worked remotely . we expect a negative effect on our business due to these disruptions ; however , the magnitude of such effect is uncertain . management believes that any negative impacts will be temporary , but there can be no assurance of that . additionally , oil prices have declined sharply during the first quarter of 2020 and continuing in the second quarter in response to the economic effects of the covid-19 pandemic and the recent announcement of saudi arabia 's abandonment of output restraints . this decline could have an adverse effect on our customers in the energy industry , which could in turn cause them to cancel or delay projects and orders with us and could impair their ability to make payments to us . we are continuing to transform the company from its historical equipment leasing business that was heavily dependent upon oil and gas exploration activity . while our equipment leasing segment remains a part of our business , increasingly we see greater opportunities for growth in our marine technology products segment and expect that segment to represent an increasing part of our business going forward . historically , a significant portion of the marine technology products segment was dependent upon activity related to marine oil and gas exploration . in recent periods we have attempted to emphasize products and applications in other industries . target markets for these products and services include commercial governmental organizations , both domestically and abroad , in the hydrographic , oceanographic , security , defense and seismic industries . we believe there are a number of opportunities to expand our offerings of technology and solutions to our customers by applying our existing technology to new markets and by adding new technology to our portfolio . we expect to add new technology through internal development , acquisition and by partnering with others . during fiscal 2020 , our marine technologies products segment experienced an increase in both inquiries and order activity and an increase in revenues , particularly in the last half of fiscal 2020. as of january 31 , 2020 , our backlog of firm orders for this segment was approximately $ 8.9 million , as compared to approximately $ 8.7 million as of january 31 , 2019. we estimate that approximately 80 % of the backlog at january 31 , 2020 , relates to orders from non-energy related customers . we expect all of these orders to be completed within fiscal 2021. the level of backlog at a particular point in time may not necessarily be indicative of results in subsequent periods as the size and delivery period of individual orders can vary significantly . in fiscal 2020 , we introduced new sonar technology that we refer to as โ ma-x โ . we believe this to be revolutionary sonar technology that will significantly expand the opportunities available to us . we have received and delivered orders related to this new technology and continue to respond to orders and inquires related to this technology , including some for military related applications . while the ma-x technology has not had a material impact on our results of operations to date , we believe this technology will result in significant new opportunities for us . also , in fiscal 2020 , we received an order from a manufacturer of unmanned 25 index to financial statements underwater vehicles ( โ uuv 's โ ) for a ma-x related product to be installed on one of their uuv 's . this request relates to a potentially significant program for the u.s. navy . while this specific order may not have a material impact on our results of operations , we believe this , and similar opportunities could have a material impact on our operations . we also are pursuing a number of initiatives to further expand our product offerings . story_separator_special_tag these initiatives include new internally developed technology , introduction of new products based on our existing technology , technology obtained through partnering arrangements with others and a combination of all of these . there can be no assurance that any of these initiatives will ultimately have a material impact on our financial position or results of operations . certain of the business opportunities that we are pursuing are with military or other governmental organizations . the sales cycle for these projects can be quite long and can be impacted by a number of factors , including the level of competition and budget limitations . therefore , the timing of contract awards is often difficult to predict . however , once awarded , programs of this type can extend for a number of years . in addition , we are pursuing a number of opportunities related to activity within the marine seismic industry . certain projects , for which we anticipate providing equipment , including source controllers , have not progressed as rapidly as we had anticipated and had been indicated by our customers . based on information from our customers , we believe these projects remain viable and will proceed . however , the timing of orders and delivery of products is uncertain . demand for the rental of land seismic exploration equipment varies by geographic region and has been very sporadic in recent periods . we expect continuing demand in europe and south america through fiscal 2021 ; however , the decline in oil prices and the effect of the covid-19 pandemic could materially impact such demand . although we anticipate opportunities for projects in other parts of the world , competition is generally intense and there is no assurance that we will have the opportunity to provide equipment for such projects . we believe that specific situations may arise to reallocate capital from existing assets to other , newer technology thereby creating additional rental opportunities . in the third quarter of fiscal 2020 , we redeployed capital from previous sales of lease pool equipment and invested approximately $ 2.0 million in certain new land nodal equipment . this equipment was purchased from inova pursuant to our ongoing partnership and equipment lease agreement . although we are making efforts to move away from land-based seismic operations , the decision to invest in this particular equipment was made in response to demand from customers . this new equipment was immediately deployed on a project in europe . notwithstanding the recent uncertainty in global energy markets , we believe there are opportunities to sell lease pool equipment and redeploy that capital . in response to a decline in activity in some regions , we have taken steps to reduce costs , such as by reducing personnel , down-sizing facilities and relocating certain inventory and lease pool assets to more active locations . specifically , in fiscal 2019 we significantly reduced our presence in colombia and canada and sold our operations in russia . in addition , we sold our operations in australia in the first quarter of fiscal 2020. based on business activity and prospects , we may make further adjustments to our cost structure . subsequent to january 31 , 2020 and in response to the effects of the covid-19 pandemic and the decline in oil prices , we have taken steps to reduce expenses including the layoff or furloughing of certain employees and contractors and the deferral of other expenditures . should the effects of these factors continue , we may take further similar steps . we believe the majority of our costs are variable in nature , such as raw materials and labor related costs . accordingly , we believe we can reduce such costs commensurate with any declines in our business . our revenues and results of operations have not been materially impacted by inflation or changing prices in the past three fiscal years , except as described above . story_separator_special_tag roman ; font-size:9pt ; font-weight : bold ; '' > index to financial statements revenues and cost of sales from our equipment leasing segment were comprised of the following : replace_table_token_7_th equipment leasing revenues remained relatively flat year over year with a decrease of approximately 1 % in fiscal 2020 compared to fiscal 2019. the decrease to revenue was primarily driven by reduced land leasing activity , primarily in europe and latin america . we had expected additional lease pool sales of approximately $ 1.0 million in fiscal 2020 ; however , an anticipated transaction with a customer in asia could not be completed due to issues surrounding the covid-19 outbreak in china . subsequent to january 31 , 2020 , a lease pool sale transaction of a similar amount was completed with another customer . equipment leasing revenue in fiscal 2019 increased 46 % to $ 11.4 million compared to $ 7.8 million in fiscal 2018. sales of lease pool assets decreased to $ 3.5 million in fiscal 2019 compared to $ 12.5 million in fiscal 2018 due primarily to significant sales during the first quarter of 2018. the geographic regions with the largest contributions to our land leasing revenues in fiscal 2019 were latin america , and europe . in fiscal 2018 the regions making the largest contributions to leasing revenues were asia , latin america , europe , and the united states . from time to time , we sell equipment from our lease pool based on specific customer demand or in order to redeploy capital in other lease pool assets or other business opportunities . these transactions tend to occur as opportunities arise and , accordingly , are difficult to predict . also included in sales of lease pool equipment are charges to leasing customers for lost or destroyed equipment . due to the recent changes in the seismic equipment market we have implemented a strategy to dispose of certain lease pool equipment . sales of lease pool equipment in prior periods has resulted in reduced inventory and therefore reduced availability for sales in the current or future periods .
| the gross profit margin from the sales of seamap products in fiscal 2020 and 2019 increased to 50 % from 46 % , respectively . we had expected an additional order for approximately $ 2.0 million to a customer in asia would be completed by january 31 , 2020. however , due to customer requested modifications we were unable to make delivery by that time . we now expect this order to be completed in second quarter of fiscal 2021. the seamap gross profit margin for fiscal 2019 was negatively impacted by manufacturing expansion costs related to the start-up of our sealink product line . we began providing repair and support services to mitsubishi heavy industries , ltd ( โ mhi โ ) . during the second quarter of fiscal 2019 , pursuant to the support agreement we entered into in february 2019 , and generated revenue from these and other services related to newly acquired technology of approximately $ 1.5 million in fiscal 2019 , which resulted in a gross profit of approximately $ 200,000. this level of gross profit is lower than normally expected due to start-up costs for these operations . the time required to ramp up repair and production activity for these new products was longer than projected . gross profit during fiscal 2019 and fiscal 2018 was $ 7.4 million and $ 8.5 million , respectively . our gross profit margin was 46 % for fiscal 2019 and 2018. in fiscal 2018 , we notified customers that certain legacy products would no longer be supported beyond a specified date . due to this โ end of life โ determination we adjusted the carrying value of certain inventory related to these products resulting in a charge to cost of sales in fiscal 2018 of approximately $ 550,000. the fluctuations in gross profit margin among the periods were due primarily to the effect of these special charges and changes in product mix . revenue from the sale of klein products remained essentially flat in fiscal 2020 as compared to fiscal 2019 and improved from
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for example , the issue of the potential transfer of increased antibacterial resistance in bacteria from food-producing animals to human pathogens , and the causality of that transfer , continue to be the subject of global scientific and regulatory discussion . antibacterials refer to small molecules that can be used to treat or prevent bacterial infections and are a sub-categorization of the products that make up our anti-infectives and medicated feed additives portfolios . in some countries , this issue has led to government restrictions and bans on the use of specific antibacterials in some food-producing animals , regardless of the route of administration ( in feed or injectable ) . these restrictions are more prevalent in countries where animal protein is plentiful and governments are willing to take action even when there is scientific uncertainty . our total revenue attributable to antibacterials for livestock was approximately $ 1.2 billion for the year ended december 31 , 2017 . we can not predict whether antibacterial resistance concerns will result in additional restrictions or bans , expanded regulations , public pressure to discontinue or reduce use of antibacterials in food-producing animals or increased consumer preference for antibiotic-free protein . the overall economic environment in addition to industry-specific factors , we , like other businesses , face challenges related to global economic conditions . growth in both the livestock and companion animal sectors is driven by overall economic development and related growth , particularly in many emerging markets . in recent years , certain of our customers and suppliers have been affected directly by economic downturns , which decreased the demand for our products and , in some cases , hindered our ability to collect amounts due from customers . the cost of medicines and vaccines to our livestock producer customers is small relative to other production costs , including feed , and the use of these products is intended to improve livestock producers ' economic outcomes . as a result , demand for our products has historically been more stable than demand for other production inputs . similarly , industry sources have reported that pet owners indicated a preference for reducing spending on other aspects of their lifestyle , including entertainment , clothing and household goods , before reducing spending on pet care . while these factors have mitigated the impact of recent downturns in the global economy , further economic challenges could increase cost sensitivity among our customers , which may result in reduced demand for our products , which could have a material adverse effect on our operating results and financial condition . competition the animal health industry is competitive . although our business is the largest by revenue in the animal health medicines and vaccines industry , we face competition in the regions in which we operate . principal methods of competition vary depending on the particular region , species , product category or individual product . some of these methods include new product development , quality , price , service and promotion to veterinary professionals , pet owners and livestock producers . our competitors include the animal health businesses of large pharmaceutical companies and specialty animal health businesses . in recent years , there has been an increase in consolidation in the animal health industry . there are also several new start-up companies working in the animal health area . in addition to competition from established market participants , there could be new entrants to the animal health medicines and vaccines industry in the future . in certain markets , we also compete with companies that produce generic products , but the level of competition from generic products varies from market to market . for example , the level of generic competition is higher in europe and certain emerging markets than in the united states . weather conditions and the availability of natural resources the animal health industry and demand for many of our animal health products in a particular region are affected by weather conditions , as usage of our products follows varying weather patterns and weather-related pressures from pests , such as ticks . as a result , we may experience regional and seasonal fluctuations in our results of operations . in addition , veterinary hospitals and practitioners depend on visits from and access to the animals under their care . veterinarians ' patient volume and ability to operate could be adversely affected if they experience prolonged snow , ice or other severe weather conditions , particularly in regions not accustomed to sustained inclement weather . furthermore , livestock producers depend on the availability of natural resources , including large supplies of fresh water . their animals ' health and their ability to operate could be adversely affected if they experience a shortage of fresh water due to human population growth or floods , droughts or other weather conditions . in the event of adverse weather conditions or a shortage of fresh water , veterinarians and livestock producers may purchase less of our products . for example , drought conditions could negatively impact , among other things , the supply of corn and the availability of grazing pastures . a decrease in harvested corn results in higher corn prices , which could negatively impact the profitability of livestock producers of cattle , pork and poultry . higher corn prices and reduced availability of grazing pastures contribute to reductions in herd or flock sizes that in turn result in less spending on animal health products . as such , a prolonged drought could have a material adverse impact on our operating results and financial condition . factors 32 | influencing the magnitude and timing of effects of a drought on our performance include , but may not be limited to , weather patterns and herd management decisions . disease outbreaks sales of our livestock products could be adversely affected by the outbreak of disease carried by animals . story_separator_special_tag outbreaks of disease may reduce regional or global sales of particular animal-derived food products or result in reduced exports of such products , either due to heightened export restrictions or import prohibitions , which may reduce demand for our products . also , the outbreak of any highly contagious disease near our main production sites could require us to immediately halt production of our products at such sites or force us to incur substantial expenses in procuring raw materials or products elsewhere . alternatively , sales of products that treat specific disease outbreaks may increase . manufacturing and supply in order to sell our products , we must be able to produce and ship our products in sufficient quantities . many of our products involve complex manufacturing processes and are sole-sourced from certain manufacturing sites . minor deviations in our manufacturing or logistical processes , such as temperature excursions or improper package sealing , could result in delays , inventory shortages , unanticipated costs , product recalls , product liability and or regulatory action . in addition , a number of factors could cause production interruptions that could result in launch delays , inventory shortages , recalls , unanticipated costs or issues with our agreements under which we supply third parties . our manufacturing network may be unable to meet the demand for our products or we may have excess capacity if demand for our products changes . the unpredictability of a product 's regulatory or commercial success or failure , the lead time necessary to construct highly technical and complex manufacturing sites , and shifting customer demand increase the potential for capacity imbalances . foreign exchange rates significant portions of our revenue and costs are exposed to changes in foreign exchange rates . our products are sold in more than 100 countries and , as a result , our revenue is influenced by changes in foreign exchange rates . for the year ended december 31 , 2017 , approximately 47 % of our revenue was denominated in foreign currencies . we seek to manage our foreign exchange risk , in part , through operational means , including managing same-currency revenue in relation to same-currency costs and same-currency assets in relation to same-currency liabilities . as we operate in multiple foreign currencies , including the australian dollar , brazilian real , canadian dollar , chinese yuan , euro , u.k. pound and other currencies , changes in those currencies relative to the u.s. dollar will impact our revenue , cost of goods and expenses , and consequently , net income . exchange rate fluctuations may also have an impact beyond our reported financial results and directly impact operations . these fluctuations may affect the ability to buy and sell our goods and services between markets impacted by significant exchange rate variances . for the year ended december 31 , 2017 , approximately 53 % of our total revenue was in u.s. dollars . our year-over-year revenue growth was favorably impacted by 1 % from changes in foreign currency values relative to the u.s. dollar . in 2015 , we recorded a net remeasurement loss of $ 89 million on bolivar-denominated net monetary assets , primarily related to cash deposits in venezuela . this loss was recorded as a result of our evaluation of evolving economic conditions in venezuela , including the devaluation of the venezuelan bolivar in 2013 and the subsequent changes to venezuela 's foreign currency exchange mechanisms , in addition to our expectation of venezuela 's responses to changes in its economy , and continued volatility . operational efficiency program and supply network strategy during 2015 , we launched a comprehensive operational efficiency program , which was incremental to the previously announced supply network strategy . these initiatives have focused on reducing complexity in our product portfolios through the elimination of approximately 5,000 product stock keeping units ( skus ) , changing our selling approach in certain markets , reducing our presence in certain countries , and planning to sell or exit 10 manufacturing sites over a long term period . as of december 31 , 2017 , we divested or exited three u.s. manufacturing sites , four international manufacturing sites , and our 55 percent ownership share of a taiwan joint venture , inclusive of its related manufacturing site . we are also continuing to optimize our resource allocation and efficiency by reducing resources associated with non-customer facing activities and operating more efficiently as a result of less internal complexity and more standardization of processes . as part of these initiatives , we planned to reduce certain positions through divestitures , normal attrition and involuntary terminations by approximately 2,000 to 2,500 , subject to consultations with works councils and unions in certain countries . in 2016 , the operations of the guarulhos , brazil manufacturing site , including approximately 300 employees , were transferred to us from pfizer , which increased our range of planned reduction in certain positions to 2,300 to 2,800. including divestitures , as of december 31 , 2017 , approximately 2,600 positions have been eliminated and the comprehensive operational efficiency program is substantially complete , however in the fourth quarter of 2017 , we expanded the supply network strategy initiative which increases our planned reductions in certain positions by 40. we expect these additional reductions related to our supply network strategy to take place over the next twelve months , and the remainder of the reductions from the initial plan to take place through divestitures over the next several years . for additional information , see notes to consolidated financial statementsโ note 4b . acquisitions and divestitures : divestitures and note 5. restructuring charges and other costs associated with acquisitions and cost-reduction/productivity initiatives . our growth strategies we seek to enhance the health of animals and to bring solutions to our customers who raise and care for them .
| livestock growth was partially offset by product rationalizations , primarily impacting poultry and swine product sales . companion animal revenue growth resulted primarily from increased sales of our dermatology portfolio , in addition to new products , primarily simparica ยฎ . sales also benefited from increased demand in china due to field force expansions and increasing medicalization rates . segment revenue was favorably impacted by foreign exchange , which increased revenue by approximately 1 % , primarily driven by the appreciation of the brazilian real , partly offset by the depreciation of the u.k. pound and egyptian pound . international segment earnings increased by $ 186 million , or 18 % , in 2017 compared with 2016. operational earnings growth was $ 183 million , or 17 % , primarily due to higher revenue and improved gross margin . 2016 vs. 2015 u.s. operating segment u.s. segment revenue increased by $ 119 million , or 5 % , in 2016 compared with 2015 , of which approximately $ 24 million resulted from declines in livestock products and approximately $ 143 million resulted from growth in companion animal products . livestock revenue declined primarily due to product rationalizations as part of the company 's operational efficiency initiative , which impacted both poultry and swine . additionally , sales of cattle products were impacted by unfavorable market conditions , while swine was impacted by increased competition . companion animal revenue growth was driven by increased sales of apoquel ยฎ , new product launches , and initial sales of products into expanded distribution relationships . partially offsetting growth was a decline in the company 's surgical fluid products . u.s. segment earnings increased by $ 118 million , or 8 % , in 2016 compared with 2015 , primarily due to revenue growth and improved gross margin . international operating segment international segment revenue increased by $ 4 million , in 2016 compared with 2015. segment revenue was unfavorably impacted by foreign exchange , which decreased revenue by approximately 5 % , primarily driven by the depreciation of
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we expect our research and development and sales and marketing expenses to continue to increase in the future periods but believe our general and administrative expenses will remain consistent with 2018. our effective tax rate was 4 % in 2018 compared to 2 % in 2017. the variance from the u.s. federal statutory tax rate of 21 % and 34 % from 2018 to 2017 was due to the change in tax law . we ended 2018 with cash , cash equivalents , and short-term investments totaling $ 33.8 million . we believe that our performance and future success depend upon several factors including manufacturing costs , investments in our growth , our ability to expand into growing addressable markets , including consumer , enterprise , and automotive , the asp of our products per device , the number of antennas per device , and our ability to diversify the number of devices that incorporate our antenna products . our customers are extremely price conscious , and our operating results are affected by pricing pressure which may force us to lower prices below our established list prices . in addition , a few end-customer devices which incorporate our antenna products comprise a significant amount of our sales , and the discontinuation or modification of such devices may materially and adversely affect our sales and results of operations . our ability to maintain or increase our sales depends on new and existing end-customers selecting our antenna solutions for their heterogeneous next-generation wireless devices and networks depends on the proliferation of wi-fi connected home devices and data intensive applications , investments in our growth to address customer needs , target new end markets , develop our product offerings and technology solutions and expand internationally , as well as successfully integrating past and any future acquisitions . while each of these areas presents significant opportunities for us , they also pose significant risks and challenges we must successfully address . we discuss many of these risks , uncertainties and other factors in this annual report in greater detail under the section entitled โ risk factors. โ seasonality our operating results historically have not been subject to significant seasonal variations . however , our operating results are affected by how customers make purchasing decisions around local holidays in china . for example , a national holiday the first week of october in china may cause customers to purchase product in the third quarter ahead of their holiday season to account for higher volume requirements in the fourth quarter . in addition , although it is difficult to make broad generalizations , our sales tend to be lower in the first quarter of each year compared to other quarters due to the chinese new year . results for any quarter may not be indicative of the results that may be achieved for the full fiscal year and these patterns may change as a result of general customer demand or product cycles . key components of our results of operations and financial condition sales we primarily generate revenue from the sales of our products . as discussed further in โ critical accounting policies and significant judgments and estimates โ below , we recognize revenue when persuasive evidence of an arrangement exists , delivery has occurred , the fee is fixed or determinable , and collectability is reasonably assured . we generally recognize sales at the time of shipment to our customers , provided that all other revenue recognition criteria have been met . although currently insignificant , we may also generate service revenue derived from agreements to provide design , engineering , and testing for a customer . 40 cost of goods sold the cost of goods sold reflects the cost of producing antenna products that are shipped for our customers ' devices . this primarily includes manufacturing costs of our products payable to our third-party contract manufacturers , as well as manufacturing costs incurred at our manufacturing facility in arizona . the cost of goods sold that we generate from services provided to customers primarily includes personnel costs . operating expenses our operating expenses are classified into three categories : research and development , sales and marketing , and general and administrative . for each category , the largest component is personnel costs , which includes salaries , employee benefit costs , bonuses , and stock-based compensation . operating expenses also include allocated overhead costs for depreciation of equipment , facilities and information technology . allocated costs for facilities consist of leasehold improvements and rent . operating expenses are generally recognized as incurred . research and development . research and development expenses primarily consist of personnel and facility-related costs attributable to our engineering research and development personnel . these expenses include work related to the design , engineering and testing of antenna designs , and antenna integration , validation and testing of customer devices . these expenses include salaries , including stock-based compensation , benefits , bonuses , travel , communications , and similar costs , and depreciation and allocated operating expenses such as office supplies , premises expenses and insurance . we may also incur expenses from consultants and for prototyping new antenna solutions . we expect research and development expense to continue to increase in future periods as we continue to invest in the development of new solutions and markets and as we invest in improving efficiencies within our supply chain , although our research and development expense may fluctuate as a percentage of total sales . sales and marketing . sales and marketing expenses primarily consist of personnel and facility-related costs for our sales , marketing , and business development personnel , stock-based compensation , bonuses and commissions earned by our inside sales representatives and third-party sales representative firms . sales and marketing expense also includes the costs of trade shows , marketing programs , promotional materials , demonstration equipment , travel , recruiting , and allocated costs for certain facilities . story_separator_special_tag we expect sales and marketing expense to increase in future periods as we continue to invest in our growth opportunities , although our sales and marketing expense may fluctuate as a percentage of total sales . general and administrative . general and administrative expenses primarily consist of personnel and facility- related costs for our executive , finance , and administrative personnel , including stock-based compensation , as well as legal , accounting , and other professional services fees , depreciation , and other corporate expenses . we have recently incurred , and expect to continue to incur , additional expenses as we grow our operations and operate as a public company , including higher legal , corporate insurance and accounting expenses , and the additional costs of achieving and maintaining regulatory compliance . we expect general and administrative expense to remain consistent with 2018 , although our general and administrative expense may fluctuate as a percentage of total sales . other income interest income . interest income consists of interest from our cash and cash equivalents and our short-term investments . gain on deferred purchase price liability . during the year ending december 31 , 2018 , skycross , inc. and us came to an agreement that we would pay skycross $ 375,000 for deferred consideration under our asset purchase agreement entered into in december 2015. gain on deferred consideration consists of the variance between the amount paid to skycross for the deferred purchase price and the elimination of the accounts receivable due from skycross and the accounts payable due to skycross . interest expense . interest expense consists of interest on our outstanding debt . fair market value adjustmentsโwarrants . consists of the change in fair value of our convertible preferred stock warrant liability . the preferred stock warrants are classified as liabilities on our balance sheets and their 41 estimated fair value is re-measured at each balance sheet d ate using a combination of an option-pricing model and current value model under the probability-weighted return method , with the corresponding change recorded within other expense ( income ) . in may 2016 , the warrants were amended such that they became imme diately exercisable into shares of our common stock . concurrent with such amendment , the holders of the outstanding warrants elected to net exercise the warrants , and they were granted an aggregate of 127,143 shares of our common stock . following such net exercise , there will be no future re-measurement of the warrant liability . provision for income taxes provision for income taxes consists of federal and state income taxes . in assessing the realizability of deferred tax assets , management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized . the ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible . management considers the scheduled reversal of deferred tax liabilities ( including the impact of available carryback and carryforward periods ) , projected future taxable income , and tax-planning strategies in making this assessment . it is difficult for us to project future taxable income as the timing and size of sales of our products are variable and difficult to predict . we concluded that it is not more likely than not that we will utilize our deferred tax assets other than those that are offset by reversing temporary differences . on december 22 , 2017 , the 2017 tax act , was enacted . the 2017 tax act includes a number of changes to existing u.s. tax laws that impact us , most notably a reduction of the u.s. corporate income tax rate from 35 % to 21 % effective for tax years beginning january 1 , 2018. the 2017 tax act changes primarily affected our tax rate on certain deferred tax assets and deferred tax liabilities . story_separator_special_tag enterprise and automotive markets . the increase in sales of $ 6.1 million from $ 43.4 million for the year ended december 31 , 2016 to $ 49.5 million for the year ended december 31 , 2017 , was primarily driven by an increase in demand within the consumer market . cost of goods sold for the year ended december 31 , 2018 2017 increase/ ( decrease ) % change cost of goods sold $ 34,114,044 $ 26,218,965 $ 7,895,079 30.1 % for the year ended december 31 , 2017 2016 increase/ ( decrease ) % change cost of goods sold $ 26,218,965 $ 24,156,792 $ 2,062,173 8.5 % the increase in cost of goods sold between the years ended december 31 , 2018 and december 31 , 2017 , was primarily due to an increase in costs of goods sold within the consumer and enterprise markets the increase in cost of goods sold between the years ended december 31 , 2017 and december 31 , 2016 , was primarily due to an increase in the consumer market and the carrier gateway and set-top-box products . gross profit replace_table_token_4_th replace_table_token_5_th gross profit as a percentage of sales decreased 3.3 % for the year ended december 31 , 2018 as compared to the year ended december 31 , 2017. the decrease in gross profit as a percentage of sales was primarily driven by a shift in the sales mix for the year ended december 31 , 2018 when compared to the year ended december 31 , 2017. gross profit as a percentage of sales increased 2.7 % for the year ended december 31 , 2017 as compared to the year ended december 31 , 2016. the increase in gross profit as a percentage of sales was primarily driven by a shift in the sales mix for the year ended december 31 , 2017 when compared to the year ended december 31 , 2016 .
| results of operations the following tables set forth our operating results for the periods presented as a percentage of our total sales for those periods . the period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods . replace_table_token_3_th comparison of the years ended december 31 , 2018 , 2017 and 2016 for the year ended december 31 , 2018 2017 increase/ ( decrease ) % change sales $ 60,625,212 $ 49,521,171 $ 11,104,041 22.4 % 42 for the year ended december 31 , 2017 2016 increase/ ( decrease ) % change sales $ 49,521,171 $ 43,433,867 $ 6,087,304 14.0 % the increase in sales of $ 11.1 million from $ 49.5 million for the year ended december 31 , 2017 to $ 60.6 million for the year ended december 31 , 2018 , was primarily driven by an increase in demand within the consumer ,
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we also expect to increase sales by commercializing new products , but expect the increase of sales from new products to be partially offset by decreased sales of earlier-generation products . we classify our products into two categories : innovative fusion and disruptive technologies . disruptive technologies are those that represent a significant shift in the treatment of spine disorders , by allowing for novel surgical procedures , improvements to existing surgical procedures , the treatment of spine disorders by new physician specialties , and surgical intervention earlier in the continuum of care . as a result , we anticipate disruptive technology products to continue to drive our sales growth in the future . cost of goods sold our products are generally manufactured by third-party suppliers . substantially all of our suppliers manufacture our products in the united states . our cost of goods sold consists primarily of costs of products purchased from our third-party suppliers , excess and obsolete inventory charges , depreciation of surgical instruments and cases , royalties , shipping , inspection and related costs incurred in making our products 53 available for sale or use . beginning in january 2013 , our cost of goods sold increased as a result of a medical device excise tax ( โ mdet โ ) of up to 2.3 % on the sale of certain medical devices in the united states . research and development expenses our research and development expenses primarily consist of engineering , product development , clinical and regulatory expenses , consulting services , outside prototyping services , internal and external research activities , materials , depreciation , and other costs associated with development of our products . research and development expenses also include related personnel and consultants ' compensation and stock-based compensation expense . we expense research and development costs as they are incurred . we expect to incur additional research and development costs as we continue to develop new products . these costs will increase in absolute terms as we continue to expand our product pipeline and add personnel . selling , general and administrative expenses selling , general and administrative expenses primarily consist of salaries , benefits and other related costs , including stock-based compensation for personnel employed in sales , marketing , finance , legal , compliance , administrative , information technology , medical education and training , quality and human resource departments . our selling , general and administrative expenses also include commissions , generally based on a percentage of sales , to direct sales representatives and distributors . we expect our selling , general and administrative expenses will increase in absolute terms with the continued expansion of our sales force and commercialization of our current and pipeline products . we plan to hire more personnel to support the growth of our business . provision for litigation loss/ ( income ) we record a provision for litigation settlements when a loss is known or considered probable and the amount can be reasonably estimated . income tax provision we are taxed at the rates applicable within each jurisdiction . the composite income tax rate , tax provisions , deferred tax assets and deferred tax liabilities will vary according to the jurisdiction in which profits arise . tax laws are complex and subject to different interpretations by management and the respective governmental taxing authorities , and require us to exercise judgment in determining our income tax provision , our deferred tax assets and liabilities , and the valuation allowance recorded against our net deferred tax assets . deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized . a valuation allowance is established when it is more likely than not that the future realization of all or some of the deferred tax assets will not be achieved . critical accounting policies and estimates the preparation of the consolidated financial statements requires us to make assumptions , estimates and judgments that affect the reported amounts of assets and liabilities , the disclosures of contingent assets and liabilities as of the date of the consolidated financial statements , and the reported amounts of sales and expenses during the reporting periods . certain of our more critical accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates . by their nature , these judgments are subject to an inherent degree of uncertainty . on an ongoing basis , we evaluate our judgments , including but not limited to those related to inventories , recoverability of long-lived assets and the fair value of our common stock . we use historical experience and other assumptions as the basis for our judgments and making these estimates . because future events and their effects can not be determined with precision , actual results could differ significantly from these estimates . any changes in 54 those estimates will be reflected in our consolidated financial statements as they occur . while our significant accounting policies are more fully described in โ item 8. financial statements and supplementary data ; notes to consolidated financial statements ; note 1. background and summary of significant accounting policies โ below in this annual report , we believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our reported financial results . the critical accounting policies addressed below reflect our most significant judgments and estimates used in the preparation of our consolidated financial statements . we have reviewed these critical accounting policies with the audit committee of our board . revenue recognition . we recognize revenue when persuasive evidence of an arrangement exists , product delivery has occurred , pricing is fixed or determinable , and collection is reasonably assured . we generate a significant portion of our revenue from consigned inventory maintained at hospitals or with sales representatives . for these products , we recognize revenue at the time we are notified the product has been used or implanted . story_separator_special_tag for all other transactions , we recognize revenue when title to the goods and risk of loss transfer to customers , provided there are no remaining performance obligations that will affect the customer 's final acceptance of the sale . our policy is to classify shipping and handling costs billed to customers as sales and the related expenses as cost of goods sold . in general , our customers do not have any rights of return or exchange . accounts receivable and allowance for doubtful accounts . the majority of our accounts receivable is composed of amounts due from hospitals . accounts receivable is carried at cost less an allowance for doubtful accounts . on a regular basis , we evaluate accounts receivable and estimate an allowance for doubtful accounts , as needed , based on various factors such as customers ' current credit conditions , length of time past due , and the general economy as a whole . receivables are written off against the allowance when they are deemed uncollectible . excess and obsolete inventory . we state inventories at the lower of cost or market . we determine cost on a first-in , first-out basis . the majority of our inventory is finished goods , because we primarily utilize third-party suppliers to source our products . we periodically evaluate the carrying value of our inventories in relation to the estimated forecast of product demand , which takes into consideration the estimated life cycle of product releases . when quantities on hand exceed estimated sales forecasts , we record a reserve for excess inventories , which results in a corresponding charge to cost of goods sold . charges incurred for excess and obsolete inventory were $ 7.0 million , $ 8.2 million and $ 6.1 million for the years ended december 31 , 2014 , 2013 and 2012 , respectively . the need to maintain substantial levels of inventory impacts the risk of carrying excess inventory . many of our products come in sets which feature components in a variety of sizes so that the implant or device may be customized to the patient 's needs . in order to market our products effectively , we must often maintain and provide surgeons and hospitals with consignment implant sets , back-up products and products of different sizes . for each surgery , fewer than all of the components of the set are used , and therefore certain portions of the set may be considered excess inventory since they are not likely to be used . one of our primary business goals is to focus on continual product innovation . though we believe this provides us with a competitive advantage , it also increases the risk that our products will become excess or obsolete inventory prior to sale or prior to the end of their anticipated useful lives . when we introduce new products or next-generation products , we may be required to take charges for excess and obsolete inventory that have a significant impact on the value of our inventory or on our operating results . goodwill and intangible assets . goodwill represents the excess purchase price over the fair values of the identifiable assets acquired less the liabilities assumed . we acquired goodwill in connection with the various acquisitions completed . goodwill is tested for impairment at a minimum on an annual basis . the 55 fair value is estimated using an income and discounted cash flow approach . we completed our annual goodwill and intangible assets impairment test in the fourth quarter of 2014 and determined that there was no impairment . intangible assets consist of purchased in-process research and development ( โ ipr & d โ ) , patents , customer relationships , supplier networks and non-compete agreements . intangible assets with finite useful lives are amortized over the period of estimated benefit using the straight-line method and estimated useful lives ranging from one to seventeen years . intangible assets are tested for impairment annually or whenever events or circumstances indicate that a carrying amount of an asset ( asset group ) may not be recoverable . if impairment is indicated , we measure the amount of the impairment loss as the amount by which the carrying amount exceeds the fair value of the asset . fair value is generally determined using a discounted future cash flow analysis . ipr & d has an indefinite life and is not amortized until completion and development of the project at which time the ipr & d becomes an amortizable asset . if the related project is not completed in a timely manner , we may have an impairment related to the ipr & d , calculated as the excess of the asset 's carrying value over its fair value . long-lived assets . we periodically evaluate the recoverability of the carrying amount of long-lived assets , which include property and equipment , whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable . we assess impairment when the undiscounted future cash flows from the use and eventual disposition of an asset are less than its carrying value . if impairment is indicated , we measure the amount of the impairment loss as the amount by which the carrying amount exceeds the fair value of the asset . we base our fair value methodology on quoted market prices , if available . if quoted market prices are not available , we estimate fair value based on prices of similar assets or other valuation techniques including present value techniques . income taxes . we recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases . we measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the year in which such items are expected to be received or settled .
| 58 cost of goods sold replace_table_token_7_th the increase in cost of goods sold was due primarily to $ 7.8 million of increased sales volume and mix , an increase of $ 2.8 million in freight , and an increase of $ 2.1 million in depreciation , offset partially by a decrease of $ 2.2 million for inventory reserves and write-offs and a decrease of $ 0.7 million due to changes in material and other costs . research and development expenses replace_table_token_8_th the increase in research and development expenses was due primarily to an increase of $ 3.4 million in employee compensation , due primarily to increased headcount , including employees for the recently acquired surgical robotic positioning system and ttot , and an increase of $ 1.4 million in project and clinical trial costs . selling , general and administrative expenses replace_table_token_9_th the increase in selling , general and administrative expenses was due primarily to an increase of $ 2.7 million for expansion and growth of our international sales efforts , $ 3.1 million related to increased compensation costs in the united states to support increased sales volume and company growth , and an increase of $ 1.4 million in legal expenses and other selling , general and administrative costs , offset by a decrease of $ 1.9 million related to the reduction of an acquisition related contingent liability . provision for litigation loss/ ( income ) replace_table_token_10_th the provision for litigation in the current year was due primarily to the bianco , altus and other litigation matters . in the prior year we recognized the depuy synthes charge of $ 18.2 million . 59 for additional information regarding litigation , please refer to โ item 8. financial statements and supplementary data ; notes to consolidated financial statements ; note 14. commitments and contingencies โ below for more information . other income , net replace_table_token_11_th the decrease in other income , net is due primarily to increases in foreign exchange losses and decreases in miscellaneous income , partially offset by increases in interest income . income tax provision replace_table_token_12_th the increase in the effective tax rate was due primarily to the timing of the previous american taxpayer relief act of 2012 ( the โ atra โ ) . under prior law , a taxpayer was entitled to a research and experimentation tax credit for qualifying amounts incurred through december 31 ,
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looking ahead , we believe our pentag platform for 5g handsets is the most advanced cellular baseband ip in the industry today and puts us in a strong position to power 5g smartphones , fixed wireless and a range of machine to machine devices that will appear in cars , smart cities and industrial products . โ our specialization and competitive edge in signal processing platforms for 5g base station ran , including remote radio units ( rru ) and base band units ( bbu ) , put us in a strong position to capitalize on the emergence of 5g to address mass market adoption and benefit from new 5g infrastructure usage models , such as remote radio heads , cellular backhaul and small cells . โ our broad bluetooth , wi-fi and nb-iot ips allow us to expand further into iot applications and substantially increase our overall addressable market and value-add . our addressable market size for bluetooth , wi-fi and nb-iot is expected to be more than 9 billion devices annually by 2022 based on abi research and ericsson mobility reports . โ the growing market potential for voice assisted devices , as voice is becoming a primary user interface for iot applications , including handsets , true wireless stereo ( tws ) earbuds and headsets , mobile , smart home and consumer devices , offers an additional growth segment for us . to better address this market , we introduced our whispro speech recognition technology and clearvox voice input software that are offered in conjunction with our audio/voice dsps . these highly-integrated platforms , plus our proven track record in audio/voice processing with more than 6 billion audio chips shipped to date , put us in a strong position to power audio and voice roadmaps across this new range of addressable end markets . โ our ceva-xm4 and ceva-xm6 imaging and vision platforms and deep learning capabilities provide highly compelling offerings for any camera-enabled device such as smartphones , automotive safety ( adas ) , autonomous driving ( ad ) , drones , robotics , security and surveillance , augmented reality ( ar ) and virtual reality ( vr ) , drones , and signage . per research from yole dรฉvelopement , camera-enabled devices incorporating computer vision and ai are expected to exceed 1 billion units by 2022. we have already signed more than fifty licensing agreements for our imaging and vision dsps across those markets , where our customers can add camera-related enhancements such as smarter autofocus , better picture using super resolution algorithms , and better image capture in low-light environments . other customers can add video analytics support to enable new services like augmented reality , gesture recognition and advanced safety capabilities in cars . this transformation in vision processing and neural net software are opportunities for us to expand our footprint and content in smartphones , drones , consumer cameras , surveillance , automotive adas and industrial iot applications . โ neural networks are increasingly being deployed in a wide range of camera-based devices in order to make these devices โ smarter. โ to address this significant and lucrative opportunity , we recently introduced neupro-s - a second-generation family of ai processors for deep learning at the edge . these self-contained vision/ai processors bring the power of deep learning to the device , without relying on connectivity to the cloud . we believe this market opportunity for ai at the edge is on top of our existing product lines and represents new licensing and royalty drivers for the company in the coming years . in the first quarter of 2019 , we concluded an agreement with one of the world 's leading automotive oems for our neupro ai processor targeting autonomous driving . in the third quarter of 2019 , we concluded an agreement with a global automotive semiconductor company for our latest neupro-s processor for their adas platform . these deals are indicative of the new licensing and royalty drivers in the coming years . 31 โ our recent acquisition of the hillcrest labs sensor fusion business allows us to address an important technology for smart sensing , in addition to our existing portfolio for camera-based computer vision and ai processing , and microphone-based sound processing . mems-based inertial and environmental sensors are used in an increasing number of devices , including robotics , smartphones , laptops , tablets , tws earbuds headsets , remote controls and many other consumer and industrial devices . hillcrest labs ' innovative and proven motionengine software supports a broad range of merchant sensor chips and is licensed to oems and semiconductor companies that can run the software on ceva dsps or a variety of risc cpus . the motionengine software expands and complements ceva 's smart sensing technology . hillcrest labs ' technology has already shipped in more than 100 million devices , indicative of its market traction and excellence . as a result , our licensees can now benefit from our capabilities as a complete , one-stop-shop for processing all classes and types of sensors . in the fourth quarter , we concluded three deals for our sensor fusion technologies , reflecting the positive response we are already receiving from customers . as a result of our diversification strategy beyond baseband for handsets and our progress in addressing those new markets under the iot umbrella , we expect significant growth in royalty revenues derived from non-handset baseband applications over the next few years , which will be comprised of a range of different products at different royalty asps , spanning from high volume bluetooth to high value sensor fusion and base station ran . the royalty asp of our other products will be in between the two ranges . story_separator_special_tag at our first investor and analyst day held on january 14 , 2019 in new york city , we presented our anticipated financial metrics for year 2022. we forecasted that our licensing and related revenue in 2022 will grow approximately 10 % to 20 % from the 2018 levels , our royalty revenue will be approximately two times greater than 2018 levels , and our non-gaap net income will be approximately three times greater than 2018 levels . critical accounting policies , estimates and assumptions our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the united states ( u.s. gaap ) . these accounting principles require us to make certain estimates , judgments and assumptions . we believe that the estimates , judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates , judgments and assumptions are made . these estimates , judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements , as well as the reported amounts of revenues and expenses during the periods presented . to the extent there are material differences between these estimates , judgments or assumptions and actual results , our financial statements will be affected . the significant accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following : โ revenue recognition ; โ business combinations and valuation of goodwill and other acquired intangible assets ; โ income taxes ; โ equity-based compensation ; and โ impairment of marketable securities . in many cases , the accounting treatment of a particular transaction is specifically dictated by u.s. gaap and does not require management 's judgment in its application . there are also areas in which management 's judgment in selecting among available alternatives would not produce a materially different result . 32 revenue recognition significant management judgments and estimates must be made and used in connection with the recognition of revenue in any accounting period . material differences in the amount of revenue in any given period may result if these judgments or estimates prove to be incorrect or if management 's estimates change on the basis of development of business or market conditions . management 's judgments and estimates have been applied consistently and have been reliable historically . effective as of january 1 , 2018 , we have followed the provisions of accounting standards codification ( โ asc โ ) topic 606 , revenue from contracts with customers ( โ asc 606 โ ) . the guidance provides a unified model to determine how revenue is recognized . see note 2 to our consolidated financial statements for the year ended december 31 , 2019 for further information regarding revenue recognition . the following is a description of principal activities from which we generate revenue . revenues are recognized when control of the promised goods or services are transferred to the customers in an amount that reflects the consideration that we expect to receive in exchange for those goods or services . we determine revenue recognition through the following steps : โ identification of the contract with a customer ; โ identification of the performance obligations in the contract ; โ determination of the transaction price ; โ allocation of the transaction price to the performance obligations in the contract ; and โ recognition of revenue when , or as , we satisfy a performance obligation . we enter into contracts that can include various combinations of products and services , as detailed below , which are generally capable of being distinct and accounted for as separate performance obligations . we generate our revenues from ( 1 ) licensing intellectual properties , which in certain circumstances are modified for customer-specific requirements , ( 2 ) royalty revenues and ( 3 ) other revenues , which include revenues from support , training and sale of development systems and chips . we license our ip to semiconductor companies throughout the world . these semiconductor companies then manufacture , market and sell custom-designed chipsets to oems of a variety of consumer electronics products . we also license our technology directly to oems , which are considered end users . we account for our ip license revenues and related services , which provide our customers with rights to use our ip , in accordance with asc 606. a license may be perpetual or time limited in its application . in accordance with asc 606 , we recognize revenue from ip license at the time of delivery when the customer accepts control of the ip , as the ip is functional without professional services , updates and technical support . we have concluded that our ip license is distinct as the customer can benefit from the software on its own . most of our contracts with customers contain multiple performance obligations . for these contracts , we account for individual performance obligations separately , if they are distinct . the transaction price is allocated to the separate performance obligations on a relative standalone selling price basis . stand-alone selling prices of ip license are typically estimated using the residual approach . stand-alone selling prices of services are typically estimated based on observable transactions when these services are sold on a standalone basis . when contracts involve a significant financing component , we adjust the promised amount of consideration for the effects of the time value of money if the timing of payments agreed to by the parties to the contract ( either explicitly or implicitly ) provide the customer with a significant benefit of financing , unless the financing period is under one year and only after the products or services were provided , which is a practical expediency permitted under asc 606 . 33 revenues from contracts that involve significant customization of our ip to customer-specific specifications are performance obligations we generally account for as performance obligations satisfied over time .
| 38 the following table sets forth the products and services as percentages of our total revenues in each of the periods set forth below : replace_table_token_8_th we expect to continue to generate a significant portion of our revenues for 2019 from the above products and services . licensing and related revenue replace_table_token_9_th total 2019 licensing and related revenue reached a new all-time record high , due to diversification of technologies , markets , new and recurring customers and overall sales execution . the increase in licensing and related revenues from 2018 to 2019 principally reflected an increase in vision and handset baseband licensing deals , partially offset by decreased revenues from licensing of bluetooth products . the decrease in licensing and related revenues from 2017 to 2018 principally reflected a decrease in vision and base station related licensing deals , partially offset by higher revenues from licensing of bluetooth and wi-fi related products . this strong licensing performance and the strategic engagements we have formed with top tier companies set the foundation for our licensing revenue growth in future years . we plan to capitalize on our recent momentum in licensing to continue to grow our revenue and expand our customer base . licensing agreements trigger a advantageous cycle , whereby new licensees drive royalties which then enable additional research and development investments for new technologies and future markets , which in turn drive further growth in licensing and ultimately generate royalty momentum . our licensing business hit another record high number of license agreements signed , reaching 52 agreements and include 23 first-time customers . these customers are targeting a range of large and diversified markets , including baseband processing for 5g base stations , smartphones and cellular iot devices , ai and computer vision , consumer electronics , surveillance and automotive , audio and bluetooth connectivity for true wireless stereo earbuds , sensor fusion for smart tv control , laptops and pc peripherals , and bluetooth and wi-fi connectivity for a wide variety of iot devices . licensing and
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as a result of dialogue with the government , the jv company has made modifications to its battery exchange model and obtained government approval in february of 2016. based on subsidy guidelines , our ev models were eligible to receive government subsidies of rmb 50,000.00 ( approximately usd 7,195.00 ) in 2013 , rmb 47,500.00 ( approximately usd 6,835.00 ) in 2014 , and rmb 45,000.00 ( approximately usd 6,475.00 ) in 2016 on a per car basis . applying the 2016 subsidy eligibility guidelines for the evs it manufactured from 2013 to 2014 , the jv company wrote off approximately usd 6.2 million of previously recorded account receivables . evs that were manufactured by the jv company in 2015 and 2016 remain eligible for the same amount of government subsidies . the completion of government 's subsidy review and expected resumption of the government 's subsidy payments will help us to regain revenue growth momentum in 2017. on december 29 , 2016 , the chinese government issued new policies effective as of january 1 , 2017 , further adjusting renewable energy vehicle subsidies . the new central government subsidy policies significantly increased the technical standard for evs to qualify to receive subsidies and call for a 20 % of reduction of central government subsidies per car in 2017 from 2016 levels and total local government 's subsidy matches are now limited to 50 % of the central government subsidies per car . the chinese government also changed its subsidy payment method from paid in advance to paid post-sale , which may cause a potential delay in the collection of the accounts receivable from our business partners . although we are confident the chinese government is firmly committed to supporting the growth of china 's ev industry and that the subsidy program itself will continue through 2020 , the jv company and the company are actively seeking new revenue growth avenues and optimizing our business models to cope with this industry -wide policy change . our long-term goal is , by improving technical capabilities , optimizing cost structure and increasing operation efficiency , to develop high-performance yet price-competitive evs for our end consumers to meet market demand and sustainably grow our business . the company will continue to work closely with geely , leverage its support , and seek additional strategic alliances or partnerships to jointly develop the jv company 's ev business and rapidly expand its business footprint in china . story_separator_special_tag amortized over the next eight years . general and administrative expenses general and administrative expenses were $ 20,665,709 for the year ended december 31 , 2016 , compared to $ 28,255,267 for the year ended december 31 , 2015 and $ 14,058,548 for the year ended december 31 , 2014 , representing a decrease of $ 7,589,558 or 26.9 % , from 2015 and an increase of $ 6,607,161 , or 47.0 % , from 2014. for the year ended december 31 , 2016 , general and administrative expenses included $ 14,959,687 in expenses for common stock awards to employees and consultants for their services , compared to $ 22,379,220 and $ 8,455,422 for the years ended december 31 , 2015 and 2014 , respectively . excluding stock award costs , our net general and administrative expenses for the year ended december 31 , 2016 were $ 5,706,022 , a decrease of $ 170,025 , or 2.9 % , compared to $ 5,876,047 for the year ended december 31 , 2015 , and an increase of $ 102,896 , or 1.8 % , compared to $ 5,603,126 for the year ended december 31 , 2014. interest income interest income was $ 2,961,153 for the year ended december 31 , 2016 , compared to $ 3,138,717 for the year ended december 31 , 2015 , and $ 1,701,121 for the year ended december 31 , 2014 , representing a decrease of $ 177,564 , or 5.7 % , from 2015 , and an increase of $ 1,260,032 , or 74.1 % , from 2014. the decrease as compared to 2015 was primarily due to reduced interest income earned on a loan to a third party and cash in banks . the increase as compared to 2014 was mainly due to various loans made to the jv company during 2016 and 2015 , which generated approximately $ 1,899,900 and $ 1,457,389 of interest income in 2016 and 2015 , respectively . interest expense 34 interest expense was $ 1,831,667 for the year ended december 31 , 2016 , compared to $ 2,214,635 for the year ended december 31 , 2015 , and $ 3,480,646 for the year ended december 31 , 2014 , representing a decrease of $ 382,968 from 2015 and a decrease of $ 1,648,979 from 2014. this change was primarily due to renewed loans with lower interest rates in the year 2016. in 2015 , china people 's bank reduced the one-year loan interest rate five times from 5.6 % at the beginning of 2015 to 4.35 % in october 2015. therefore , loans renewed in 2016 generally have a lower interest rate compared to the same periods in 2015 and 2014.the significant decrease as compared to 2014 was mainly due to $ 1,262,691 of bond interest expense recorded in 2014 , which expense was nil in 2016 and 2015.of the interest expenses , $ 18,694 , $ 24,839 and $ 0 , respectively , were the discounts associated with the settlement of bank acceptance notes . change in fair value of financial instruments for the year ended december 31 , 2016 , gain related to changes in the fair value of derivative liability relating to warrants issued to investors and placement agents was $ 3,823,590 , compared to $ 8,519,295 for the year ended december 31 , 2015 , and $ 6,531,308 for the year ended december 31 , 2014 , a decrease of $ 4,695,705 from 2015 and a decrease of $ 2,707,718 from 2014 , respectively . story_separator_special_tag the change in fair value of derivative liability is mainly the result of all remaining unexercised warrants expiring during the year 2016. government grants government grants totaled $ 25,913,540 for the year ended december 31 , 2016 , compared to $ 1,645,032 for the year ended december 31 , 2015 , and $ 288,498 for the year ended december 31 , 2014 , representing an increase of $ 24,268,508 , or 1475.3 % from 2015 and an increase of $ 25,625,042 , or 8882.2 % from 2014. the significant increases were mainly due to subsidies we received from the hainan provincial government to assist our development of a new ev model . the total grant amount is rmb 300 million ( approximately usd 45 million ) , of which the initial payment of rmb200 million ( approximately usd30 million ) was received and $ 24,844,149 was recognized as income in 2016. share of profit ( loss ) of associated company investment losses were $ 0 in 2016 , compared to $ 0 in 2015 and a loss of $ 54,308 in 2014. this change was caused by the fact that we disposed of an investment for an equity ownership of jinhua service company in year 2014 , and there was no losses in the years 2016 and 2015. share of profit ( loss ) after tax of the jv company for the year ended december 31 , 2016 , the jv company 's net sales were $ 179,328,669 , gross income was $ 19,278,511 , and net loss was $ 14,155,578. we accounted for our investments in the jv company under the equity method of accounting because we have a 50 % ownership interest in the jv company . as a result , we recorded 50 % of the jv company 's loss , or $ 7,077,789 for the year ended december 31 , 2016. after eliminating intra-entity profits and losses , our share of the after tax loss of the jv company was $ 7,307,510 for the year ended december 31 , 2016 , compared to income of $ 11,841,855 for 2015 , representing a decrease in income of $ 19,149,365. during the year 2016 , the jv company 's revenues were primarily derived from sales growth of ev products in china , with a total of 10,148 units sold during the year . other income ( expense ) , net net other income was $ 1,627,933 for the year ended december 31 , 2016 , compared to net other income of $ 1,814,882 for the year ended december 31 , 2015 , and net other expense of $ 34,649 for the year ended december 31 , 2014 , a decrease in net other income of $ 186,949 from 2015 and an increase in net other income of $ 1,662,582 from 2014. the increased other income in 2016 and 2015 as compared to 2014 was primarily due to receipt of fees for providing technical services for ev technical development . 35 income taxes in accordance with the relevant chinese tax laws and regulations , our applicable corporate income tax rate is 25 % . however , kandi vehicle is qualified as a high technology company in china and is therefore entitled to use a reduced income tax rate of 15 % . each of our wholly-owned subsidiaries , kandi new energy , yongkang scrou and kandi hainan , has an applicable corporate income tax rate of 25 % . we have a 50 % ownership interest in the jv company , which has an applicable corporate income tax rate of 25 % . each of the jv company 's subsidiaries has an applicable corporate income tax rate of 25 % as well . our actual effective income tax rate was -11.69 % of 2016 taxable corporate income as compared to 29.47 % of 2015 taxable corporate income . the change in effective tax rates was largely due to our negative income before taxes in 2016 as compared to the positive income before taxes in 2015. net income ( loss ) we recorded net loss of $ 6,510,757 for the year ended december 31 , 2016 , compared to net income of $ 14,665,495 for the year ended december 31 , 2015 , and net income of $ 12,271,338 for the year ended december 31 , 2014 , a decrease of $ 21,176,252 from the year ended december 31 , 2015 and a decrease of $ 18,782,095 from the year ended december 31 , 2014. the decrease in net income was primarily attributable to decreased revenue and gross profits , the jv company 's net losses , and significantly increased r & d expenses to prepare the company for future business growth . excluding ( i ) the effects of stock award expenses , which were $ 14,959,687 , $ 22,379,220 and $ 8,455,422 for the years ended december 31 , 2016 , 2015 and 2014 , respectively , and ( ii ) the change in the fair value of financial derivatives , which were gains of $ 3,823,590 , $ 8,519,295 and 6,531,308 for the years ended december 31 , 2016 , 2015 and 2014 , respectively , our net income ( non-gaap ) was $ 4,625,340 for the year ended december 31 , 2016 , as compared to net income ( non-gaap ) of $ 28,525,420 for the year ended december 31 , 2015 , a decrease of $ 23,900,080 or 83.8 % , and compared to net income ( non-gaap ) of $ 14,195,452 for the year ended december 31,2014 , a decrease of $ 9,570,112 or 67.4 % . the decrease in net income ( non-gaap ) was primarily attributable to the decrease of revenue and gross profits , jv company 's net losses , and significantly increased r & d expenses to prepare the company for future business growth . we make reference to certain non-gaap financial measures , i.e. , adjusted net income .
| our revenue for the year ended december 31 , 2016 primarily consisted of the sales of battery packs , body parts , ev drive motors , ev controllers , air conditioning units and other auto parts to the jv company for use in the manufacturing of ev products , which accounted for 92.7 % of total sales . among total sales for the year ended december 31 , 2016 , approximately 78.9 % were related to the sale of battery packs . in compliance with the regulation of the chinese auto industry , we hold the necessary production licenses to manufacture the battery packs exclusively used in ev products manufactured by the jv company . besides the sale of battery packs , approximately 4.0 % of total sales were related to sales of ev controllers , approximately 3.5 % of the total sales were related to sales of air conditioning units , approximately 3.1 % of total sales were related to sales of ev drive motors and approximately 3.2 % of total sales were related to sales of body parts and other auto parts . during the year ended december 31 , 2016 , our revenues from the sale of ev parts to the jv company accounted approximately 59.8 % of our total net revenue for the year . for the year ended december 31 , 2016 , the majority of ev parts we sold were sold to the jv companies and its subsidiaries : approximately 58.9 % of such sales were to the jv company , approximately 0.3 % of such sales were to kandi changxing , approximately 0.5 % of such sales were to kandi shanghai , and approximately 0.3 % of such sales were to kandi jiangsu . the ev parts we sold were used in manufacturing pure ev products by the jv company 's subsidiaries . during the year ended december 31 , 2016 , our revenue from the sale of ev parts to the service company was 3.0 % of total sales . the service company purchased the battery packs for speed upgrades and other ev parts for repair and maintenance . ev products our revenues from the sale of ev products for the fiscal year 2016
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any decrease in expected cash flows due to an increase in expected credit losses will increase the fdic loss-sharing asset and any increase in expected future cash flows due to a decrease in expected credit losses will decrease the fdic loss-sharing asset . increases and decreases to the fdic loss-sharing asset are recorded as adjustments to noninterest income . valuation and recoverability of goodwill goodwill represented $ 115.6 million of our $ 4.91 billion in total assets and $ 764.0 million in total shareholders ' equity as of december 31 , 2012 . the company has one , single reporting unit . we review goodwill for impairment annually , during the third quarter , and also test for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of our reporting unit below its carrying amount . such events and circumstances may include among others : a significant adverse change in legal factors or in the general business climate ; significant decline in our stock price and market capitalization ; unanticipated competition ; the testing for recoverability of a significant asset group within the reporting unit ; and an adverse action or assessment by a regulator . any adverse change in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our consolidated financial statements . under the intangibles โ goodwill and other topic of the fasb asc , the testing for impairment may begin with an assessment of qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount . when required , the goodwill impairment test involves a two-step process . we first test goodwill for impairment by comparing the fair value of the reporting unit with its carrying amount . if the fair value of the reporting unit exceeds the carrying amount of the reporting unit , goodwill is not deemed to be impaired , and no further testing is necessary . if the carrying amount of the reporting unit were to exceed the fair value of the reporting unit , we would perform a second test to measure the amount of impairment loss , if any . to measure the amount of any impairment loss , we would determine the implied fair value of goodwill in the same manner as if the reporting unit were being acquired in a business combination . specifically , we would allocate the fair value of the reporting unit to all of the assets and liabilities of the reporting unit in a hypothetical calculation that would determine the implied fair value of goodwill . if the implied fair value of goodwill is less than the recorded goodwill , we would record an impairment charge for the difference . the accounting estimates related to our goodwill require us to make considerable assumptions about fair values . our assumptions regarding fair values require significant judgment about economic and industry factors , as well as our views regarding the growth and earnings prospects of the bank . changes in these judgments , either individually or collectively , may have a significant effect on the estimated fair values . based on the results of the annual goodwill impairment test , we determined that no goodwill impairment charges were required and our single reporting unit was not at risk of failing step one . as of december 31 , 2012 we determined there were no events or circumstances which would more likely than not reduce the fair value of our reporting unit below its carrying amount . even though we determined that there was no goodwill impairment during 2012 , additional adverse changes in the operating environment for the financial services industry may result in a future impairment charge . please refer to note 9 to the consolidated financial statements in โ item 8. financial statements and supplementary data โ of this report for further discussion . 26 2012 story_separator_special_tag the number of branches decreased by 3 from december 31 , 2011 to december 31 , 2012 as part of the company 's ongoing effort to improve efficiencies . 27 business combinations on august 5 , 2011 , the bank acquired certain assets and assumed certain liabilities of the bank of whitman from the fdic in an fdic-assisted transaction . the bank and the fdic entered into a modified whole bank purchase and assumption agreement without loss share . the bank acquired approximately $ 437.5 million in assets , including $ 200.0 million in loans measured at fair value , and approximately $ 401.1 million in deposits located in nine branches in eastern washington . the bank participated in a competitive bid process in which the accepted bid included no deposit premium on non-brokered deposits and a negative bid of $ 30.0 million on net assets acquired . on may 27 , 2011 , the bank acquired certain assets and assumed certain liabilities of first heritage bank from the fdic in an fdic-assisted transaction . the bank acquired approximately $ 165.0 million in assets and approximately $ 159.5 million in deposits located in five branches in the king and snohomish counties of washington . first heritage bank 's loans and other real estate assets acquired of approximately $ 89.7 million are subject to a loss-sharing agreement with the fdic . the bank participated in a competitive bid process in which the accepted bid included a 0.75 % deposit premium on non-brokered deposits and a negative bid of $ 10.5 million on net assets acquired . on may 20 , 2011 , the bank acquired certain assets and assumed certain liabilities of summit bank from the fdic , in an fdic-assisted transaction . the bank acquired approximately $ 131.1 million in assets and approximately $ 123.3 million in deposits located in three branches in in the northern puget sound region of washington . story_separator_special_tag summit bank 's loans and other real estate assets acquired of approximately $ 71.9 million are subject to a loss-sharing agreement with the fdic . the bank participated in a competitive bid process in which the accepted bid included a 0.75 % deposit premium on non-brokered deposits and a negative bid of $ 9.5 million on net assets acquired . on january 29 , 2010 , the bank acquired substantially all of the deposits and assets of american marine bank from the fdic , which was appointed receiver of american marine bank . the bank acquired approximately $ 307.8 million in assets and approximately $ 254.0 million in deposits located in 11 branches in the western puget sound region . american marine bank 's loans and other real estate assets acquired of approximately $ 257.5 million are subject to a loss-sharing agreement with the fdic . in addition , columbia state bank will continue to operate the trust division of american marine bank . the bank participated in a competitive bid process in which the accepted bid included a 1 % deposit premium on non-brokered deposits and a negative bid of $ 23.0 million on net assets acquired . on january 22 , 2010 , the bank acquired all of the deposits and certain assets of columbia river bank from the fdic , in an fdic-assisted transaction . the bank acquired approximately $ 912.9 million in assets and approximately $ 893.4 million in deposits located in 21 branches in oregon and washington . columbia river bank 's loans and other real estate assets acquired of approximately $ 696.1 million are subject to a loss-sharing agreement with the fdic . the bank participated in a competitive bid process in which the accepted bid included a 1 % deposit premium on non-brokered deposits and a negative bid of $ 43.9 million on net assets acquired . 28 results of operations summary a summary of the company 's results of operations for each of the last five years ended december 31 follows : replace_table_token_6_th net interest income net interest income is the difference between interest income and interest expense . net interest income on a fully taxable-equivalent basis expressed as a percentage of average total interest-earning assets is referred to as the net interest margin , which represents the average net effective yield on interest-earning assets . 29 the following table sets forth the average balances of all major categories of interest-earning assets and interest-bearing liabilities , the total dollar amounts of interest income on interest-earning assets and interest expense on interest-bearing liabilities , the average yield earned on interest-earning assets and average rate paid on interest-bearing liabilities by category and in total , net interest income , net interest spread , net interest margin and the ratio of average interest-earning assets to interest-earning liabilities : net interest income summary replace_table_token_7_th ( 1 ) nonaccrual loans were included in loans . amortized net deferred loan fees and net unearned discounts on certain acquired loans were included in the interest income calculations . the amortization of net deferred loan fees was $ 2.1 million in 2012 , $ 1.3 million in 2011 and $ 2.1 million in 2010 . the amortization of net unearned discounts on certain acquired loans was $ 5.9 million in 2012 and $ 14.3 million in 2011 . there was no amortization of net unearned discounts in 2010 . ( 2 ) yields on fully taxable equivalent basis , based on a marginal tax rate of 35 % . the tax equivalent yield adjustment to interest earned on noncovered loans was $ 765 thousand , $ 567 thousand and $ 543 thousand for the years ended december 31 , 2012 , 2011 , and 2010 , respectively . the tax equivalent yield adjustment to interest earned on tax exempt securities was $ 5.5 million , $ 5.6 million and $ 5.2 million for the years ended december 31 , 2012 , 2011 , and 2010 , respectively . ( 3 ) reclassified to conform to the current period 's presentation . ( 4 ) federal home loan bank advances includes prepayment charge of $ 603 thousand in 2012 . 30 net interest income is impacted by the volume ( changes in volume multiplied by prior rate ) , interest rate ( changes in rate multiplied by prior volume ) and the mix of interest-earning assets and interest-bearing liabilities . the following table shows changes in net interest income on a fully taxable-equivalent basis between 2012 and 2011 , as well as between 2011 and 2010 broken down between volume and rate . changes attributable to the combined effect of volume and interest rates have been allocated proportionately to the changes due to volume and the changes due to interest rates : changes in net interest income replace_table_token_8_th ( 1 ) reclassified to conform to the current period 's presentation . comparison of 2012 with 2011 taxable-equivalent net interest income totaled $ 245.2 million in 2012 , compared with $ 242.9 million for 2011 . the increase in net interest income during 2012 resulted from the increase in the size of the noncovered loan portfolio as well as lower rates paid on deposits . these increases were partially offset by lower incremental accretion on covered loans and lower yields on the loan and securities portfolios . the incremental accretion income represents the amount of income recorded on the acquired loans above the contractual rate stated in the individual loan rates . the additional income stems from the discount established at the time these loan portfolios were acquired , and increases net interest income and the net interest margin . the incremental accretion income had a positive impact of approximately 144 basis points on the 2012 net interest margin compared to a positive impact of 174 basis points on the 2011 net interest margin .
| noninterest expense increased 5 % to $ 162.9 million for 2012 due to increases in staffing and occupancy costs related to the three fdic-assisted transactions that occurred during mid 2011 as well as additional legal and professional expenses incurred in 2012 related to the pending acquisition of west coast . total assets at december 31 , 2012 were $ 4.91 billion , up 3 % from $ 4.79 billion at the end of 2011 . the increase from december 31 , 2011 reflects the company 's noncovered loan growth as well as the increase in cash and cash equivalents in anticipation of payment of the cash portion of the west coast bancorp acquisition consideration . investment securities available for sale totaled $ 1.00 billion at december 31 , 2012 compared to $ 1.03 billion at december 31 , 2011 . loans , excluding covered loans , were $ 2.53 billion , up 8 % from $ 2.35 billion at the end of 2011 . the increase from december 31 , 2011 reflects additional loan volume arising from the company 's organic loan growth . noncovered loan growth during 2012 was $ 177.3 million and was centered mainly in commercial business and commercial and multifamily residential loans . the allowance for noncovered loan and lease losses decreased to $ 52.2 million at december 31 , 2012 from $ 53.0 million at december 31 , 2011 due to improved loan quality . the company 's allowance amounts to 2.07 % of total noncovered loans , compared with 2.26 % at the end of 2011 . nonperforming assets totaled $ 48.5 million at december 31 , 2012 , significantly down from $ 85.4 million at december 31 , 2011 . net loan charge-offs were $ 14.3 million in 2012 , compared with $ 15.4 million in 2011 . nonaccrual loans decreased $ 16.1 million to $ 37.4 million and other real estate owned and other personal property owned decreased $ 20.8 million to $ 11.1 million . deposits totaled $ 4.04 billion at december 31 , 2012 compared to $
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r & d expense was $ 3.6 million for fiscal 2018 and $ 4.5 million for fiscal 2017. r & d expense decreased to 25.8 % of net sales in fiscal 2018 compared to 26.5 % of net sales in fiscal 2017. r & d expense in fiscal 2018 was $ 0.9 million less than fiscal 2017. the decrease in r & d expense resulted primarily from reduced personnel and consultant costs in fiscal 2018. selling , general , and administrative . sg & a expense increased $ 2.9 million or 78.5 % to $ 6.7 million or 48.2 % of net sales , for fiscal 2018 from $ 3.7 million , or 22.3 % , for fiscal 2017. the increase in sg & a expenses in fiscal 2018 was primarily the result of the february 23 , 2017 settlement with delta , which lowered sg & a expenses in fiscal 2017 due to the reversal of the $ 3.6 million reserve of the delta unbilled receivable . the fiscal 2018 increase in sg & a expenses was partially offset by lower legal fees compared to fiscal 2017. interest income , net . net interest income increased by $ 18,000 to $ 54,000 for fiscal 2018 from $ 36,000 for fiscal 2017. the increase in interest was mainly a result of higher interest rates in fiscal 2018 as compared to fiscal 2017. other income . other income was $ 0.1 million in fiscal 2018 and $ 4.9 million in fiscal 2017 , a decrease of $ 4.8 million . the delta settlement payment to the company of $ 7.75 million was partially reflected in the fiscal 2017 financial statements as payment of the $ 3.6 million unbilled receivable previously reserved in sg & a expenses , and the remainder of the settlement payment , approximately $ 4.1 million was reflected in other income . in addition , in fiscal 2017 the company sold its outstanding pennsylvania r & d tax credits and realized a gain on the sale of $ 0.7 million which was also reflected in other income . royalties earned in fiscal 2018 were approximately $ 68,000 as compared to $ 57,000 in fiscal 2017. income taxes . income tax expense for the fiscal 2018 was $ 64,000 as compared to income tax expense of $ 248,000 for fiscal 2017. the effective tax rate for fiscal 2018 was ( 1.8 % ) and differs from the statutory rate mostly due to an increase in the deferred tax valuation allowance of approximately $ 0.7 million . the majority of this change in valuation allowance was a result of the tax benefit related to pre-tax losses not being currently realizable in future periods . the tax act permits an indefinite carryforward period for nols . net ( loss ) income . as a result of the factors described above , the company 's net loss for fiscal 2018 was $ 3.7 million compared to net income of $ 4.6 million for fiscal 2017. on a fully diluted basis , net loss per share was $ 0.22 for fiscal 2018 , compared to a net income of $ 0.27 per share for fiscal 2017 . 26 liquidity and capital resources the following table highlights key financial measurements of the company : replace_table_token_6_th replace_table_token_7_th ( 1 ) excludes contract liability ( 2 ) calculated as : the sum of cash and cash equivalents plus accounts receivable , net , divided by current liabilities ( 3 ) calculated as : current assets divided by current liabilities the company 's principal source of liquidity has been cash flows from current year operations and cash accumulated from prior years ' operations . cash is used principally to finance inventory , accounts receivable , contract assets , and payroll . apart from what has been disclosed above , management is not aware of any trends , events or uncertainties that have had or are likely to have a material impact on our liquidity , financial condition and capital resources . operating activities the company generated $ 2.1 million of cash in operating activities during fiscal 2019 as compared to cash used of $ 1.7 million during fiscal 2018. the cash used in operating activities for the year ended september 30 , 2019 was primarily generated by net income of $ 1.9 million and a decrease in accounts receivable of $ 1.1 million , partially offset by a decrease in accounts payable of $ 0.5 million and accrued expenses of $ 0.4 million . the company used $ 1.7 million of cash in operating activities during fiscal 2018 as compared to cash generated of $ 6.1 million during fiscal 2017. the cash used in operating activities for the year ended september 30 , 2018 was primarily a result of a net loss of $ 3.7 million , partially offset by depreciation of $ 0.4 million , and the decrease of unbilled receivables of $ 1.5 million , which principally represent sales previously recorded under the percentage-of-completion method of accounting that were billed to customers in accordance with applicable edc terms . investing activities cash used in investing activities was $ 0.1 million for fiscal 2019 and consisted of spending for production equipment and laboratory test equipment . the company plans to continue investing in capital equipment to support engineering development efforts and operations . cash used in investing activities was $ 2.5 million for fiscal 2018 and consisted primarily of the purchase of our hawker beechcraft b200gt aircraft for $ 2.4 million . 27 financing activities cash used by financing activities was $ 0 for fiscal years 2019 and 2018. summary future capital requirements depend upon numerous factors , including market acceptance of the company 's products , the timing and rate of expansion of business , acquisitions , joint ventures , and other factors . story_separator_special_tag is & s has experienced increases in expenditures since its inception and anticipates that expenditures , excluding the purchase of the hawker beechcraft b200gt , will remain relatively constant with the levels experienced in fiscal 2018 and fiscal 2017. the company believes that its cash and cash equivalents will provide sufficient capital to fund operations for at least the next twelve months . further , is & s may need to develop and introduce new or enhanced products , to respond to competitive pressures , to invest in or acquire businesses or technologies , or to respond to unanticipated requirements or developments . if insufficient funds are available , the company may not be able to introduce new products or to compete effectively . contractual obligations the company 's contractual obligations as of september 30 , 2019 mature as follows : replace_table_token_8_th ( 1 ) a ยpurchase obligationย is defined as an agreement to purchase goods or services that is enforceable and legally binding on the company and that specifies all significant terms , including fixed or minimum quantities to be purchased ; fixed , minimum or variable price provisions ; and the approximate timing of the transaction . these amounts are primarily composed of open purchase order commitments entered in the ordinary course of business with vendors and subcontractors pertaining to fulfillment of the company 's current order backlog . off-balance sheet arrangements the company has no off-balance sheet arrangements . inflation is & s does not believe inflation had a material effect on its financial position or results of operations during the past three years ; however , it can not predict future effects of inflation . critical accounting policies the preparation of financial statements in conformity with accounting principles generally accepted in the united states of america ( ยgaapย ) requires management to make estimates and assumptions that affect reported amounts of assets and liabilities , disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period . the company 's most critical accounting policies are revenue recognition , income taxes , inventory valuation , share based compensation and warranty reserves . 28 revenue recognition the company enters into sales arrangements with customers that , in general , provide for the company to design , develop , manufacture and deliver large flat-panel display systems , flight information computers and advanced monitoring systems that measure and display critical flight information , including data relative to aircraft separation , airspeed , altitude , and engine and fuel data measurements . revenue from contracts with customers the company adopted asc 606 on october 1 , 2018 using the modified retrospective method for all contracts not completed as of the date of adoption . the reported results for fiscal year ended september 30 , 2019 reflect the application of asc 606 guidance while the reported results for the fiscal years ended september 30 , 2018 and september 30 , 2017 were prepared under the guidance of asc 605 , ยrevenue recognitionย ( ยasc 605ย ) , which is also referred to herein as ยlegacy gaapย or the ยprevious guidance.ย the adoption of asc 606 represents a change in accounting principles . in accordance with asc 606 , revenue is recognized when a customer obtains control of promised goods or services . the amount of revenue recognized reflects the consideration to which the company expects to be entitled to receive in exchange for these goods or services . to achieve this core principle , the company applies the following five steps : 1 ) identify the contract with a customer the company 's contract with its customers typically is the form of a purchase order issued to the company by its customers and , to a lesser degree , in the form of a purchase order issued in connection with a formal contract executed with a customer . for the purpose of accounting for revenue under asc 606 , a contract with a customer exists when ( i ) the company enters into an enforceable contract with a customer that defines each party 's rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services , ( ii ) the contract has commercial substance and , ( iii ) the company determines that collection of substantially all consideration for goods or services that are transferred is probable based on the customer 's intent and ability to pay the promised consideration . the company applies judgment in determining the customer 's ability and intention to pay , which is based on a variety of factors including the customer 's historical payment experience or , in the case of a new customer , published credit and financial information pertaining to the customer . 2 ) identify the performance obligations in the contract performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct , whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available from third parties or from the company , and are distinct in the context of the contract , whereby the transfer of the goods or services is separately identifiable from other promises in the contract . most of our revenue is derived from purchases under which we provide a specific product or service and , as a result , there is only one performance obligation . in the event that a contract includes multiple promised goods or services , such as an edc contract which includes both engineering services and a resulting product shipment , the company must apply judgment to determine whether promised goods or services are capable of being distinct in the context of the contract .
| r & d expense was $ 2.5 million for fiscal 2019 and $ 3.6 million for fiscal 2018. r & d expense decreased to 14.2 % of net sales in fiscal 2019 compared to 25.8 % of net sales in fiscal 2018. r & d expense in fiscal 2019 was $ 1.1 million less than fiscal 2018. this decrease in r & d expense resulted primarily from reduced personnel and consultant costs in fiscal 2019.in addition , in fiscal 2019 , edc programs required a shift of engineering resources from internal r & d . selling , general , and administrative ( ยsg & aย ) . sg & a expense decreased $ 0.8 million or 11.9 % to $ 5.9 million or 33.4 % of net sales , for fiscal 2019 from $ 6.7 million , or 48.2 % , for fiscal 2018. the decrease in sg & a expense was primarily the result of reduced legal , personnel and consultant costs . interest income , net . net interest income increased by $ 196,000 to $ 250,000 for fiscal 2019 from $ 54,000 for fiscal 2018. the increase in interest income was mainly a result of higher interest rates in fiscal 2019 compared to fiscal 2018. other income . other income is primarily composed of royalties earned and increased by $ 6,000 , to $ 74,000 in fiscal 2019 from $ 68,000 in fiscal 2018. income taxes . income tax expense for the fiscal 2019 was $ 2,000 as compared to income tax expense of $ 64,000 for fiscal 2018. the effective tax rate for fiscal 2019 was 0.10 % and differs from the statutory rate mostly due to a decrease in the deferred tax valuation allowance of approximately $ 375,000. the majority of this change in valuation allowance was a result of net operating loss ( ยnolย ) usage . the tax act permits an indefinite carryforward period for nols . net income . as a result of the factors described above , the company 's net income for fiscal 2019 was $ 1.9 million compared to net loss of $ 3.7 million for fiscal 2018. on a fully diluted basis , net income per share was $ 0.11 for fiscal 2019 , compared to a net loss of $ 0.22
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the amount of our liabilities and expenses depends on a number of uncertainties , including the number of prior tax years for which we may be liable to the irs , the number of domestic life insurance policies we will be required to remediate , the methodology applicable to the calculation of taxable benefits under non-compliant policies and the amount of time and resources we will require from external advisors who are assisting us with resolving these issues . given the range of potential outcomes and the significant variables assumed in establishing our estimates , actual amounts incurred may exceed our reserve and also could exceed the high end of our estimated range of liabilities and expenses . to the extent the amount reserved is insufficient to meet the actual amount of our liabilities and expenses , or if our estimates of those liabilities and expenses change in the future , our financial condition and results of operations may be materially adversely affected . the financial data for 2015 has been restated to correct accounting for policy benefit reserves , dac and a legal expense accrual and the financial data used for 2014 has been restated to correct accounting for policy benefit reserves and dac . see note 1 , correction of immaterial errors and reclassifications of certain amounts in the notes to the consolidated financial statements . current financial highlights our 2016 financial results are driven by our historical business management model and traditional life insurance product sales . although interest rates have risen recently , the historically low interest rate environment continues to impact our results and our industry as investment yields are an integral component of our business operations . our assets grew $ 103 million in 2016 and totaled $ 1.6 billion as of december 31 , 2016 . total stockholders ' equity increased from $ 246.9 million at december 31 , 2015 , to $ 249.1 million at december 31 , 2016 due to our net income and net unrealized gains on available-for-sale securities in 2016 . insurance premiums rose 1.7 % and 3.2 % in 2016 and 2015 , respectively , primarily from our life insurance segment , which increased $ 3.4 million from 2015 . net investment income increased 6.1 % and 11.5 % for 2016 and 2015 , respectively , primarily due to an increase in the investment asset balances in 2016 compared to the prior year and an increase in yields in 2015 . the average yield on the consolidated investment portfolio has changed from a yield of 4.21 % in 2014 up to 4.38 % in 2015 and declining to a yield of 4.28 % in 2016 , as investment rates available have remained low in the sustained low interest rate environment . realized net investment losses resulted from other-than-temporary impairments ( `` otti '' ) on investment securities which were recorded totaling $ 4.3 million and $ 5.4 million , in 2016 and 2015 , respectively , and are reported as realized losses . the otti in 2016 was somewhat offset by realized investment gains on sales of fixed maturity securities in our available-for-sale portfolio and sales of equity securities . during 2016 , claims and surrenders expense increased 3.2 % from the comparable period in 2015 , primarily due to an increase in surrender benefits and matured endowments in the life segment compared to the 2015 levels . policyholders ' dividends decreased 36.4 % in 2016 compared to 2015 , due to the dividend rate actions taken by us at the end of 2015 to improve our product profitability . general expenses increased slightly and remained at relatively high levels due to the tax compliance issue noted above relating to product qualification under irc section 7702 and 72 ( s ) and remediation costs that have been identified , as well as increased consulting costs for actuarial , tax , and legal assistance . amortization of deferred policy acquisition expenses increased from $ 23.4 million at december 31 , 2015 to $ 28.5 million at december 31 , 2016 primarily due to the higher surrender activity . 28 citizens , inc. and consolidated subsidiaries life insurance . for over thirty-seven years , cica and its predecessors have accepted policy applications from foreign nationals for u.s. dollar-denominated ordinary whole life insurance and endowment policies . we make our insurance products available using third-party marketing organizations and independent marketing consultants . endowment product sales have been on the rise and represented approximately 77.1 % of new sales in the life segment in 2016 . the company currently offers a fifteen and twenty year endowment and our top selling endowment is a product that matures at age sixty-five . the company repriced its top six selling international products at the end of 2016 to increase profitability . through the domestic market of our life insurance segment , we provide ordinary whole life , credit life insurance , and final expense policies to middle and lower income families and individuals in certain markets in the mountain west , mid-west and southern u.s. the majority of our domestic revenues are generated by the policies of domestic life insurance companies we have acquired since 1987. home service insurance . we provide final expense ordinary and industrial life insurance to middle and lower income individuals in louisiana , mississippi and arkansas . our policies in this segment are sold and serviced through a home service marketing distribution system utilizing employee-agents who work on a route system to collect premiums and service policyholders , and through networks of funeral homes that collect premiums and provide personal policyholder service . premiums in this segment increased slightly in 2016 compared to 2015 , as renewal premiums increased while first year premiums decreased slightly as the home service business is a mature business . this is the same trend we saw in 2015 compared to 2014 . economic and insurance industry developments significant economic issues impacting our business and industry currently and into the future are discussed below . story_separator_special_tag slow increases in the interest rate environment will limit increases in profit margins for insurers . we have been impacted by the historically low interest rate environment over the past several years as our fixed income investment portfolio , primarily invested in callable securities , has been reinvested at lower yields . the company 's conservative investment strategy has not changed but we have focused new purchases into holding of state , municipalities , essential service and corporate issuers compared to our historical investment in u.s. government holdings . our investment earnings also impact the reserve and deferred acquisition costs ( โ dac โ ) balances , as assumptions are used in the development of the balances . due to the recent decline in investment yields on our portfolio , our projection of long-term investment returns has declined . this has resulted in increasing the reserves on policies issued in the current year , as well as reducing the dac asset . as an increasing percentage of the world population reaches retirement age , we believe we will benefit from increased demand for living benefit products rather than death products , as customers will require cash accumulation to pay expenses to meet their lifetime income needs . our ordinary life products are designed to accumulate cash values to provide for living expenses in a policy owner 's later years , while continuously providing a death benefit . we believe there is a trend toward consolidation of domestic life insurance companies , due to significant losses incurred by the life insurance industry as a result of the credit crisis and related economic pressures , as well as increasing costs of regulatory compliance for domestic life insurance companies . we believe this trend should benefit our acquisition strategy as more complementary acquisition candidates may become available for us to consider . many of the events and trends affecting the life insurance industry have had an impact on the life reinsurance industry . these events have led to a decline in the availability of reinsurance . while we currently cede a limited amount of our primary insurance business to reinsurers , we may find it difficult to obtain reinsurance in the future , forcing us to seek reinsurers who are more expensive to us . if we can not obtain affordable reinsurance coverage , either our net exposures will increase or we will have to reduce our underwriting commitments . while our management has extensive experience in writing life insurance policies for foreign residents , changes to foreign laws and regulations and their related application and enforcement , along with currency controls affecting our foreign resident insureds could adversely impact our revenues , results of operations and financial condition . 29 citizens , inc. and consolidated subsidiaries acquisition history - last five years on march 7 , 2014 , the company acquired magnolia guaranty life insurance company ( `` mglic '' ) in the amount of $ 5.2 million . mglic is a mississippi domiciled company that began writing business in 1992 and issues primarily industrial life policies through independent funeral homes in the state of mississippi . we recorded $ 0.1 million of goodwill as a result of this transaction . mglic is reported in our home service segment . story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; color : # 000000 ; text-decoration : none ; '' > 2016 from 2015 and 30.3 % from 2014 to 2015 , or 0.7 % and 0.7 % of direct ordinary whole life insurance inforce for 2016 and 2015 , respectively . the increase in surrender expense is primarily related to our international business and is expected to increase over time due to the aging of this block of business . a significant portion of surrenders relates to policies that have been in force over fifteen years and no longer have a surrender charge associated with them . total direct insurance inforce reported in 2016 was $ 5.0 billion compared to $ 5.0 billion in 2015 and $ 4.9 billion 2014 . endowment benefits decreased slightly in 2016 compared to 2015 amounts . we have a series of international policies that carry an immediate endowment benefit of an amount selected by the policy owner . these benefits have been popular in the pacific rim and latin america , where the company has experienced increased interest in our guaranteed products in recent years . annual guaranteed endowments are factored into the premium and , as such , the increase or decrease is expected to have little impact on expected profitability . matured endowments increased in each of the last two years and we expect this trend to continue as this block of business increases , persists and policies begin to reach maturity . property claims increased 15 % to approximately $ 1.9 million in 2016 compared with the amount reported for 2015 due to a slight increase in weather related claims . other policy benefits resulted primarily from interest paid on premium deposits and policy benefit accumulations and increased as these policy liabilities also increased . reserves . the change in future policy benefit reserves has decreased in 2016 by 1.5 % and in 2015 by 6.0 % , primarily due to higher surrenders in each year . changes in future policy benefit reserves are largely driven by policyholder activity ( e.g . premiums , surrenders , etc . ) policyholder dividends . the company issues long duration participating policies to foreign residents that are expected to pay dividends to policyholders based upon actual experience . initially , policyholder dividend scales are factored into the guaranteed premiums at the time the product is developed , based on expected future experience and desired profit goals . as actual and expected experience develops over time , it can become necessary to adjust dividends , as we did at the end of 2015 , in order to maintain our original expected level of long term product profitability .
| replace_table_token_5_th we have traditionally invested in fixed maturity securities with a large percent held in callable issues . the sustained low interest rate environment of the past several years is holding down yields . while u.s. treasury interest rates have risen recently after a fairly significant decline during 2016 , yields on high quality corporate and municipal securities have been slower to rise . the interest rate direction is uncertain but as market interest rates begin to rise , our call risk will diminish , resulting in our fixed securities maturing at the stated maturity dates and our portfolio yield will rise more slowly over time , as new money investments would be made at higher rates . investment income from fixed maturity securities accounted for approximately 87.0 % of total investment income for the year ended december 31 , 2016 . we have increased our investment purchases of corporate and municipal securities over the past several years , with no focus on any particular industry sectors in these security categories , but rather a focus on higher yielding securities . in addition , we currently have $ 17.1 million invested in equity securities related to bond and stock mutual funds as these securities offer a competitive yield with a shorter duration . however , we have reduced our holdings over the last several years due to higher earnings volatility and rbc charges . replace_table_token_6_th investment income from fixed maturity investments increased in 2016 due to an increase in the portfolio from new money investment purchases as noted above relative to the fixed maturity portfolio . in addition , the increase in the policy loans asset balance , which represents policyholders utilizing their accumulated policy cash value , contributed to the increase to investment income . investment income from equity securities has declined as we have reduced our holdings as discussed above . realized losses on investments . net realized investment losses resulted from otti on both
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we continue to see a greater number of people enrolled in plans with underlying incentive-based care provider payment models that reward high-quality , affordable care and foster collaboration . we work together with clinicians to leverage our data and analytics to provide the necessary information to close gaps in care and improve overall health outcomes for patients . we are increasingly rewarding care providers for delivering improvements in quality and cost-efficiency . as of december 31 , 2016 , we served more than 15 million people through some form of aligned contractual arrangement , including full-risk , shared-risk and bundled episode-of-care and performance incentive payment approaches . as of december 31 , 2016 , our contracts with value-based elements total nearly $ 53 billion in annual spending . this trend is creating needs for health management services that can coordinate care around the primary care physician , including new primary care channels , and for investments in new clinical and administrative information and management systems , which we believe provide growth opportunities for our optum business platform . regulatory trends and uncertainties following is a summary of management 's view of the trends and uncertainties related to some of the key provisions of the aca and other regulatory matters . for additional information regarding the aca and regulatory trends and uncertainties , see part i , item 1 โ business - government regulation โ and item 1a , โ risk factors. โ medicare advantage rates . final 2017 medicare advantage rates resulted in an increase in industry base rates of approximately 0.85 % , well short of the industry forward medical cost trend of 3 % , which creates continued pressure in the medicare advantage program . the impact of this funding shortfall in medicare advantage is partially mitigated by reductions in provider payments for those care providers with rates indexed to medicare advantage revenues or medicare fee-for-service payment rates . these factors can affect our plan benefit designs , pricing , growth prospects and earnings expectations for our medicare advantage plans . the ongoing pressure on medicare advantage funding places continued importance on effective medical management and ongoing improvements in administrative efficiency . there are a number of adjustments we have made to partially offset these rate pressures and reductions . in some years , these adjustments will impact the majority of the seniors we serve through medicare advantage . for example , we seek to intensify our medical and operating cost management , make changes to the size and composition of our care provider networks , adjust members ' benefits , implement or increase the member premiums that supplement the monthly payments we receive from the government and decide on a county-by-county basis where we will offer medicare advantage plans . as medicare advantage payments change , other products may become relatively more attractive to medicare beneficiaries and increase the demand for other senior health benefits products such as our market-leading medicare supplement and stand-alone medicare part d insurance offerings . as provided in the aca , our medicare advantage rates are currently enhanced by cms quality bonuses in certain counties based on our local plans ' star ratings . the level of star ratings from cms , based upon specified clinical and operational performance standards , will impact future quality bonuses . in addition , star ratings affect the amount of savings a plan can use to offer supplemental benefits , which ultimately may affect the plan 's membership and revenue . for the 2016 payment year , approximately 57 % of our medicare advantage members were in plans rated four stars or higher . we expect that at least 80 % of our medicare advantage members will be in plans rated four stars or higher for payment year 2017. we continue to dedicate substantial resources to advance our quality scores and star ratings to strengthen our local market programs and further improve our performance . health insurance industry tax and premium stabilization programs . the industry-wide amount of the health insurance industry tax was $ 11.3 billion in 2016 and we paid our portion of the tax , which was $ 1.8 billion , in september 2016. a provision in the 2016 federal budget imposes a one year moratorium for 2017 on the collection of the health insurance industry tax . the health insurance industry tax is scheduled to be imposed for 2018 and beyond . in 2018 , the industry-wide amount of the health insurance industry tax is expected to be $ 14.3 billion . the aca also included three programs designed to stabilize the health insurance markets . these programs encompassed : a transitional reinsurance program ; a temporary risk corridors program ; and a permanent risk adjustment program . the transitional reinsurance and temporary risk corridors programs expired at the end of 2016. individual public exchanges . in 2016 , we participated in individual public exchanges in 34 states and offered individual aca compliant products . we recorded a premium deficiency reserve for a portion of our estimated 2016 losses in our 2015 results 29 for in-force contracts as of january 1 , 2016. during 2016 , we incurred additional losses in our individual aca compliant products and , for 2017 , reduced our participation to three individual public exchanges . we expect to reduce the number of consumers we serve through individual insurance plans by nearly 1 million people in 2017 , which will reduce our premium revenues by more than $ 4 billion . results summary the following table summarizes our consolidated results of operations and other financial information : replace_table_token_4_th nm= not meaningful ( a ) medical care ratio is calculated as medical costs divided by premium revenue . ( b ) net earnings margin attributable to unitedhealth group shareholders . ( c ) return on equity is calculated as annualized net earnings divided by average equity . average equity is calculated using the equity balance at the end of the preceding year and the equity balances at the end of each of the four quarters in the year presented . story_separator_special_tag selected operating performance and other significant items the following represents a summary of select 2016 year-over-year operating comparisons to 2015 and other 2016 significant items . consolidated revenues increased by 18 % , unitedhealthcare revenues increased 13 % and optum revenues grew 24 % . unitedhealthcare grew to serve an additional 2.1 million people domestically . earnings from operations increased by 17 % , including increases of 8 % at unitedhealthcare and 32 % at optum . diluted earnings per common share increased 21 % to $ 7.25 . cash flows from operations were $ 9.8 billion . 30 2016 results of operations compared to 2015 results our results of operations were affected by our acquisition of catamaran in the third quarter of 2015. story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > 2016 cash flows compared to 2015 cash flows cash flows provided by operating activities increased slightly as higher net earnings were mostly offset by increased cms receivables and other operating items . other significant changes in sources or uses of cash year-over-year included increased net purchases of investments in 2016 and the decreases in cash paid for acquisitions and proceeds from debt issuances due to the 2015 acquisition of catamaran . 2015 cash flows compared to 2014 cash flows cash flows provided by operating activities in 2015 increased primarily due to growth in risk-based products , which increased medical costs payable and an increase in cms risk share payables , which increased other liabilities . these increases were partially offset by an increase in pharmacy rebates , which increased other receivables , the increase in the payment of the 2015 health insurance industry tax and the payment of reinsurance program fees in 2015. other significant changes in sources or uses of cash year-over-year included increased cash paid for acquisitions and net debt issuances and decreased share repurchases , all due to the catamaran acquisition . financial condition as of december 31 , 2016 , our cash , cash equivalent and available-for-sale investment balances of $ 36.7 billion included $ 10.4 billion of cash and cash equivalents ( of which approximately $ 700 million was available for general corporate use ) , $ 24.2 billion of debt securities and $ 2.0 billion of investments in equity securities consisting of investments in non-u.s. dollar fixed-income funds ; employee savings plan related investments ; venture capital funds ; and dividend paying stocks . given the significant portion of our portfolio held in cash equivalents , we do not anticipate fluctuations in the aggregate fair value of our financial assets to have a material impact on our liquidity or capital position . other sources of liquidity , primarily from operating cash flows and our commercial paper program , which is supported by our bank credit facilities , reduce the need to sell investments during adverse market conditions . see note 4 of notes to the consolidated financial statements included in part ii , item 8 , โ financial statements โ for further detail concerning our fair value measurements . our available-for-sale debt portfolio had a weighted-average duration of 3.3 years and a weighted-average credit rating of โ aa โ as of december 31 , 2016 . when multiple credit ratings are available for an individual security , the average of the available ratings is used to determine the weighted-average credit rating . capital resources and uses of liquidity in addition to cash flows from operations and cash and cash equivalent balances available for general corporate use , our capital resources and uses of liquidity are as follows : commercial paper and bank credit facilities . our revolving bank credit facilities provide liquidity support for our commercial paper borrowing program , which facilitates the private placement of senior unsecured debt through third-party broker-dealers , and are available for general corporate purposes . for more information on our commercial paper and bank credit facilities , see note 8 of notes to the consolidated financial statements included in part ii , item 8 , โ financial statements. โ our revolving bank credit facilities contain various covenants , including covenants requiring us to maintain a defined debt to debt-plus-shareholders ' equity ratio of not more than 55 % . as of december 31 , 2016 , our debt to debt-plus-shareholders ' equity ratio , as defined and calculated under the credit facilities was approximately 44 % . long-term debt . periodically , we access capital markets to issue long-term debt for general corporate purposes , such as , to meet our working capital requirements , to refinance debt , to finance acquisitions or for share repurchases . in february 2016 , we issued debt to repay commercial paper borrowings , which were incurred for general corporate and working capital purposes , and to repay our 5.375 % notes that were due march 15 , 2016. in december 2016 , we issued debt to repay commercial paper borrowings , which were incurred for general corporate and working capital purposes . for more information on these debt issuances , see note 8 of notes to the consolidated financial statements included in part ii , item 8 โ financial statements. โ credit ratings . our credit ratings as of december 31 , 2016 were as follows : moody 's standard & poor 's fitch a.m. best ratings outlook ratings outlook ratings outlook ratings outlook senior unsecured debt a3 negative a+ negative a- negative bbb+ stable commercial paper p-2 n/a a-1 n/a f1 n/a amb-2 n/a 35 the availability of financing in the form of debt or equity is influenced by many factors , including our profitability , operating cash flows , debt levels , credit ratings , debt covenants and other contractual restrictions , regulatory requirements and economic and market conditions . for example , a significant downgrade in our credit ratings or adverse conditions in the capital markets may increase the cost of borrowing for us or limit our access to capital . share repurchase program .
| the increase in unitedhealthcare 's operating earnings was due to diversified growth , offset by guaranty fund assessments recorded in the fourth quarter of 2016. for more information on these assessments , see note 12 of notes to the consolidated financial statements included in part ii , item 8 , โ financial statements. โ operating earnings in 2015 included the establishment of premium deficiency reserves for 2016 , primarily for individual aca compliant business . optum total revenues and operating earnings increased as each segment reported increased revenues and earnings from operations as a result of the factors discussed below . the results by segment were as follows : optumhealth revenue increased at optumhealth primarily due to growth in its health care delivery businesses as well as expansion of behavioral services into new medicaid markets . strong performance in business supporting unitedhealthcare partially offset by investments in the health care delivery business drove the increase in earnings from operations . 32 optuminsight revenue and earnings from operations at optuminsight increased primarily due to growth in revenue management , business process outsourcing and technology services . optumrx revenue and earnings from operations at optumrx increased primarily due to the full-year impact of catamaran and organic growth . in 2016 , optumrx fulfilled 1.24 billion adjusted scripts compared to 932 million in 2015 . 2015 results of operations compared to 2014 results consolidated financial results revenues the increase in revenues was primarily driven by the effect of the catamaran acquisition and organic growth in the number of individuals served across our benefits businesses and across all of optum 's businesses . medical costs medical costs increased primarily due to risk-based membership growth in our benefits businesses . medical costs also included losses on individual aca compliant products related to 2015 , and the establishment of premium deficiency reserves related to the 2016 policy year for anticipated future losses for in-force individual aca compliant contracts and a new state medicaid contract . operating cost ratio the decrease in our operating cost ratio was due to the inclusion of catamaran and
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increased base and blended oil pricing and volumes accounted for $ 87.2 million of incremental direct revenue from the comparable period in 2016 . this increase was partially offset by lower revenue of $ 15.6 million from a decrease in prices charged for used motor oil collection in 2017 . inclusive in the year-over-year changes within the safety-kleen segment was also the positive impact of foreign currency translation on our canadian operations of approximately $ 2.8 million in the year ended december 31 , 2017 from the comparable period in 2016 . cost of revenues we believe that our ability to manage operating costs is important to our ability to remain price competitive . we continue to upgrade the quality and efficiency of our services through the development of new technology and continued modifications at our facilities , invest in new business opportunities and aggressively implement strategic sourcing and logistics solutions as well as other cost reduction initiatives while also continuing to optimize our management and operating structure in an effort to maintain and increase operating margins . 30 environmental services replace_table_token_8_th environmental services cost of revenues for the year ended december 31 , 2018 increased $ 202.9 million from the comparable period in 2017 . the acquired veolia business had cost of revenues of $ 131.2 million in the year ended december 31 , 2018 . excluding these costs , environmental services cost of revenues for the year ended december 31 , 2018 increased $ 71.7 million primarily due to increases in labor related costs of $ 45.4 million , transportation , disposal and fuel costs of $ 16.2 million and equipment , supply and various other expenses of $ 10.0 million . the incremental operating costs were commensurate with greater activity levels in 2018 and overall inflationary pressure across several cost categories including certain commodity supplies such as fuel and other supplies . costs as a percentage of direct revenues decreased slightly over the comparable period of 2017 , which can be attributed to a more favorable mix of waste streams in our incineration network which increased profitability . environmental services cost of revenues for the year ended december 31 , 2017 increased $ 86.2 million from the comparable period in 2016 . excluding the impacts from divestitures , environmental services cost of revenues for the year ended december 31 , 2017 increased $ 133.0 million from the comparable period in 2016 primarily due to increases in labor and subcontractor related costs of $ 59.9 million , equipment and supply costs of $ 46.6 million , and transportation , disposal and fuel costs of $ 28.4 million , partially offset by $ 1.9 million of reductions across various expense categories . the incremental operating costs were primarily driven by the el dorado incinerator which came online in early 2017 and its relevant start-up activities , higher down days across our network associated with the hurricanes that impacted the gulf region of the u.s. in 2017 and overall increased economic activity . the higher concentration of lower margin waste in our incineration network decreased profitability as we focused on driving network utilization in response to the increased capacity . continued pricing pressures felt in 2017 in the industries in which we operate and integration costs also contributed to the increase in cost of revenues as a percentage of direct revenue from the comparable period in 2016 . safety-kleen replace_table_token_9_th safety-kleen cost of revenues for the year ended december 31 , 2018 increased $ 35.4 million from the comparable period in 2017 primarily due to increased costs of raw materials associated with oil products of $ 15.8 million , increased transportation , disposal and fuel costs of $ 12.3 million and labor related costs of $ 6.3 million . these increases were in line with the overall growth of the business and increased costs of commodities . our costs as a percentage of direct revenues decreased over the comparable period of 2017 due to our effective management of the spread between used oil input costs and base oil pricing , as well as the implementation of new pricing strategies , which generated greater levels of direct revenue . safety-kleen cost of revenues for the year ended december 31 , 2017 increased $ 45.1 million from the comparable period in 2016 primarily due to increased equipment and supply costs of $ 19.0 million , increased labor related costs of $ 13.8 million and increased transportation , disposal and fuel costs of $ 8.3 million . as a percentage of direct revenue , these costs decreased 1.3 % in the year ended december 31 , 2017 from the comparable period in 2016 primarily as a result of greater direct revenue levels driven by pricing partially offset by higher maintenance costs in the re-refinery network . selling , general and administrative expenses we strive to manage our selling , general and administrative expenses commensurate with the overall performance of our segments and corresponding revenue levels . we believe that our ability to properly align these costs with business performance is reflective of our strong management of the businesses and further promotes our ability to remain competitive in the marketplace . 31 environmental services replace_table_token_10_th environmental services selling , general and administrative expenses for the year ended december 31 , 2018 increased $ 21.3 million from the comparable period in 2017 due to increases in salary , benefits and variable compensation related costs of $ 14.7 million and bad debt expense of $ 7.0 million , partially offset by cost reductions across various expense categories . the increases in salary , benefits and variable compensation are in line with the growth of the business in 2018 as compared to 2017 . as a percentage of direct revenue , our costs remained consistent for the year ended december 31 , 2018 as compared to 2017 . environmental services selling , general and administrative expenses for the year ended december 31 , 2017 increased $ 10.2 million from the comparable period in 2016 . story_separator_special_tag excluding costs associated with divestitures impacting the comparability of these fiscal years , environmental services selling , general and administrative expenses for the year ended december 31 , 2017 increased $ 13.4 million primarily due to increased labor related costs including increased variable compensation and commissions . these increases were consistent with the growth of the business during 2017 as compared to 2016 . as a percentage of direct revenue , these costs remained consistent for the year ended december 31 , 2017 as compared to 2016 . safety-kleen replace_table_token_11_th safety-kleen selling , general and administrative expenses for the year ended december 31 , 2018 increased $ 5.8 million from the comparable period in 2017 primarily due to increased salaries , benefits and variable compensation of $ 5.7 million as we continue to grow the business . as a percentage of direct revenue , safety-kleen sg & a costs decreased for the year ended december 31 , 2018 as compared to 2017 as the additional direct revenues outpaced incremental sg & a costs . safety-kleen selling , general and administrative expenses for the year ended december 31 , 2017 increased $ 16.5 million from the comparable period in 2016 primarily due to increased labor related costs of $ 11.6 million , and an additional $ 4.9 million related to costs generated from strategic initiatives in the areas of the oilplus ยฎ closed loop initiative and centralization activities associated with this segment . as a percentage of direct revenue , our costs remained consistent for the year ended december 31 , 2017 as compared to 2016 . corporate items replace_table_token_12_th corporate items selling , general and administrative expenses for the year ended december 31 , 2018 increased $ 20.1 million from the comparable period in 2017 primarily due to increased salaries and benefits resulting from continued commitments to investing in our employees and variable compensation totaling $ 14.8 million as well as increased stock-based compensation of $ 4.3 million primarily attributable to the achievement of performance metrics associated with performance based awards in 2018. incremental costs associated with the acquired veolia business also contributed to the increased costs . corporate items selling , general and administrative expenses for the year ended december 31 , 2017 increased $ 7.9 million from the comparable period in 2016 primarily due to an increase in variable compensation of $ 7.4 million and stock-based compensation of $ 3.4 million attributable to greater revenue and earnings results in 2017 , partially offset by a reduction in severance costs of $ 3.5 million . 32 adjusted ebitda management considers adjusted ebitda to be a measurement of performance which provides useful information to both management and investors . adjusted ebitda should not be considered an alternative to net income ( loss ) or other measurements under generally accepted accounting principles ( `` gaap '' ) . adjusted ebitda is not calculated identically by all companies and , therefore our measurements of adjusted ebitda , while defined consistently and in accordance with our existing credit agreement , may not be comparable to similarly titled measures reported by other companies . we use adjusted ebitda to enhance our understanding of our operating performance , which represents our views concerning our performance in the ordinary , ongoing and customary course of our operations . we historically have found it helpful , and believe that investors have found it helpful , to consider an operating measure that excludes certain expenses relating to transactions not reflective of our core operations . the information about our operating performance provided by this financial measure is used by our management for a variety of purposes . we regularly communicate adjusted ebitda results to our lenders since our loan covenants are based upon levels of adjusted ebitda achieved and to our board of directors and we discuss with the board our interpretation of such results . we also compare our adjusted ebitda performance against internal targets as a key factor in determining cash and equity bonus compensation for executives and other employees , largely because we believe that this measure is indicative of how the fundamental business is performing and is being managed . we also provide information relating to our adjusted ebitda so that analysts , investors and other interested persons have the same data that we use to assess our core operating performance . we believe that adjusted ebitda should be viewed only as a supplement to the gaap financial information . we also believe , however , that providing this information in addition to , and together with , gaap financial information permits the foregoing persons to obtain a better understanding of our core operating performance and to evaluate the efficacy of the methodology and information used by management to evaluate and measure such performance on a standalone and a comparative basis . the following is a reconciliation of net income ( loss ) to adjusted ebitda for the following periods ( in thousands ) : replace_table_token_13_th depreciation and amortization replace_table_token_14_th depreciation and amortization for the year ended december 31 , 2018 increased $ 10.2 million from the comparable period in 2017 , primarily due to incremental depreciation from acquisitions and a slight increase in volumes at our landfills that drove higher landfill amortization . depreciation and amortization for the year ended december 31 , 2017 remained consistent with the comparable period in 2016 . 33 goodwill impairment charge replace_table_token_15_th during the year ended december 31 , 2016 , we recorded a $ 34.0 million goodwill impairment charge in our lodging services line of business . information regarding our 2016 goodwill impairment charge was disclosed in prior years ' annual reports on form 10-k. other ( expense ) income , net replace_table_token_16_th for the year ended december 31 , 2018 , other ( expense ) income , net decreased $ 1.6 million from the comparable period in 2017 primarily due to smaller losses recognized on sales or disposals of fixed assets in 2018 .
| '' net cash from operating activities for 2018 was $ 373.2 million , an increase of $ 87.5 million from 2017 . adjusted free cash flow , which management uses to measure our financial strength and ability to generate cash , was $ 195.3 million in 2018 , which represented a $ 55.1 million increase over 2017 primarily due to greater levels of operating income , lower interest payments and a reduction in environmental expenditures , offset by higher working capital levels and capital spending . additional information regarding adjusted free cash flow , which is a non-gaap measure , including a reconciliation of adjusted free cash flow to net cash from operating activities , appears below under `` adjusted free cash flow . '' 28 segment performance the primary financial measure by which we evaluate the performance of our segments is adjusted ebitda . the following table sets forth certain financial information associated with our results of operations for the years ended december 31 , 2018 , 2017 and 2016 . replace_table_token_5_th _ n/m = not meaningful ( 1 ) direct revenue is revenue allocated to the segment performing the provided service . ( 2 ) cost of revenue is shown exclusive of items presented separately on the statements of operations , which consist of ( i ) accretion of environmental liabilities and ( ii ) depreciation and amortization . direct revenues there are many factors which have impacted and continue to impact our revenues . these factors include , but are not limited to : overall industrial activity and growth in north america , existence or non-existence of large scale environmental waste and remediation projects , competitive industry pricing , impacts of acquisitions and divestitures , the level of emergency response projects , general conditions of the energy related industries , base and blended oil pricing , market changes relative to the collection of used oil , the number of parts washers placed at
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for further information on the regulatory , business and product pipeline , please see the โ business โ section of this annual report on form 10-k. for further information on the risk factors , please see the โ risk factors โ section of this annual report on form 10-k. revenue we do not have any products approved for sale , have not generated any revenue from product sales since our inception and do not expect to generate any revenue from the sale of products in the near future . if our development efforts result in clinical success and regulatory approval or collaboration agreements with third parties for any of our product candidates , we may generate revenue from those product candidates . operating expenses the majority of our operating expenses to date have been for the general and administrative activities related to general business activities , capital market activities and stock-based compensation , and research and development activities related to our lead product candidates . research and development expense all costs of research and development are expensed in the period in which they are incurred . research and development costs primarily consist of salaries and related expenses for personnel , stock-based compensation expense , fees paid to consultants , outside service providers , professional services , travel costs and materials used in clinical trials and research and development . we have a non-invasive diagnostic assay or blood test , zm-017 , that we are developing as an aid for veterinarians in diagnosing cancer in canines . we have four drug product candidates in development . our lead drug product candidate is zm-012 , a novel tablet formulation of metronidazole targeting the treatment of acute diarrhea in dogs . our second drug product candidate is zm-007 , an oral suspension formulation of metronidazole and a complementary formulation to zm-012 , targeting the treatment of acute diarrhea in small breeds and puppies under nine pounds or four kilograms . our third drug product candidate is zm-006 , a transdermal gel formulation of methimazole targeting hyperthyroidism in cats . our fourth drug product candidate is zm-011 , a transdermal gel formulation of fluoxetine , most commonly known as prozacยฎ , its human pharmaceutical brand name . we are also investigating the development of alternative drug delivery systems for our drug product candidates . we typically use our employee and infrastructure resources across multiple development programs . we track outsourced development costs by product candidate , but do not allocate personnel or other internal costs related to development to specific programs or product candidates . general and administrative expense general and administrative expense consists primarily of personnel costs , including salaries , related benefits and stock-based compensation for employees , consultants and directors . general and administrative expenses also include rent and other facilities costs and professional and consulting fees for legal , accounting , tax services and other general business services . - 39 - professional fees professional fees include attorney 's fees , accounting fees and consulting fees incurred in connection with product investigation and analysis , regulatory analysis , government relations , audit , securities offerings , investor relations , and general corporate and intellectual property advice . income taxes as of december 31 , 2017 , we had net operating loss carryforwards for federal and state income tax purposes of $ 5,008,180 and non-capital loss carryforwards for canada of approximately $ 6,526,850 respectively , which will begin to expire in fiscal year 2035. we have evaluated the factors bearing upon the realizability of our deferred tax assets , which are comprised principally of net operating loss carryforwards and non-capital loss carryforwards . we concluded that , due to the uncertainty of realizing any tax benefits as of december 31 , 2017 , a valuation allowance was necessary to fully offset our deferred tax assets . critical accounting policies and significant judgments and estimates our management 's discussion and analysis of financial condition and results of operations is based on our consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states , or u.s. gaap . the preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities , and revenue , costs and expenses and related disclosures during the reporting periods . on an ongoing basis , we evaluate our estimates and judgments , including those described below . we base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances , the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . while our significant accounting policies are more fully described in note 3 of the notes to our financial statements appearing elsewhere in this document , we believe that the estimates and assumptions involved in the following accounting policies may have the greatest potential impact on our financial statements . jobs act the jumpstart our business startups act , or the jobs act , contains provisions that , among other things , reduce certain reporting requirements for an โ emerging growth company. โ we have irrevocably elected not to avail ourselves of the jobs act provision that an emerging growth company may delay adopting new or revised accounting standards until such times as those standards apply to private companies . in addition , we are in the process of evaluating the benefits of relying on the other exemptions and reduced reporting requirements provided by the jobs act . story_separator_special_tag subject to certain conditions set forth in the jobs act , if as an โ emerging growth company โ we choose to rely on such exemptions , we may not be required to , among other things , ( i ) provide an auditor 's attestation report on our system of internal controls over financial reporting pursuant to section 404 , and ( ii ) comply with any requirement that may be adopted by the public company accounting oversight board regarding mandatory audit firm rotation or a supplement to the auditor 's report providing additional information about the audit and the financial statements ( auditor discussion and analysis ) . these exemptions will apply until december 31 , 2022 or until we no longer meet the requirements of being an โ emerging growth company , โ whichever is earlier . use of estimates the preparation of consolidated financial statements in conformity with u.s. gaap requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the year . actual results could differ from those estimates . - 40 - areas where significant judgment is involved in making estimates are : the determination of the functional currency ; the fair values of financial assets and liabilities ; the determination of fair value of stock-based compensation ; and forecasting future cash flows for assessing the going concern assumption . research and development costs research and development expenses comprise costs incurred in performing research and development activities , including salaries and benefits , safety and efficacy studies and contract manufacturing costs , contract research costs , patent procurement costs , materials and supplies and occupancy costs . research and development activities include internal and external activities associated with research and development studies of current product candidates and advancing product candidates towards a goal of obtaining regulatory approval to manufacture and market the product candidate . research and development costs related to continued research and development programs are expensed as incurred in accordance with asc topic 730. translation of foreign currencies the functional currency , as determined by management , is u.s. dollars , which is also our reporting currency . transactions denominated in currencies other than u.s. dollars and the monetary value of assets and liabilities are translated at the period end exchange rates . revenue and expenses are translated at rates of exchange prevailing on the transaction dates . all of the exchange gains or losses resulting from these other transactions are recognized in the consolidated statements of operations and comprehensive loss . stock-based compensation we measure the cost of equity-settled transactions by reference to the fair value of the equity instruments at the date at which they are granted if the fair value of the goods or services received by us can not be reliably estimated . we calculate stock-based compensation using the fair value method , under which the fair value of the options at the grant date is calculated using the black-scholes option pricing model , and subsequently expensed over the vesting period of the option . the provisions of our stock-based compensation plans do not require us to settle any options by transferring cash or other assets , and therefore we classify the awards as equity . stock-based compensation expense recognized during the period is based on the value of stock-based payment awards that are ultimately expected to vest . we estimate forfeitures at the time of grant and revised , if necessary , in subsequent periods if actual forfeitures differ from those estimates . volatility is determined based on volatilities of comparable companies when the company does not have its own trading history . the expected term , which represents the period of time that options granted are expected to be outstanding , is estimated based on an average of the term of the options . the risk-free rate assumed in valuing the options is based on the canadian treasury yield curve in effect at the time of grant for the expected term of the option . the expected dividend yield percentage at the date of grant is nil as we are not expected to pay dividends in the foreseeable future . loss per share basic loss per share , or eps , is computed by dividing the loss attributable to common shareholders by the weighted average number of common shares outstanding . diluted eps reflects the potential dilution that could occur from common shares issuable through the exercise or conversion of stock options , restricted stock awards , warrants and convertible securities . in certain circumstances , the conversion of options , warrants and convertible securities are excluded from diluted eps if the effect of such inclusion would be anti-dilutive . the dilutive effect of stock options is determined using the treasury stock method . stock options and warrants to purchase our common shares issued during the period were not included in the computation of diluted eps , as the effect would be anti-dilutive . comprehensive loss we follow asc topic 220. this statement establishes standards for reporting and display of comprehensive ( loss ) income and its components . comprehensive loss is net loss plus certain items that are recorded directly to shareholders ' equity . we currently have no other comprehensive loss items .
| the increase was primarily due to expenses related to the addition of personnel , accounting for salaries of $ 2,703,865 , which included share-based compensation expense of $ 849,679 , primarily as a result of the granting of options to purchase an aggregate of 535,000 common shares in february 2017 , all of which vested immediately upon the date of grant , and the granting of options to purchase an aggregate of 1,280,000 common shares in august 2017 , of which 1,242,500 have vested . other expenses included travel and accommodation of $ 338,738 , office expenses of $ 199,843 , insurance costs of $ 182,753 , marketing and investor relations costs of $ 168,623 , rent of $ 164,250 , and regulatory expense of $ 138,289. we expect that general and administrative expense will increase in 2018 and future periods as we increase our level of activity . - 42 - professional fees professional fees for the year ended december 31 , 2017 were $ 1,294,044 compared to $ 1,245,182 for the year ended december 31 , 2016 , an increase of $ 48,862 or 4 % . the increase was primarily due to expenses in connection with the preparation of our initial u.s. registration statement and work on our application to list our common shares on the nyse american . professional fees for the 2016 period consisted primarily of consulting fees incurred in connection with establishing our initial operations and preparing to execute our business plan , as well as legal fees incurred in connection with the qualifying transaction and our initial fundraising efforts . net loss our net loss for the year ended december 31 , 2017 was $ 8,065,072 , or $ 0.09 per share , compared with a net loss of $ 5,740,492 , or $ 0.07 per share , for the year ended december 31 , 2016 , an increase of $ 2,324,580 or 40 % . the net loss in each period was attributed to the matters described above . we expect to continue to record net losses in future periods until such
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reductions in the availability of financing for our investments could significantly impact our business and force us to sell assets that we otherwise would not sell , potentially at losses or at amounts below their true fair value . investing in mortgage-related securities on a leveraged basis subjects us to liquidity risk and interest rate risk which are discussed in further detail in item 7a , `` quantitative and qualitative disclosures about market risk '' and in the `` liquidity and capital resources '' section of this item 7. with respect to interest rate risk , such risk arises from changes in the absolute level of rates ( e.g. , the level of libor or treasury securities rates ) , changes in relationships between rate indices ( e.g. , libor versus treasury securities rates ) , and changes in the relationships between short-term and long-term rates ( e.g. , the 2-year treasury securities rate versus the 10-year treasury securities rate ) . interest rate risk also arises from changes in market spreads reflecting the perceived riskiness of assets ( e.g. , swap rates and mortgage rates relative to the treasury securities rates ) . because we leverage our capital , changes in interest rates can be disproportionately favorable or unfavorable on our results of operations and our book value . we attempt to manage our exposure to changes in interest rates by investing in shorter duration instruments and managing our investment portfolio within risk tolerances set by our board of directors . our current goal is to maintain a portfolio duration target ( a measure of interest rate risk ) within a range of 0.5 to 1.5 years . our portfolio duration could drift outside of our target range due to changes in market conditions , interest rates , market spreads , and activity in our investment portfolio . we will use interest rate swaps and other instruments to help manage our interest rate risk and , where practical , we will attempt to fund our assets with financings that have similar terms as the related investments . in general , mortgage portfolios have interest rate risk and , when financed with repurchase agreements , will underperform in a period of rising interest rates and outperform in a period of declining interest rates . the interest rates on our assets will generally reset less frequently than the interest rates on our liabilities , particularly our repurchase agreement financing . as such , during periods of rising interest rates , we will generally experience a reduction in our net interest income , notwithstanding our efforts to manage interest rate risk . this reduction in net interest income will be larger when short-term interest rates are rising rapidly . with the maturities of our assets generally of longer term than those of our liabilities , interest rate increases will also tend to decrease the market value of our assets ( and therefore our book value ) . many of our investments are purchased at premiums to their par balance . because we amortize premiums based on contractual payments as well as actual and expected future principal prepayments on the investments , changes in actual and expected prepayment rates will impact our yield on these investments and our operating results for the period in which any such 30 change occurs . principal prepayments on our investments are influenced by changes in market interest rates and a variety of economic , geographic , and other factors beyond our control . in addition , actions taken by the u.s. government could increase prepayments as discussed further below under โ trends and recent market impacts โ . increasing prepayments on premium assets will reduce their overall yield , negatively impacting our results . we attempt to manage the risks of purchasing assets at a premium by purchasing assets with protection from prepayments ( e.g. , agency cmbs ) and by purchasing assets which we believe will have less susceptibility to prepayments ( e.g. , hybrid agency arms collateralized by interest-only loans ) . trends and recent market impacts the following marketplace conditions and prospective trends have impacted and may continue to impact our future results of operations and our financial condition . for additional information about risks that may be posed by these trends , please refer to item 1a , `` risk factors '' contained within this annual report on form 10-k , as well as `` quantitative and qualitative disclosures about market risk '' contained within item 7 of this annual report on form 10-k. credit markets and liquidity risk our business model requires that we have access to leverage , principally the repurchase agreement market . repurchase agreement financing is uncommitted financing and as such , there can be no guarantee that we will always have access to such financing . during periods of sustained volatility in the credit markets , such as was experienced in 2008 , or other disruptions to the credit and financing markets , access to repurchase agreement financing may be limited as liquidity providers reduce their exposure to the short-term funding credit markets or may be available on less favorable terms . in an attempt to manage this risk , we seek to diversify our exposure to repurchase agreement counterparties and seek to extend the maturity dates of our repurchase agreements where practicable . we believe the diversification of counterparties reduces , but does not eliminate , our liquidity risk resulting from the exit or failure of one or more of our repurchase agreement counterparties . short-term interest rates in response to the volatility and lack of liquidity in the credit markets in 2008 , the fomc lowered the federal funds target rate ( the rate at which u.s. banks may borrow from each other ) from 4.25 % at the beginning of 2008 to its current targeted rate of 0.25 % and purchased sizeable quantities of agency mbs and treasury securities . while the credit markets are functioning more normally and liquidity has generally returned , economic activity in the u.s. has remained muted . story_separator_special_tag as noted above , the fomc has pledged to keep the federal funds target rate at the historically low target range of 0 % to 0.25 % until 2014. as economic activity improves , the federal reserve may decide to increase the federal funds target rate . such an increase would likely increase our funding costs because , as discussed above , our repurchase agreement financing is based on libor , which typically closely tracks the federal funds target rate . yield curve as of december 31 , 2011 , the spread between the two-year treasury security and the ten-year treasury security was 1.64 % versus 2.70 % as of december 31 , 2010 . while our borrowing costs are based on short-term market rates such as libor and the federal funds target rate , our asset yields more closely correlate with longer-term treasury rates and longer-term swap rates . as discussed previously , we hedge our exposure to changes in interest rates principally by entering into pay-fixed interest rate swaps . a flattening of the yield curve will generally result in a reduction in value of our interest rate swaps and an increase in value of our mbs . the relationship is not one-to-one , however , and the value of our interest rate swaps have declined in amounts in excess of the increase in our mbs , due primarily to the widening of credit spreads in our mbs investments . this resulted in a decline in our book value from a reduction in aoci and also resulted in margin calls on our interest rate swaps . a flattening of the yield curve generally will also result in reduced net interest spread on new investments that we may purchase from reinvestment of prepayments or if we raise additional capital . despite the flattening of the yield curve , we continue to see attractive investment opportunities to purchase mbs at acceptable yields relative to the cost of financing such investments . prepayments and agency mbs we experienced favorable prepayment activity on our agency rmbs throughout most of 2011. we believe this is 31 primarily due to the inability of borrowers to refinance their mortgages . our average constant prepayment rate , or cpr , for our agency rmbs during the fourth quarter of 2011 was 24.9 % versus 23.9 % for the third quarter of 2011 , 23.4 % for the second quarter of 2011 , 21.9 % for the first quarter of 2011 , and 25.8 % for all of 2010. as of december 31 , 2011 , the weighted average coupon on the mortgage loans underlying our agency rmbs was 5.07 % , while the average for the past twelve months of the 30-year fixed mortgage rate and the 5-year hybrid arm mortgage rate , as published by freddie mac , were 4.45 % and 3.31 % , respectively . generally , this type of interest rate environment encourages the average borrower to refinance their mortgage loans at lower rates . however , in many cases , obstacles exist to refinancing , including but not limited to , the lack of borrower 's equity in the underlying real estate and the lack of an acceptable level of income . we believe these obstacles contributed to the limited refinancing of loans in our agency rmbs portfolio and kept prepayment speeds on our agency rmbs relatively low during 2011. however , given the continued low level of interest rates , the proposed changes to the home affordable refinance program ( `` harp '' ) , and the commitment by the federal reserve to keep long-term rates low through `` operation twist '' ( discussed further below ) , we expect our prepayment speeds to increase in 2012. our forecasted prepayment speeds on our agency rmbs for 2012 is currently 28.0 % cpr . as discussed earlier , increased prepayments may impact our net interest income by increasing the amortization expense on any investments which we own at premiums to their par balance . gse reform on february 11 , 2011 , the treasury released proposals to limit or potentially wind down the role that fannie mae and freddie mac play in the mortgage market . similar proposals to limit or wind down the role of fannie mae and freddie mac were proposed during 2011 by politicians , housing industry observers and government regulators . any such proposals , if enacted , may have broad adverse implications for the mbs market and our business , results of operations , and financial condition . such proposals have been , and we expect them to continue to be , the subject of significant discussion , and it is not yet possible to determine whether such proposals will be enacted . financial regulatory reform and other government activity in july 2010 the dodd-frank wall street reform and consumer protection act ( the โ dodd-frank act โ ) was enacted into law . this legislation aims to restore responsibility and accountability to the financial system . it is unclear how this legislation may impact the borrowing environment , the investing environment for agency and non-agency mbs , or interest rate swaps and other derivatives because much of the dodd-frank act 's implementation has not yet been defined by regulators . in addition to the lowering of the federal funds target rate discussed above , the federal reserve also responded to market instability and economic weakness by purchasing agency mbs and treasury securities . from january 2009 through june 2011 the federal reserve purchased approximately $ 1.25 trillion of agency mbs and $ 600 billion in treasury securities of varying maturities . in september 2011 , the fomc announced its intention to sell shorter-term treasury securities and purchase longer-term treasury securities in response to weakening economic conditions in a policy operation which has become known as `` operation twist '' . the stated intention of the fomc in operation twist is to put downward pressure on longer-term interest rates and to help make broader financial conditions more accommodative .
| the effective yield on our agency rmbs purchased during the year ended december 31 , 2011 was 2.69 % compared to the effective yield of 3.60 % earned on our agency rmbs portfolio during the year ended december 31 , 2010 . during the third quarter of 2011 , we increased our forecasted prepayment speeds for our agency rmbs to 28 % cpr due to our belief that prepayment speeds on variable-rate agency rmbs investments will increase in the next twelve months as a result of the continued low interest rate environment and proposed changes to the harp program . increasing our forecasted prepayment speed reduced our interest income from agency mbs by increasing our net premium amortization expense for the year ended december 31 , 2011 . excluding interest rate swap expense , our financing cost for agency mbs increased $ 3.1 million to $ 4.8 million for the year ended december 31 , 2011 from $ 1.7 million for the year ended december 31 , 2010 due to our increase in average 39 balance of repurchase agreement financing , which increased due to our use of repurchase agreement borrowings to partially finance our agency mbs purchases during the year ended december 31 , 2011 . the average rate on the repurchase agreements ( excluding interest rate swap expense ) collateralized with agency mbs remained flat at 0.29 % for both years ended december 31 , 2011 and december 31 , 2010 . our financing costs for agency mbs shown in the table above for the year ended december 31 , 2011 include the allocation of $ 9.0 million of interest expense related to our interest rate swaps designated as cash flow hedges compared to $ 2.1 million of interest rate swap expense for the year ended december 31 , 2010 . this increase is due to the additional interest rate swap agreements we have entered into since december 31 , 2010 in order to hedge our increased exposure to interest rate risk associated with our increased use of repurchase
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our models employ both proprietary and vendor-based systems and include cross-line correlations for property , marine , offshore energy , aviation , workers compensation and personal accident . currently , we seek to limit our 1-in-250 year return period net probable maximum pre-tax loss from a severe catastrophic event in any geographic zone to approximately 25 % of total shareholders ' equity . we reserve the right to change this threshold at any time . based on in-force exposure estimated as of january 1 , 2013 , our modeled peak zone catastrophe exposure ( using the updated vendor-based system version ) is a windstorm affecting the northeastern u.s. , with a net probable maximum pre-tax loss of $ 867 million , followed by windstorms affecting the gulf of mexico and florida tri-county with net probable maximum pre-tax losses of $ 838 million and $ 603 million , respectively . our exposures to other perils , such as u.s. earthquake and international events , are less than the exposures arising from u.s. windstorms and hurricanes . as of january 1 , 2013 , 85 our modeled peak zone earthquake exposure ( new madrid area earthquake ) represented less than 45 % of our peak zone catastrophe exposure , and our modeled peak zone international exposure ( japan earthquake ) is substantially less than both our peak zone windstorm and earthquake exposures . net probable maximum pre-tax loss estimates are net of expected reinsurance recoveries , before income tax and before excess reinsurance reinstatement premiums . loss estimates are reflective of the zone indicated and not the entire portfolio . since hurricanes and windstorms can affect more than one zone and make multiple landfalls , our loss estimates include clash estimates from other zones . the loss estimates shown above do not represent our maximum exposures and it is highly likely that our actual incurred losses would vary materially from the modeled estimates . there can be no assurances that we will not suffer a net loss greater than 25 % of our total shareholders ' equity from one or more catastrophic events due to several factors , including the inherent uncertainties in estimating the frequency and severity of such events and the margin of error in making such determinations resulting from potential inaccuracies and inadequacies in the data provided by clients and brokers , the modeling techniques and the application of such techniques or as a result of a decision to change the percentage of shareholders ' equity exposed to a single catastrophic event . in addition , actual losses may increase if our reinsurers fail to meet their obligations to us or the reinsurance protections purchased by us are exhausted or are otherwise unavailable . see `` risk factorsยrisk relating to our industry '' and `` management 's discussion and analysis of financial condition and results of operationsยnatural and man-made catastrophic events . '' financial measures management uses the following three key financial indicators in evaluating our performance and measuring the overall growth in value generated for acgl 's common shareholders : book value per common share book value per common share represents total common shareholders ' equity divided by the number of common shares outstanding . management uses growth in book value per common share as a key measure of the value generated for our common shareholders each period and believes that book value per common share is the key driver of acgl 's common share price over time . book value per common share is impacted by , among other factors , our underwriting results , investment returns and share repurchase activity , which has an accretive or dilutive impact on book value per common share depending on the purchase price . book value per common share was $ 36.19 at december 31 , 2012 , a 13.9 % increase from $ 31.76 at december 31 , 2011. the growth in 2012 was generated through underwriting results and investment returns . after-tax operating return on average common equity after-tax operating return on average common equity ( `` operating roae '' ) represents after-tax operating income available to common shareholders divided by the average of beginning and ending common shareholders ' equity during the period . after-tax operating income available to common shareholders , a `` non-gaap measure '' as defined in the sec rules , represents net income available to common shareholders , excluding net realized gains or losses , net impairment losses recognized in earnings , equity in net income or loss of investment funds accounted for using the equity method , net foreign exchange gains or losses and loss on repurchase of preferred shares , net of income taxes . management uses operating roae as a key measure of the return generated to common shareholders and has set an objective to achieve an average operating roae of 15 % or greater over the insurance cycle , which it believes to be an attractive return to common shareholders given the risks we assume . see `` comment on non-gaap financial measures . '' 86 our operating roae was 7.7 % for 2012 , compared to 7.2 % for 2011 and 12.0 % for 2010. the operating roaes for 2012 and 2011 reflect a higher amount of losses from catastrophic events than the 2010 period and also reflect the impact of current insurance and reinsurance market conditions and the impact of lower interest yields on the investment portfolio . total return on investments total return on investments includes net investment income , equity in net income or loss of investment funds accounted for using the equity method , net realized gains and losses and the change in unrealized gains and losses generated by our investment portfolio . total return is calculated on a pre-tax basis and before investment expenses and includes the effect of financial market conditions along with foreign currency fluctuations . story_separator_special_tag management uses total return on investments as a key measure of the return generated to common shareholders on the capital held in the business , and compares the return generated by our investment portfolio against a benchmark return index . the benchmark return index is a customized combination of indices intended to approximate a target portfolio by asset mix and average credit quality while also matching the approximate estimated duration and currency mix of our insurance and reinsurance liabilities . although the estimated duration and average credit quality of this index will move as the duration and rating of its constituent securities change , generally we do not adjust the composition of the benchmark return index . the benchmark return index should not be interpreted as expressing a preference for or aversion to any particular sector or sector weight . the index is intended solely to provide , unlike many master indices that change based on the size of their constituent indices , a relatively stable basket of investable indices . at december 31 , 2012 , the benchmark return index had an average moody 's credit quality of `` aa2 '' , an estimated duration of 3.29 years and included weightings to the following indices : weighting the bank of america merrill lynch 1 - 10 year u.s. treasury & agency index 30.875 % the bank of america merrill lynch 1 - 10 year aa u.s. corporate & yankees index 20.875 % the bank of america merrill lynch u.s. mortgage backed securities index 11.875 % barclays capital cmbs , aaa index 10.000 % the bank of america merrill lynch 1 - 10 year u.s. municipal securities index 7.125 % msci world free index 5.000 % the bank of america merrill lynch 0 - 3 month u.s. treasury bill index 4.750 % the bank of america merrill lynch u.s. high yield constrained index 2.375 % barclays capital u.s. high-yield corporate loan index 2.375 % the bank of america merrill lynch 1 - 10 year u.k. gilt index 2.375 % the bank of america merrill lynch 1 - 10 year euro government index 2.375 % total 100.000 % 87 the following table summarizes the pre-tax total return ( before investment expenses ) of our investment portfolio compared to the benchmark return against which we measured our portfolio during the periods : replace_table_token_13_th ( 1 ) our investment expenses were approximately 0.22 % , 0.22 % and 0.19 % , respectively , of average invested assets in 2012 , 2011 and 2010. total return for our investment portfolio outperformed that of the benchmark return index in 2012 and reflected strong returns on high-yield corporate bonds , asian and emerging market investments and bank loans , which augmented the return on our investment grade fixed income portfolio . excluding foreign exchange , total return was 5.59 % for 2012 , compared to 4.10 % for 2011 and 7.26 % for 2010. comment on non-gaap financial measures throughout this filing , we present our operations in the way we believe will be the most meaningful and useful to investors , analysts , rating agencies and others who use our financial information in evaluating the performance of our company . this presentation includes the use of after-tax operating income available to common shareholders , which is defined as net income available to common shareholders , excluding net realized gains or losses , net impairment losses recognized in earnings , equity in net income or loss of investment funds accounted for using the equity method net foreign exchange gains or losses and loss on repurchase of preferred shares , net of income taxes . the presentation of after-tax operating income available to common shareholders is a `` non-gaap financial measure '' as defined in regulation g. the reconciliation of such measure to net income available to common shareholders ( the most directly comparable gaap financial measure ) in accordance with regulation g is included under `` results of operations '' below . we believe that net realized gains or losses , net impairment losses recognized in earnings , equity in net income or loss of investment funds accounted for using the equity method , net foreign exchange gains or losses and loss on repurchase of preferred shares in any particular period are not indicative of the performance of , or trends in , our business . although net realized gains or losses , net impairment losses recognized in earnings , equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses are an integral part of our operations , the decision to realize investment gains or losses , the recognition of net impairment losses , the recognition of equity in net income or loss of investment funds accounted for using the equity method and the recognition of foreign exchange gains or losses are independent of the insurance underwriting process and result , in large part , from general economic and financial market conditions . furthermore , certain users of our financial information believe that , for many companies , the timing of the realization of investment gains or losses is largely opportunistic . in addition , net impairment losses recognized in earnings on our investments represent other-than-temporary declines in expected recovery values on securities without actual realization . the use of the equity method on certain of our investments in certain funds that invest in fixed maturity securities is driven by the ownership structure of such funds ( either limited partnerships or limited liability companies ) . in applying the equity method , these investments are initially recorded at cost and are subsequently adjusted based on our proportionate share of the net income or loss of the funds ( which include changes in the fair value of the underlying securities in the funds ) .
| growth in professional liability primarily reflected new business written in small and medium sized accounts while the growth in executive assurance business primarily resulted from small and medium sized accounts in the u.k. and the u.s. the increase in accident and health business primarily resulted from new business . the reduction in onshore energy premiums reflected a strategic shift towards writing more on an excess basis and utilizing smaller capacity per account as well as an increased use of reinsurance . 2011 versus 2010 : increases in property and energy business as well as in program business , national accounts and executive assurance were partially offset by reductions in commercial aviation and professional liability lines of business . the increase in property premiums primarily resulted from new business and a higher retention rate on existing accounts in the insurance segment 's u.s. operations and growth in the insurance segment 's european operations in both global property and energy lines . the increase in national accounts resulted from new business while the increase in program business resulted from growth on existing programs . the reduction in commercial aviation business primarily resulted from a strategic decision to exit the business in early 2010 while the lower level of professional liability business was primarily due to market conditions . 91 net premiums earned . the following table sets forth our insurance segment 's net premiums earned by major line of business : replace_table_token_18_th ( 1 ) includes excess workers ' compensation , employer 's liability , alternative markets and accident and health business . net premiums earned by the insurance segment were 7.2 % higher in 2012 than in 2011 , reflecting changes in net premiums written over the previous five quarters . net premiums earned by the insurance segment were 1.7 % higher in 2011 than in 2010. losses and loss adjustment expenses . the table below shows the components of the insurance segment 's loss ratio : replace_table_token_19_th current year loss ratio . 2012 versus 2011 : the insurance segment 's current year loss ratio was 0.1 points higher in 2012
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we have expanded to 388 stores located in 25 states as of january 30 , 2021. during 2020 , our stores were supported by three distribution centers , one each in york , pa , commerce , ga , and lancaster , tx . we believe our distribution capabilities can support a range of 500 to 600 stores over the next several years . we have invested in our associates , infrastructure , distribution network and information systems to allow us to continue to rapidly grow our store footprint , including : growing our merchant buying team to increase our access to brand name/closeout merchandise ; adding members to our senior management team ; 41 index expanding the capacity of our distribution centers to their current 2.2 million square feet ; and investing in information technology , accounting and warehouse management systems . our business model has produced consistent and predictable store growth over the past several years , during both strong and weaker economic cycles . we plan to continue to enhance our competitive positioning and drive growth in sales and profitability by executing on the following strategies : growing our store base ; increasing our offerings of great bargains ; and leveraging and expanding ollie 's army . we have a proven portable , flexible , and highly profitable store model that has produced consistent financial results and returns . our new store model targets a store size between 25,000 to 35,000 square feet and an average initial cash investment of approximately $ 1.0 million , which includes store fixtures and equipment , store-level and distribution center inventory ( net of payables ) and pre-opening expenses . we target new store sales of approximately $ 4.0 million in their first full year of operations . while we are focused on driving comparable store sales and managing our expenses , our revenue and profitability growth will primarily come from opening new stores . the core elements of our business model are procuring great deals , offering extreme values to our customers and creating consistent , predictable store growth and margins . in addition , our new stores generally open strong , immediately contributing to the growth in net sales and profitability of our business . from 2016 to 2020 , net sales grew at a cagr of 19.3 % . we plan to achieve continued net sales growth , including increases in our comparable stores sales , by adding stores to our store base and by continuing to provide quality merchandise at a value for our customers as we scale and gain more access to purchase directly from major manufacturers . we also plan to leverage and expand our ollie 's army database marketing strategies . in addition , we plan to continue to manage our sg & a by furthering process improvements and by maintaining our standard policy of reviewing our operating costs . our ability to grow and our results of operations may be impacted by additional factors and uncertainties , such as consumer spending habits , which are subject to macroeconomic conditions and changes in discretionary income . our customers ' discretionary income is primarily impacted by gas prices , wages and consumer trends and preferences , which fluctuate depending on the environment . the potential consolidation of our competitors or other changes in our competitive landscape could also impact our results of operations or our ability to grow , even though we compete with a broad range of retailers . our key competitive advantage is our direct buying relationships with many major manufacturers , wholesalers , distributors , brokers and retailers for our brand name and closeout products and unbranded goods . we also augment our product mix with private label brands . as we continue to grow , we believe our increased scale will provide us with even greater access to brand name and closeout products as major manufacturers seek a single buyer to acquire an entire deal . how we assess the performance of our business and key line items we consider a variety of financial and operating measures in assessing the performance of our business . the key measures we use are number of new stores , net sales , comparable store sales , gross profit and gross margin , sg & a , pre-opening expenses , operating income , ebitda and adjusted ebitda . 42 index number of new stores the number of new stores reflects the number of stores opened during a particular reporting period . before we open new stores , we incur pre-opening expenses described below under โ pre-opening expenses โ and we make an initial investment in inventory . we also make initial capital investments in fixtures and equipment , which we amortize over time . we opened 46 new stores in 2020. we expect new store growth to be the primary driver of our sales growth . our initial lease terms are approximately seven years with options to renew for three to five successive five-year periods . our portable and predictable real estate model focuses on backfilling existing markets and entering new markets in contiguous states . our new stores often open with higher sales levels as a result of greater advertising and promotional spend in connection with grand opening events but decline shortly thereafter to our new store model levels . net sales we recognize retail sales in our stores when merchandise is sold and the customer takes possession of the merchandise . also included in net sales in 2020 , 2019 and 2018 is revenue allocated to certain redeemed discounts earned via the ollie 's army loyalty program and gift card breakage . net sales are presented net of returns and sales tax . net sales consist of sales from comparable stores and non-comparable stores , described below under โ comparable store sales. โ growth of our net sales is primarily driven by expansion of our store base in existing and new markets . story_separator_special_tag as we continue to grow , we believe we will have greater access to brand name and closeout merchandise and an increased deal selection , resulting in more potential offerings for our customers . net sales are impacted by product mix , merchandise mix and availability , as well as promotional activities and the spending habits of our customers . our broad selection of offerings across diverse product categories supports growth in net sales by attracting new customers , which results in higher spending levels and frequency of shopping visits from our customers , including ollie 's army members . the spending habits of our customers are subject to macroeconomic conditions and changes in discretionary income . our customers ' discretionary income is primarily impacted by gas prices , wages and consumer trends and preferences , which fluctuate depending on the environment . however , because we offer a broad selection of merchandise at extreme values , we believe we are less impacted than other retailers by economic cycles . these cycles correspond with declines in general consumer spending habits and we benefit from periods of increased consumer spending . comparable store sales comparable store sales measure performance of a store during the current reporting period against the performance of the same store in the corresponding period of the previous year . comparable store sales consist of net sales from our stores beginning on the first day of the sixteenth full fiscal month following the store 's opening , which is when we believe comparability is achieved . comparable store sales are impacted by the same factors that impact net sales . we define comparable stores to be stores : that have been remodeled while remaining open ; that are closed for five or fewer days in any fiscal month ; that are closed temporarily and relocated within their respective trade areas ; and that have expanded , but are not significantly different in size , within their current locations . 43 index non-comparable store sales consist of new store sales and sales for stores not open for a full 15 months . stores which are closed temporarily , but for more than five days in any fiscal month , are included in non-comparable store sales beginning in the fiscal month in which the temporary closure begins until the first full month of operation once the store re-opens , at which time they are included in comparable store sales . opening new stores is the primary component of our growth strategy and as we continue to execute on our growth strategy , we expect a significant portion of our sales growth will be attributable to non-comparable store sales . accordingly , comparable store sales are only one measure we use to assess the success of our growth strategy . gross profit and gross margin gross profit is equal to our net sales less our cost of sales . cost of sales includes merchandise costs , inventory markdowns , shrinkage and transportation , distribution and warehousing costs , including depreciation . gross margin is gross profit as a percentage of our net sales . gross margin is a measure used by management to indicate whether we are selling merchandise at an appropriate gross profit . in addition , our gross margin is impacted by product mix , as some products generally provide higher gross margins , by our merchandise mix and availability and by our merchandise cost , which can vary . our gross profit is variable in nature and generally follows changes in net sales . we regularly analyze the components of gross profit as well as gross margin . specifically , our product margin and merchandise mix is reviewed by our merchant team and senior management , ensuring strict adherence to internal margin goals . our disciplined buying approach has produced consistent gross margins and we believe helps to mitigate adverse impacts on gross profit and results of operation . the components of our cost of sales may not be comparable to the components of cost of sales or similar measures of our competitors and other retailers . as a result , our gross profit and gross margin may not be comparable to similar data made available by our competitors and other retailers . selling , general and administrative expenses sg & a are comprised of payroll and benefits for store , field support and support center associates . sg & a also include marketing and advertising expense , occupancy costs for stores and the store support center , insurance , corporate infrastructure and other general expenses . the components of our sg & a remain relatively consistent per store and for each new store opening . consolidated sg & a generally increase as we grow our store base and as our net sales increase . a significant portion of our expenses is primarily fixed in nature , and we expect to continue to maintain strict discipline while carefully monitoring sg & a as a percentage of net sales . the components of our sg & a may not be comparable to the components of similar measures of other retailers . we expect that our sg & a will continue to increase in future periods with future growth . depreciation and amortization expenses property and equipment are stated at original cost less accumulated depreciation and amortization . depreciation and amortization expenses are calculated over the estimated useful lives of the related assets , or in the case of leasehold improvements , the lesser of the useful lives or the remaining term of the lease . expenditures for additions , renewals , and betterments are capitalized ; expenditures for maintenance and repairs are charged to expense as incurred . depreciation and amortization are computed on the straight-line method for financial reporting purposes . depreciation as it relates to our distribution centers is included within cost of sales on the consolidated statements of income . 44 index pre-opening expenses pre-opening expenses consist of expenses of opening new stores and distribution centers , as well as store closing costs .
| 50 index on may 22 , 2019 , we completed a transaction in which we refinanced our credit facility ( the โ credit facility โ ) . the credit facility provides for a five-year $ 100.0 million revolving credit facility , which includes a $ 45.0 million sub-facility for letters of credit and a $ 25.0 million sub-facility for swingline loans ( the โ revolving credit facility โ ) . the loans under the revolving credit facility mature on may 22 , 2024. in addition , we may at any time add term loan facilities or additional revolving commitments up to $ 150.0 million pursuant to terms and conditions set out in the credit facility . the interest rates for the credit facility are calculated as follows : for base rate loans , the higher of the prime rate , the federal funds effective rate plus 0.50 % or the eurodollar rate plus 1.0 % , plus the applicable margin , or , for eurodollar loans , the eurodollar rate plus the applicable margin . the applicable margin will vary from 0.00 % to 0.50 % for a base rate loan and 1.00 % to 1.50 % for a eurodollar loan , based on availability under the credit facility . the eurodollar rate is subject to a 0 % floor . under the terms of the revolving credit facility , as of january 30 , 2021 , we could borrow up to 90.0 % of the most recent appraised value ( valued at cost , discounted for the current net orderly liquidation value ) of our eligible inventory , as defined , up to $ 100.0 million . as of january 30 , 2021 , we had no outstanding borrowings under the revolving credit facility , with $ 92.0 million of borrowing availability , outstanding letters of credit commitments of $ 7.8 million and $ 0.2 million of rent reserves . the revolving credit facility also contains a variable unused line fee ranging from 0.125 % to 0.250 % per annum . we incurred unused line fees of $ 0.1 million and $ 0.2
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we recorded no interest and other expense during the year ended december 31 , 2013. during the year ended december 31 , 2012 , we recorded interest and other expense of $ 0.3 million comprised of $ 0.2 million related to interest incurred on a value added tax audit in mexico and $ 0.1 million related to losses on investments . gain ( loss ) on foreign currency . we recorded a $ 0.6 million foreign currency loss for the year ended december 31 , 2013 compared to a $ 0.5 million foreign currency gain for the year ended december 31 , 2012. foreign currency gains and losses are primarily related to the effect of currency fluctuations on monetary assets net of liabilities held by our foreign subsidiaries that are denominated in currencies other than us dollars . such foreign currency denominated monetary assets and liabilities have increased with the acquisition of the velardeรฑa properties . income taxes . for the year ended december 31 , 2013 we recorded an income tax benefit of $ 49.7 million primarily related to the impairment of long lived assets during the year . our income tax benefit for the year ended december 31 , 2012 was $ 8.0 million primarily related to an increase in net operating losses and the amortization of the mineral deposit at our velardeรฑa properties in mexico . liquidity and capital resources at december 31 , 2013 our aggregate cash and short-term investments totaled $ 19.1 million . during the first quarter of 2013 we completed the sale of certain peruvian exploration properties to a third party for net proceeds of $ 3.5 million . we received other proceeds of $ 0.5 million related to joint venture option payments on other mexican and peruvian exploration properties . with the cash balance at december 31 , 2013 , and the assumptions described below , and excluding costs related to a potential restart of the velardeรฑa properties , we expect to have sufficient funding to continue our long term business strategy through 2014 , ending 2014 with a cash balance of approximately $ 5.0 million . absent a source of cash flow beyond 2014 , our cash balance would be depleted by midyear 2015. in addition , a potential restart of the velardeรฑa properties during 2014 could require additional funding . we will be required to seek additional funding from equity or debt or from monetization of non-core assets . there can be no assurance that we would be successful in obtaining sufficient funding from any of these actions or sources in the future on terms acceptable to us or at all . our cash and short-term investment balance at december 31 , 2013 of $ 19.1 million is $ 25.5 million lower than the $ 44.6 million in similar assets held at december 31 , 2012 due primarily to $ 6.9 million in operating losses at the velardeรฑa properties ; $ 6.4 million related to velardeรฑa shutdown and care and maintenance costs ; $ 4.8 million in velardeรฑa properties capital and development expenditures ; $ 4.6 million in exploration expenditures ; $ 5.6 million in general and administrative expenses ; and $ 2.6 million spent on the el quevar project ; offset in part by net proceeds of $ 4.0 million from the sale of non strategic exploration property interests and a decrease in working capital of $ 1.4 million primarily related to a reduction in inventories and receivables at the velardeรฑa properties . with the cash balance at december 31 , 2013 of $ 19.1 million we plan to spend the following amounts totaling approximately $ 14.0 million during 2014. these amounts do not include costs related to a potential restart of the velardeรฑa properties . ยท approximately $ 3.5 million on care and maintenance activities at the velardeรฑa properties , primarily related to labor and contractor costs ; ยท approximately $ 1.0 million on drilling costs at the velardeรฑa properties related to the development of restart plans ; 43 ยท approximately $ 1.0 million at the el quevar project to fund ongoing maintenance activities and property holding costs ; ยท approximately $ 3.5 million on other exploration activities and property holding costs related to the company 's portfolio of exploration properties located primarily in mexico ; and ยท approximately $ 5.5 million on general and administrative costs partially offset by $ 0.5 million in decreased working capital , primarily related to the collection of vat receivables . the actual amount that we spend through year-end 2014 and the projected year-end cash balance may vary significantly from the amounts specified above and will depend on a number of factors , including the timing and costs associated with a potential restart of the velardeรฑa properties , and the results of continued project assessment work at our other exploration properties . if we are able to restart mining at the velardeรฑa properties on a profitable basis , it is unlikely that those activities will generate sufficient revenue to fund all of our continuing business activities as currently conducted . we will be required to seek additional funding from equity or debt or from monetization of non-core assets . therefore , whether or not we recommence mining at the velardeรฑa properties , we expect to require additional funding in 2014 or 2015 for general and administrative costs and other working capital needs to fund our continuing business activities . critical accounting policies and estimates the selection and application of accounting policies is an important process that has developed as our business activities have evolved and as the accounting rules have changed . accounting rules generally do not involve a selection among alternatives , but involve an implementation and interpretation of existing rules , and the use of judgment , to the specific set of circumstances existing in our business . story_separator_special_tag discussed below are the accounting policies that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset , liability , revenue or expense being reported . mineral reserves when and if we determine that a mineral property has proven and probable reserves , subsequent development costs are capitalized to mineral properties . when mineral properties are developed and operations commence , capitalized costs are charged to operations using the units-of-production method over proven and probable reserves . ยmineralized materialย as used in this annual report , although permissible under sec 's industry guide 7 , does not indicate ยreservesย by sec standards , and therefore all development costs incurred by us are expensed when incurred . the company can not be certain that any part of the deposits at the velardeรฑa properties or the yaxtchรฉ deposit at the el quevar project will ever be confirmed or converted into sec industry guide 7 compliant ยreservesย . asset retirement obligations we record asset retirement obligations in accordance with auditing standards codification ( ยascย ) 410 , ยasset retirement and environmental obligationsย ( ยasc 410ย ) , which establishes a uniform methodology for accounting for estimated reclamation and abandonment costs . according to asc 410 , the fair value of a liability for an asset retirement obligation ( ยaroย ) is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made . an offsetting asset retirement cost is capitalized as part of the carrying value of the assets with which it is associated , and depreciated over the useful life of the asset . during 2012 , a third party engineering firm completed a detailed closure plan for our velardeรฑa properties which resulted in a reduction to the original aro estimate , recorded in conjunction with the acquisition of the velardeรฑa properties , of approximately $ 1.7 million ( see note 11 to the accompanying consolidated financial statements ) . long lived assets and goodwill we assess the recoverability of our long lived assets , including goodwill , at least annually or whenever events or changes in circumstances indicate that the carrying value of the assets may be impaired . the significant decrease in metals prices during 2013 and the shutdown of mining and processing at the velardeรฑa properties during june 2013 were events that required an assessment of the recoverability of the velardeรฑa properties asset group and goodwill . we completed an impairment analysis using a market valuation approach which relies upon assumptions related to the velardeรฑa properties asset group in comparison to other corroborated observable market data . at june 30 , 2013 we determined that both the long lived assets and the goodwill associated with the velardeรฑa properties and the san diego property were impaired . as a result at june 30 , 2013 we recorded a $ 237.8 million impairment charge related to the long lived assets and an $ 11.2 million impairment charge related to goodwill . at december 31 , 2013 we reviewed the remaining carrying value of the long lived assets and goodwill based on the corroborated observable market data at that date and determined that the long lived assets and goodwill were further impaired . as a result , at december 31 , 2013 we recorded an additional $ 6.1 million impairment 44 charge related to the long lived assets and a $ 0.5 million impairment charge related to goodwill which reduced the carrying value of the goodwill to zero . during 2012 , as the result of decreased gold and silver prices and changes to certain assumptions related to the long term plan for the velardeรฑa properties we completed an impairment analysis of the goodwill carrying value , which indicated that goodwill was impaired . as a result of the impairment analysis we recorded goodwill impairments of $ 58.5 million , reducing the goodwill carrying value from $ 70.2 million to $ 11.7 million at december 31 , 2012. deferred taxes in accordance with asc 740 , ยincome taxesย , the company presents deferred tax assets net of its deferred tax liabilities on a tax jurisdictional basis on its consolidated balance sheets . the net deferred tax liability as of december 31 , 2013 was zero , while the net deferred tax liability as of december 31 , 2012 was $ 47.1 million . our income tax benefit of $ 49.7 million for the year ended december 31 , 2013 was due primarily to the deferred tax benefit of $ 47.2 million , primarily related to the long lived assets impairment of the velardeรฑa properties . the impairment of long lived assets required the removal of the deferred tax liability existing at the time of impairment . the deferred tax liability existed as a result of the acquisition of our velardeรฑa properties and was calculated taking the difference between the fair value and the tax basis of the assets acquired and liabilities assumed multiplied by the mexico income tax rate . 45 table of contractual obligations the following table summarizes our contractual obligations at december 31 , 2013 : replace_table_token_16_th ( 1 ) the operating lease obligations are related to our corporate headquarters office in golden , colorado , as well as another office lease associated with our velardeรฑa properties . the lease for the corporate headquarters office space was renegotiated and extended during the first quarter 2014. the new lease reflects an approximately 46 % reduction in space and an approximately 44 % reduction in cost beginning march 1 , 2014. the new lease expires november 30 , 2019. the lease for the velardeรฑa properties office expires in 2015 . ( 2 ) we make annual maintenance payments of approximately $ 11,800 to the mexico federal government to maintain the velardeรฑa properties concessions and approximately $ 34,000 to the argentine federal government to maintain the el quevar project
| the decrease in exploration expenses for the year ended december 31 , 2013 as compared to the year ended december 31 , 2012 is the result of our reduced spending on exploration as we rationalized and monetized our exploration portfolio . velardeรฑa project expense . during the years ended december 31 , 2013 and 2012 we incurred approximately $ 3.1 million and $ 7.9 million of expenses , respectively , primarily related to construction of the san mateo ramp , other mine construction and engineering work at our velardeรฑa properties in mexico . in addition to amounts expensed during the years ended december 31 , 2013 and 2012 , we incurred capital expenditures of approximately $ 1.8 million and $ 9.5 million , respectively for plant construction , mining and other equipment . we suspended mining and processing at our velardeรฑa properties effective june 19 , 2013 , as discussed above . velardeรฑa shutdown and care and maintenance costs . during the year ended december 31 , 2013 we recorded a $ 6.4 million expense related to the severance of 440 positions and other shutdown and care and maintenance costs at our velardeรฑa properties as the result of the suspension of mining and processing activities at the velardeรฑa properties effective june 19 , 2013. we had no such charges during the year ended december 31 , 2012 . 41 el quevar project expense . during the years ended december 31 , 2013 and 2012 we incurred $ 2.6 million and $ 5.1 million of expenses , respectively , primarily related to furthering our evaluation of the yaxtchรฉ deposit at our el quevar project in argentina . the reduction in costs for 2013 is primarily the result of placing the el quevar project in a holding and maintenance state during 2013 while we actively solicit a partner to move the project forward . for both years , costs incurred for work performed outside of the yaxtchรฉ deposit are included in ย exploration expense ย discussed above . administrative expense . administrative
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these statements involve known and unknown risks , uncertainties and other factors that may cause our actual results , levels of activity , performance or achievements to be materially different from the information expressed or implied by these forward-looking statements . while we believe that we have a reasonable basis for each forward-looking statement contained in this annual report , we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future , about which we can not be certain . we undertake no obligation to publicly update any forward-looking statements , whether as a result of new information , future events or otherwise . you are advised , however , to consult any further disclosures we make on related subjects in our quarterly reports on form 10-q , current reports on form 8-k , and our website . overview we are a clinical-stage biopharmaceutical company applying a precision medicine approach to the development and commercialization of genetically targeted therapies for cardiovascular diseases . precision medicine refers to the tailoring of medical treatment to the individual characteristics of patients , using genomic and other information that extends beyond general diagnostic categorization . we believe that when implemented correctly precision medicine can enhance therapeutic response , improve patient outcomes , and reduce healthcare costs . 43 our lead product candidate , gencaro ( bucindolol hydrochloride ) , is a pharmacogenetic ally -targeted beta-adrenergic receptor antagonist with mild vasodilator properties t hat we are developing as a fourth - generation beta-blocker based on its pharmacogenetic targeting . we believe the pharmacology of gencaro is unique and has the potential for enhanced efficacy in patients with a specific genetic characteristic for the beta-1 adrenergic receptor , termed the beta-1 389 arginine homozygous genotype . the beta-1 389 arginine homozygous genotype is present in approximately 50 % of the north american and european general populations , and it can be detected by a genetic test currently performed in a centralized laboratory or in the future potentially at the point of care during a patient visit . we are developing gencaro to treat cardiovascular disease , focusing on atrial fibrillation , or af , in patients with chronic heart failure , or hf . hf is a chronic condition in which the heart is unable to pump enough blood to meet the body 's needs . af is a disruption of the heart 's normal rhythm or rate , which commonly occurs in patients with hf . in hf patients , the presence of af leads to worsening symptoms , and increased risk of hospitalization and death . current treatment options for af in hf patients are limited , and can be invasive , costly and dangerous . gencaro was previously studied in the best trial , a phase 3 hf mortality trial in 2,708 patients . the best trial included a dna substudy of over 1,000 patients , which was used to evaluate the effect of genetic variations in cardiac adrenergic receptors on the response to gencaro . data from this substudy showed that patients with the beta-1 389 arginine homozygous genotype had substantial improvements in mortality , hospitalization and the prevention of arrhythmias . we believe that these genetically determined receptor variations , which are detectable using standard dna testing technology , can serve as diagnostic markers for predicting enhanced therapeutic response to gencaro . our current clinical development of gencaro is focused on af in hf patients who have a left ventricular ejection fraction , or lvef , of 40 % and higher and the specific genotype we believe responds best to gencaro . there are currently no drug therapies approved to treat af or hf in this population , which encompasses more than half of all hf in the united states and europe . we believe that , if approved , there are additional indication expansion opportunities for gencaro in other hf populations and cardiac arrhythmias , as well as the potential for new formulation developments to extend marketing exclusivity . in may 2019 , we published the results of our phase 2b clinical trial that examined gencaro for the prevention of af in hf patients , in the journal of the american college of cardiology : heart failure . in this trial , known as genetic-af , we compared gencaro against toprolโxl ( metoprolol succinate ) , a beta-blocker that is commonly prescribed for hf patients with af . genetic-af enrolled 267 hf patients with lvef values ranging from 12 % to 55 % who had recently experienced af and had the specific genotype we believe responds best to gencaro . our analysis of the results identified what we believe is a targeted patient population for phase 3 development ; one showing greater response to gencaro compared to toprol-xl for multiple clinical assessments , including the primary endpoint of time to af recurrence , maintenance of normal sinus rhythm , cumulative af burden , and af-related clinical interventions and complications . in july 2019 , we reached an agreement with the u.s. food and drug administration , or fda , known as a special protocol assessment , or spa , for the requirements of the gencaro phase 3 clinical trial . based on the spa agreement , our planned phase 3 clinical trial , if successful at a statistical threshold of at least p โค 0.01 , may support a new drug application , or nda , for the marketing approval of gencaro . story_separator_special_tag precisionโaf , the clinical trial specified by the spa , is anticipated to enroll approximately 400 hf patients with lvef values ranging from 40 % to 55 % who have recently experienced af and have the specific genotype we believe responds best to gencaro . the clinical trial design is similar to genetic-af , including the active comparator , toprolโxl , and the primary endpoint of time to af recurrence during a 6-month follow-up period . secondary objectives will examine other important endpoints , such as af burden and af treatment-related interventions . subject to available financing , we plan to initiate enrollment of precision-af in the fourth quarter of 2020 and project that topline data will be available in approximately two and a half years from our initiation of patient enrollment . if the trial meets the criteria specified in the spa , we plan to file for approval of gencaro with the fda , european medicines agency , and other regulatory authorities . we believe that patients with hf and af represent a major unmet medical need , and that this need is most pronounced in patients with lvef values of 40 % and above . this lvef range constitutes more than half of all chronic hf in the united states and europe , and there are currently no approved or guideline recommended therapies for these patients to treat either their af or hf . af is a very common complication in these patients , with estimates of af incidence ranging from 40 % to 60 % . beta-blockers approved for hf are commonly used off-label to treat af and hf in these patients , but they are only moderately effective in preventing af and none are approved for patients with lvef โฅ 40 % . other anti-arrhythmic drugs approved for the treatment of af have adverse side effects and in hf patients are either contraindicated or have label warnings for use due to an increased risk of mortality . interventional procedures for af , such as catheter ablation and electrical cardioversion , are invasive , expensive , and often temporary ; typically requiring the continued use of beta blockers post-intervention to manage both af and hf . we believe that gencaro , if approved , may be a safe and more effective therapy for the treatment of hf patients with af . we believe there are several potentially important attributes that would differentiate gencaro from existing therapies , including : more effective rhythm control compared to the current standard of care ; 44 reduction in the need for catheter ablation , electrical cardioversion , or toxic anti-arrhythmic drugs ; effective rate control with lower risk of treatment-limiting bradycardia ; foundational beta-blocker benefits for hf and unique evidence of efficacy in hf patients with af ; the only drug therapy approved for af in hf patients with lvef โฅ 40 % . we have exclusive development and commercial rights for gencaro in all indications . we have an international patent portfolio for gencaro in the united states , the european union , or eu , and other major markets , as well as new chemical entity status , which we believe will give us a strong intellectual property position to approximately 2031 in the united states and approximately ten years from approval in the eu . additional issued and pending patents have the potential for longer exclusivity in these and other markets . we have developed a laboratory platform to perform the genetic test that was approved by fda for use in the phase 2b clinical trial . we retain all rights to this test platform which we expect to use in future clinical trials , and which we believe could be used for commercialization . to support the continued development of gencaro , including the planned precision-af clinical trial , we will need additional financing to fund the phase 3 clinical trial and our general and administrative costs through its projected completion . considering the substantial time and costs associated with the development of gencaro and the risk that we may be unable to raise a significant amount of capital on acceptable terms , we are also pursuing co-development and commercialization partnering opportunities with large pharmaceutical and or specialty pharmaceutical companies and may pursue a strategic combination or other strategic transactions . if we are delayed in obtaining financing or are unable to complete a strategic transaction , we may discontinue our development activities on gencaro or discontinue our operations . we believe our cash and cash equivalents balance as of december 31 , 2019 will be sufficient to fund our operations , at our current cost structure , after giving effect to potential cost reductions , through the end of the third quarter of 2020. however , changing circumstances may cause us to consume capital significantly faster or slower than we currently anticipate . we have based these estimates on assumptions that may prove to be wrong , and we could exhaust our available financial resources sooner than we currently anticipate . in 2017 , we entered into a sales agreement , with an agent to sell , from time to time , our common stock having an aggregate offering price of up to $ 10.2 million , in an โ at the market offering. โ in 2019 , we further amended the sales agreement to increase the maximum aggregate value of shares which we may issue and sell from time to time under this sales agreement from $ 10.2 million to $ 17.5 million .
| g & a expenses were $ 4.0 million for the year ended december 31 , 2019 , compared to $ 3.9 million for 2018 , an increase of approximately $ 0.1 million . the increase in expenses during 2019 comprised primarily of increased consulting costs and corporate franchise tax , partially offset by lower personnel costs in 2019 , as compared to 2018. g & a expenses in 2020 are expected to be consistent with those in 2019 as we maintain administrative activities to support our ongoing operations . interest and other income interest and other income was $ 172,000 for the year ended december 31 , 2019 as compared to $ 162,000 for 2018 , resulting in an increase of $ 10,000. we expect interest income to be lower in 2020 than in 2019 , as we continue to use our cash and cash equivalents to fund our operations . interest expense interest expense was $ 7,000 for the year ended december 31 , 2019 as compared to $ 8,000 for 2018. the amounts were nominal to our overall operations . based on our current capital structure , interest expense is expected to be negligible in 2020. income tax benefit income tax benefit was $ 167,000 for the year ended december 31 , 2019 as compared to $ 31,000 for 2018 , primarily 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 . in 2019 , these benefits were fully monetized and we do not expect additional income tax benefits in 2020. liquidity and capital resources cash and cash equivalents december 31 , 2019 2018 ( in thousands ) cash and cash equivalents $ 8,363 $ 6,608 as of december 31 , 2019 , we had total cash and cash equivalents of approximately $ 8.4 million , as compared to $ 6.6 million as of december
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we expect to continue incurring significant expenses and operating losses for at least the next several years as we : - conduct additional clinical trials for selโ212 , our lead product candidate ; - continue the research and development of our other product candidates ; - seek to enhance our svp technology and discover and develop additional product candidates ; - seek regulatory approvals for any product candidates that successfully complete clinical trials ; - potentially establish a sales , marketing and distribution infrastructure and scaleโup external manufacturing capabilities to commercialize any products for which we may obtain regulatory approval ; - maintain , expand and protect our intellectual property portfolio , including through licensing arrangements ; and - add clinical , scientific , operational , financial and management information systems and personnel , including personnel to support our product development and potential future commercialization efforts and to support our operations as a public company . until such time , if ever , as we can generate substantial product revenues , we expect to finance our cash needs through a combination of equity offerings , debt financings , license and collaboration agreements with partners , and research grants . we may be unable to raise capital when needed or on reasonable terms , if at all , which would force us to delay , limit , reduce or terminate our product development or future commercialization efforts . we will need to generate significant revenues to achieve profitability , and we may never do so . the consolidated financial information presented below includes the accounts of selecta biosciences inc. and our wholly owned subsidiaries , selecta ( rus ) llc , a russian limited liability company , or selecta rus , and selecta biosciences security corporation , a massachusetts securities corporation . all intercompany accounts and transactions have been eliminated . we expect that our existing cash , cash equivalents , short-term investments and restricted cash as of december 31 , 2017 , will enable us to fund our operating expenses and capital expenditure requirements into mid-2019 . for additional information , see โ liquidity and capital resources. โ 73 financial operations overview grant and collaboration revenue to date , we have not generated any product sales . our revenue consists of grant and collaboration revenue , which includes amounts recognized related to upfront and milestone payments for research and development funding under collaboration and license agreements . in addition , we earn revenue under the terms of government contracts or grants , which require the performance of certain research and development activities . we expect that any revenue we generate will fluctuate from quarter to quarter because of the timing and amount of fees , research and development reimbursements and other payments from collaborators . we do not expect to generate revenue from product sales for at least the next several years . if we or our collaborators fail to complete the development of our product candidates in a timely manner or fail to obtain regulatory approval as needed , our ability to generate future revenue will be harmed , and will affect the results of our operations and financial position . for a further description of the agreements underlying our collaboration and grantโbased revenue , see notes 2 and 13 to our consolidated financial statements included elsewhere in this annual report on form 10-k. research and development our research and development expenses consist of external research and development costs , which we track on a programโbyโprogram basis and primarily include contract manufacturing organization , or cmo , related costs , fees paid to contract research organizations , or cros , and internal research and development costs , which are primarily compensation expenses for our research and development employees , lab supplies , analytical testing , allocated overhead costs and other related expenses . our research and development costs are often devoted to expanding our programs and are not necessarily allocable to a specific target . we have incurred a total of $ 150.3 million in research and development expenses from inception through december 31 , 2017 , with a majority of the expenses being spent on the development of selโ212 and a prior nicotine vaccine , and the remainder being spent on our various discovery and preclinical stage product candidate programs and the general expansion of our technology . as we expand the clinical development of selโ212 , we expect our research and development expenses to increase . in addition , as a result of the termination of the sanofi agreement , which was effective on may 8 , 2017 , we exercised our right to acquire the development programs under the sanofi agreement . the exercise itself did not require the payment of any consideration to sanofi . we are solely responsible for performing and funding any development and clinical trial activities relating to further development of vaccine candidates that we choose to undertake after the termination date of the sanofi agreement . we expense research and development costs as incurred . conducting a significant amount of research and development is central to our business model . product candidates in clinical development generally have higher development costs than those in earlier stages of development , primarily due to the size and duration of clinical trials . we plan to increase our research and development expenses for the foreseeable future as we seek to complete development of selโ212 , and to further advance our preclinical and earlier stage research and development projects . the successful development of our clinical and preclinical product candidates is highly uncertain . at this time , we can not reasonably estimate the nature , timing or costs of the efforts that will be necessary to complete the development of selโ212 or any of our preclinical programs or the period , if any , in which material net cash inflows from these product candidates may commence . clinical development timelines , the probability of success and development costs can differ materially from our expectations . story_separator_special_tag for example , if the fda or another regulatory authority were to require us to conduct clinical trials beyond those which we currently expect will be required for the completion of clinical development of a product candidate , or if we experience significant delays in enrollment in any of our clinical trials , we could be required to expend significant additional financial resources and time to complete any clinical development . the following table sets forth the components of our research and development expenses during the periods indicated ( in thousands , except percentages ) : replace_table_token_5_th 74 ( i ) beginning in the third quarter of 2017 , we began presenting research and development costs incurred on sela-070 , our svp-nicotine vaccine candidate . as a result , prior period amounts were reclassified to conform to the current year presentation . general and administrative general and administrative expenses consist primarily of salaries and related benefits , including stock-based compensation , related to our executive , finance , business development and support functions . other general and administrative expenses include facility-related costs not otherwise allocated to research and development expenses , travel expenses for our general and administrative personnel and professional fees for auditing , tax and corporate legal services , including intellectual property-related legal services . we expect that our general and administrative expenses will increase in future periods , reflecting an expanding infrastructure and increased professional fees associated with being a public reporting company and maintaining and expanding our intellectual property portfolio . investment income investment income consists primarily of interest income earned on our cash and cash equivalents and short-term investments . loss on extinguishment of debt the company recognized a loss on extinguishment of debt of $ 0.7 million for the year ended december 31 , 2017. the loss on extinguishment of debt consists of a final payment fee , a loan prepayment fee , the write-off of unamortized debt issuance costs , unamortized warrant valuation discount and miscellaneous costs incurred as a result of our repayment of the 2015 term loan totaling $ 10.0 million . interest expense interest expense consists of interest expense on amounts borrowed under our credit facilities . other income ( expense ) other income ( expense ) for the years ended december 31 , 2017 , 2016 and 2015 was de minimis . foreign currency transaction gain ( loss ) the functional currency of our russian subsidiary is the russian ruble . in addition to holding cash denominated in russian rubles , our russian bank accounts also hold cash balances denominated in u.s. dollars to facilitate payments to be settled in u.s. dollars or other currencies . at december 31 , 2017 and december 31 , 2016 , we maintained cash of $ 1.3 million and $ 2.5 million , respectively , in russian banks , of which $ 1.2 million and $ 1.6 million was denominated in u.s. dollars for the years ended december 31 , 2017 and 2016 , respectively . the amounts denominated in u.s. dollars and used in transacting the day-to-day operations of our russian subsidiary are subject to transaction gains and losses , which are reported as incurred . income taxes on december 22 , 2017 , the president of the united states signed into law the tax cuts and jobs act ( `` tax reform act '' ) . the legislation significantly changes u.s. tax law by , among other things , lowering corporate income tax rates , implementing a territorial tax system , expanding the tax base and imposing a tax on deemed repatriated earnings of foreign subsidiaries . the tax reform act permanently reduces the u.s. corporate federal income tax rate from a maximum of 35 % to a flat 21 % rate , effective january 1 , 2018. we have recognized the impact of the tax reform act in our consolidated financial statements and related disclosures . due to the complexities involved in accounting for the enactment of the tax reform act , the sec staff issued staff accounting bulletin no . 118 ( `` sab 118 '' ) , which allows a registrant to record provisional amounts during a measurement period not to extend beyond one year of the enactment date . in accordance with sab 118 , we recorded provisional amounts reflecting the impact of the tax reform act in our consolidated financial statements and related disclosures . the impact of the remeasurement of our u.s. deferred tax assets and liabilities to 21 % resulted in the reduction of deferred tax assets of approximately $ 23.4 million , which is offset by a full valuation allowance , thus there is no net effect . we recorded no tax expense related to the deemed repatriation tax because its foreign entity , selecta ( rus ) is a foreign disregarded entity , which is not subject to the repatriation tax . our preliminary estimate of the tax reform act and the remeasurement of our deferred tax assets and liabilities is subject to the finalization of management 's analysis related to certain matters , such as developing interpretations of the provisions of the tax reform act , changes to certain estimates and the filing of our tax returns . u.s. treasury regulations , administrative interpretations or court decisions interpreting the tax reform act may require further adjustments and changes in our estimates . the final determination of the tax reform act and the remeasurement of our deferred assets and liabilities will be completed as additional information becomes available , but no later than one year from the enactment of the tax reform act . 75 as of december 31 , 2017 , we had net operating loss carryforwards , or nols , for federal and state income tax purposes of $ 162.9 million and $ 157.9 million , respectively , which expire at various dates through 2037 . in 2014 , our wholly owned subsidiary , selecta rus , was granted a โ skolkovo designated โ resident status in russia .
| general and administrative the following is a comparison of general and administrative expenses for the years ended december 31 , 2017 and 2016 ( in thousands , except percentages ) : year ended december 31 , increase 2017 2016 ( decrease ) general and administrative $ 18,826 $ 13,051 $ 5,775 44 % for the year ended december 31 , 2017 , our general and administrative expenses increased $ 5.8 million , or 44 % , as compared to 2016 , primarily due to ( i ) $ 1.9 million related to growth in headcount to support public company filings and control processes , ( ii ) a $ 0.6 million increase in professional fees related to the universal shelf registration filing , ( iii ) $ 1.5 million of stock compensation expense , ( iv ) $ 0.8 million relating to contract licensing fees associated with collaborations , ( v ) $ 0.5 million of office and facilities expense and ( vi ) $ 0.6 million in consulting fees , offset by a $ 0.3 million reduction in patent costs . 79 investment income investment income increased by $ 0.4 million during the year ended december 31 , 2017 as compared to 2016. this increase was due to the mix of investments and yield earned on the investments . loss on extinguishment of debt the company recognized a loss on extinguishment of debt of $ 0.7 million for the year ended december 31 , 2017. there was no extinguishment of debt during the year ended december 31 , 2016. the loss on extinguishment of debt consists of the unamortized portion of the final fee payment , a loan prepayment fee , the write-off of unamortized debt issuance costs , unamortized warrant valuation discount and miscellaneous costs incurred as a result of our repayment of the 2015 term loan totaling $ 10.0 million . foreign currency transaction gain ( loss ) we recognized foreign currency losses of $ 0.1 million and $ 0.5 million during the years ended december 31 , 2017 and 2016 , respectively , reflecting the
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our results of operations depend in large part on our ability to accurately predict and effectively manage health care costs through effective contracting with providers of care to our members and our medical management and health and wellness programs . several economic factors related to health care costs , such as regulatory mandates of coverage as well as direct-to-consumer advertising by providers and pharmaceutical companies , have a direct impact on the volume of care consumed by our members . the potential effect of escalating health care costs , any changes in our ability to negotiate competitive rates with our providers and any regulatory or market driven restrictions on our ability to obtain adequate premium rates to offset overall inflation in health care costs , including increases in unit costs and utilization resulting from the aging of the population and other demographics , as well as advances in medical technology , may impose further risks to our ability to profitably underwrite our business , and may have a material impact on our results of operations . our future results of operations will also be impacted by certain external forces and resulting changes in our business model and strategy . in 2010 , the patient protection and affordable care act , or aca , as well as the health care and education reconciliation act of 2010 , or collectively , health care reform , became law , causing significant changes to the u.s. health care system . since then , significant regulations have been enacted by the u.s. department of health and human services , or hhs , the department of labor and the department of the treasury . the legislation and regulations are far-reaching and are intended to expand access to health insurance coverage over time by increasing the eligibility thresholds for most state medicaid programs and providing certain other individuals and small businesses with tax credits to subsidize a portion of the cost of health insurance coverage . as a result of the complexity of the law , its impact on health care in the united states and the continuing modification and interpretation of health care reform rules , we continue to analyze and refine our estimates of the ultimate impact of health care reform on our business , cash flows , financial condition and results of operations . health care reform provides growth opportunities for health insurers , but also introduces new risks and uncertainties , and required changes in the way products are designed , underwritten , priced , distributed and administered . for additional discussion , see part i , item 1 โ business - regulation , โ and part i , item 1a โ risk factors โ in this annual report on form 10-k. pricing in our commercial and specialty business segment , including our individual and small group lines of business , remains competitive , but rational , and we strive to price our health care benefit products consistent with anticipated underlying medical trends . we believe our pricing strategy , based on predictive modeling , proprietary research and data-driven processes , as well as our overall investments for health care reform , have positioned us to benefit from the potential growth opportunities available in fully-insured commercial products as a result of health care reform . in the individual and small group markets , we offer on-exchange products through state or federally facilitated marketplaces , referred to as public exchanges ; and off-exchange products . federal premium subsidies are available only for certain members who purchase certain public exchange products . while the ultimate level of public exchange enrollment can not be predicted , we have experienced a greater number of policy applications for new members through the public exchanges than expected , including geographical regions with lower price competition . the public exchanges may increase the risk that our products will be selected by individuals who have a higher risk profile or utilization rate than the pool of participants we anticipated when we - 45 - established the pricing for these public exchange products . however , the risk characteristics of new applicants in 2014 tracked closely to the risk levels utilized in the development of our pricing assumptions . although it is not yet clear whether our products sold on the public exchanges will be more or less profitable products , we believe that our pricing strategy , brand name and network quality will provide a strong foundation for commercial risk membership growth opportunities in the future . in our individual markets we offer bronze , silver and gold products , both on and off the public exchanges , in the states of california , colorado , connecticut , georgia , indiana , kentucky , maine , missouri , nevada , new hampshire , new york , ohio , virginia and wisconsin . additionally , we offer platinum products , both on and off the public exchanges , in the states of california and new york . in our small group markets , we offer bronze , silver and gold products , both on and off the public exchanges , in the states of colorado , connecticut , georgia , indiana , kentucky , maine , missouri , new hampshire , ohio and virginia and we offer bronze , silver and gold products , off the public exchanges , in the states of california , new york and wisconsin . additionally , we offer platinum products , off the public exchanges , in the states of california , colorado , connecticut , georgia , maine , new hampshire , missouri and virginia . private exchanges have recently gained significant visibility in the marketplace based on the promise of helping employers reduce costs , increase consumer engagement and manage the complexities created by the aca and other market forces . story_separator_special_tag while private exchanges have been a distribution channel in the medicare and individual markets for some time , the heightened level of activity and investment among the consulting and broker communities and other health insurance carriers has generated an increasing level of interest among employers in the commercial market . to date , adoption levels have been lower than analyst predictions , but expectations for significant longer term growth remain . while the ultimate volume , pace of growth and winning business models remain highly uncertain , we believe private exchanges will provide opportunities for growth and will serve a significant role in our future strategy . health care reform also imposes new regulations on the health insurance sector , including , but not limited to , guaranteed coverage and expanded benefit requirements ; prohibitions on some annual and all lifetime limits on amounts paid on behalf of or to our members ; increased restrictions on rescinding coverage ; establishment of minimum medical loss ratio , or mlr , and customer rebate requirements ; establishment of a mandatory annual health insurance provider fee , or hip fee ; creation of a federal rate review process ; a requirement to cover preventive services on a first dollar basis ; the establishment of public exchanges and essential benefit packages and greater limitations on how we price certain of our products . the legislation also reduces the reimbursement levels for our health plans participating in the medicare advantage program over time . there are also limitations on the amount of executive compensation that is deductible for income tax purposes . as a result of health care reform , hhs issued mlr regulations that require us to meet minimum mlr thresholds for large group , small group and individual lines of business . for purposes of determining mlr rebates , hhs has defined the types of costs that should be included in the mlr rebate calculation . however , certain components of the mlr calculation as defined by hhs can not be classified consistently under u.s. generally accepted accounting principles , or gaap . while considered benefit expense or a reduction of premium revenue by hhs , certain of these costs are classified as other types of expense , such as income tax expense or selling , general and administrative expense , in our gaap basis financial statements . accordingly , the benefit expense ratio determined using our consolidated gaap operating results is not comparable to the mlr calculated under hhs regulations . health care reform also imposed a separate minimum mlr threshold of 85 % for medicare advantage plans beginning in 2014. medicare advantage plans that do not meet this threshold will have to pay a minimum mlr rebate . if a plan 's mlr is below 85 % for three consecutive years beginning with 2014 , enrollment will be restricted . a medicare advantage plan contract will be terminated if the plan 's mlr is below 85 % for five consecutive years . beginning in 2014 , health care reform imposes an annual hip fee on health insurers that write certain types of health insurance on u.s. risks . the annual hip fee is allocated to health insurers based on the ratio of the amount of an insurer 's net premium revenues written during the preceding calendar year to an adjusted amount of health insurance for all u.s. health risk for those certain lines of business written during the preceding calendar year . the hip fee is non-deductible for federal income tax purposes . the total amount to be collected from allocations to health insurers in 2014 was $ 8,000.0 , and our portion of the hip fee for 2014 was $ 893.3 . the final calculation and payment of the hip fee occurred in the third quarter of 2014 and was recognized as a general and administrative expense . the annual hip fee to be allocated to all health insurers - 46 - increases to $ 11,300.0 for 2015 and 2016 , $ 13,900.0 for 2017 and $ 14,300.0 for 2018. for 2019 and beyond , the annual hip fee will increase from the amount for the preceding year by the rate of premium growth for the preceding year . these and other provisions of health care reform are likely to have significant effects on our future operations , which , in turn , could impact the value of our business model and results of operations , including potential impairments of our goodwill and other intangible assets . we will continue to evaluate the impact of health care reform as key aspects go into effect and additional guidance is made available . for additional discussion regarding health care reform , see part i , item 1 โ businessโregulation โ and part i , item 1a โ risk factors โ in this annual report on form 10-k. finally , federal and state regulatory agencies may further restrict our ability to obtain new product approvals , implement changes in premium rates or impose additional restrictions , under new or existing laws that could adversely affect our business , cash flows , financial condition and results of operations . we are also subject to regulations that may result in assessments under state insurance guarantee association laws . the national organization of life & health insurance guaranty associations , or nolhga , is a voluntary organization consisting of the state life and health insurance guaranty associations located throughout the u.s. such associations , working together with nolhga , provide a safety net for their state 's policyholders , ensuring that they continue to receive coverage , subject to state maximum limits , even if their insurer is declared insolvent . we are aware that the pennsylvania insurance commissioner , or insurance commissioner , has placed penn treaty network america insurance company and its subsidiary american network insurance company , or collectively penn treaty , in rehabilitation , an intermediate action before insolvency . the state court denied the insurance commissioner 's petition for the liquidation of penn treaty and ordered the insurance commissioner to file an updated plan of rehabilitation .
| the increase was further offset by higher experience rated refunds in our medicaid business , and lower premiums in our medicare advantage business primarily due to membership declines and a refinement of estimates associated with medicare risk score revenue for prior years . the increase in administrative fees primarily resulted from membership growth in our local group business , including the new york state contract conversion and the acquisition of a large state aso contract , which both occurred in the first quarter of 2014. the increase in administrative fees was further attributable to growth in our national accounts business . net investment income increased $ 65.3 , or 9.9 % , to $ 724.4 in 2014 , primarily due to higher income from alternative investments and higher investment yields . net realized gains on investments decreased $ 94.9 , or 34.9 % , to $ 177.0 in 2014 , primarily due to a decrease in net realized gains on sales of equity securities , partially offset by an increase in net realized gains on sales of fixed maturity securities . other-than-temporary impairment losses on investments decreased $ 49.9 , or 50.5 % , to $ 49.0 in 2014 , primarily due to a decrease in impairment losses on certain joint venture investments and fixed maturity securities . benefit expense increased $ 617.8 , or 1.1 % , to $ 56,854.9 in 2014 , primarily due to benefit cost trends across our businesses and membership growth in our medicaid and individual businesses . the increase in benefit expense was further a result of higher pharmacy costs primarily attributable to new high cost hepatitis c drug therapies . these increases were partially offset by the fully-insured membership declines in our local group and medicare advantage businesses , as described above . in addition , the increase in benefit expense was offset , in part , by our estimate of reinsurance recoveries relating to the health care reform
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overview the trust is a statutory trust created under the delaware statutory trust act in may 2011. the business and affairs of the trust are managed by the trustee . the trustee has no authority over or responsibility for , and no involvement with , any aspect of the oil and gas operations or other activities on the underlying properties . the delaware trustee has only minimal rights and duties that are necessary to satisfy the requirements of the delaware statutory trust act . in connection with the closing of the initial public offering , on november 8 , 2011 , enduro contributed the net profits interest to the trust in exchange for 33,000,000 newly issued trust units . the net profits interest entitles the trust to receive 80 % of the net profits from the sale and production of oil and natural gas attributable to the underlying properties that are produced during the term of the conveyance , which commenced on july 1 , 2011. the trust is not subject to any pre-set termination provisions based on a maximum volume of oil or natural gas to be produced or the passage of time . the trust will dissolve upon the earliest to occur of the following : ( 1 ) the trust , upon approval of the holders of at least 75 % of the outstanding trust units , sells the net profits interest , ( 2 ) the annual cash proceeds received by the trust attributable to the net profits interest are less than $ 2 million for each of any two consecutive years , ( 3 ) the holders of at least 75 % of the outstanding trust units vote in favor of dissolution or ( 4 ) the trust is judicially dissolved . the trust is required to make monthly cash distributions of substantially all of its monthly cash receipts , after deducting the trust 's administrative expenses , to holders of record ( generally the last business day of each calendar month ) on or before the 10 th business day after the record date . the net profits interest will be entitled to a share of the profits from and after july 1 , 2011 attributable to production occurring on or after june 1 , 2011. during 2011 , the trust paid one distribution , which was announced on november 18 , 2011. the trust 's first distribution related to net profits generated during the calculation period from july 1 , 2011 through september 30 , 2011 as provided in the conveyance . the distribution primarily represented oil and natural gas production during the months of june and july 2011 and a portion of oil production related to august 2011 , while expenses were included for the full three months in the calculation period . the amount of trust revenues and cash distributions to trust unitholders depends on , among other things : oil and gas sales prices ; volumes of oil and natural gas produced and sold attributable to the underlying properties ; production and development costs ; price differentials ; potential reductions or suspensions of production ; and the amount and timing of trust administrative expenses . story_separator_special_tag font size= '' 2 '' style= '' font-family : times new roman '' > in 2013 , enduro expects capital to range from $ 22- $ 24 million ( $ 18- $ 19 million net to the trust 's 80 % npi ) , focused on projects in the permian basin . this capital primarily relates to four permian basin oil wells being drilled in the lost tank field in southeastern new mexico , in which enduro owns a 50 % working interest . two of the lost tank wells were spud in december 2012 and are expected to be completed and producing in early 2013. these projects are anticipated to grow oil production during the year . discussion and analysis of historical results of the underlying properties the following table sets forth revenues , direct operating expenses and the excess of revenues over direct operating expenses relating to the underlying properties for the six months ended june 30 , 2011 and for the year ended december 31 , 2010 derived from the historical revenues and direct operating expenses of the underlying properties included elsewhere in this annual report on form 10-k. replace_table_token_13_th 47 the following table provides oil and natural gas sales volumes , average sales prices , average costs per boe and capital expenditures relating to the underlying properties for the six months ended june 30 , 2011 and for the year ended december 31 , 2010. replace_table_token_14_th 48 discussion and analysis of pro forma combined historical results of the underlying properties pro forma combined historical results for the year ended december 31 , 2010 excess of revenues over direct operating expenses for the underlying properties was $ 69.2 million for the year ended december 31 , 2010 as a result of an increase in the average price received for the oil and natural gas sold . revenues . revenues from oil and natural gas sales were $ 103.8 million as a result of an increase in the average price received for crude oil sold to $ 74.58 per bbl for the year ended december 31 , 2010. in addition , the average price received for natural gas sold was $ 4.71 per mcf for the year ended december 31 , 2010. lease operating expenses . lease operating expenses were $ 24.6 million for the year ended december 31 , 2010 , which represented an $ 0.87 per boe increase in the lease operating expense rate from the prior year . gathering and processing expenses . story_separator_special_tag gathering and processing expenses were $ 2.0 million for the year ended december 31 , 2010. production and other taxes . production and other taxes were $ 8.1 million based on the increase in revenues from oil and natural gas sales on which these taxes are based . liquidity and capital resources the trust 's principal sources of liquidity are cash flow generated from the net profits interest and borrowing capacity under the letter of credit described below . other than trust administrative expenses , including any reserves established by the trustee for future liabilities , the trust 's only use of cash is for distributions to trust unitholders . available funds are the excess cash , if any , received by the trust from the net profits interest and other sources ( such as interest earned on any amounts reserved by the trustee ) in that month , over the trust 's expenses paid for that month . available funds are reduced by any cash the trustee decides to hold as a reserve against future expenses . the trustee may create a cash reserve to pay for future liabilities of the trust . if the trustee determines that the cash on hand and the cash to be received are , or will be , insufficient to cover the trust 's liabilities , the trustee may authorize the trust to borrow money to pay administrative or incidental expenses of the trust that exceed cash held by the trust . the trustee may authorize the trust to borrow from the any person , including the trustee or the delaware trustee or an affiliate thereof , although none of the trustee , the delaware trustee or any affiliate of either of them intends to lend funds to the trust . the trustee may also cause the trust to mortgage its assets to secure payment of the indebtedness . the terms of such indebtedness and security interest , if funds were loaned by the entity serving as trustee or delaware trustee or an affiliate thereof , would be similar to the terms which such entity would grant to a similarly situated commercial customer with whom it did not have a fiduciary relationship . in addition , enduro has agreed to provide the trust with a $ 1 million letter of credit to be used by the trust in the event that its cash on hand ( including available cash reserves ) is not sufficient to pay ordinary course administrative expenses . further , if the trust requires more than the $ 1 million under the letter of credit to pay administrative expenses , enduro has agreed to loan funds to the trust necessary to pay such expenses . if the trust borrows funds , draws on the letter of credit or enduro loans funds to the trust , no further distributions will be made to trust unitholders until such amounts borrowed or drawn are repaid . except for the foregoing , the trust has no source of liquidity or capital resources . the trustee has no current plans to authorize the trust to borrow money . during the year ended december 31 , 2012 , the trust increased its cash reserve for future trust expenses by $ 81,782 to $ 194,538. at december 31 , 2011 , the trust had withheld $ 112,746 as cash reserves for future trust expenses . since its formation , the trust has not borrowed any funds and no amounts have been drawn on the letter of credit . 49 cash held by the trustee as a reserve against future liabilities or for distribution at the next distribution date must be invested in : interest-bearing obligations of the united states government ; money market funds that invest only in united states government securities ; repurchase agreements secured by interest-bearing obligations of the united states government ; or bank certificates of deposit . alternatively , cash held for distribution at the next distribution date may be held in a noninterest-bearing account . as substantially all of the underlying properties are located in mature fields , enduro does not expect future costs for the underlying properties to change significantly as compared to recent historical costs other than changes due to fluctuations in the cost of oilfield services generally . the amounts received by enduro from the hedge contract counterparty upon settlement of the hedge contracts will reduce the operating expenses related to the underlying properties in calculating the net profits . however , if the hedge payments received by enduro under the hedge contracts and other non-production revenue exceed operating expenses during a period , the ability to use such excess amounts to offset operating expenses will be deferred , with interest accruing on such amounts at the prevailing prime rate , until the next period where the hedge payments and the other non-production revenue are less than such expenses . in addition , the aggregate amounts paid by enduro on settlement of the hedge contracts will reduce the amount of net profits paid to the trust . the trust pays the trustee an administrative fee of $ 200,000 per year . the trust pays the delaware trustee a fee of $ 2,000 per year . the trust also incurs , either directly or as a reimbursement to the trustee , legal , accounting , tax and engineering fees , printing costs and other expenses that are deducted by the trust before distributions are made to trust unitholders .
| the average received price of oil was $ 89.39 per bbl from inception through december 31 , 2011 compared to an average nymex oil price of approximately $ 93.09 for the relevant production months , while the average received price of natural gas was $ 4.63 per mcf from inception through december 31 , 2011 compared to an average nymex natural gas price of approximately $ 4.34 for the relevant production months . 45 computation of net profits income received by the trust the trust 's net profits income consists of monthly net profits attributable to the net profits interest . net profits income for the year ended december 31 , 2012 and the period from inception through december 31 , 2011 was determined as shown in the following table : replace_table_token_12_th excess of revenues over direct operating expenses and development expenses from the underlying properties was approximately $ 73.9 million in 2012. this amount includes settlements of approximately $ 11.8 million related to hedge contracts . applying the net profits interest percentage of 80 % to the excess of revenues over direct operating expenses and development expenses results in income from the net profits interest to the trust ( prior to trust general and administrative expenses and cash withheld for expenses ) of approximately $ 59.1 million for the year ended december 31 , 2012. excess of revenues over direct operating expenses and development expenses from the underlying properties was approximately $ 13.2 million from inception through december 31 , 2011. this amount includes settlements of approximately $ 0.7 million related to hedge contracts . applying the net profits interest percentage of 80 % to the excess of revenues over direct operating expenses and development expenses results in income from the net profits interest to the trust ( prior to trust general and administrative expenses and cash withheld for expenses ) of approximately $ 10.5 million for the period . as the trust was not
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the following discussion supplements and provides information about the major components of the results of operations , financial condition , liquidity and capital resources of the corporation . this discussion and analysis should be read in conjunction with the accompanying consolidated financial statements . critical accounting policies the preparation of financial statements requires us to make estimates and assumptions . those accounting policies with the greatest uncertainty and that require our most difficult , subjective or complex judgments affecting the application of these policies , and the likelihood that materially different amounts would be reported under different conditions , or using different assumptions , are described below . allowance for loan losses : we establish the allowance for loan losses through charges to earnings in the form of a provision for loan losses . loan losses are charged against the allowance when we believe that the collection of the principal is unlikely . subsequent recoveries of losses previously charged against the allowance are credited to the allowance . the allowance represents an amount that , in our judgment , will be adequate to absorb any losses on existing loans that may become uncollectible . our judgment in determining the level of the allowance is based on evaluations of the collectibility of loans while taking into consideration such factors as trends in delinquencies and charge-offs , changes in the nature and volume of the loan portfolio , current economic conditions that may affect a borrower 's ability to repay and the value of collateral , overall portfolio quality and review of specific potential losses . this evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available . for more information see the section titled โ asset quality โ within item 7 . 27 allowance for indemnifications : the allowance for indemnifications is established through charges to earnings in the form of a provision for indemnifications , which is included in other noninterest expenses . a loss is charged against the allowance for indemnifications under certain conditions when a purchaser of a loan ( investor ) sold by c & f mortgage incurs a loss due to borrower misrepresentation , fraud , early default , or underwriting error . the allowance represents an amount that , in management 's judgment , will be adequate to absorb any losses arising from indemnification requests . management 's judgment in determining the level of the allowance is based on the volume of loans sold , historical experience , current economic conditions and information provided by investors . this evaluation is inherently subjective , as it requires estimates that are susceptible to significant revision as more information becomes available . impairment of loans : we consider a loan impaired when it is probable that the corporation will be unable to collect all interest and principal payments as scheduled in the loan agreement . we do not consider a loan impaired during a period of delay in payment if we expect the ultimate collection of all amounts due . we measure impairment on a loan-by-loan basis for commercial , construction and residential loans in excess of $ 500,000 by either the present value of expected future cash flows discounted at the loan 's effective interest rate , the loan 's obtainable market price , or the fair value of the collateral if the loan is collateral dependent . large groups of smaller balance homogeneous loans are collectively evaluated for impairment . we maintain a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment . troubled debt restructurings ( tdrs ) are also considered impaired loans , even if the loan balance is less than $ 500,000. a tdr occurs when we agree to significantly modify the original terms of a loan due to the deterioration in the financial condition of the borrower . for more information see the section titled โ asset quality โ within item 7. loans acquired in a business combination : the corporation has accounted for the loans acquired in the acquisition of cvbk and its subsidiary cvb in accordance with fasb accounting standards codification ( asc ) topic 805 , business combinations . accordingly , as of the acquisition , cvb 's loans were segregated between ( i ) purchased credit-impaired ( pci ) loans and ( ii ) purchased performing loans and were recorded at estimated fair value without the carryover of the related allowance for loan losses . pci loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the corporation will not collect all contractually required principal and interest payments . when determining fair market value , pci loans were aggregated into pools of loans based on common risk characteristics as of the date of acquisition such as loan type , date of origination , and evidence of credit quality deterioration such as internal risk grades and past due and nonaccrual status . the difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the `` nonaccretable difference , '' and is not recorded . any excess of cash flows expected at acquisition over the estimated fair value is referred to as the `` accretable '' yield and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows . subsequent decreases to the expected cash flows will generally result in a provision for loan losses , while subsequent increases in cash flows may result in a reversal of post-acquisition provision for loan losses , or a transfer from nonaccretable difference to accretable yield . subsequent to acquisition , we evaluate on a quarterly basis our estimate of cash flows expected to be collected . in the current economic environment , estimates of cash flows for pci loans require significant judgment . story_separator_special_tag subsequent decreases to the expected cash flows will generally result in a provision for loan losses resulting in an increase to the allowance for loans losses . subsequent significant increases in cash flows will generally result in an increase in interest income over the remaining life of the loan , or pool ( s ) of loans . disposals of loans , which may include sale of loans to third parties , receipt of payments in full or part from the borrower or foreclosure of the collateral , result in removal of the loan from the pci loan portfolio at its carrying amount . the corporation 's pci loans currently consist of loans acquired in connection with the acquisition of cvb . pci loans that were classified as nonperforming loans by cvb are no longer classified as nonperforming so long as , at acquisition and quarterly re-estimation periods , we believe we will fully collect the new carrying value of the pools of loans . 28 purchased performing loans are recorded at fair value as of the acquisition using the contractual cash flows method of recognizing discount accretion based on the acquired loans ' contractual cash flows . the fair value discount , including a credit discount , is accreted as an adjustment to yield over the estimated lives of the loans . there is no allowance for loan losses established at the acquisition date for purchased performing loans . a provision for loan losses may be required in future periods for any deterioration in these loans subsequent to the acquisition . impairment of securities : impairment of securities occurs when the fair value of a security is less than its amortized cost . for debt securities , impairment is considered other-than-temporary and recognized in its entirety in net income if either ( i ) we intend to sell the security or ( ii ) it is more-likely-than-not that we will be required to sell the security before recovery of its amortized cost basis . if , however , we do not intend to sell the security and it is not more-likely-than-not that we will be required to sell the security before recovery , we must determine what portion of the impairment is attributable to a credit loss , which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security . if there is no credit loss , there is no other-than-temporary impairment . if there is a credit loss , other-than-temporary impairment exists , and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income . for equity securities , impairment is considered to be other-than-temporary based on our ability and intent to hold the investment until a recovery of fair value . other-than-temporary impairment of an equity security results in a write-down that must be included in net income . we regularly review each investment security for other-than-temporary impairment based on criteria that includes the extent to which cost exceeds market price , the duration of that market decline , the financial health of and specific prospects for the issuer , our best estimate of the present value of cash flows expected to be collected from debt securities , our intention with regard to holding the security to maturity and the likelihood that we would be required to sell the security before recovery . other real estate owned ( oreo ) : assets acquired through , or in lieu of , loan foreclosure are held for sale and are initially recorded at the lower of the loan balance or the fair value less costs to sell at the date of foreclosure . subsequent to foreclosure , management periodically performs valuations of the foreclosed assets based on updated appraisals , general market conditions , recent sales of like properties , length of time the properties have been held , and our ability and intention with regard to continued ownership of the properties . the corporation may incur additional write-downs of foreclosed assets to fair value less costs to sell if valuations indicate a further other-than-temporary deterioration in market conditions . goodwill : the corporation 's goodwill was recognized in connection with the corporation 's acquisition of cvbk in october 2013 and c & f bank 's acquisition of c & f finance company in september 2002. with the adoption of accounting standards update ( asu ) 2011-08 , intangible-goodwill and other-testing goodwill for impairment , in 2012 , the corporation may first assess qualitative factors to determine if it is more likely than not that the fair value of goodwill is less than the carrying amount , which determines if the two-step goodwill impairment test is necessary . if the likelihood of impairment is more than 50 percent , the corporation must perform a test for impairment and we may be required to record impairment charges . in assessing the recoverability of the corporation 's goodwill , major assumptions used in determining impairment are increases in future income , sales multiples in determining terminal value and the discount rate applied to future cash flows . if an impairment test is performed , we will prepare a sensitivity analysis by increasing the discount rate , lowering sales multiples and reducing increases in future income . retirement plan : c & f bank maintains a non-contributory , defined benefit pension plan for eligible full-time employees as specified by the plan . plan assets , which consist primarily of mutual funds invested in marketable equity securities and corporate and government fixed income securities , are valued using market quotations . c & f bank 's actuary determines plan obligations and annual pension expense using a number of key assumptions . key assumptions may include the discount rate , the interest crediting rate , the estimated future return on plan assets and the anticipated rate of future salary increases .
| 53 table 14 : maturity/repricing schedule of loans replace_table_token_24_th the increase in total loans primarily occurred in the bank 's real estate loans for commercial , land acquisition and development and builder line purposes , which was offset in part by a decline in residential mortgage and commercial business loans . total loans at december 31 , 2014 and 2013 include loans purchased in connection with the corporation 's acquisition of cvb on october 1 , 2013. these loans were recorded at estimated fair value on the date of acquisition without the carryover of the related allowance for loan losses . the acquired loans fall into two categories , purchased performing loans and purchased credit-impaired ( pci ) loans . on the date of acquisition , the corporation acquired pci loans with a fair value of $ 35.3 million and acquired purchased performing loans with a fair value of $ 111.8 million . the following tables present the outstanding principal balance and the carrying amount of purchased loans that are included in the corporation 's balance sheet at december 31 , 2014 and 2013 : table 15 : pci and purchased performing loans replace_table_token_25_th 54 replace_table_token_26_th see `` critical accounting policies '' in this item 7 for a description of the corporation 's accounting for purchased performing and pci loans . credit policy the corporation 's credit policy establishes minimum requirements and provides for appropriate limitations on overall concentration of credit within the corporation . the policy provides guidance in general credit policies , underwriting policies and risk management , credit approval , and administrative and problem asset management policies . the overall goal of the corporation 's credit policy is to ensure that loan growth is accompanied by acceptable asset quality with uniform and consistently applied approval , administration , and documentation practices and standards . residential mortgage lending โ held for sale the mortgage banking segment 's guidelines for underwriting conventional conforming loans comply with the underwriting criteria established by fannie mae , freddie mac and or the applicable third party investor . the guidelines for non-conforming conventional loans are based on the requirements
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this income will be the result of the interest spread received on the mortgage loans over the interest paid to noteholders . we will continue to sell to third parties on a whole-loan basis a portion of the loans we originate and purchase , through encore credit , one of our trss , in order to generate cash from gain on sales to grow our equity capital base . as part of this new strategy , we intend to retain the servicing rights to the loans we hold on balance sheet ; however , for the immediate future , we will continue to outsource the servicing of the loans . we will receive servicing revenue , which will be a result of the difference of servicing revenue received and servicing expenses paid to third party service providers . we may choose to start our own servicing unit at such time as we determine that it has become economically feasible and advantageous to create a servicing unit , or we may choose to sell the servicing rights to a third party . because we have not previously held the loans we originated for an extended period of time and because we have sold substantially all of the loans we originated , our historical results of operations are not likely to be indicative of our future results . in the future , our goal will be to maximize the value of our loan origination infrastructure by increasing our loan origination volume and revenue while limiting the growth of our fixed origination costs . loan origination volumes in our industry are affected by such external factors as home values , the level of consumer debt and the overall condition of the economy . in addition , the premiums we receive from the sale of our loans may fluctuate or may be influenced by the overall condition of the economy and , more importantly , by the interest rate environment . critical accounting policies we have established various accounting policies that apply accounting principles generally accepted in the united states of america , or gaap , in the preparation of our historical financial statements . certain accounting policies require us to make significant estimates and assumptions that may have a material impact on certain assets and liabilities or our results of operations , and we consider these to be critical accounting policies . the estimates and assumptions used are based on historical experience and other factors , which we believe to be reasonable under the circumstances . actual results could differ materially from these estimates and assumptions , which could have a material impact on the carrying value of our assets and liabilities and our results of operations . we believe the following are critical accounting policies that require the most significant estimates and assumptions that are subject to significant change in the preparation of our consolidated financial statements : gain on sale of loans we sell most of our loans through whole loan sales and recognize a cash gain on sale . gains or losses resulting from sales or securitizations of mortgage loans are recognized at the date of settlement and are based on the difference between the selling price for sales or securitizations and the carrying value of the related loans sold . as part of the sale of a mortgage loan , we sell the servicing rights . the purchasing company pays us a service release premium for that right . this premium is included in ยgain on sale of loansย in the accompanying statements of income . 45 loan sales and securitizations are accounted for as sales when control of the loans is surrendered , to the extent that consideration other than beneficial interests in the loans transferred is received in the exchange . retained interests in securitizations are measured by allocating the previous carrying value between the loans sold and the interests retained , if any , based on their relative fair values at the date of transfer . prospectively , we or our subsidiaries will issue asset-backed securities secured by mortgage loans we originate in securitization transactions . as part of these securitization transactions we may not surrender control of the underlying loans , in which case such securitizations will be accounted for as financing transactions with the related mortgage loans shown on our balance sheet as loans held for investment . allowance for repurchase losses losses incurred on mortgage loans that we have sold and subsequently repurchased due to breaches of representations and warranties contained in the purchase and sale agreements are charged to the allowance for repurchase losses . the allowance represents our estimate based upon management 's evaluation of historical experience with respect to each investor of the principal , premium , interest losses and other costs , if any , expected to occur at the time of repurchase . the provision for expected repurchase losses is charged to gain on sales of loans and credited to an allowance . allowance for losses on mortgage loans held for investment because we intend to maintain a portion of our loan production on our balance sheet for the life of the loans , we will need to maintain an allowance for losses related to the mortgage loans held for investment . at december 31 , 2004 all loans were held for sale . accordingly , we have no allowance for losses recorded . we will begin recording a provision for losses on mortgage loans held for investment in the first quarter of 2005. we will periodically conduct reviews of all loans held in our portfolio in order to determine collectibility . story_separator_special_tag we plan to determine the amount of the loss allowance for these loans based on a review of static pools , gross defaults , recovery rate trends , current economic conditions and trends , borrowers ' credit profile characteristics such as fico scores ( an industry standard credit scoring methodology used to determine the likelihood that credit users will pay their bills , developed by the fair isaac credit organization ) and other relevant customer credit and loan structure data . we plan to compare actual loss performance to original loss assumptions and , if necessary , make adjustments to the allowance for losses . in order to increase allowances , a loan loss provision is charged to the income statement , resulting in a reduction to earnings . loans that are deemed to be uncollectible will be charged off and deducted from the allowance . recoveries on loans previously charged off will be added to the allowance . as our portfolio of loans held for investment increases and ages , we would expect a corresponding increase in our allowance for losses . our estimate of expected losses could increase if our actual loss experience is different than originally estimated , or if economic facts change the value we could reasonably expect to obtain from a sale . in particular , if actual losses increase , the allowance for losses would increase . any increase in the allowance for losses relating to these factors may adversely affect our results of operations . fair value of residual interests in loan securitizations in securitizations completed through 2004 , we conveyed loans that we originated to a special purpose entity ( such as a trust ) , or to a third party that subsequently sold the loans to a special purpose entity , in exchange for cash proceeds and a residual interest in the trust . the cash proceeds were raised through an offering of the pass-through certificates or bonds evidencing the right to receive principal payments and interest on the certificate balance or on the bonds . pursuant to financial accounting standards board , or fasb , statement of financial accounting standards no . 140 , accounting for transfers and servicing of financial assets and extinguishments of liabilities , or sfas no . 140 , and its predecessor accounting pronouncements , we recorded gain on sales of loans , equal to the difference between the portion sold and any retained interests ( residual interests ) based on their relative fair values at the date of transfer and our basis in the loans . the residual interests represent , over the estimated life of the loans , the present value of the estimated cash flows . these cash flows are determined by the excess of the projected interest earned on each pool of securitized loans over the sum of the interest paid to investors , the contractual servicing fee , a monoline insurance fee , if any , an estimate for credit losses and other ongoing costs of the securitization . each agreement that we have entered into in connection with these securitizations requires the over-collateralization of the trust that may 46 initially be funded by cash or an excess of loans deposited into the trust . the amount and timing of the cash flows expected to be released from the securitization trusts consider the impact of the applicable delinquency and credit loss limits specified in the securitization agreements . we determined the present value of the cash flows at the time each securitization transaction closed using certain assumptions and estimates made by management at the time the loans were sold . these assumptions and estimates included : estimates of future interest rates based upon the forward libor curve ; future rates of principal prepayment on the loans ; timing and magnitude of credit losses ; and discount rate used to calculate present value . the future cash flows represent management 's best estimate . management monitors the performance of the loans , and any changes in the estimates are reflected in earnings . there can be no assurance of the accuracy of management 's estimates . most of our retained residual interests are recorded at estimated fair value and are marked to market through a charge ( or credit ) to earnings . on a quarterly basis , we review the fair value of our retained residual interests by analyzing prepayment , credit loss , discount rate assumptions and other performance assumptions and estimates in relation to our actual experience and current rates of prepayment and credit loss prevalent in the industry . we may adjust the value of our retained residual interests or take a charge to earnings related to the retained residual interests , as appropriate , to reflect a valuation or write-down of the residual interests based upon the actual performance of the retained residual interests as compared to our key assumptions and estimates used to determine fair value . although management believes that the assumptions used to estimate the fair value of the retained residual interests are reasonable , there can be no assurance as to the accuracy of the assumptions or estimates . estimated future cash flows in excess of the amortized cost of our investment in residual interests are recognized as income at a constant rate of interest ( level-yield ) over the estimated period of time that the cash flows will be received . on a quarterly basis , if estimated cash flows generated from the securitized asset 's underlying collateral differ from the cash flows previously estimated due to actual prepayment or credit loss experience , we calculate revised yields based on the current amortized cost of the investment and the revised cash flows . the revised yields are then applied prospectively to recognize interest income . derivative financial investments and hedging activities hedging will be a critical aspect of our business because the value of our assets is sensitive to the fluctuation of interest rates .
| we believe this decrease was due to an interest rate environment in which rates are beginning to increase after a period of historical low rates . the following table represents the components of gain on sales recorded each period : replace_table_token_11_th our practice is to record at the date of the sale a provision for estimated repurchase losses attributable to principal , premium , interest and other costs of loans repurchased based upon our historical experience of the amount of sales that ultimately require repurchase . the obligations to repurchase loans and to reimburse the investor for any premiums paid on loans attributable to early payment are contractual obligations and require management to estimate such amounts at the time of sale . the provisions , therefore , can vary from year to year depending on the contractual obligations and loan performance . our provision for repurchase losses increased for the year ended december 31 , 2004 as compared to the year ended december 31 , 2003 , as a result of increased whole-loan sales volume . loan origination fees , as well as discount points and certain direct origination costs , are initially capitalized and recorded as an adjustment to our cost of the loan , which is reflected in the gain on sale we record when the loan is sold . deferred origination costs increased 114.0 % to $ 134.6 million for the year ended december 31 , 2004 from $ 62.9 million for the year ended december 31 , 2003 , primarily due to higher whole-loan sales volume as a result of higher loan origination volume . as our loan origination volume increases , we expect our deferred origination costs will also continue to increase . the residual interests represent the present value of the excess of estimated future cash flows received from borrowers on mortgage loans sold into securitization trusts over the cash flows passed through to the related asset-backed securities . because
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the unemployment rates in several market areas have generally tracked lower than the national level throughout the recent recession and slow recovery . uncertainty over fiscal policy and healthcare costs have tempered some employers ' hiring decisions . pricing pressures remain subdued , but employment costs related to tax policy , regulation and healthcare are concerns of many businesses . loan demand across most of the markets that hancock serves has increased , but competition for quality borrowers remains stiff . auto lending , mortgage lending on both new and existing homes , energy lending and some commercial real estate development financing all had expanded activity . the overall u.s. economy continued to expand , with most all regions showing modest to moderate growth rates . confidence in the prospect of a higher rate of sustained growth is improving for businesses and consumers alike , although uncertainties remain about such matters as the health of the international economy and the implications of pending or proposed changes in u.s. fiscal and tax policies and regulations . the federal reserve has responded to the slow recovery from the deep recession by taking steps to hold interest rates at unprecedented low levels and has expressed its intent to maintain rates at these levels pending further improvement in the unemployment rate . the dodd-frank act that was signed into law in july 2010 significantly overhauled many aspects of the financial services industry and includes provisions that have had or likely will have an impact on the nature and pricing of services offered by the banks and other financial services industry participants . the independent consumer financial protection bureau that was established under the dodd-frank act has broad rulemaking , supervisory and enforcement authority over consumer financial products , including deposit products , residential mortgages , home-equity loans and credit cards . the dodd-frank act directs applicable regulatory authorities to promulgate a large number of regulations implementing its provisions over time . the cfpb now conducts consumer compliance examinations of the banks . 32 acquisition of whitney holding corporation on june 4 , 2011 , hancock acquired whitney holding corporation , the parent of whitney national bank based in new orleans , louisiana , in a stock and cash transaction . the total purchase price was approximately $ 1.6 billion , including 40.8 million hancock common shares issued to whitney common shareholders at a fair value of $ 1.3 billion and $ 308 million paid by the company to purchase and subsequently retire whitney 's preferred stock and common stock warrant that had been issued under tarp . the fair value of the assets acquired , excluding goodwill , totaled $ 11.2 billion , and included $ 6.5 billion in loans , $ 2.6 billion of investment securities , and $ 224 million of identifiable intangible assets . liabilities assumed were $ 10.1 billion , including $ 9.2 billion of deposits . whitney national bank served the five-state gulf coast region stretching from houston , texas , across southern louisiana and the coastal region of mississippi , to central and south alabama , the panhandle of florida , and the metropolitan area of tampa , florida . highlights of 2012 financial results net income for the year ended december 31 , 2012 was $ 151.7 million , almost double the $ 76.8 million net income in 2011. this increase was primarily due to the full-year impact of the acquired whitney operations and lower merger-related expenses in 2012. diluted earnings per share for 2012 were $ 1.75 , a $ 0.60 increase from 2011. diluted earnings per share on operating income , which excludes tax-effected merger-related expenses , debt reduction costs and securities gains and losses , were $ 2.13 for 2012 , an $ 0.11 improvement over 2011. hancock 's return on average assets ( roa ) for 2012 was 0.80 % compared to 0.52 % for 2011 , while the operating roa increased to 0.97 % in 2012 , up 7 basis points from 2011. net interest income ( te ) in 2012 totaled $ 722.5 million , a $ 189.3 million ( 36 % ) increase over 2011. average earning assets in 2012 were up almost 30 % over 2011 , related mainly to the whitney acquisition in june 2011. the reported net interest margin widened 23 basis points to 4.48 % in 2012 , reflecting a relatively stable yield on earning assets and a further decline in funding costs . asset yields were supported by the continued favorable performance of whitney 's acquired loan portfolio and an increase in interest income recognized on the portfolio under purchase accounting . the core net interest margin , which is calculated excluding total net purchase accounting adjustments , has compressed some during 2012 , mainly on lower core yields on the loan and securities portfolios . the provision for loan losses was $ 54.2 million in 2012 compared to $ 38.7 million in 2011 , with each related mainly to loans not covered under fdic loss-sharing agreements . approximately $ 13.7 million of the 2012 provision was associated with a bulk sale of non-covered problem loans toward the end of that year . net charge-offs from the non-covered portfolio during 2012 were $ 55.0 million or 0.49 % of average total loans , including $ 16.2 million related to the bulk loan sale . this compares to the net non-covered charge-offs of $ 33.8 million , or 0.40 % of average total loans , in 2011. the determination of allowances for covered loans and other loans acquired with existing credit impairment is discussed in note 1 to the consolidated financial statements . total assets at december 31 , 2012 were $ 19.5 billion , down less than 2 % from the prior year-end . total loans increased $ 400.8 million ( 4 % ) during 2012 , and were up $ 556 million ( 5 % ) excluding the fdic-covered portfolio . story_separator_special_tag during 2012 , net growth primarily in commercial non-real estate ( c & i ) loans , but also in residential mortgages and consumer loans , was partially offset by net reductions in construction and land development and commercial real estate credits . the banks increased their level of liquidity investments toward the end of 2012 to address the potential for some run-off of deposits in early 2013 following the expiration of a special deposit insurance program . no material outflows were noted and the excess liquidity will be redeployed during the first quarter of 2013. at december 31 , 2012 , deposits in total were up slightly from the end of 2011 , as growth in noninterest-bearing and lower rate interest-bearing deposits outpaced the run-off of higher rate time deposits . noninterest-bearing demand deposits increased 2 % and comprised 36 % of total deposits at december 31 , 2012 . 33 results of operations net interest income net interest income ( tax equivalent or ยteย ) is the primary component of our earnings and represents the difference , or spread , between revenue generated from interest-earning assets and the interest expense related to funding those assets . for internal analytical purposes , management adjusts net interest income to a ยtaxable equivalentย basis using a 35 % federal tax rate on tax exempt items ( primarily interest on municipal securities and loans ) . net interest income ( te ) for 2012 totaled $ 722.5 million , a $ 189.3 million ( 36 % ) increase over 2011. average earning assets in 2012 were up almost 30 % over 2011 , reflecting mainly the whitney acquisition in june 2011. the reported net interest margin improved 23 basis points ( bps ) to 4.48 % in 2012. the net interest margin is the ratio of net interest income ( te ) to average earnings assets . the core margin ( net interest margin calculated excluding total net purchase accounting adjustments ) was approximately 3.74 % in 2012. the core margin has compressed 23 bps during 2012 to approximately 3.61 % in the fourth quarter compared to the fourth quarter of 2011 , mainly from a decline in the core yields on the loan and securities portfolios . the reported net interest margin was stable to slightly higher during 2012. whitney 's acquired portfolio continued to perform better than expected over this period . as a result , re-projections of expected cash flows from the acquired portfolio led to increased loan accretion that favorably impacted both net interest income and the net interest margin . changes in activity related to prepayments and payoffs in the acquired portfolio can cause quarterly accretion levels to be volatile . the overall reported yield on earning assets was 4.80 % in 2012 , down 2 bps from 2011. the reported loan portfolio yield of 6.00 % in 2012 was up 3 bps from 2011. recent growth in commercial loans has been in very competitively priced segments , but the increasing yield recognized on the acquired portfolio has helped to support the overall loan yield . the reported yield on the mainly fixed-rate portfolio of investment securities declined 69 bps from 2011 , reflecting both lower yields available on the reinvestment of repayments and maturities and the market yield on whitney 's securities portfolio at the acquisition date . the mix of average earning assets improved moderately in 2012 , as the proportion of loans increased to 70 % of earnings assets compared to 68 % in 2011 with a corresponding decline in short-term investments . the cost of funding earning assets declined to 0.32 % in 2012 , down 25 bps from 2011. the overall rate paid on interest-bearing deposits declined 34 bps from 2011 to 0.33 % in 2012. this decrease was due primarily to the impact of the sustained low rate environment on deposit rates in general and on the re-pricing of time deposits in particular . the opportunity to re-price time deposits at significantly lower rates over the near term has largely been eliminated . the mix of funding sources improved during 2012 , related mainly to the full-year effect of the composition of the acquired whitney deposit base . interest-free sources , including non-interest bearing demand deposits , funded 32 % of average earnings assets in 2012 compared to 26 % in 2011. as earning assets continue to re-price at lower rates , and with little opportunity to further reduce funding costs , management expects continued compression in the core net interest margin in the near term . all else equal , some near-term compression in the reported margin is also anticipated . net interest income ( te ) for 2011 totaled $ 533.2 million , almost double the $ 282.0 million earned in 2010. earning assets in 2011 were up 71 % over 2010 , reflecting mainly the whitney acquisition , and the net interest margin improved by 37 basis points to 4.25 % in 2011. the yield on average earning assets decreased 19 basis points to 4.82 % in 2011. loan yields increased 11 basis points to 5.97 % in 2011 , while the yield on the investment portfolio declined 137 basis points from 2010. positive adjustments to the yield earned on the acquired whitney portfolio based on post-merger portfolio performance benefited the overall loan yield in 2011. the overall mix of average earning assets was relatively stable between 2011 and 2010 , with loans comprising approximately 68 % of the total in each year . 34 the cost of funding earning assets decreased 56 basis points to 0.57 % in 2011. the overall rate paid on interest-bearing deposits was down 58 basis points from 2010 to 0.67 % in 2011 , reflecting mainly the impact of the sustained low rate environment on deposit rates and the expected runoff or re-pricing of higher rate time deposits from the people 's first acquisition . there was a favorable shift in the mix of funding sources during 2011 , related mainly to the composition of the acquired whitney deposit base .
| 59 noninterest-bearing demand deposits ( ddas ) totaled $ 5.6 billion at december 31 , 2012 , up $ 473 million ( 9 % ) compared to september 30 , 2012. ddas comprised 36 % of total period-end deposits at december 31 , 2012 , up slightly from september 30 , 2012. interest-bearing public fund deposits totaled $ 1.6 billion at year-end 2012 , up $ 259 million ( 20 % ) compared to september 30 , 2012. dda and public fund deposits typically reflect higher balances at year-end with subsequent reductions beginning in the first quarter . time deposits , primarily certificates of deposits ( cds ) , totaled $ 2.5 billion at december 31 , 2012 , up $ 78 million ( 3 % ) from september 30 , 2012. in november of 2012 , the company issued $ 200 million in brokered cds as a temporary liquidity source in anticipation of the year-end expiration of the fdic transaction account guarantee ( tag ) program . the company has not experienced any material outflow of deposits as a result of the tag expiration . hancock recorded a total provision for loan losses for the fourth quarter of 2012 of $ 28.1 million , up from $ 8.1 million in the third quarter of 2012. excluding the impact of the bulk sale , provision expense for the fourth quarter of 2012 was $ 14.4 million . the provision for non-covered loans , excluding the impact of the bulk sale , increased to $ 14.2 million in the fourth quarter of 2012 from $ 8.1 million in the third quarter of 2012. net charge-offs from the non-covered loan portfolio were $ 28.0 million , or 0.97 % of average total loans on an annualized basis in the fourth quarter . excluding the impact of the bulk sale , non-covered net charge-offs for the fourth quarter of 2012 were $ 11.8 million , or 0.41 % of average total loans , compared to $ 9.7 million , or 0.34 % of average total loans , for the third quarter of 2012. net charge-offs from previously impaired loan pools in the covered portfolio were $ 3.2 million for the fourth quarter of 2012. net interest income ( te ) for the fourth quarter of 2012 was $ 182.8 million , up from $ 180.1
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16 gross profit as a percentage of net sales was relatively flat in 2009 compared to 2008. strengthened inventory management reduced the impact of close-out and damaged merchandise by approximately $ 2.5 million in 2009 compared to 2008. the impact of the change to our lifo reserve was approximately a $ 1.1 million benefit in 2009 compared to a $ 1.0 million expense in 2008. these changes , along with improvements generated by new products , helped offset much of the impact from promotional pricing discounts on our gross profit . 2012 outlook increasing freight costs and labor rates for our suppliers will generate pressure on product costs . we anticipate continued soft demand and expect that over capacity will help dampen vendor price increases . our merchandising strategy will be similar to prior years using promotional pricing selectively during traditional holiday and other sales events or to highlight specific products or categories . we expect that annual gross margins for 2012 will be similar to our annual 2011 levels . selling , general and administrative expenses sg & a expenses are comprised of five categories : selling ; occupancy ; delivery and certain warehousing costs ; advertising and administrative . selling expenses primarily are comprised of compensation of sales associates and sales support staff , and fees paid to credit card and third-party finance companies . occupancy costs include rents , depreciation charges , insurance and property taxes , repairs and maintenance expense and utility costs . delivery costs include personnel , fuel costs , and depreciation and rental charges for rolling stock . warehouse costs include supplies , depreciation and rental charges for equipment . advertising expenses are primarily media production and space , direct mail costs , market research expenses , employee compensation and agency fees . administrative expenses are comprised of compensation costs for store personnel exclusive of sales associates , information systems , executive , accounting , merchandising , advertising , supply chain , real estate and human resource departments . year-to-year comparisons our sg & a costs increased $ 4.0 million or 1.3 % for 2011 compared to 2010. the change was largely due to our increased advertising and marketing expenses , higher delivery costs and greater administrative expenses . sg & a costs increased $ 1.4 million or 0.4 % for 2010 versus 2009 as sales increased 5.5 % in 2010. total sg & a costs , as a percentage of net sales were 50.9 % for 2011 as compared to 50.3 % in 2010 and 52.8 % in 2009. selling expenses generally vary with sales volume . the amounts paid for bank card charges depends upon how many customers choose that payment option . the cost of our third-party financing offers will vary based on usage and the types of credit programs we offer and those selected by our customers . these costs remained relatively flat as a percentage of net sales over the past three years . occupancy costs in total did not change significantly in 2011 from 2010. however increased depreciation of $ 1.4 million was offset by reductions in rents and utilities . occupancy expenses decreased $ 3.7 million in 2010 from 2009 largely due to reductions in depreciation , property taxes and utilities . we expect occupancy costs will rise in 2012 due to an increased number of stores . warehouse expenses were down slightly in 2011 compared to 2010 due to labor efficiencies and reductions in repairs . warehouse expenses in 2010 were $ 2.2 million higher than in 2009 as transportation and variable wages and labor costs rose on the increased throughput as business conditions improved . delivery expenses increased $ 1.0 million in 2011 compared to 2010 due to higher fuel prices and other truck related expenses . delivery costs in 2010 were relatively flat compared to 2009 despite a 5.5 % increase in sales due to reductions in insurance costs offset by increases in fuel prices . 17 total advertising and marketing costs as a percentage of sales were 6.9 % for 2011 , 6.7 % for 2010 and 6.6 % for 2009. we increased our spending $ 1.1 million in 2011 as we engaged a new marketing agency and increased our television advertising . our spending increased $ 2.8 million in 2010 from 2009 as we anticipated a rebounding consumer interest in home furnishing purchases . we continue to focus on television branding messages , targeted mail and electronic advertising . administrative costs increased $ 1.6 million or 2.3 % in 2011 from 2010. the change was primarily due to increased salaries and related payroll and benefit costs and greater travel expense offset in part by lower business insurance expense . administrative costs decreased $ 2.2 million or 3.0 % for 2010 versus 2009 due primarily to continued reductions in compensation costs . 2012 outlook the fixed and discretionary type expenses within sg & a for the full year of 2012 are expected to be approximately $ 213 million to $ 214 million , or a 3.1 % increase compared to those same costs in 2011. the main increases in this category are for new store occupancy expense , store remodeling , advertising expenses and compensation . variable costs within sg & a are expected to be 17.0 % to 17.5 % as a percent of sales for 2012 based on modest increases in fuel costs used to make home deliveries . we expect that total sg & a expenses for 2012 will be slightly lower than 2011 levels as a percentage of net sales as we leverage our fixed costs with increased sales . story_separator_special_tag credit service charge revenue and allowance for doubtful accounts we maintain a small in-house financing program for our customers with the offer most frequently chosen carrying no interest for 12 months and requiring equal monthly payments . this program generates very minor credit revenue and is for credit worthy customers who prefer financing with the retailer directly or who are not able to quickly establish sufficient credit with other providers on comparable terms . we offer our customers different credit promotions , more widely used , through a third-party provider . sales financed by this provider are not havertys ' receivables ; accordingly , we do not have any credit risk or servicing responsibility for these accounts , and there is no credit or collection recourse to havertys . the most popular programs offered through the third-party provider for 2011 were no interest offers requiring monthly payments over periods of 18 to 36 months . 18 the following summarizes the financing vehicles used , accounts receivable , allowance for doubtful accounts and credit service charge revenue ( dollars in thousands ) : replace_table_token_8_th the allowance as a percent of total accounts receivable has decreased as we experienced improvement in the delinquency and problem category percentages . the dollar amount of the allowance is also lower due to the reduction in total accounts receivable . our credit service charge revenue has continued to decline as our receivables portfolio is reduced and customers choose credit promotions with no interest features . interest expense , net interest expense ( income ) , net is primarily comprised of interest expense on the company 's debt . the following table summarizes the components of interest expense ( income ) , net ( in thousands ) : replace_table_token_9_th interest expense on debt decreased in 2011 due to more favorable terms related to our credit facility after the september 1 , 2011 renewal . provision for income taxes our effective tax rate was ( 235.9 ) % , 2.6 % and 22.7 % for 2011 , 2010 and 2009 , respectively . refer to note 7 of the notes to the consolidated financial statements for a reconciliation of our income tax expense to the federal income tax rate . 19 our 2011 rate included a benefit from income taxes of $ 14.1 million related to the release of almost all of the valuation allowance against our net deferred tax assets . we increased our valuation allowance against most of our net deferred tax assets in 2008 , reflecting cumulative losses incurred , as well as our financial outlook at the time . we implemented significant cost-cutting measures and the sustained improvements in our results over the past few years now supports the amount released in the fourth quarter . the $ 14.1 million benefit related to the release includes approximately $ 7.7 million that was originally charged to accumulated other comprehensive income for pension liabilities but due to the prohibition against โ backward tracing โ the release is included in the continuing operations provision . our 2011 rate also includes a $ 717,000 unfavorable impact of a change in treatment of certain state port credits by the state of georgia . these credits were almost completely reserved in our valuation allowance as are the remaining credits . during 2011 we also finalized the net operating loss carryback and amended returns for the tax years 2005 through 2008. we adjusted the related receivables for refunds of tax and interest and amounts available for federal and state net operating loss carryforwards . this resulted in additional expense of $ 422,000. our 2010 rate included a $ 3.1 million favorable impact related to the release of a portion of our deferred tax asset valuation allowance . we release amounts from our reserve as it becomes more-likely-than-not we will be able to utilize the unreserved portion of our deferred tax assets . we had approximately $ 16.7 million in our valuation allowance for deferred tax assets at december 31 , 2010. our 2009 rate included the impact of the changes in federal tax laws enacted in the fourth quarter of 2009 related to the treatment of net operating loss carrybacks and the amending of prior years ' tax returns . these changes resulted in a reduction of current tax expense of approximately $ 671,000 for additional refunds and a related increase in deferred tax expense of $ 495,000 for the decrease in alternative minimum tax credit carryforwards . the 2009 rate also includes the unfavorable impact of $ 682,000 for the increase in our deferred tax valuation allowance . liquidity and capital resources overview of liquidity our primary cash requirements include working capital needs , contractual obligations , benefit plan contributions , income tax obligations and capital expenditures . we have funded these requirements exclusively through cash generated from operations and not used our credit facility since 2008. we have no funded debt and our increased lease obligations are primarily due to arrangements that are not considered capital leases but must be recorded on our balance sheets . we believe funds generated from our expected results of operations and available cash and cash equivalents will be sufficient to fund our primary obligations and complete projects that we have underway or currently contemplate for the next fiscal and foreseeable future years . at december 31 , 2011 , our cash and cash equivalents balance was $ 49.6 million , a decrease of $ 8.5 million compared to december 31 , 2010. this decrease in cash primarily resulted from working capital requirements , purchases of property and equipment and the change in our insurance collateral from a letter of credit to an escrow account .
| 15 the following outlines our sales and comp-store sales increases and decreases for the periods indicated . ( amounts and percentages may not always add to totals due to rounding . ) december 31 , 2011 2010 2009 net sales comp-store sales net sales comp-store sales net sales comp-store sales period ended dollars in millions % increase ( decrease ) over prior period % increase ( decrease ) over prior period dollars in millions % increase ( decrease ) over prior period % increase ( decrease ) over prior period dollars in millions % increase ( decrease ) over prior period % increase ( decrease ) over prior period q1 $ 154.2 ( 1.2 ) % ( 0.6 ) % $ 156.0 8.2 % 10.1 $ 144.2 ( 22.1 ) % ( 22.9 ) % q2 143.1 ( 1.4 ) ( 1.4 ) 145.1 11.9 13.2 129.7 ( 23.0 ) ( 22.6 ) q3 155.4 ( 1.1 ) ( 0.6 )
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the company continues to evaluate home rental operations and may continue to invest in additional units . in the company 's resort properties , the company continues to work on extending customer stays . the company has had success lengthening customer stays . in the spring of 2010 , the company introduced low-cost membership products that focus on the installed base of almost eight million rv owners . such products may include right-to-use contracts that entitle the customer to use certain properties ( the โ agreements โ ) . the company is offering a zone park pass ( โ zpp โ ) , which can be purchased for one to four zones of the united states and required annual payments in 2012 of $ 499. beginning on february 1 , 2012 , the required annual payments increased to $ 525. this replaces high cost products that were typically entered into at properties after tours and lengthy sales presentations . the company historically incurred significant costs to generate leads , conduct tours and make the sales presentations . a single zone zpp requires no upfront payment while passes for additional zones require modest upfront payments . since inception the company has entered into approximately 22,000 zpp 's . for the year ended december 31 , 2012 , the company entered into approximately 10,100 zpp 's , or a 36.5 % increase from approximately 7,400 for the year ended december 31 , 2011 . in 2012 , the company initiated a program with rv dealers to feature the company 's zpp as part of the dealers ' sales and marketing efforts . in return , the company provides the dealer with a zpp membership to give to the dealers ' customers in connection with the purchase of an rv . since the inception of the zpp program with the rv dealers , the company has activated 1,289 zpps and recorded approximately $ 140,000 of revenue through december 31 , 2012 . existing membership customers may be offered an upgrade agreement from time-to-time . an upgrade agreement is currently distinguishable from a new agreement that a customer would enter into by , depending on the type of upgrade , offering ( 1 ) increased length of consecutive stay by 50 % ( i.e . up to 21 days ) ; ( 2 ) ability to make earlier advance reservations ; ( 3 ) discounts on rental units ; ( 4 ) access to additional properties , which may include use of sites at non-membership rv properties and ( 5 ) membership in discount travel programs . each upgrade contract requires a nonrefundable upfront payment . the company may finance the nonrefundable upfront payment under any agreement . the company actively seeks to acquire additional properties and currently is engaged in negotiations relating to the possible acquisition of a number of properties . at any time these negotiations are at varying stages , which may include contracts outstanding , to acquire certain properties , which are subject to satisfactory completion of the company 's due diligence review . 33 property acquisitions , joint ventures and dispositions the following chart lists the properties or portfolios acquired , invested in , or sold since january 1 , 2011 : replace_table_token_4_th since january 1 , 2011 the gross investment in real estate increased from $ 2,585 million to $ 4,172 million as of december 31 , 2012 , due primarily to the aforementioned acquisitions and dispositions of properties during the period . on november 9 , 2012 , the company entered a letter of intent with morgan rv resorts ( โ morgan โ ) , which granted the company a right of exclusive dealing ( โ exclusivity right โ ) and a right of first refusal ( โ rofr โ ) with respect to the purchase of 15 of morgan 's rv resorts . on december 13 , 2012 , sun communities , inc. announced in an sec filing that certain of its affiliates ( collectively , โ sun โ ) had entered into a contract with morgan to purchase eleven of those same properties , as a result of which the company subsequently exercised its rofr . in a suit initiated by sun on december 26 , 2012 against the company and morgan in the oakland county ( michigan ) circuit court , the parties are litigating the issue of who has the right to the properties . on february 12 , 2013 , sun announced in an sec filing that it had closed its purchase from morgan on ten of the eleven properties at issue . the litigation is not expected to have a material adverse impact on our results of operations or financial condition . markets the following table identifies the company 's largest markets by number of sites and provides information regarding the company 's properties ( excluding five properties owned through joint ventures ) . replace_table_token_5_th _ ( 1 ) property operating revenues for this calculation excludes approximately $ 14.3 million of property operating revenue not allocated to properties , which consists primarily of upfront payments from right-to-use contracts . 34 story_separator_special_tag acquisition properties , the company recorded contingent consideration of approximately $ 6.7 million related to this escrow . the company will revalue the asset as of each reporting date and will recognize in earnings any increase or decrease in fair value of the escrow . comparison of year ended december 31 , 2011 to year ended december 31 , 2010 income from property operations the following table summarizes certain financial and statistical data for the property operations for all properties owned and operated for the same period in both years ( โ core portfolio โ ) and the total portfolio for the years ended december 31 , 2011 and 2010 ( amounts in thousands ) . the core portfolio may change from time-to-time depending on acquisitions , dispositions and significant transactions or unique situations . story_separator_special_tag the core portfolio in this comparison of the year ended december 31 , 2011 to december 31 , 2010 includes all properties acquired on or prior to december 31 , 2009 and which were owned and operated by the company during the years ended december 31 , 2011 and december 31 , 2010 . growth percentages exclude the impact of gaap deferrals of up-front payments from right-to-use contracts entered and related commissions . replace_table_token_12_th the 2.8 % increase in core community base rental income primarily reflects a 2.2 % increase in rates and a 0.6 % increase in occupancy . the average monthly base rent per site increased to $ 554 in 2011 from $ 542 in 2010. the average occupancy increased to 90.9 % in 2011 from 90.4 % in 2010 . 38 resort base rental income is comprised of the following ( amounts in thousands ) : replace_table_token_13_th the increase in rental home income and rental home operating and maintenance are discussed in further detail in the rental operations table below . the decrease in right-to-use annual payments is primarily due to net attrition in the member base . the core portfolio and total portfolio property operating revenues for the years ended december 31 , 2011 and 2010 were impacted by the company 's introduction of low-cost membership products in 2010 and the phase-out of memberships with higher initial upfront payments . the decrease in sales and marketing expenses is due to reduced commissions as a result of reduced high-cost right-to-use contracts activity . the following growth rate percentages are before property management ( amounts in thousands ) : replace_table_token_14_th the increase in total portfolio income from property operations is primarily due to the acquisition of the 2011 acquisition properties during the year ended december 31 , 2011 . ( see note 19 in the notes to the consolidated financial statements contained in this form 10-k for details regarding the 2011 acquisition . ) home sales operations the following table summarizes certain financial and statistical data for the home sales operations for the years ended december 31 , 2011 and 2010 ( amounts in thousands , except sales volumes ) . replace_table_token_15_th _ ( 1 ) includes third party home sales of three and 19 for the years ended december 31 , 2011 and 2010 , respectively . ( 2 ) includes third party home sales of one and 10 for the years ended december 31 , 2011 and 2010 , respectively . 39 income from home sales operations decreased primarily as a result of decreased profit on used home sales and a decrease in ancillary revenues . rental operations the following table summarizes certain financial and statistical data for manufactured home rental operations for the years ended december 31 , 2011 and 2010 ( dollars in thousands ) . replace_table_token_16_th _ ( 1 ) approximately $ 23.9 million and $ 15.4 million as of december 31 , 2011 and 2010 , respectively , are included in community base rental income in the property operations table . the increase in income from rental operations and depreciation expense is primarily due to the increase in the number of rental units resulting from the acquisition of the 2011 acquisition properties during the year ended december 31 , 2011. other income and expenses the following table summarizes other income and expenses for the years ended december 31 , 2011 and 2010 ( amounts in thousands ) . replace_table_token_17_th depreciation on real estate and rental homes , amortization of in-place leases , interest income and interest and related amortization increased primarily due to the purchase of the 2011 acquisition properties during the year ended december 31 , 2011. acquisition costs consist primarily of the following costs incurred related to the 2011 acquisition : seller 's debt defeasance costs , transfer tax , professional fees , and costs related to due diligence items such as title , survey , zoning and environmental . impairment decreased due to a non-cash write-off of $ 3.6 million in the year ended december 31 , 2010 of goodwill associated with a 2009 acquisition of a florida internet and media based advertising business . 40 liquidity and capital resources liquidity the company 's primary demands for liquidity include payment of operating expenses , debt service , including principal and interest , capital improvements on properties , purchasing both new and pre-owned homes , acquisitions of new properties , and dividends . the company expects these similar demands for liquidity to continue for the short-term and long-term . the commitment to capital improvements on existing assets will be consistent with last year . the company 's primary sources of cash include operating cash flows , proceeds from financings , borrowings under our line of credit and proceeds from issuance of equity and debt securities . the company entered into equity distribution agreements with sales agents , pursuant to which the company may sell , from time to time , shares of the company 's common stock , par value $ 0.01 per share , having an aggregate offering price of up to $ 125.0 million . the company has not sold any common stock to date under the equity distribution agreements . in addition , the company has available liquidity in the form of authorized and unissued preferred stock of approximately 9.9 million shares and authorized common stock in an unallocated shelf registration statement which was automatically effective when filed with the sec . one of the company 's stated objectives is to maintain financial flexibility . achieving this objective allows the company to take advantage of strategic opportunities that may arise . the company believes effective management of its balance sheet , including maintaining various access points to raise capital , manage future debt maturities and borrow at competitive rates enable it to meet this objective . the company believes it currently has sufficient liquidity , in the form of $ 37.1 million in available cash and $ 380.0 million available on its unsecured line of credit ( โ loc โ ) , to satisfy its near term obligations .
| 35 the core portfolio and total portfolio property operating revenues for the year ended december 31 , 2012 were negatively impacted by the temporary cessation of the entry of right-to-use contracts ( membership upgrades ) in connection with third party sales force training and the roll out of new membership upgrade products during the year ended december 31 , 2012. as a result , membership upgrade sales , which are included in right-to-use contracts current period , gross , were down $ 4.4 million compared to the year ended december 31 , 2011. the decrease in right-to-use contracts for the year ended december 31 , 2012 was offset by a $ 0.4 million decrease in sales and marketing expenses , resulting in a net decline of $ 4.0 million from these activities compared to the year ended december 31 , 2011. the following growth rate percentages are before property management ( amounts in thousands ) : replace_table_token_8_th the increase in total portfolio income from property operations is primarily due to the acquisition of the 2011 acquisition properties on various dates during the six months ended december 31 , 2011 . ( see note 19 in the notes to the consolidated financial statements contained in this form 10-k for details regarding the 2011 acquisition . ) home sales operations the following table summarizes certain financial and statistical data for the home sales operations for the years ended december 31 , 2012 and 2011 ( amounts in thousands , except sales volumes ) . replace_table_token_9_th _ ( 1 ) includes third party home sales of three for the year ended december 31 , 2011 . ( 2 ) includes third party home sales of one for the year ended december 31 , 2011 . income from home sales operations decreased primarily as a result of decreased profit on used home sales and a decrease in ancillary revenues . 36 rental operations the following table summarizes certain financial and statistical data for manufactured home rental operations for the years ended december 31 , 2012 and 2011 ( dollars in thousands ) . replace_table_token_10_th _
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customer account balances with invoices past due 90 days are considered delinquent . we generally do not charge interest on past due amounts . the carrying amount of accounts receivable is reduced by an allowance for doubtful accounts that reflects management 's best estimate of amounts that will not be collected . the allowance is based on historical loss experience and any specific risks identified in client collection matters . accounts receivable are charged off against the allowance for doubtful accounts when it is determined that the receivable is uncollectible . goodwill and other intangibles goodwill represents the excess of consideration transferred over the value assigned to the net tangible and identifiable intangible assets of businesses acquired . in accordance with asc topic 350 intangibles - goodwill and other : testing goodwill for impairment , goodwill is not amortized , but instead is tested for impairment annually , or more frequently if circumstances indicate a possible impairment may exist . absent any special circumstances that could require an interim test , we have elected to test for goodwill impairment during the fourth quarter of each year . prior to the command integration in october 2016 , we were organized into two operating segments for purposes of goodwill impairment testing , echo and command , which were aggregated into one reportable segment pursuant to the provisions of asc topic 280 segment reporting , which establishes accounting standards for segment reporting . prior to the integration of command and as part of our annual goodwill impairment assessment , we performed a quantitative impairment assessment of both reporting units . we estimated fair value of these reporting units using the best information available . we utilized a combination of two valuation methodologies commonly referred to as the income approach and the market approach . for the income approach , we used the discounted cash flow model and for the market approach , we used the guideline public company method . the discounted cash flow method under the income approach uses the reporting unit 's projection of estimated operating results and cash flows that is discounted using a weighted-average cost of capital that reflects current market conditions appropriate to the reporting unit . the guideline public company method under the market approach uses pricing multiples of a peer group of publicly traded companies and applies these multiples to the operating results of each reporting unit to provide indications of value . a concluded enterprise value based on equal weighting of the two methods was reconciled to current market capitalization . both methods use management 's best estimates of economic and market conditions over the projected period , including growth rates in sales , costs , estimates of future expected changes in operating margins and cash expenditures . other significant estimates and assumptions include terminal value growth rates , future estimates of capital expenditures and changes in future working capital requirements . as a result of our quantitative assessment of the two reporting units , we concluded that the fair value of each reporting unit exceeded its carrying amount . subsequent to the integration of command , we manage the business as one operating segment and reporting unit . there have been no changes in our determination that we have one reportable segment from prior periods . in september 2011 , the financial accounting standards board ( `` fasb '' ) approved accounting standards update ( `` asu '' ) no . 2011-08 , โ intangibles - goodwill and other : testing goodwill for impairment . '' this asu permits an entity to first assess qualitative factors to determine whether it is more likely than not ( a likelihood of more than 50 percent ) that the fair value of a reporting unit is less than its carrying amount . after assessing qualitative factors , if an entity determines that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount , no further testing is necessary . after the integration of command , we performed a qualitative goodwill impairment assessment of the single , combined reporting unit in accordance with asc 350. we concluded that it was more likely than not that the fair value of the combined reporting unit exceeded its carrying amount . asc topic 350 also requires that intangible assets with finite lives be amortized over their respective estimated useful lives and reviewed for impairment whenever impairment indicators exist in accordance with asc topic 360 property , plant and equipment . our intangible assets consist of customer relationships , carrier relationships , non-compete agreements and trade names , which are being amortized on an accelerated basis over their estimated weighted-average useful lives of 14.8 years , 17.0 years , 6.7 years and 4.0 years , respectively . refer to note 7. stock-based compensation we account for stock-based compensation in accordance with asc topic 718 compensation - stock compensation which requires all share-based payments to employees , including grants of stock options , to be recognized in the income statement based upon their fair values . share-based employee compensation costs are recognized as a component of selling , general and 25 administrative expense in the consolidated statements of operations . for more information about our stock-based compensation programs , see note 14โstock-based compensation plans . income taxes we account for income taxes in accordance with asc topic 740 income taxes , under which deferred assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying values of assets and liabilities and their respective tax bases . a valuation allowance is established to reduce the carrying value of deferred tax assets if it is considered more likely than not that such assets will not be realized . any change in the valuation allowance would be charged to income in the period such determination was made . story_separator_special_tag we recognize the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities , based on technical merits of the position . the tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon settlement . comparison of years ended december 31 , 2016 and 2015 revenue revenue was $ 1.7 billion in 2016 , an increase of 13.5 % from $ 1.5 billion in 2015 . the increase in revenue was attributable to a full year of revenue from command and an increase in shipment volume , offset by a decline in tl rates . command contributed $ 477.9 million of revenue for the year ended december 31 , 2016 . in the prior year , command contributed $ 286.4 million of revenue from the acquisition date through december 31 , 2015. revenue from transactional clients was $ 1.4 billion in 2016 , an increase of 13.9 % from $ 1.2 billion in 2015 . our percentage of revenue from transactional clients was 81.3 % in 2016 , an increase from 81.0 % in 2015 . the increase in transactional revenue was driven by the full year impact of the command acquisition , along with increases in both the number and productivity of client sales employees , offset by a decline in tl rates . revenue from managed transportation clients was $ 320.3 million in 2016 , an increase of 11.6 % from $ 287.0 million in 2015 . this increase was driven by an increase in the number of managed transportation clients and overall managed transportation shipment volume . in 2016 , 18.7 % of our revenue was generated from managed transportation clients , a decrease from 19.0 % in 2015 . this decrease was driven by the inclusion of a full year of transactional revenue resulting from the acquisition of command . transportation costs transportation costs were $ 1.4 billion in 2016 , an increase of 14.4 % from $ 1.2 billion in 2015 . the growth in the total number of shipments , including the shipments attributable to a full year of results from the command acquisition , drove the increase in our transportation costs during this period . our transportation costs as a percentage of revenue increased to 81.4 % in 2016 from 80.8 % in 2015 due to a decline in tl margins . net revenue net revenue was $ 318.6 million in 2016 , an increase of 9.8 % from $ 290.3 million in 2015 . the growth in the total number of shipments , including the shipments attributable to a full year of results from the command acquisition , accounted for most of the increase in our net revenue during this period . net revenue margins decreased to 18.6 % in 2016 from 19.2 % in 2015 due to a decline in tl margins . operating expenses commission expense was $ 95.6 million in 2016 , an increase of 11.3 % from $ 86.0 million in 2015 . this increase was primarily attributable to the increase in net revenue , including the net revenue attributable to a full year of results from the command acquisition . for 2016 and 2015 , commission expense was 30.0 % and 29.6 % , respectively , of our net revenue . the marginal increase in commission expense as a percentage of net revenue was due to the fluctuation in the composition of our net revenue by mode , as tl shipments typically have higher commission percentages than other modes . the increase in tl net revenue as a percent of total net revenue was driven by a full year of results from the command acquisition and by organic tl growth at echo . 26 selling , general and administrative expenses were $ 175.3 million in 2016 , an increase of 11.6 % from $ 157.1 million in 2015 . as a percentage of net revenue , selling , general and administrative expenses increased to 55.0 % in 2016 from 54.1 % in 2015 . these increases are primarily attributable to integration costs resulting from the command integration and lower net revenue margins . the contingent consideration fair-value adjustment resulted in a benefit of $ 0.1 million and expense of $ 0.2 million in 2016 and 2015 , respectively . in the current year , the benefit is the result of adjustments made to the fair value of the contingent obligation due to previous acquisition owners as a result of financial performance and the time value of money . the benefit was offset by an increase in the fair value of the receivable due from the former owner of command , as the likelihood of employee retention was adjusted along with the time value of money . the fair value of the contingent consideration obligation for each acquisition reflects updated probabilities as of december 31 , 2016 . depreciation expense was $ 16.3 million in 2016 , an increase of 31.7 % from $ 12.4 million in 2015 . the increase in depreciation expense was primarily attributable to the leasehold improvements , addition of furniture and the addition of computer equipment for the new chicago space , as the former command employees located in skokie moved to the chicago headquarters in october 2016. the increase was also due to purchases of computer hardware and software , equipment , leasehold improvements , furniture and fixtures , and internally developed software . amortization expense in 2016 was $ 15.8 million , an increase of 34.6 % from $ 11.7 million in 2015 . the increase in amortization expense was attributable to the amortization of intangible assets for a full year of expense related to the 2015 acquisitions of command and xpress solutions , inc. ( `` xpress '' ) .
| we expect to continue to expand both our transactional and managed transportation client base in the future , although the rate of growth for each type of client will vary depending on opportunities in the marketplace . revenue recognized per shipment will vary depending on the transportation mode , fuel prices , shipment weight , density and mileage of the product shipped . the primary modes of shipment that we transact in are tl , ltl and intermodal . other transportation modes include domestic air , expedited services , international and small parcel . material shifts in the percentage of our revenue by transportation mode could have a significant impact on our revenue growth . in 2016 , tl accounted for 67.6 % of our revenue , ltl accounted for 26.4 % of our revenue , intermodal accounted for 4.3 % of our revenue and other transportation accounted for 1.7 % of our revenue . the transportation industry has historically been subject to seasonal sales fluctuations as shipments generally are lower during and after the winter holiday season because many companies ship goods and stock inventories prior to the winter holiday season . while we experience some seasonality , differences in our revenue between periods have been driven primarily by growth in our client base . transportation costs and net revenue we act primarily as a service provider to add value and expertise in the procurement and execution of transportation and logistics services for our clients . our pricing structure is primarily variable , although we have entered into a limited number of fixed-fee arrangements that represent an insignificant portion of our revenue . net revenue is a non-gaap measure equal to revenue minus transportation costs . our transportation costs consist primarily of the direct cost of transportation paid to the carrier . net revenue is considered by management to be an important measurement of our success in the marketplace . our transportation costs are typically lower for an ltl shipment than for a tl shipment . in turn , our net revenue margin is typically higher for an ltl shipment than for a tl shipment . material shifts in the
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the company largely completed the wind down of its sea ray sport yacht and yacht operations during 2018. non-gaap figures exclude the results of sport yacht and yacht operations in 2018 and 2017 , and certain amounts in 2019 related to changes in estimated liabilities . acquisition of power products on august 9 , 2018 , the company completed its acquisition of the global marine business of power products holdings , llc ( power products ) for $ 909.6 million in cash , on a cash-free , debt-free basis . for further discussion regarding the acquisition , refer to note 5 โ acquisitions in the notes to consolidated financial statements . overview the company 's 2019 results represent the tenth consecutive year of growth , resulting from strong operating performance . the company looked to achieve the following financial objectives in 2019 : deliver revenue growth . increase earnings before income taxes , as well as deliver improvements in both gross margin and operating margin percentages , excluding non-recurring charges . continue to generate strong free cash flow and execute against the company 's capital strategy . achievements against the company 's financial objectives in 2019 were as follows : deliver revenue growth : ended the year with a slight decrease in net sales when compared with 2018 due to the following : the decrease in gaap net sales included a benefit of 4.1 percent relating to recent acquisitions , negative impacts from foreign exchange rate of 1 percent , and negative impact from the exit of sport yacht and yacht operations of 1 percent . the u.s. engine and boat operations experienced total industry powerboat retail unit declines of 5 percent in 2019 versus an expectation at the beginning of the year of a low-to-middle single digit percent increase , reflecting a challenging retail environment during the first half of the year with volumes stabilizing in the second half . outboard engine retail units were up slightly year-over-year . the marine engine segment reported sales increases as the addition of power products and continued gains in higher horsepower outboard engine categories were partially offset by reductions in outboard engines 150 horsepower and below , as well as lower sales of sterndrive engines . boat segment net sales decreased as a result of planned reductions in wholesale unit shipments of value pontoons and aluminum fish products . saltwater fishing sales were affected by challenging comparisons between years at boston whaler due to leaning pipelines in advance of upcoming major product launches . sales declines were partially offset by gains in other premium offerings , including sea ray sport boats and cruisers . international sales for the company increased 3 percent in 2019 when compared with 2018 on a gaap basis and increased 4 percent on a constant currency basis , excluding the impact of acquisitions and sport yacht and yacht operations ; the increase was driven by europe , asia-pacific and rest-of-world regions , partially offset by weakness in canada . 26 increase earnings before income taxes , as well as deliver improvements in both gross margin and operating margin percentages , excluding non-recurring charges : reported earnings before income taxes of $ 110.7 million in 2019 compared with earnings before income taxes of $ 310.7 million in 2018 ; adjusted earnings before income taxes were $ 465.2 million in 2019 versus $ 461.7 million in 2018 gross margin improved 190 basis points when compared with 2018 and reflected the absence of sport yacht and yacht operations and purchase accounting amortization associated with the power products acquisition , both of which negatively impacted 2018. gross margin , as adjusted , improved 50 basis points as benefits from the power products acquisition and favorable changes in sales mix in the marine engine segment outweighed the impact of lower sales , tariffs and unfavorable changes in foreign exchange rates operating margin improved by 290 basis points when compared with the prior year due to the factors affecting gross margin percentage discussed above , as well as reduced restructuring , exit , impairment and other charges and acquisition-related costs . operating margin , as adjusted , was up 50 basis points compared with 2018 earnings before income taxes included a pre-tax , non-cash charge of $ 292.8 million relating to the exit of its remaining defined benefit pension plans during the year continue to generate strong free cash flow and execute against the company 's capital strategy : generated free cash flow of $ 250.4 million in 2019 , and had cash flow from discontinued operations of $ 440.6 million including proceeds from the sale of fitness , enabling the company to continue executing its capital strategy as follows : funded investments in growth : organically through capital expenditures and research and development , which included investments in new products as well as capacity expansions , primarily within the marine engine segment through the acquisition of freedom boat club for $ 64.1 million retired $ 300.0 million of near-term debt including the retirement of the company 's 4.625 percent senior notes due 2021 and refinancing of acquisition-related debt completed the exit from the company 's qualified defined benefit pension plans enhanced shareholder returns in 2019 by repurchasing $ 400.0 million of common stock under the company 's share repurchase program and increased cash dividends paid to shareholders to $ 73.4 million ended the year with $ 332.7 million of cash and marketable securities net earnings from continuing operations decreased to $ 30.4 million in 2019 from $ 253.4 million in 2018 , and included an after-tax , non-cash charge of $ 310.3 million related to pension settlement costs as well as a net tax benefit of $ 17.2 million primarily related to favorable rate change impacts on state deferred tax assets as well as a reassessment of the state valuation allowance . the 2018 results reflect an income tax provision of $ 57.3 million and included a net benefit of $ 4.8 million primarily related to 2017 u.s. tax reform updates . story_separator_special_tag outlook for 2020 reportable segment changes the company has refocused its strategy on four business pillars - propulsion , parts and accessories ( p & a ) , boats and business acceleration . effective january 1 , 2020 , the company changed its management reporting and updated its reportable segments to propulsion , p & a and boat ( inclusive of business acceleration ) to align with its strategy . outlook statements included in this discussion will reflect these new segments . for further information , refer to the company 's current report on form 8-k filed with the sec on january 30 , 2020 and note 23 โ subsequent events in the notes to consolidated financial statements . 27 outlook the company is projecting 2020 to be another year of strong growth and operating performance , with free cash flow generation in excess of $ 325 million . the company is targeting growth in the range of 6 percent to 8 percent . the company projects u.s. marine industry powerboat retail unit demand for 2020 to be flat to slightly up versus 2019. our efforts to manage pipeline inventory levels in the back half of 2019 put us in a favorable position entering 2020 , as wholesale boat sales are expected to more closely match retail sales for the year resulting in top-line growth versus 2019. we anticipate continued growth and share gains in higher horsepower engine categories bolstered by our completed capacity expansion efforts . boat segment sales in 2020 will also benefit from significant new product introductions as well as the company 's continued focus on product with more technology features and content . the propulsion and boat segments will experience more challenging wholesale revenue comparisons early in the year , with more favorable comparisons in the second-half , as a result of the timing of wholesale activity in 2019 , including the impact of second-half reductions in wholesale shipments and pipeline inventories . the p & a segment should benefit from more normal seasonal conditions for boating activity . the company is planning to deliver higher earnings before income taxes in 2020 resulting from planned sales increases and continued margin growth resulting from improved operating efficiency . however , as a result of the expiration and non-renewal of the tariff exemption related to 40 to 60 horsepower engines assembled in china , the company now anticipates the full impact of tariffs on its 2020 pre-tax earnings to be between $ 30 to $ 35 million , or an incremental $ 10 to $ 15 million over 2019. in addition , the company expects foreign currency exchange rates to negatively impact 2020 earnings growth by one percent to two percent . the company is planning for its effective tax rate in 2020 to be approximately 21 percent to 22 percent based on existing tax law . matters affecting comparability certain events occurred during 2019 , 2018 and 2017 that the company believes affect the comparability of the results of operations . the tables below summarize the impact of changes in currency exchange rates , the impact of recent acquisitions and the impact of sport yacht and yacht operations on the company 's net sales : replace_table_token_8_th replace_table_token_9_th 28 sport yacht and yacht wind-down . the results of sport yacht and yacht operations are summarized in the table below . replace_table_token_10_th ( a ) during 2019 , results included $ ( 0.7 ) million of charges within net sales related to estimated retail sales incentives to support the sale of sport yachts and yachts currently in the dealer pipeline . during 2018 , results included $ 16.0 million of charges within net sales to support the sale of sport yachts and yachts in the dealer pipeline at that time . there were no comparable charges in 2017. acquisitions . the company completed acquisitions during 2019 , 2018 and 2017 that affect the comparability of net sales . the impacts on consolidated and segment sales comparisons are reflected above . refer to note 5 โ acquisitions in the notes to consolidated financial statements for further information . changes in foreign currency rates . percentage changes in net sales expressed in constant currency reflect the impact that changes in currency exchange rates had on comparisons of net sales . to determine this information , net sales transacted in currencies other than u.s. dollars have been translated to u.s. dollars using the average exchange rates that were in effect during the comparative period . the percentage change in net sales expressed on a constant currency basis better reflects the changes in the underlying business trends , excluding the impact of translation arising from foreign currency exchange rate fluctuations . approximately 22 percent of the company 's annual net sales are transacted in a currency other than the u.s. dollar . the company 's most material exposures include sales in euros , canadian dollars , australian dollars and brazilian reais . additionally , operating earnings comparisons were negatively affected by foreign exchange rates by approximately $ 15 million in 2019 when compared with 2018 , and were positively affected by foreign exchange rates by approximately $ 1 million in 2018 when compared with 2017. these estimates include the impact of translation on all sales and costs transacted in a currency other than the u.s. dollar and the impact of hedging activities . restructuring , exit and impairment charges . the company recorded restructuring , exit and impairment charges during 2019 , 2018 and 2017 . the following table summarizes these charges by cash charges and non-cash charges . replace_table_token_11_th ( a ) restructuring , exit and impairment activities within the boat segment primarily related to the wind-down of sport yacht and yacht operations . as the wind-down was substantially completed by the end of 2019 . ( b ) during 2019 , the company recorded $ 2.2 million of charges within corporate related to it transformation project costs resulting from the fitness business sale .
| during 2019 , the company recorded restructuring , exit and impairment charges of $ 18.8 million compared with $ 54.8 million in 2018 . see note 4 โ restructuring , exit and impairment activities in the notes to consolidated financial statements for further details . the company recognized equity earnings of $ 7.3 million and $ 7.7 million in 2019 and 2018 , respectively , which were mainly related to the company 's marine joint ventures . equity earnings in 2018 included a $ 2.3 million gain on the sale of an equity investment as discussed in note 9 โ investments in the notes to consolidated financial statements . 31 in 2019 , the company recorded $ 292.8 million of charges related to pension settlement actions as discussed in note 17 โ postretirement benefits in the notes to consolidated financial statements . there were no pension settlement actions in 2018. the company recognized $ ( 2.1 ) million and $ ( 4.3 ) million in 2019 and 2018 , respectively , in other expense , net . other expense , net primarily includes pension and other postretirement benefit costs , the amortization of deferred income related to a trademark licensing agreement with amf bowling centers , inc. as discussed in note 1 - significant accounting policies in the notes to consolidated financial statements , as well as remeasurement gains and losses resulting from changes in foreign currency rates . net interest expense increased $ 29.6 million to $ 72.7 million in 2019 compared with 2018 primarily due to recent debt activity as discussed in note 16 โ debt in the notes to consolidated financial statements . transaction financing charges of $ 5.1 million in 2018 related to the 364-day senior unsecured bridge facility which was secured in connection with the power products acquisition as discussed in note 16 โ debt in the notes to consolidated financial statements . income tax provision for 2019 was $ 80.3 million and includes a net charge of $ 17.5 million related
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ms. smolyansky did not receive any additional retainer fees or other meeting attendance fees in her capacity as a director . ( 2 ) represents ( i ) the company 's portion of the matching contributions to the company 's 401 ( k ) plan on behalf of ludmila smolyansky : $ 11,332 for 2012 ; and ( ii ) $ 0.00 for insurance premiums and $ 1,720 for fuel . during 2012 , each outside ( non-employee ) director other than ms. ludmila smolyansky was compensated at the rate of $ 500 per non-annual meeting attended . no employee director ( julie smolyansky ) nor any director serving as the nominee of danone ( gustavo carlos valle ) was compensated as a director during 2012. item 12. security ownership of certain beneficial owners and management and related stockholder matters . the following table sets forth certain information known to the company regarding the beneficial ownership of the company 's common stock , the company 's only outstanding class of securities , as of march 9 , 2013 by ( a ) each shareholder known by the company to be the beneficial owner of more than story_separator_special_tag comparison of quarter ended december 31 , 2012 to quarter ended december 31 , 2011 the following analysis should be read in conjunction with the audited financial statements of the company and related notes included elsewhere in this annual report and the financial statements and management 's discussion and analysis contained in our quarterly reports on form 10-q , for the fiscal quarters ended march 31 , 2012 , june 30 , 2012 , and september 30 , 2012. on march 29 , 2013 , management concluded that the consolidated statements of income for the year to date periods of march 31 , 2012 and 2011 , june 30 , 2012 and 2011 , and september 30 , 2012 and 2011 , should be restated . this restatement is a result of changing classification of various expenses from operating activities to cost of goods sold . this change did not cause any changes in net income for any of the periods presented . see note 2 and note 14 in the financial statements for further information . story_separator_special_tag during the same period in 2011. provision for income taxes was $ 3,205,076 or a 36 % effective tax rate , for the twelve-month period ended december 31 , 2012 compared with $ 1,977,837 or a 41 % effective tax rate , during the same period in 2011. the decline in the effective tax rate is primarily the result of changes in permanent differences such as the manufacturers ' deductions , and changes in prior year estimates reflected in the current period . income taxes are discussed in note 10 of the notes to consolidated financial statements . total net income was $ 5,619,798 or $ 0.34 per share for the twelve-month period ended december 31 , 2012 compared to $ 2,855,421 or $ 0.17 per share in the same period in 2011. liquidity and capital resources sources and uses of cash net cash provided by operating activities was $ 6,627,684 during the twelve-months ended december 31 , 2012 compared to net cash provided by operating activities of $ 4,042,021 the same period in 2011. this increase is primarily attributable to the increase in net income of $ 2,764,377 in 2012 . - 15 - net cash used in investing activities was $ 1,555,914 during the twelve months ended december 31 , 2012 compared to net cash used in investing activities of $ 2,112,657 in the same period in 2011. this decrease is primarily due to a decrease in purchases of investments of 981,668 compared to 2011. the company had a net increase of cash and cash equivalents of $ 1,171,076 during the twelve-month period ended december 31 , 2012 compared to a net decrease in cash and cash equivalents of $ 2,114,789 during the same period in 2011. the company had cash and cash equivalents of $ 2,286,226 as of december 31 , 2012 compared to cash and cash equivalents of $ 1,115,150 as of december 31 , 2011. assets and liabilities total assets were $ 53,506,626 as of december 31 , 2012 , which is an increase of $ 2,033,318 when compared to december 31 , 2011. this is primarily due to cash and cash equivalents of $ 2,286,226 as of december 31 , 2012 , which is an increase of of $ 1,171,076 , when compared to december 31 , 2011. total current liabilities were $ 6,209,694 as of december 31 , 2012 , which is a decrease of $ 863,026 when compared to december 31 , 2011. this is primarily due to a $ 997,735 decrease in current maturities of notes payable . notes payable decreased by $ 583,891 as of december 31 , 2012 , when compared to december 31 , 2011. the balance of the notes payable as of december 31 , 2012 was $ 4,955,945. total stockholder 's equity was $ 39,312,469 as of december 31 , 2012 , which is an increase of $ 3,955,312 when compared to december 31 , 2011. this is primarily due the increase in retained earnings of $ 4,473,481 when compared to december 31 , 2011. we previously held significant portions of our assets in investment securities . all of our marketable securities are classified as available-for-sale on our balance sheet . all of these securities are stated thereon at market value as of the end of the applicable period . gains and losses on the portfolio are determined by the specific identification method . we anticipate being able to fund the company 's foreseeable liquidity requirements internally . we continue to explore potential acquisition opportunities in our industry in order to boost sales while leveraging our distribution system to consolidate and lower costs . off-balance sheet arrangements we have never entered into any off-balance sheet financing arrangements and have never established story_separator_special_tag ms. smolyansky did not receive any additional retainer fees or other meeting attendance fees in her capacity as a director . ( 2 ) represents ( i ) the company 's portion of the matching contributions to the company 's 401 ( k ) plan on behalf of ludmila smolyansky : $ 11,332 for 2012 ; and ( ii ) $ 0.00 for insurance premiums and $ 1,720 for fuel . during 2012 , each outside ( non-employee ) director other than ms. ludmila smolyansky was compensated at the rate of $ 500 per non-annual meeting attended . no employee director ( julie smolyansky ) nor any director serving as the nominee of danone ( gustavo carlos valle ) was compensated as a director during 2012. item 12. security ownership of certain beneficial owners and management and related stockholder matters . the following table sets forth certain information known to the company regarding the beneficial ownership of the company 's common stock , the company 's only outstanding class of securities , as of march 9 , 2013 by ( a ) each shareholder known by the company to be the beneficial owner of more than story_separator_special_tag comparison of quarter ended december 31 , 2012 to quarter ended december 31 , 2011 the following analysis should be read in conjunction with the audited financial statements of the company and related notes included elsewhere in this annual report and the financial statements and management 's discussion and analysis contained in our quarterly reports on form 10-q , for the fiscal quarters ended march 31 , 2012 , june 30 , 2012 , and september 30 , 2012. on march 29 , 2013 , management concluded that the consolidated statements of income for the year to date periods of march 31 , 2012 and 2011 , june 30 , 2012 and 2011 , and september 30 , 2012 and 2011 , should be restated . this restatement is a result of changing classification of various expenses from operating activities to cost of goods sold . this change did not cause any changes in net income for any of the periods presented . see note 2 and note 14 in the financial statements for further information . story_separator_special_tag during the same period in 2011. provision for income taxes was $ 3,205,076 or a 36 % effective tax rate , for the twelve-month period ended december 31 , 2012 compared with $ 1,977,837 or a 41 % effective tax rate , during the same period in 2011. the decline in the effective tax rate is primarily the result of changes in permanent differences such as the manufacturers ' deductions , and changes in prior year estimates reflected in the current period . income taxes are discussed in note 10 of the notes to consolidated financial statements . total net income was $ 5,619,798 or $ 0.34 per share for the twelve-month period ended december 31 , 2012 compared to $ 2,855,421 or $ 0.17 per share in the same period in 2011. liquidity and capital resources sources and uses of cash net cash provided by operating activities was $ 6,627,684 during the twelve-months ended december 31 , 2012 compared to net cash provided by operating activities of $ 4,042,021 the same period in 2011. this increase is primarily attributable to the increase in net income of $ 2,764,377 in 2012 . - 15 - net cash used in investing activities was $ 1,555,914 during the twelve months ended december 31 , 2012 compared to net cash used in investing activities of $ 2,112,657 in the same period in 2011. this decrease is primarily due to a decrease in purchases of investments of 981,668 compared to 2011. the company had a net increase of cash and cash equivalents of $ 1,171,076 during the twelve-month period ended december 31 , 2012 compared to a net decrease in cash and cash equivalents of $ 2,114,789 during the same period in 2011. the company had cash and cash equivalents of $ 2,286,226 as of december 31 , 2012 compared to cash and cash equivalents of $ 1,115,150 as of december 31 , 2011. assets and liabilities total assets were $ 53,506,626 as of december 31 , 2012 , which is an increase of $ 2,033,318 when compared to december 31 , 2011. this is primarily due to cash and cash equivalents of $ 2,286,226 as of december 31 , 2012 , which is an increase of of $ 1,171,076 , when compared to december 31 , 2011. total current liabilities were $ 6,209,694 as of december 31 , 2012 , which is a decrease of $ 863,026 when compared to december 31 , 2011. this is primarily due to a $ 997,735 decrease in current maturities of notes payable . notes payable decreased by $ 583,891 as of december 31 , 2012 , when compared to december 31 , 2011. the balance of the notes payable as of december 31 , 2012 was $ 4,955,945. total stockholder 's equity was $ 39,312,469 as of december 31 , 2012 , which is an increase of $ 3,955,312 when compared to december 31 , 2011. this is primarily due the increase in retained earnings of $ 4,473,481 when compared to december 31 , 2011. we previously held significant portions of our assets in investment securities . all of our marketable securities are classified as available-for-sale on our balance sheet . all of these securities are stated thereon at market value as of the end of the applicable period . gains and losses on the portfolio are determined by the specific identification method . we anticipate being able to fund the company 's foreseeable liquidity requirements internally . we continue to explore potential acquisition opportunities in our industry in order to boost sales while leveraging our distribution system to consolidate and lower costs . off-balance sheet arrangements we have never entered into any off-balance sheet financing arrangements and have never established
| - 14 - operating expenses as a percentage of net sales were approximately 24 % during the fourth quarter of 2012 , compared to approximately 25 % during the same period in 2011. this was primarily attributable to an increase in selling expenses , which increased by $ 636,234 ( approximately 25 % ) to $ 3,205,897 during the fourth quarter of 2012 , from $ 2,569,663 during the same period in 2011. the company reported income from operations of $ 1,768,219 during the fourth quarter of 2012 , an increase of $ 2,225,269 from a loss of $ 457,050 during the same period in 2011. provision for income tax was $ 721,860 , or a 40 % effective rate for the fourth quarter of 2012 compared to a benefit of $ 137,528 during the same period in 2011. total net income was $ 1,073,502 or $ 0.07 per diluted share for the three-month period ended december 31 , 2012 compared to a net loss of $ 365,933 or a loss of $ 0.02 per diluted share in the same period in 2011. comparison of year ended december 31 , 2012 to year ended december 31 , 2011 the consolidated statement of income for the year ended december 31 , 2011 has been restated due to reclassification of approximately $ 1.285 million of various expenses from operating activities to cost of goods sold . there was no change in net income from what was previously presented . see note 2 and note 14 in the financial statements for further information . total consolidated gross sales increased by $ 12,631,008 ( approximately 16 % ) to $ 89,754,007 during the twelve- month period ended december 31 , 2012 from $ 77,122,999 during the same twelve-month period in 2011. this increase is primarily attributable to increased sales and awareness of the company 's flagship line , kefir , as well as probugsยฎ organic kefir for kids and biokefir . total consolidated net sales increased by $ 11,380,856 ( approximately 16 % ) to $ 81,351,265 during the twelve-month period ended december 31 , 2012 from $ 69,970,409 during the same twelve-month period in 2011. net sales are recorded as gross sales less promotional activities such as slotting fees paid , couponing ,
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to estimate credit losses on impaired loans ( in accordance with the 40 receivables topic of the fasb asc ) , we evaluate numerous factors , as described below in ยยallowance for loan losses.ย based on our estimate of the level of allowance for loan losses required , we record a provision for loan losses to maintain the allowance for loan losses at an amount that provides for all losses that are both probable and reasonable to estimate . since we can not predict with certainty the amount of loan charge-offs that will be incurred and because the eventual level of loan charge-offs is affected by numerous conditions beyond our control , a range of loss estimates can reasonably be used to determine the allowance for loan losses and the related provisions for loan losses . in addition , various regulatory agencies , as an integral part of their examination processes , periodically review our allowance for loan losses . such agencies may require that we recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination . accordingly , actual results could differ from those estimates . deterioration in the hawaii real estate market could result in an increase in loan delinquencies , additional increases in our allowance for loan losses and provision for loan losses , as well as an increase in loan charge-offs . securities impairment . we periodically perform analyses to determine whether there has been an other-than-temporary decline in the value of our securities . our held-to-maturity securities consist primarily of debt securities for which we have a positive intent and ability to hold to maturity , and are carried at amortized cost . our available-for-sale securities are carried at fair value . we conduct a quarterly review and evaluation of the securities portfolio to determine if the value of any security has declined below its cost or amortized cost , and whether such decline is other-than-temporary . if such decline is deemed other-than-temporary , we would adjust the cost basis of the security by writing down the security for any credit losses through a charge on the income statement . the market values of our securities are affected by changes in interest rates as well as shifts in the market 's perception of the issuers . the fair value of investment securities is usually based on quoted market prices or dealer quotes . however , if there are no observable market inputs ( for securities such as trust preferred securities ) , we estimate the fair value using unobservable inputs . we obtain estimates of the fair value of trust preferred securities from pricing services which discount projected cash flows using a risk-adjusted discount rate in accordance with the fair value measurements and disclosures topic of the fasb asc . on april 9 , 2009 , the financial accounting standards board revised the investmentsยdebt and equity securities and the fair value measurements topics of the fasb asc . the revisions amend the other-than-temporary impairment guidance for u.s. gaap for debt securities to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in a company 's financial statements . before these recent revisions , to conclude that an impairment was not other than temporary , an entity was required , among other considerations , to assert that it had the intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value in accordance with securities and exchange commission staff accounting bulletin topic 5m , ยother than temporary impairment of certain investments in debt and equity securities , ย and other authoritative literature . as a result of these recent revisions , an entity should assess whether the entity ( a ) has the intent to sell the debt security or ( b ) more likely than not will be required to sell the debt security before its anticipated recovery ( for example , if its cash or working capital requirements or contractual or regulatory obligations indicate that the debt security will be required to be sold before the forecasted recovery occurs ) . the revisions also change the trigger used to assess the collectability of cash flows from ยprobable that the investor will be unable to collect all amounts dueย to ยthe entity does not expect to recover the entire amortized cost basis of the security.ย if the present value of cash flows expected to be collected is less than the amortized cost basis of the security , an other-than-temporary impairment shall have occurred . we adopted the two revisions to the fasb asc for the quarter ended march 31 , 2009 . 41 we had previously considered our investment in pretsl xxiv to be other-than-temporarily impaired . pretsl xxiv has a book value of $ 0. our investment in pretsl xxiii was determined to be other-than temporarily impaired and we recorded an impairment charge of $ 2.4 million in the year ended december 31 , 2010. when the impairment charge of $ 2.4 million on pretsl xxiii was recorded , the security was written down to its fair value of $ 32,000. the $ 1.1 million difference between the original outstanding principal balance of $ 3.5 million and the impairment charge of $ 2.4 million was reported as other comprehensive loss and is related to noncredit factors such as an inactive trust preferred securities market . see also ยitem 1a . risk factorsย for a discussion on our investment in trust preferred securities . we evaluated our $ 12.3 million investment in fhlb stock for other-than-temporary impairment as of december 31 , 2011. considering the long-term nature of this investment , the liquidity position of the fhlb of seattle , the actions taken by the fhlb of seattle to meet its regulatory capital requirement , and our intent not to sell this investment for a period of time sufficient to recover the par value , our fhlb stock was not considered other-than-temporarily impaired . story_separator_special_tag as of december 31 , 2011 , the fhlb of seattle has met all of its regulatory capital requirements . moody 's investor services and standard and poor 's have given the fhlb of seattle long-term credit ratings of aaa and aa+ , respectively . even though we did not recognize an other-than-temporary impairment loss on our investment in fhlb stock in 2011 , continued deterioration in the fhlb of seattle 's financial position may result in future impairment losses . deferred tax assets . deferred tax assets and liabilities are recognized for the estimated future tax effects attributable to temporary differences and carryforwards . a valuation allowance may be required if , based on the weight of available evidence , it is more likely than not that some portion or all of the deferred tax assets will not be realized . in determining whether a valuation allowance is necessary , we consider the level of taxable income in prior years , to the extent that carrybacks are permitted under current tax laws , as well as estimates of future taxable income and tax planning strategies that could be implemented to accelerate taxable income if necessary . if our estimates of future taxable income were materially overstated or if our assumptions regarding the tax consequences of tax planning strategies were inaccurate , some or all of our deferred tax assets may not be realized , which would result in a charge to earnings . defined benefit retirement plan . defined benefit plan obligations and related assets of our defined benefit retirement plan are presented in note 16 to the consolidated financial statements . effective december 31 , 2008 , the defined benefit retirement plan was frozen and all plan benefits were fixed as of that date . plan assets , which consist primarily of marketable equity and debt securities , are typically valued using market quotations . plan obligations and the annual pension expense are determined by independent actuaries through the use of a number of assumptions . key assumptions in measuring the plan obligations include the discount rate and the expected long-term rate of return on plan assets . in determining the discount rate , we utilize a yield that reflects the top 50 % of the universe of bonds , ranked in the order of the highest yield . these bonds provide cash flows that match the timing of expected benefit payments . asset returns are based upon the anticipated average rate of earnings expected on the invested funds of the plans . at december 31 , 2011 , we used weighted-average discount rates of 5.80 % and 4.90 % for calculating annual pension expense and projected plan liabilities , respectively , and an expected long-term rate of return on plan assets of 7.75 % for calculating annual pension expense . at december 31 , 2010 , we used a weighted-average discount rate of 6.20 % and 5.80 % for calculating annual pension expense and projected plan liabilities , respectively , and an expected long-term rate of return on plan assets of 8.00 % for calculating annual pension expense . for both the discount rate and the asset return rate , a range of estimates could reasonably have been used , which would affect the amount of pension expense and pension liability recorded . 42 an increase in the discount rate or asset return rate would reduce pension expense in 2011 , while a decrease in the discount rate or asset return rate would have the opposite effect . a 25 basis point decrease in the discount rate assumptions would increase 2011 pension expense by $ 3,000 and year-end 2011 pension liability by $ 431,000 , while a 25 basis point decrease in the asset return rate would increase 2011 pension expense by $ 25,000. balance sheet analysis assets . at december 31 , 2011 , our assets were $ 1.538 billion , an increase of $ 94.2 million , or 6.5 % , from $ 1.443 billion at december 31 , 2010. the increase was caused by a $ 108.3 million increase in investment securities and a $ 46.3 million increase in loans receivable . this was partially offset by a $ 62.5 million decrease in cash and cash equivalents . cash and cash equivalents . at december 31 , 2011 , we had $ 131.9 million of cash and cash equivalents compared to $ 194.4 million at december 31 , 2010. during 2011 , cash was used to fund a $ 108.3 million increase in investment securities and a $ 46.3 million increase in loans receivable . in addition , the company repurchased $ 25.5 million of common stock and paid $ 3.9 million of common stock dividends . this was partially offset by an $ 89.6 million increase in deposits , a $ 13.1 million increase in fhlb advances and securities sold under agreements to repurchase and net income of $ 12.8 million . 43 loan portfolio composition . the following table sets forth the composition of our loan portfolio at the dates indicated . replace_table_token_8_th loan portfolio maturities and yields . the following table summarizes the scheduled maturities of our loan portfolio at december 31 , 2011. demand loans , loans having no stated repayment schedule or maturity , and overdraft loans are reported as being due in one year or less . replace_table_token_9_th 44 the following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at december 31 , 2011 that are contractually due after december 31 , 2012. replace_table_token_10_th securities . at december 31 , 2011 , our securities portfolio totaled $ 653.9 million , or 42.5 % of assets . at that date , our securities held to maturity consisted primarily of securities with the following amortized costs : $ 579.3 million of mortgage-backed securities , $ 74.5 million of collateralized mortgage obligations and $ 32,000 of trust preferred securities . all of the mortgage-backed securities and collateralized mortgage obligations were issued by fannie mae , freddie mac or ginnie mae .
| interest and dividend income increased by $ 1.6 million to $ 62.7 million for the year ended december 31 , 2011 from $ 61.1 million for the year ended december 31 , 2010. interest income on securities rose by $ 1.1 million , primarily due to a $ 57.5 million increase in the average securities balance . interest income on loans increased by $ 598,000 , primarily due to a $ 41.5 million increase in the average loan balance . interest income on other interest earning assets decreased by $ 77,000 primarily due to a $ 30.1 million decrease in cash invested at the federal reserve bank . the interest rate spread and net interest margin were 3.41 % and 3.55 % , respectively , for the year ended december 31 , 2011 , compared to 3.14 % and 3.35 % for 2010. the improvement in the interest rate spread was the result of a 36 basis point decrease in the average cost of interest-bearing liabilities that was partially offset by a nine basis point decrease in the average yield on interest-earning assets . net interest income increased by $ 4.7 million , or 11.4 % , for the year ended december 31 , 2010 , compared to the prior year . interest expense decreased by $ 5.2 million as declining market interest rates for certificates of deposit allowed us to reduce our deposit expense by $ 3.7 million . in addition , interest expense on borrowings decreased by $ 1.4 million to $ 4.4 million for the year ended december 31 , 2010 from $ 5.9 million for the year ended december 31 , 2009. the decrease in interest expense on borrowings is due to the payoff of $ 24.7 million of subordinated debentures and $ 25.0 million of securities sold under agreements to repurchase . interest and dividend income decreased by $ 410,000 to $ 61.1 million for the year ended december 31 , 2010 from $ 61.5 million for the
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public offering of common stock on april 13 , 2017 , we entered into an underwriting agreement ( the โ underwriting agreement โ ) with cantor fitzgerald & co. , as representative of the several underwriters named therein ( the โ underwriters โ ) , relating to an underwritten public offering ( the โ offering โ ) of 23,625,084 shares of our common stock . the public offering price was $ 2.00 per share of our common stock and the underwriters agreed to purchase the shares of our common stock pursuant to the underwriting agreement at a price of $ 1.8571 per share . 54 on april 19 , 2017 , the offering was completed and resulted in net proceeds of approximately $ 43.5 million , after deducting underwriting discounts and commissions and estimated offering expenses payable by us . acquisition of virttu biologics limited on april 27 , 2017 , we entered into a share purchase agreement ( the โ virttu purchase agreement โ ) with tnk therapeutics , inc. , our majority-owned subsidiary ( โ tnk โ ) , virttu biologics limited ( โ virttu โ ) , the shareholders of virttu ( the โ virttu shareholders โ ) and dayspring ventures limited , as the representative of the virttu shareholders , pursuant to which , among other things , tnk acquired from the virttu shareholders 100 % of the outstanding ordinary shares of virttu ( the โ virttu acquisition โ ) . virttu focuses on the development of oncolytic viruses that infect and selectively multiply in and destroy tumor cells without damaging healthy tissue . its lead oncolytic virus candidate , seprehvir , infects and replicates in cancer cells selectively , leaving normal cells unharmed . under the virttu purchase agreement , the total amount of the consideration payable to the virttu shareholders in the virttu acquisition is equal to $ 25 million , less virttu 's net debt ( the โ virttu base consideration โ ) . an additional $ 10 million contingent consideration is payable upon the achievement of certain regulatory milestones ( as described below ) ( the โ regulatory approval consideration โ ) . at the closing of the virttu acquisition ( the โ closing โ ) on april 27 , 2017 , we issued to the virttu shareholders consideration valued at approximately $ 2.2 million , which consisted primarily of an aggregate of 797,081 shares ( the โ virttu closing shares โ ) and approximately $ 557,000 in cash ( the โ cash consideration โ ) . the issuance of the closing shares and the payment of the cash consideration satisfied tnk 's obligation to pay 20 % of the virttu base consideration at the closing . under the terms of the virttu purchase agreement , we agreed to provide additional consideration to the virttu shareholders , as follows : ( 1 ) upon a financing resulting in gross proceeds ( individually or in the aggregate ) to tnk of at least $ 50.0 million ( a โ qualified financing โ ) , tnk will issue to the virttu shareholders an aggregate number of shares of its capital stock ( โ tnk capital stock โ ) as is equal to the quotient obtained by dividing 80 % of the virttu base consideration by the lowest per share price paid by investors in the qualified financing ( the โ tnk financing consideration โ ) ; provided , however , that 20 % of the tnk financing consideration shall be held in escrow until april 27 , 2018 ( the โ financing due date โ ) , to be used to , among other things , satisfy the indemnification obligations of the virttu shareholders . in the event that a qualified financing does not occur , then on the financing due date , we will issue to the virttu shareholders an aggregate number of shares of our common stock as is equal to the quotient obtained by dividing 80 % of the virttu base consideration , by $ 5.55 ( as adjusted , as appropriate , to reflect any stock splits or similar events affecting our common stock after the closing ) . ( 2 ) within 45 business days after virttu becomes aware that certain governmental bodies in the united states , the european union , the united kingdom or japan have approved for commercialization , on or before october 26 , 2024 , seprehvir ( or any enhancement , combination or derivative thereof ) as a monotherapy or in combination with one or more other active components ( each of the first two such approvals by a governmental body being a โ regulatory approval โ ) , tnk shall pay half of the regulatory approval consideration to the virttu shareholders , in a combination of ( a ) up to $ 5.0 million in cash ( the โ regulatory approval cash โ ) and or ( b ) ( i ) such number of shares of our common stock as is equal to the quotient obtained by dividing $ 5.0 million less the regulatory approval cash ( the โ regulatory approval share value โ ) by the 30 day vwap ( as defined below ) of one share of our common stock ; ( ii ) if tnk has completed its first public offering of tnk capital stock , the number of shares of tnk capital stock as is equal to the quotient obtained by dividing the regulatory approval share value by the 30 day vwap of one share of tnk capital stock ; or ( iii ) such number of shares of common stock of a publicly traded company as is equal to the quotient obtained by dividing the regulatory approval share value by the volume weighted average price of the relevant security , as reported on the nasdaq capital market ( or other principal stock exchange or securities market on which the shares are then listed or quoted ) for the thirty trading days immediately following the receipt of regulatory approval ( the โ 30 day vwap โ ) , with the composition of the regulatory approval consideration to be at tnk 's option . story_separator_special_tag in order for a second regulatory approval to qualify as a regulatory approval under the purchase agreement , the second approval must be granted by a different governmental body in a different jurisdiction than that which granted the first regulatory approval . celularity transaction on november 1 , 2016 , we loaned $ 5.0 million to celularity , inc. , a research and development company ( โ celularity โ ) , pursuant to a promissory note issued by us to celularity , as amended ( as so amended , the โ celularity note โ ) , in connection with the entry into a nonbinding term sheet by us , tnk and celularity . pursuant to the terms of the celularity note , the loan was due and payable in full on the earlier of november 1 , 2017 and the occurrence of an event of default under the celularity note 55 ( the โ maturity date โ ) . under the terms of the celularity note , in the event that celularity met certain minimum financing conditions prior to the maturity date , all outstanding amounts under the celularity note would be forgiven and converted to equity . on may 31 , 2017 , we loaned an additional $ 2.0 million to celularity pursuant to the terms of the celularity note . on june 14 , 2017 , we loaned an additional $ 1.0 million to celularity . additionally , on july 7 , 2017 , we loaned an additional $ 2.0 million to celularity . the loan amounts were forgiven and converted to additional equity investment in celularity as part of the closing of the contribution agreement ( as defined below ) on june 12 , 2017. on june 12 , 2017 , we entered into a contribution agreement ( the โ contribution agreement โ ) with tnk and celularity , pursuant to which , among other things , we and tnk agreed to contribute certain intellectual property rights related to our proprietary chimeric antigen receptor ( โ car โ ) constructs and related cars to celularity in exchange for shares of celularity 's series a preferred stock equal to 25 % of celularity 's outstanding shares of capital stock , calculated on a fully-diluted basis ( the `` celularity shares '' ) . on august 15 , 2017 , the transactions contemplated by the contribution agreement closed , the loan amounts were forgiven , and , on such date , among other things , ( a ) celularity issued the celularity shares to tnk , and ( b ) we , tnk and celularity entered into a license and transfer agreement ( the `` license agreement '' ) . pursuant to the license agreement ( i ) tnk and we agreed to provide to celularity ( 1 ) our car constructs and related cars for use worldwide in combination with placenta-derived cells and or cord blood-derived cells for the treatment of any disease or disorder except that anti-cd38 car constructs and related cars may also be used in adult cells for the treatment of multiple myeloma unless tnk exercises its termination rights , and ( 2 ) our know-how relating to the foregoing , ( ii ) tnk and we granted to celularity a limited , perpetual , transferable and sublicensable license and covenant not to sue with respect to certain of their patents and other intellectual property rights , which license is exclusive for a subset of such patents , and ( iii ) celularity agreed to pay to tnk 50 % of the first $ 200 million and 20 % thereafter of any upfront and milestone payments that celularity receives in connection with any sublicense of a combination of anti-cd38 car constructs and either placenta-driven cells and or cord bloodโderived cells or adult cells . termination of servier license agreement on july 11 , 2016 , we announced a license and collaboration agreement with les laboratoires servier , sas , a corporation incorporated under the laws of france , and institut de recherches internationales servier , a company duly organized and existing under the laws of france ( individually and collectively , โ servier โ ) for the development , manufacture and commercialization of products using our fully human immuno-oncology anti-pd-1mab sti-a1110 and provided support for sevier 's initial development efforts ( the โ servier license agreement โ ) . effective november 6 , 2017 , the servier license agreement was terminated by mutual agreement pursuant to its terms . new universal shelf registration statement on form s-3 on november 9 , 2017 , we filed a universal shelf registration statement on form s-3 ( file no . 33-221443 ) ( the โ new shelf registration statement โ ) to replace our existing and expiring universal shelf registration statement on form s-3 ( file no . 333-199849 ) ( the โ existing shelf registration statement โ ) . the existing shelf registration statement expired on december 6 , 2017 , when the new shelf registration statement was declared effective . at market issuance sales agreement on november 9 , 2017 , we entered into an at market issuance sales agreement ( the โ sales agreement โ ) with b. riley fbr , inc. , as sales agent ( the โ agent โ ) , pursuant to which we may offer and sell , from time to time , through the agent ( the โ offering โ ) up to $ 100,000,000 in shares of our common stock . any shares of our common stock offered and sold in the offering will be issued pursuant to the new shelf registration statement and the prospectus relating to the offering that forms a part of the new shelf registration statement . private placement of convertible promissory notes and warrants on december 11 , 2017 , we entered into a securities purchase agreement ( the โ securities purchase agreement โ or โ note spa โ ) with certain accredited investors ( collectively , the โ purchasers โ ) .
| the increase is due primarily to increased contract manufacturing activities and higher direct materials and overhead costs for the year ended december 31 , 2017 compared to the prior year period . the costs generally include employee salaries and benefits , direct materials and overhead costs including rent , depreciation , utilities , facility maintenance and insurance . we expect cost of revenues to fluctuate with related sales and service revenues . research and development expenses . research and development expenses for the years ended december 31 , 2017 and 2016 were $ 55.5 million and $ 42.2 million , respectively . research and development expenses include expenses associated with the ramp up of ztlido tm ( lidocaine topical system 1.8 % ) as well as the costs related to our rtx program activities towards 57 entering into future clinical trials , costs to identify , isolate and advance human antibody drug candidates derived from our libraries as well as advancing our adc preclinical drug candidates , preclinical testing expenses and the expenses associated with fulfilling our development obligations related to the nih grant awards ( collectively the โ nih grants โ ) . such expenses consist primarily of salaries and personnel related expenses , stock-based compensation expense , clinical development expenses , preclinical testing , lab supplies , consulting costs , depreciation and other expenses . the increase of $ 13.4 million is attributable to increased clinical activities related to consulting and lab supply costs incurred in connection with our expanded research and development activities and activities to advance rtx into clinical trials and potentially pursue other development activities and regulatory related activities associated with ztlido tm ( lidocaine topical system 1.8 % ) . we expect research and development expenses to increase in absolute dollars as we : ( i ) advance rtx and our other product candidates into clinical trials and pursue other development , acquire , develop and manufacture clinical trial materials and increase other regulatory operating activities , ( ii ) incur incremental expenses associated with our efforts to further advance
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we also implemented remote work arrangements effective mid-march 2020 and , to date , these arrangements have not materially affected our ability to operate our business . in addition , we implemented several measures to preserve sufficient liquidity in the near term . during march 2020 , we drew down $ 500 million under our $ 2.5 billion revolving credit facility to increase our cash position and maximize flexibility in light of the current uncertainty surrounding the impact of covid-19 . in addition , in april 2020 , we entered into an amendment to our revolving credit facility , which increased flexibility under our financial covenants and issued $ 1.0 billion aggregate principal amount of senior notes due may 2030 and $ 1.0 billion aggregate principal amount of senior notes due may 2050. the proceeds from the notes were used to fund a tender offer for $ 1.5 billion of certain senior notes with maturities ranging from 2021 through 2023 and to repay the $ 500 million outstanding under our revolving credit facility . in light of the impact of covid-19 , we assessed goodwill , other intangibles , deferred tax assets , programming assets , and accounts receivable for recoverability based upon latest estimates and judgments with respect to expected future operating results , ultimate usage of content and latest expectations with respect to expected credit losses . we recorded goodwill and other intangible assets impairment charges of $ 124 million for our asia-pacific reporting unit during 2020. adjustments to reflect increased expected credit losses were not material . further , hedged transactions were assessed and we have concluded such transactions remain probable of occurrence . due to significant uncertainty surrounding the impact of covid-19 , management 's judgments could change in the future . the effects of the pandemic may have further negative impacts on our financial position , results of operations , and cash flows . however , the current level of uncertainty over the economic and operational impacts of covid-19 means the related financial impact can not be reasonably and fully estimated at this time . the nature and extent of covid-19 's effects on our operations and results will depend on future developments , which are highly uncertain and can not be predicted , including new information that may emerge concerning the severity and the extent of future surges of covid-19 , vaccine distribution and other actions to contain the virus or treat its impact , among others . we will continue to monitor covid-19 and its impact on our business results and financial condition . our consolidated financial statements reflect management 's latest estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures as of the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented . actual results may differ significantly from these estimates and assumptions . in the united states , the coronavirus aid , relief , and economic security act ( โ cares act โ ) was enacted on march 27 , 2020 , and the consolidated appropriations act , 2021 was enacted on december 27 , 2020. as of december 31 , 2020 , we do not expect the cares act or the consolidated appropriations act , 2021 to have a material effect on our financial position and results of operations . we continue to monitor other relief measures taken by the u.s. and other governments around the world . 39 story_separator_special_tag depreciation and amortization depreciation and amortization expense includes depreciation of fixed assets and amortization of finite-lived intangible assets . as reported and excluding the impact of foreign currency fluctuations , depreciation and amortization increased 1 % in 2020. the increase was primarily attributable to an increase in capital expenditures . impairment of goodwill and other intangible assets impairment of goodwill and other intangible assets was $ 124 million and $ 155 million in 2020 and 2019 . 41 restructuring and other charges restructuring and other charges were $ 91 million and $ 26 million in 2020 and 2019. restructuring and other charges primarily include employee termination costs and other cost reduction efforts . interest expense , net interest expense decreased 4 % in 2020. the decrease was primarily attributable to a lower average debt balance in 2020 , a more favorable interest rate profile on our outstanding senior notes , and incremental interest income related to the change in fair value of our cross-currency swaps . loss on extinguishment of debt in 2020 , we repurchased $ 1.5 billion aggregate principal amount of dcl 's and scripps networks ' senior notes . the repurchase resulted in a loss on extinguishment of debt of $ 76 million . the loss included $ 67 million of net premiums to par value and $ 9 million of other charges . loss from equity investees , net we reported losses from our equity method investees of $ 105 million in 2020 compared to losses of $ 2 million in 2019. the changes are attributable to the company 's share of earnings and losses from its equity investees . other income ( expense ) , net the table below presents the details of other income ( expense ) , net ( in millions ) . replace_table_token_3_th income taxes the following table reconciles our effective income tax rate to the u.s. federal statutory income tax rate . replace_table_token_4_th 42 income tax expense was $ 373 million and $ 81 million , and o ur effective tax rate was 22 % and 4 % for 2020 and 2019. the increase in income tax expense in 2020 was primarily attributable to the discrete , one-time , non-cash deferred tax benefit of $ 445 million from legal entity restructurings that was recorded in 2019. additionally , the increase in income tax expense in 2020 was attributable to an increase in provision for uncertain tax positions and an increase in the effect of foreign operations . story_separator_special_tag those increases were partially offset by a decrease in pre-tax book income , a tax benefit from a favorable multi-year state resolution , and a favorable deferred tax adjustment in the u.s. that was recorded in 2020. segment results of operations โ 2020 vs. 2019 we evaluate the operating performance of our operating segments based on financial measures such as revenues and adjusted oibda . adjusted oibda is defined as operating income excluding : ( i ) employee share-based compensation , ( ii ) depreciation and amortization , ( iii ) restructuring and other charges , ( iv ) certain impairment charges , ( v ) gains and losses on business and asset dispositions , ( vi ) certain inter-segment eliminations related to production studios , ( vii ) third-party transaction costs directly related to the acquisition and integration of scripps networks and other transactions , and ( viii ) other items impacting comparability , such as the non-cash settlement of a withholding tax claim . we use this measure to assess the operating results and performance of our segments , perform analytical comparisons , identify strategies to improve performance , and allocate resources to each segment . we believe adjusted oibda is relevant to investors because it allows them to analyze the operating performance of each segment using the same metric management uses . we exclude share-based compensation , restructuring and other charges , certain impairment charges , gains and losses on business and asset dispositions , and acquisition and integration costs from the calculation of adjusted oibda due to their impact on comparability between periods . we also exclude the depreciation of fixed assets and amortization of intangible assets , as these amounts do not represent cash payments in the current reporting period . certain corporate expenses and inter-segment eliminations related to production studios are excluded from segment results to enable executive management to evaluate segment performance based upon the decisions of segment executives . adjusted oibda should be considered in addition to , but not a substitute for , operating income , net income and other measures of financial performance reported in accordance with u.s. generally accepted accounting principles ( โ gaap โ ) . 43 the table below presents our adjusted oibda by segment , with a reconciliation of consolidated net income available to discovery , inc. to adjusted oibda ( in millions ) . replace_table_token_5_th 44 the table below presents the calculation of adjusted oibda ( in millions ) . year ended december 31 , 2020 2019 % change revenue : u.s. networks $ 6,949 $ 7,092 ( 2 ) % international networks 3,713 4,041 ( 8 ) % corporate , inter-segment eliminations , and other 9 11 ( 18 ) % total revenue 10,671 11,144 ( 4 ) % costs of revenues , excluding depreciation and amortization 3,860 3,819 1 % selling , general and administrative ( a ) 2,615 2,654 ( 1 ) % adjusted oibda $ 4,196 $ 4,671 ( 10 ) % ( a ) selling , general and administrative expenses exclude employee share-based compensation , third-party transaction and integration costs related to the acquisition of scripps networks and other transactions , and for 2019 , exclude the settlement of a withholding tax claim . u.s. networks the table below presents , for our u.s. networks segment , revenues by type , certain operating expenses , and adjusted oibda ( in millions ) . replace_table_token_6_th revenues advertising revenue decreased 5 % in 2020 primarily attributable to softer demand stemming from the covid-19 pandemic , secular declines in the pay-tv ecosystem and , to a lesser extent , lower overall ratings and a decline in inventory , partially offset by increases in pricing and the continued monetization of content offerings on our next generation platforms ( such as our go suite of tve applications and dtc subscription products ) . distribution revenue increased 4 % in 2020 primarily attributable to increases in contractual affiliate rates and certain non-recurring items , partially offset by a decline in linear subscribers . excluding these non-recurring items , distribution revenue increased 3 % in 2020. total portfolio subscribers at december 31 , 2020 were 5 % lower than at december 31 , 2019 , while subscribers to our fully distributed networks were 3 % lower than the prior year . other revenue decreased $ 23 million in 2020. costs of revenues costs of revenues increased 2 % in 2020 primarily attributable to increases in content amortization from investments to support our next generation initiatives , partially offset by a reduction in production projects as a result of covid-19 and a non-recurring reserve release established in purchase accounting . content expense was $ 1.6 billion and $ 1.5 billion in 2020 and 2019 . 45 selling , general and administrative selling , general and administrative expenses decreased 4 % in 2020 primarily attributable to a reduction in travel costs as a result of covid-19 and lower marketing-related expenses , partially offset by an increase in personnel costs to support our next generation platforms , including discovery+ . adjusted oibda adjusted oibda decreased 3 % in 2020. international networks the following table presents , for our international networks segment , revenues by type , certain operating expenses , and adjusted oibda ( in millions ) . replace_table_token_7_th revenues advertising revenue decreased 13 % in 2020. excluding the impact of foreign currency fluctuations , advertising revenue decreased 12 % . the decreases were attributable to a decline in demand stemming from the covid-19 pandemic and the discontinuation of pay-tv distribution with certain european operators . distribution revenue decreased 4 % in 2020. excluding the impact of foreign currency fluctuations , distribution revenue decreased 3 % . the decreases were primarily attributable to lower contractual affiliate rates , the discontinuation of pay-tv distribution with certain european operators , and a disruption in the number of sporting events in europe due to covid-19 , partially offset by higher next generation revenues due to subscriber growth .
| replace_table_token_2_th nm - not meaningful 40 revenues our advertising revenue is generated across multiple platforms and consists of consumer advertising , which is sold primarily on a national basis in the u.s. and on a pan-regional or local-language feed basis outside the u.s. advertising contracts generally have a term of one year or less . advertising revenue is dependent upon a number of factors , including the stage of development of television markets , the popularity of fta television , the number of subscribers to our channels , viewership demographics , the popularity of our content and our ability to sell commercial time over a group of channels . revenue from advertising is subject to seasonality , market-based variations , the mix in sales of commercial time between the upfront and scatter markets , and general economic conditions . advertising revenue is typically highest in the second and fourth quarters . in some cases , advertising sales are subject to ratings guarantees that require us to provide additional advertising time if the guaranteed audience levels are not achieved . we also generate revenue from the sale of advertising through our digital products on a stand-alone basis and as part of advertising packages with our television networks . advertising revenue decreased 8 % in 2020. excluding the impact of foreign currency fluctuations , advertising revenue decreased 7 % . the decrease was primarily attributable to a decline in demand stemming from the covid-19 pandemic at both u.s. and international networks . distribution revenue consists principally of fees from affiliates for distributing our linear networks , supplemented by revenue earned from svod content licensing and other emerging forms of digital distribution . the largest component of distribution revenue is comprised of linear distribution services for rights to our networks from cable , dth satellite and telecommunication service providers . we have contracts with distributors representing most cable and satellite service providers around the world , including the largest operators in the u.s. and major international distributors . distribution revenues are largely dependent on the rates negotiated in the
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in 2013 , the company and disney amended both the marvel and lucas agreements which extended the term of the license for marvel characters through 2020 and provides additional guaranteed royalty payments with respect to both marvel and star wars products in anticipation of expected future motion pictures and other related entertainment through 2020. in 2013 , the company had sales of marvel products related to the may 2013 release of iron man 3 ; however , these sales were not as significant as those sales of products in 2012 related to the theatrical releases of marvel 's the avengers and the amazing spider-man . during 2014 the company will market products related to three planned theatrical motion picture releases based on marvel properties , captain america : the winter soldier , the amazing spider-man 2 , and guardians of the galaxy . the company re-introduced beyblade products , another licensed entertainment property , during the second half of 2010 and had significant sales in both 2011 and 2012. sales of beyblade products experienced an expected decline in 2013. in addition to offering products based on licensed entertainment properties , the company also offers products which are licensed from outside inventors . the company also seeks to build all-encompassing brand experiences and drive product-related revenues by increasing the visibility of its brands through entertainment such as motion pictures and television programming . since 2007 , the company has had a number of motion pictures based on its brands released by major motion picture studios including three motion pictures based on its transformers brand , two motion picture based on its g.i . joe brand and one motion picture based on its gaming mega brand , battleship . the company developed and marketed product lines based on these motion pictures . the next motion picture , transformers : age of extinction , based on the company 's transformers brand is scheduled to be released in june of 2014 by paramount pictures . in addition to using motion pictures to provide entertainment experiences for its brands , the company has an internal wholly-owned production studio , hasbro studios , which is responsible for the creation and development of television programming based primarily on hasbro 's brands . this programming is currently aired in markets throughout the world . the company is a 50 % partner in a joint venture with discovery communications , inc. ( ยdiscoveryย ) which runs hub television network , llc ( ยhub networkย ) , a cable television network in the united states dedicated to high-quality children 's and family entertainment . programming on hub network includes content based on hasbro 's brands as well as programming acquired from third parties . hasbro studios programming is distributed domestically to hub network , internationally to broadcasters and cable networks and on various digital platforms including netflix and itunes . the company 's television initiatives support its strategy of growing its brands well beyond traditional toys and games and providing entertainment experiences for consumers of all ages in any form or format . the company 's strategic blueprint and brand architecture also focus on extending its brands further into digital media and gaming , including through the licensing of the company 's properties to a number of partners who develop and offer digital games and other gaming experiences based on those brands . one example of these digital gaming relationships is the company 's agreement with electronic arts inc. ( ยeaย ) under which ea has the rights to develop eight of hasbro 's best-selling gaming brands for mobile platforms globally . similarly , the company has an agreement with activision under which activision offers digital games based on the transformers brand , as well as with other third-party digital gaming companies , including dena and gameloft . furthermore , on july 8 , 2013 , the company acquired a 70 % majority stake in backflip studios , llc ( ยbackflipย ) , a mobile game developer based in boulder , colorado . backflip 's product offerings include games for tablets and mobile devices including dragonvale , ninjump and paper toss . in 2014 and beyond , backflip intends to focus on its existing product lines and launch new games , including those based on hasbro brands . 29 the company also seeks to express its brands through its lifestyle licensing business . under its lifestyle licensing programs , the company enters into relationships with a broad spectrum of apparel , food , bedding and other lifestyle products companies for the global marketing and distribution of licensed products based on the company 's brands . these relationships further broaden and amplify the consumer 's ability to experience the company 's brands . as the company seeks to grow its business in entertainment , licensing and digital gaming , the company will continue to evaluate strategic alliances and acquisitions , like backflip , which may complement its current product offerings , allow it entry into an area which is adjacent to or complementary to the toy and game business , or allow it to further develop awareness of its brands and expand the ability of consumers to experience its brands in different forms and formats . during the fourth quarter of 2012 the company announced a multi-year cost savings initiative in which it targets annual cost reductions of $ 100,000 by the end of 2015. this plan included an approximate 10 % workforce reduction , facility consolidations and process improvements which reduce redundancy and increase efficiencies . during 2013 , the company incurred restructuring and related pension charges of $ 43,702 and product-related charges of $ 19,736 related to this plan in addition to charges of $ 36,046 recognized during the fourth quarter of 2012. for the full year 2013 , the company recognized gross cost savings , before restructuring costs , from these actions of approximately $ 50,000. these savings are prior to other costs which have or are anticipated to increase in 2013 and in future years , such as compensation costs and other investments in certain components of the business . story_separator_special_tag the company 's business is highly seasonal with a significant amount of revenues occurring in the second half of the year . in 2013 , 2012 and 2011 , the second half of the year accounted for 65 % , 64 % and 63 % of the company 's net revenues , respectively . the company sells its products both within the united states and in a number of international markets . in recent years , the company 's international net revenues have experienced growth as the company has sought to increase its international presence . net revenues of the company 's international segment represented 46 % , 44 % and 43 % of total net revenues in 2013 , 2012 and 2011 , respectively . the company has driven international growth by opportunistically opening offices in certain markets , primarily emerging markets , to develop a greater presence . emerging markets offer greater opportunity for revenue growth than in developed economies which have faced challenging economic environments in recent years . in 2013 and 2012 , net revenues from emerging markets increased by 25 % and 16 % , respectively , and represented more than 10 % of consolidated net revenues in each of these years . the company 's business is separated into three principal business segments , u.s. and canada , international and entertainment and licensing . the u.s. and canada segment develops , markets and sells both toy and game products in the united states and canada . the international segment consists of the company 's european , asia pacific and latin and south american toy and game marketing and sales operations . the company 's entertainment and licensing segment includes the company 's lifestyle licensing , digital licensing and gaming , movie and television entertainment operations . in addition to these three primary segments , the company 's world-wide manufacturing and product sourcing operations are managed through its global operations segment . the company is committed to returning excess cash to its shareholders through share repurchases and dividends . as part of this initiative , from 2005 through 2013 , the company 's board of directors ( the ยboardย ) adopted seven successive share repurchase authorizations with a cumulative authorized repurchase amount of $ 3,325,000. the seventh authorization was approved in august 2013 for $ 500,000. at december 29 , 2013 , the company had $ 524,822 remaining available under theses authorizations . during the three years ended 2013 , the company spent a total of $ 625,554 , to repurchase 15,424 shares in the open market . the company intends to , at its discretion , opportunistically repurchase shares in the future subject to market conditions , the company 's other potential uses of cash and the company 's levels of cash generation . in addition to the share repurchase program , the company also seeks to return excess cash through the payment of quarterly dividends . in february 2014 the company 's board increased the company 's quarterly dividend rate to $ 0.43 per share , an 8 % increase from the prior year quarterly dividend of $ 0.40 per share . this was the tenth dividend increase in the previous 11 years . during that period , the company has increased its quarterly cash dividend from $ 0.03 to $ 0.43 per share . 30 story_separator_special_tag magic , as well as the third quarter 2013 introduction of my little pony equestria girls fashion doll products which was supported by the release of an animated movie in summer of 2013. also , 2013 was the first full year of net revenues from furby products including the introduction of furby in non-english speaking markets . lastly , nerf rebelle , a line of action performance products , was successfully launched during the second half of 2013. these higher net revenues were partially offset by lower net revenues from littlest pet shop and furreal friends products . net revenues in the girls ' category increased 7 % in 2012 compared to 2011 primarily due to new initiatives including the introduction of furby in english-speaking markets as well as one direction products . higher net revenues from my little pony products , supported by the aforementioned television programming , also contributed to growth in the girls ' category . these higher net revenues were partially offset by decreased net revenues from littlest pet shop , furreal friends and strawberry shortcake products . preschool : net revenues in the preschool category increased 1 % in 2013 compared to 2012. higher net revenues from play-doh , playskool heroes , specifically transformers rescue bots , and sesame street , including big hugs elmo , products were almost wholly offset by lower net revenues from tonka and playskool products . in 2013 , the company elected to out-license the distribution of tonka products to a third-party , thereby earning licensing revenue in 2013 compared to wholesale revenue in 2012. net revenues in the preschool category decreased 5 % in 2012 compared to 2011. increased net revenues from play-doh were more than offset by declines in sesame street and tonka products . the following table presents net revenues and operating profit data for the company 's three principal segments for 2013 , 2012 and 2011. replace_table_token_6_th u.s. and canada u.s. and canada segment net revenues for the year ended december 29 , 2013 decreased 5 % compared to 2012 and 6 % in 2012 compared to 2011. the impact of currency translation was not material in 2013 and 2012. lower net revenues in 2013 were partially due to continued challenging economic conditions which resulted in lower consumer spending ; however , the u.s. and canada segment did achieve growth in franchise brands in 2013. in 2013 and 2012 , lower net revenues from boys and preschool products were only partially offset by higher net revenues from girls and games products . 33 in the boys ' category , lower sales of marvel , beyblade and star wars products in 2013 compared to 2012 more than offset slightly higher net revenues from nerf and transformers products .
| net earnings for 2013 also includes restructuring and related pension charges , net of tax , of $ 30,877 , or $ 0.23 per diluted share , related to the multi-year cost savings initiative announced during the fourth quarter of 2012. during 2013 the company also recognized product-related charges , net of tax , of $ 25,895 , or $ 0.20 per diluted share , related to the exit from certain non-strategic brands . net earnings for 2013 were also positively impacted by a favorable tax benefit of $ 23,637 , or $ 0.18 per diluted share , related to the settlement of certain tax exams in the united states . 31 net earnings for 2012 includes an unfavorable impact of $ 32,762 , or $ 0.26 per diluted share , resulting from restructuring charges related to cost savings initiatives announced during the first and fourth quarters of 2012. net earnings for 2011 includes an unfavorable impact of $ 9,178 , or $ 0.07 per diluted share , resulting from costs associated with the reorganization of the company 's games business announced during the second quarter of 2011. net earnings for 2011 also includes a $ 0.15 per diluted share favorable tax benefit resulting from the settlement of tax examinations . in july 2013 the company acquired a 70 % majority interest in backflip . the company is consolidating the financial results of backflip in its consolidated financial statements and , accordingly , reported revenues , costs and expenses , assets and liabilities , and cash flows include 100 % of backflip , with the 30 % noncontrolling interests share reported as net loss attributable to noncontrolling interests in the consolidated statements of operations , and redeemable noncontrolling interests on the consolidated balance sheets . the results of operations for the year ended december 29 , 2013 include the operations of backflip from the acquisition closing date of july 8 , 2013 and are reported in the entertainment and licensing segment . consolidated net revenues for the year ended december
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additionally , we completed the process of transferring various functions , such as corporate financial accounting and reporting from germany to the u.s. , in the third quarter of 2014 . 28 to streamline production and operations in our credentials business , we initiated the closure of our german production fac ility for rfid and nfc inlays , tags , and labels to consolidate production in our facility in singapore . the closure of this production facility was completed in the second quarter of 2014. we have in the past expanded production capacity with the addition of production and assembly lines at our existing facility in california and via partnerships with external manufacturers , and we are planning to further invest in our card production capabilities . additionally , we continue to invest in enhancements to our data center infrastructure to support the expected growth of our cloud service offerings . in addition to the initiatives noted above , on january 27 , 2016 , we commenced the implementation of a worldwide restructuring plan designed to refocus resources on our core business segments , including physical access and transponders , and to further consolidate our operations in several worldwide locations . the restructuring plan includes a reduction of approximately 25 % of our non-manufacturing employee base , reallocating overhead roles into direct business activities and the elimination of certain management and executive roles . see note 11 , restructuring and severance , and note 15 , subsequent events , in the accompanying notes to our consolidated financial statements for more information . restructuring and severance as a result of the actions discussed above , certain employees related to non-core functions were terminated . in the year ended december 31 , 2014 , we recorded $ 3.1 million in restructuring , severance and other closure related costs . in addition , during the year ended december 31 , 2015 , we recorded $ 1.3 million in severance costs primarily related to restructuring within our sales and marketing organization in conjunction with recent corporate restructuring and cost reduction activities . in connection with the january 2016 restructuring initiatives , we estimate that we will incur aggregate cash charges of approximately $ 1.6 million to $ 2.0 million , consisting of approximately $ 1.5 million to $ 1.75 million related to severance payments to employees and approximately $ 100,000 to $ 250,000 in lease termination fees . the majority of the charges are expected to be paid out during the first quarter of 2016 . 29 story_separator_special_tag style= '' margin-top:12pt ; margin-bottom:0pt ; text-indent:4.54 % ; font-family : times new roman ; font-size:10pt ; font-weight : normal ; font-style : normal ; text-transform : none ; font-variant : normal ; '' > net revenue in our all other segment was $ 1.5 million in 2015 , down 57 % from $ 3.6 million in 2014. digital media reader product sales were down significantly in 2015 compared to 2014 and are expected to remain at low levels as certain customers are expected to exit this business . gross profit gross profit for 2015 was $ 23.1 million , or 38 % of revenues , compared to $ 33.5 million or 41 % of revenues in 2014. gross profit represents revenues less direct cost of product sales , manufacturing overhead , other costs directly related to preparing the product for sale including freight , scrap , inventory adjustments and amortization , where applicable . gross profit margins were down in 2015 primarily related to product mix with significantly higher sales in our lower-margin segments and inventory write downs and reserve adjustments . in our premises segment , gross profit on sales of physical access control solutions , including panels , controllers , and access readers was $ 11.5 million in 2015 and $ 11.4 million in 2014. gross profit was higher in 2015 as a direct result of higher sales in the premises segment in 2014. gross profit margins in the premises segment were relatively stable ranging from 58 % in 2015 to 60 % in 2014. in our identity segment , gross profit on sales of information readers and modules as well as cloud-based credential provisioning and management services was $ 5.0 million in 2015 compared to $ 8.2 million in 2014. gross profit was lower in 2015 as a direct result of lower sales in the identity segment in 2014. gross profit margins in the identity segment were lower in 2015 at 42 % compared to 48 % in 2014 due to product mix and the negative impact of absorbing fixed overhead over a smaller revenue base in the period . in our credentials segment , gross profit on sales of rfid & nfc inlays and tags was $ 5.6 million in 2015 and $ 11.9 million in 2014. gross profit was lower in 2015 as a direct result of higher sales of transponders in the credentials segment in 2014. gross profit margins in the credentials segment decreased from 29 % in 2014 to 21 % in 2015. we expect there will be some variation in our gross profit from period to period , as our gross profit has been and will continue to be affected by a variety of factors , including , without limitation , competition , product pricing , the volume of sales in any given quarter , manufacturing volumes , product configuration and mix , the availability of new products , product enhancements , software and services , risk of inventory write-downs and the cost and availability of components . 32 operating expenses information about our operating expenses for the fiscal years ended december 31 , 2015 and 2014 is set forth below . research and development replace_table_token_7_th research and development expenses consist primarily of employee compensation and fees for the development of hardware , software and firmware products . we focus the bulk of our research and development activities on the continued development of existing products and the story_separator_special_tag additionally , we completed the process of transferring various functions , such as corporate financial accounting and reporting from germany to the u.s. , in the third quarter of 2014 . 28 to streamline production and operations in our credentials business , we initiated the closure of our german production fac ility for rfid and nfc inlays , tags , and labels to consolidate production in our facility in singapore . the closure of this production facility was completed in the second quarter of 2014. we have in the past expanded production capacity with the addition of production and assembly lines at our existing facility in california and via partnerships with external manufacturers , and we are planning to further invest in our card production capabilities . additionally , we continue to invest in enhancements to our data center infrastructure to support the expected growth of our cloud service offerings . in addition to the initiatives noted above , on january 27 , 2016 , we commenced the implementation of a worldwide restructuring plan designed to refocus resources on our core business segments , including physical access and transponders , and to further consolidate our operations in several worldwide locations . the restructuring plan includes a reduction of approximately 25 % of our non-manufacturing employee base , reallocating overhead roles into direct business activities and the elimination of certain management and executive roles . see note 11 , restructuring and severance , and note 15 , subsequent events , in the accompanying notes to our consolidated financial statements for more information . restructuring and severance as a result of the actions discussed above , certain employees related to non-core functions were terminated . in the year ended december 31 , 2014 , we recorded $ 3.1 million in restructuring , severance and other closure related costs . in addition , during the year ended december 31 , 2015 , we recorded $ 1.3 million in severance costs primarily related to restructuring within our sales and marketing organization in conjunction with recent corporate restructuring and cost reduction activities . in connection with the january 2016 restructuring initiatives , we estimate that we will incur aggregate cash charges of approximately $ 1.6 million to $ 2.0 million , consisting of approximately $ 1.5 million to $ 1.75 million related to severance payments to employees and approximately $ 100,000 to $ 250,000 in lease termination fees . the majority of the charges are expected to be paid out during the first quarter of 2016 . 29 story_separator_special_tag style= '' margin-top:12pt ; margin-bottom:0pt ; text-indent:4.54 % ; font-family : times new roman ; font-size:10pt ; font-weight : normal ; font-style : normal ; text-transform : none ; font-variant : normal ; '' > net revenue in our all other segment was $ 1.5 million in 2015 , down 57 % from $ 3.6 million in 2014. digital media reader product sales were down significantly in 2015 compared to 2014 and are expected to remain at low levels as certain customers are expected to exit this business . gross profit gross profit for 2015 was $ 23.1 million , or 38 % of revenues , compared to $ 33.5 million or 41 % of revenues in 2014. gross profit represents revenues less direct cost of product sales , manufacturing overhead , other costs directly related to preparing the product for sale including freight , scrap , inventory adjustments and amortization , where applicable . gross profit margins were down in 2015 primarily related to product mix with significantly higher sales in our lower-margin segments and inventory write downs and reserve adjustments . in our premises segment , gross profit on sales of physical access control solutions , including panels , controllers , and access readers was $ 11.5 million in 2015 and $ 11.4 million in 2014. gross profit was higher in 2015 as a direct result of higher sales in the premises segment in 2014. gross profit margins in the premises segment were relatively stable ranging from 58 % in 2015 to 60 % in 2014. in our identity segment , gross profit on sales of information readers and modules as well as cloud-based credential provisioning and management services was $ 5.0 million in 2015 compared to $ 8.2 million in 2014. gross profit was lower in 2015 as a direct result of lower sales in the identity segment in 2014. gross profit margins in the identity segment were lower in 2015 at 42 % compared to 48 % in 2014 due to product mix and the negative impact of absorbing fixed overhead over a smaller revenue base in the period . in our credentials segment , gross profit on sales of rfid & nfc inlays and tags was $ 5.6 million in 2015 and $ 11.9 million in 2014. gross profit was lower in 2015 as a direct result of higher sales of transponders in the credentials segment in 2014. gross profit margins in the credentials segment decreased from 29 % in 2014 to 21 % in 2015. we expect there will be some variation in our gross profit from period to period , as our gross profit has been and will continue to be affected by a variety of factors , including , without limitation , competition , product pricing , the volume of sales in any given quarter , manufacturing volumes , product configuration and mix , the availability of new products , product enhancements , software and services , risk of inventory write-downs and the cost and availability of components . 32 operating expenses information about our operating expenses for the fiscal years ended december 31 , 2015 and 2014 is set forth below . research and development replace_table_token_7_th research and development expenses consist primarily of employee compensation and fees for the development of hardware , software and firmware products . we focus the bulk of our research and development activities on the continued development of existing products and the
| the hirsch velocity software platform enables centralized management of access and security operations across an organization , including control of doors , gates , turnstiles , elevators and other building equipment , monitoring users as they move around a facility , preventing unwanted access , maintaining compliance and providing a robust audit trail . utrust door readers provide unique features to support a number of security environments and standards . for example , utrust scramblepad readers employ numerical scrambling on the keypad to protect access codes from being stolen as they are entered . utrust ts readers support the majority of legacy card credentials with a robust next-generation platform that can help companies migrate to more secure credentials and technologies , including smart cards , nfc and government-issued credentials . because of the complex nature of the problems we address for our premises solutions customers , pricing pressure is not prevalent in this segment . net revenue in our premises segment was $ 20.0 million in 2015 , an increase of 5 % from $ 19.0 million in 2014. the increase in 2015 primarily was due to higher sales of physical access control solutions in the u.s. , resulting from higher overall demand from u.s. government customers compared to 2014 . 31 in our identity segment , we offer products to secur e enterprise information , including pcs , networks , email encryption , login , and printers via delivery of smart card reader products and identity management via our idondemand service . identiv offers smart card readers - a broad range of contact , contactles s and mobile smart card readers , tokens and terminals - to enable logical ( i.e. , pc , network or data ) access and security and identification applications , such as national id , payment , e-health and e-government . our idondemand service can be used to provis ion ( i.e. , create and issue ) and manage identity credentials . net revenue in our identity segment was $ 12.0 million in 2015 , a decrease of 30 % from $ 17.0 million in 2014. this decrease in identity segment net revenue in 2015 was primarily the result of significant orders being received
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we expect our expenses will increase substantially in 2018 and in the future in connection with our ongoing activities , as we : โ conduct clinical trials for lenabasum in scleroderma , cystic fibrosis , dm , systemic lupus erythematosus and other indications ; โ continue our research and development efforts ; โ manufacture clinical study materials and develop commercial scale manufacturing capabilities ; โ seek regulatory approval for our product candidates ; โ add personnel to support development of our product candidates ; and โ operate as a public company . revenue to date , we have not generated any revenues from the sales of products . we do not expect to generate revenue from product sales unless and until we successfully complete development and obtain regulatory approval for the marketing of lenabasum , which we expect will take a number of years and is subject to significant uncertainty . we recognized $ 2,440,195 , $ 1,911,424 and $ 648,382 of revenue from awards in the years ended december 31 , 2017 , 2016 and december 31 , 2015 , respectively , related to an award agreement ( the โ 2015 cfft award agreement ) we entered into in fiscal 2015 with the cfft , pursuant to which we received a development award ( the โ 2015 cfft award โ ) for up to $ 5 million in funding . we received a total of $ 5 million in payments under the 2015 cfft award as outlined below . the payments received under the 2015 cfft award were recorded as deferred revenue when the triggering event to receive those amounts occurred and were amortized on a straight-line basis over the expected duration of the remaining performance period under the 2015 cfft award , which concluded in the third quarter of 2017. upon the execution of the 2015 cfft award agreement , we received a payment of $ 1,250,000 in may 2015. in november 2015 , we received a second payment of $ 1,250,000 upon the achievement of a milestone for dosing the first patient . in august 2016 , we received a third payment from the cfft in the amount of $ 1,000,000 for achieving a milestone in july 2016 related to dosing the median clinical trial patient . in january 2017 , we received a fourth payment from the cfft in the amount of $ 1,000,000 for achieving a milestone in december 2016 related to completing the final visit for the final patient . in november 2017 , we received the fifth and final payment from the cfft in the amount of $ 500,000 for achieving a milestone in september 2017 related to completing the final integrated statistical report related to the phase 2 cf clinical trial . pursuant to the terms of the award agreement , we are obligated to make royalty payments to cfft contingent upon commercialization of lenabasum in the field of use ( as defined in the cfft award agreement ) as follows : ( i ) a royalty payment equal to five times the amount we receive under the cfft award agreement , up to $ 25 million , payable in three equal annual installments following the first commercial sale of lenabasum , the first of which is due within 90 days following the first commercial sale of lenabasum , ( ii ) a royalty payment to cfft equal to the amount we receive under the cfft award agreement , up to $ 5 million , due in the first calendar year in which the aggregate cumulative net sales of lenabasum in the field of use exceed $ 500 million , and ( iii ) royalty payment ( s ) to cfft of up to approximately $ 15 million if we transfer , sell or license lenabasum in the field of use other than for certain clinical or development purposes , or if we enter into a change of control transaction , with such payment ( s ) to be credited against the royalty payments due upon commercialization . the field of use is defined in the cfft award agreement as the treatment in humans of cf , asbestosis , bronchiectasis , byssinosis , chronic bronchitis/copd hypersensitivity pneumonitis , pneumoconiosis , primary ciliary dyskinesis , sarcoidosis and silicosis . either cfft or we may terminate the cfft award agreement for cause , which includes our material failure to achieve certain commercialization and development milestones . our payment obligations , if any , would survive the termination of the cfft award agreement . 50 on january 26 , 2018 , we entered into the cystic fibrosis program related investment agreement ( โ investment agreement ) with the cystic fibrosis foundation ( โ cff โ ) , a non-profit drug discovery and development corporation , pursuant to which we received a development award for up to $ 25 million in funding ( the โ 2018 cff award โ ) to support a phase 2b clinical trial ( the โ phase 2b clinical trial โ ) of lenabasum in patients with cystic fibrosis of which we received $ 6.25 million to date . the remainder of the 2018 cff award is payable to us incrementally upon the achievement of the remaining milestones related to the progress of the phase 2b clinical trial , as set forth in the investment agreement . we will assess this agreement for accounting under asc 606 in the first quarter of 2018 , including if this agreement falls under the scope of such standard . we have not yet determined the potential effect the new standard will have on our consolidated financial statements . story_separator_special_tag pursuant to the terms of the investment agreement , we are obligated to make certain royalty payments to cff , including a royalty payment of one and one-half times the amount of the 2018 cff award , payable in cash within sixty days upon the first receipt of approval of lenabasum in the united states and a second royalty payment of one and one-half times the amount of the 2018 cff award upon approval in another major market , as set forth in the investment agreement ( the โ approval royalty โ ) . at our election , we may satisfy the first of the two approval royalties in registered shares of our common stock . additionally , we are obligated to make ( i ) royalty payments to cff of two and one-half percent of net sales from lenabasum due within sixty days after any quarter in which such net sales occur in the field , as defined in the investment agreement , ( ii ) royalty payments to cff of one percent of net sales of non-field products , as defined in the investment agreement due within sixty days after any quarter in which such net sales occur , and ( iii ) royalty payments to cff of ten percent of any amount that we and our stockholders receive in connection with the license , sale , or other transfer to a third party of lenabasum , if indicated for the treatment or prevention of cf , or a change of control transaction , except that such payment shall not exceed five times the amount of the 2018 cff award , with such payments to be credited against any other net sales royalty payments due . either cff or we may terminate the investment agreement for cause , which includes our material failure to achieve certain commercialization and development milestones . our payment obligations survive the termination of the investment agreement . research and development research and development expenses are incurred for the development of lenabasum and consist primarily of payroll and payments to contract research and development companies . to date , these costs are related to generating pre-clinical data and the cost of manufacturing lenabasum for clinical trials and conducting clinical trials . these costs are expected to increase significantly in the future as lenabasum is continued to be evaluated in additional later stage clinical trials . general and administrative expenses general and administrative expenses consist primarily of payroll , rent and professional services such as accounting and legal services . we anticipate that our general and administrative expenses will increase significantly during 2018 and in the future as we increase our headcount to support our continued research and development and the potential commercialization of our product candidates . we also anticipate increased expenses related to audit , legal , and tax-related services associated with maintaining compliance with nasdaq exchange listing and sec requirements , director and officer insurance , and investor relations costs associated with being a public company . other income ( expense ) , net other income ( expense ) , net consists primarily of interest income we earn on interest-bearing accounts , interest expense incurred on our outstanding debt , and foreign currency exchange transaction losses and gains . critical accounting policies and estimates our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the united states of america . the preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period . on an ongoing basis , we evaluate our estimates and judgments for all assets and liabilities , including those related to stock-based compensation expense and accrued research and development expense . we base our estimates and judgments on historical experience , current economic and industry conditions and on various other factors that are believed to be reasonable under the circumstances . this forms 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 . 51 we believe that full consideration has been given to all relevant circumstances that we may be subject to , and the consolidated financial statements accurately reflect our best estimate of the results of operations , financial position and cash flows for the periods presented . accrued research and development expenses as part of the process of preparing financial statements , we are required to estimate and accrue expenses , the largest of which are research and development expenses . this process involves : communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost ; estimating and accruing expenses in our financial statements as of each balance sheet date based on facts and circumstances known to us at the time ; and periodically confirming the accuracy of our estimates with selected service providers and making adjustments , if necessary . examples of estimated research and development expenses that we accrue include : โ fees paid to cros in connection with nonclinical studies ; โ fees paid to contract manufacturers in connection with the production of lenabasum for clinical trials ; โ fees paid to cro and research institutions in connection with conducting of clinical studies ; and โ professional service fees for consulting and related services . we base our expense accruals related to clinical studies on our estimates of the services performed pursuant to contracts with multiple research institutions and clinical research organizations that conduct and manage clinical studies on our behalf . the financial terms of these agreements vary from contract to contract and may result in uneven payment flows .
| research and development expenses for the year ended december 31 , 2017 totaled approximately $ 26,039,000 , an increase of $ 10,602,000 over the $ 15,437,000 recorded for the year ended december 31 , 2016. the increase in fiscal 2017 as compared to fiscal 2016 was primarily attributable to increases of approximately $ 6,577,000 in clinical trial costs , $ 2,646,000 in compensation costs , and $ 1,379,000 in stock-based compensation expense . general and administrative . general and administrative expense for the year ended december 31 , 2017 totaled approximately $ 8,964,000 , an increase of $ 2,504,000 over the $ 6,460,000 recorded for year ended december 31 , 2016. the increase in fiscal 2017 as compared to fiscal 2016 was primarily attributable to increases of approximately $ 1,152,000 in stock-based compensation expense , $ 429,000 in compensation costs , $ 289,000 in investor relations and public company costs , $ 260,000 in recruiting costs , $ 150,000 in insurance costs , and $ 113,000 in consulting expenses . other income ( expense ) , net . other income , net for fiscal 2017 was approximately $ 141,000 as compared to other expense , net of approximately $ 14,000 recorded for fiscal 2016 and was primarily attributable to an increase in net interest income of approximately $ 183,000 due to increased cash balances in 2017 as compared to 2016 , offset partially by increases in foreign currency exchange transaction losses of approximately $ 28,000 . 53 comparison of year ended 2016 to 2015 revenue from awards . we have recognized approximately $ 1,911,000 and $ 648,000 of revenue related to the 2015 cfft award in the years ended december 31 , 2016 and december 31 , 2015 , respectively . as of december 31 , 2016 , we had billed and received a total of $ 4.5 million in payments since the inception of the 2015 cfft award as outlined below the payments received under the 2015 cfft award were recorded as deferred revenue when the triggering event to receive those amounts occurred and were amortized on a straight-line basis over the expected duration of the remaining performance
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the company is focused on developing a portfolio of cloud computing software technologies and application services to address the needs of isv 's , data center providers , as well as commercial and government organizations . gbsx is pursuing an aggressive growth strategy based upon highly targeted mergers and acquisitions so as to build its portfolio of technologies , applications , and services . 17 story_separator_special_tag 31 , 2011 , our total non-current liabilities were $ 7,940,061 , compared to $ 10,283,853 at march 31 , 2010. notes payable decreased from $ 1,549,490 at march 31 , 2010 to $ 0 at march 31 , 2010 and consisted of the reclassification into current liabilities . the decrease from 2010 to 2010 was primarily due to the reclassification to the current liabilities . liabilities to banks decreased from $ 3,231,405 at march 31 , 2010 to $ 780,277 at march 31 , 2011 and consisted a long -term liabilities vis-ร -vis baden-wรผrttembergische bank . the decrease from 2010 to 2011 was primarily due to a positive cash-flow based on the sales of the two subsidiaries gedys intraware gmbh and group business software holding oy . deferred tax liabilities decreased from $ 926,357 at march 31 , 2010 to $ 878,450 at march 31 , 2011 and consists of the deferred tax liabilities from of capitalization of software expenses and allocation of assets from a purchase price allocation . the decrease from 2010 to 2011 was primarily due to depreciation of assets . retirement benefit obligation increased from $ 150,276 at march 31 , 2010 to $ 153,962 and consisted of retirement benefit obligations . other liabilities increased from $ 4,426,326 at march 31 , 2010 to $ 6,127,373 at march 31 , 2011 and consisted of a purchase of assets . the increase from 2010 to 2011 was primarily due to the purchase of assets from lotus 911 , fastworks , permessa and salesplace . revenues for the fiscal year ended march 31 , 2011 , our net sales decreased to $ 27,707,226 from $ 31,584,732 for the fiscal year ended march 31 , 2011. the company generates nets sales by licenses , maintenance , services , third-party products and others . the decrease from 2010 to 2011 was primarily due to the sales of the subsidiary gedys intraware gmbh . cost of goods sold for the fiscal year ended march 31 , 2011 , our cost of goods sold increased to $ 14,082,494 from $ 11,323,991 for the fiscal year ended march 31 , 2010. cost of goods sold consists of cost for services , cost for third-party products and cost for software licenses . the increase from 2010 to 2011 was primarily due to raising the cost for software licenses based on a higher sales volume . operating expenses for the fiscal year ended march 31 , 2011 , our operating expenses decreased to $ 15,918,290 from $ 19,032,719 for the fiscal year ended march 31 , 2010. operating expenses consist of selling expenses , administrative expenses and general expenses . for the fiscal year ended march 31 , 2011 , our selling expenses decreased to $ 10,610,545 from $ 13,847,697 for the fiscal year ended march 31 , 2010. selling expenses consist of cost for the sales , marketing and service units . the reason for the decrease from 2010 to 2011 was primarily due to the sales of the subsidiary gedys intraware gmbh . for the fiscal year ended march 31 , 2011 , our administrative expenses decreased to $ 3,853,532 from $ 4,481,893 for the fiscal year ended march 31 , 2010. administrative expenses consist of cost for the management and administration units . the reason for the decrease from 2010 to 2011 was primarily due to the reduction from consultancy , investor relation and travel expenses . for the fiscal year ended march 31 , 2011 , our general expenses increased to $ 1,453,961 from $ 703,129 for the fiscal year ended march 31 , 2010. general expenses consist of cost for the organization . the reason for the increase from 2010 to 2011 was primarily due to the increase of professional fees , cost of money transactions , currency conversion and communication cost in the united states because of the increase in united states ' business activity . liquidity & capital resources at march 31 , 2011 , we had $ 8,530,864 in cash and cash equivalents , compared to $ 1,774,965 at march 31 , 2011. on march 11 , 2011 and march 29 , 2011 , the company consummated a private placement offering of an aggregate of 6,044,000 units at a purchase price of $ 1.25 per unit , for gross proceeds of $ 7,555,000. each unit was comprised of one share of common stock and one three-year warrant to purchase one share of common stock at an exercise price of $ 1.50 per share . the warrants are only exercisable by the payment of cash . pursuant to the terms of the warrants , the holders of the warrants are required to exercise their warrants in the event our common stock trades at an average of at least $ 3.00 per share for a period of not less than 20 consecutive trading days . also , throughout the three year exercise period of the warrants , the company has the right to redeem the warrants for $ 0.05 per share . the company has agreed to register the shares of common stock issuable upon the exercise of the warrant under the securities act of 1933 , as amended , on a registration statement on form s-1 . as of march 31 , 2011 , none of the warrants have been exercised or redeemed . upon the full exercise of the warrants , the company would receive gross proceeds of $ 9,066,000. we intend to use the net proceeds of the private placement offering of units to increase our marketing , advertising and cloud and transformer service development teams , acquisitions and for general corporate working purposes . story_separator_special_tag management believes that the company 's cash at march 31 , 2011 will be sufficient to meet the company 's working capital requirements for the next 12 month period . management believes that as a result of the assets purchased to date , it will generate additional funds and that it will be able to obtain additional capital as required to meet projected operational requirements . cash flows 19 replace_table_token_3_th critical accounting policies and estimates critical accounting policies and estimates the preparation of financial statements in conformity with accounting principles generally accepted in the united states of america requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period . actual results could differ from those estimates . comprehensive income ( loss ) the company adopted fasb codification topic 220 , reporting comprehensive income , which establishes standards for the reporting and display of comprehensive income and its components in the financial statements . comprehensive income consists of net income and other gains and losses affecting stockholder 's equity that are excluded from net income , such as unrealized gains and losses on investments available for sale , foreign currency translation gains and losses and minimum pension liability . since inception , the company 's other comprehensive income represents foreign currency translation adjustments . net income per common share fasb codification topic 260 , earnings per share , requires dual presentation of basic and diluted earnings per share ( eps ) with a reconciliation of the numerator and denominator of the eps computations . basic earnings per share amounts are based on the weighted average shares of common stock outstanding . if applicable , diluted earnings per share would assume the conversion , exercise or issuance of all potential common stock instruments such as options , warrants and convertible securities , unless the effect is to reduce a loss or increase earnings per share . diluted net income ( loss ) per share on the potential exercise of the equity-based financial instruments is not presented where anti-dilutive . there were no adjustments required to net income for the period presented in the computation of diluted earnings per share . financial instruments financial instruments consist of cash and cash equivalents , accounts receivable , financial assets , notes payable , liabilities to banks , accounts payable and accrued liabilities and other liabilities . as of the financial statement date , the company does not hold any derivate financial instruments . financial assets and liabilities are measured upon first recognition and reviewed at the financial statement date . changes in fair value are recognized through profit and loss . unless otherwise noted , it is management 's opinion that the company is not exposed to significant interest or credit risks arising from these financial instruments . currency risk we use the us dollar as our reporting currency . the functional currencies of our significant foreign subsidiaries are the local currency , which includes the euro and the british pound . accordingly , some assets and liabilities are incurred in those currency and we are subject to foreign currency risks . fair value measurements the company follows fasb codification topic 820 , fair value measurements and disclosures , for all financial instruments and non-financial instruments accounted for at fair value on a recurring basis . this new accounting standard establishes a single definition of fair value and a framework for measuring fair value , sets out a fair value hierarchy to be used to classify the source of information used in fair value measurement and expands disclosures about fair value measurements required under other accounting pronouncements . it does not change existing guidance as to whether or not an instrument is carried at fair value . the company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date . when determining the fair value measurements for assets and liabilities , which are required to be recorded at fair value , the company considers the principal or most advantageous market in which the company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability , such as inherent risk , transfer restrictions and credit risk . 20 the company has adopted fasb codification topic 825 , financial instruments , which allows companies to choose to measure eligible financial instruments and certain other items at fair value that are not required to be measured at fair value . the company has not elected the fair value option for any eligible financial instruments . cash and cash equivalents the company considers all highly liquid instruments with a maturity of three months or less at the time of issuance to be cash equivalents . inventories pursuant to fasb asc 330 ( inventories ) , inventories held for sale are recognized under inventories . inventories were measured at cost , which is determined on a first-in-first out basis , without any overhead component . intangible assets intangible assets predominately comprise goodwill , acquired software and capitalized software development services . intangible assets acquired in exchange for payment are reflected as acquisition costs . if the development costs can be capitalized per fasb accounting standard codification ( โ asc โ ) 985-20-25 , these are reflected as ascribable personnel and overhead costs . company created software can be intended for sale to third parties or used by the company itself . if the conditions for capitalization are not met , the expenses are recorded with their effect on profit in the year in which they were incurred . group amortizes intangible assets with a limited useful life to the estimated residual book value in accordance with asc regulations .
| other receivables consisted of a receivable for anticipated compensation for damage , security deposits , tax refund claims and increased from $ 332,812 at march 31 , 2010 to $ 1,981,887 at march 31 , 2011. the increase was primarily due to the compensation of damage $ 1,901,522. assets held for sale consist of the outgoing assets associated with the sale of the two subsidiaries , gedys intraware gmbh and group business software holding oy , and decreased from $ 12,372,600 at march 31 , 2010 to $ 0 at march 31 , 2011. the decrease from 2010 to 2011 was due to the sale of the two companies on february 28 , 2010 . at march 31 , 2011 , our total non-current assets were $ 59,231,576 , compared to $ 54,692,432 at march 31 , 2010. our financial assets increased from $ 475,845 at march 31 , 2010 to $ 1,369,454 at march 31 , 2011 and consist of the value of the 50 % interest in an associated company and the amount still outstanding against the purchaser of gedys intraware gmbh due for monthly repayments . the increase from 2010 to 2011 was primarily due to $ 984,239 against the purchaser of gedys intraware gmbh . our deferred tax assets decreased $ 4,968,740 at march 31 , 2010 to $ 1,136,135 at march 31 , 2011 and consisted of deferred tax assets derived from financial assets and losses carried forward . the decrease from 2010 to 2011 was primarily due to losing the benefit of a tax carry forward because of change in ownership in group business software ag . goodwill increased from $ 35,767,273 at march 31 , 2010 to $ 39,688,966 at march 31 , 2011 and consisted of the goodwill associated with eleven business units . the increase from 2010 to 2011 was primarily due to the purchase of permessa corp. on september 22 , 2010 with goodwill of $ 2,387,444. software increased from $ 13,028,818 at march 31 , 2010 to $ 16,514,894 at march 31 , 2011 and consist capitalized development cost , product rights and licenses . the increase from 2010 to 2011 was primarily due to the purchase of assets of two business units . other assets increased
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the decrease in gross margin was primarily driven by increases in pricing programs and incentive and marketing activities , additional costs from the transition of the distribution center in north america in the third quarter of fiscal year 2018 , and product mix , partially offset by product cost reductions and favorable currency exchange rates . in addition , in fiscal year 2017 , we recorded a first-time-adoption benefit of $ 14.4 million primarily due to a change in estimated breakage attributable to customer incentive , cooperative marketing and pricing program accruals in emea . operating expenses for fiscal year 2018 were $ 679.5 million , or 26.5 % of net sales , compared to $ 608.2 million , or 27.4 % , for fiscal year 2017 . the increase in operating expenses was primarily driven by $ 39.7 million of higher personnel-related costs due to increased headcount , higher share-based compensation and businesses acquired during fiscal year 2018 , $ 22.2 million higher external cost mostly attributed to higher external advertising and marketing expenses , $ 3.2 million lower credit from change in fair value of contingent consideration for business acquisition and $ 3.1 million higher amortization of intangible assets from the business acquisitions . income tax provision for fiscal year 2018 was impacted by a provisional charge of $ 21.7 million from the remeasurement of federal and state deferred tax assets and liabilities in the united states to reflect a reduction in corporate income tax rate from 35 % to 21 % as a result of the enactment of h.r.1 , also known as the tax cuts and jobs act ( the tax act ) in the united states on december 22 , 2017. net income for fiscal year 2018 was $ 208.5 million , compared to $ 205.9 million for fiscal year 2017 . trends in our business our strategy focuses on five large multi-category market opportunities including music , gaming , video collaboration , smart home and creativity & productivity . we see opportunities to deliver growth with products in all these markets . we believe our future growth will be determined by our ability to rapidly create innovative products across multiple digital platforms , including gaming , digital music devices , video and computing . the following discussion represents key trends specific to our market opportunities . trends specific to our five market opportunities music : the music market grew during fiscal year 2018 , driven by growing consumption of music through mobile devices such as smartphones and tablets . according to the recording industry association of america ( riaa ) , revenues from streaming music platforms increased over 40 % in 2017. the integration of personal voice assistants has become increasingly competitive in the speaker categories and the market for third-party , voice-enabled speakers has not yet gained traction . moreover , the market for mobile speakers appears to be maturing with slower growth . our investments in the ultimate ears and jaybird brands , new channel expansion , integration of personal voice assistants , such as google assistant and amazon alexa , and our new product introductions , have driven our growth in this market through the third quarter of fiscal year 2018 , though sales of our mobile speakers declined during the fourth quarter . logitech international s.a. | fiscal 2018 form 10-k | 41 gaming : the pc gaming and console gaming platform continues to show strong growth as online gaming , multi-platform experiences , and esports gain greater popularity and gaming content becomes increasingly more demanding . we believe logitech is well positioned to benefit from the pc gaming market growth . with astro gaming , we are also strengthening our portfolio in adjacent categories , such as the console gaming market . video collaboration : the near and long-term structural growth opportunities in the video collaboration market are significant . video meetings are on the rise , and companies increasingly want lower-cost , cloud-based solutions . we are continuing our efforts to create and sell innovative products to accommodate the increasing demand from medium-sized meeting rooms to small-sized rooms such as huddle rooms . we will continue to invest in select business-specific products , targeted product marketing and sales channel development . smart home : this market increased in fiscal year 2017 and has continued growing in fiscal year 2018. in october 2016 , we integrated amazon alexa and google assistant voice capabilities into our logitech harmony hub that enables voice control of the living room entertainment experience when used with an amazon echo or google home device . through harmony , alexa can turn on/off and control a tv and av system . we have also seen early success with the professional installer channel through the recent introduction of the harmony pro . we will continue to explore other innovative experiences for the smart home . creativity & productivity : although new pc shipments continue to be lackluster , the installed base of pc users remains large . we believe that innovative pc peripherals , such as our mice and keyboards , can renew the pc usage experience , providing growth opportunities . smaller mobile computing devices , such as tablets , have created new markets and usage models for peripherals and accessories . we offer a number of products to enhance the use of mobile devices , including keyboard folios for the ipad and ipad mini , and keyboard covers and folios for the ipad air . in fiscal year 2018 , we have seen the recovery of the ipad tablet market and our tablet & other accessories category has benefited from the recovery along with our innovative products . business seasonality , product introductions and business acquisitions we have historically experienced higher net sales in our third fiscal quarter ending december 31 , compared to other fiscal quarters in our fiscal year , due in part to seasonal holiday demand . additionally , new product introductions and business acquisitions can significantly impact net sales , product costs and operating expenses . story_separator_special_tag product introductions can also impact our net sales to distribution channels as these channels are filled with new product inventory following a product introduction , and often channel inventory of an earlier model product declines as the next related major product launch approaches . net sales can also be affected when consumers and distributors anticipate a product introduction or changes in business circumstances . however , neither historical seasonal patterns nor historical patterns of product introductions should be considered reliable indicators of our future pattern of product introductions , future net sales or financial performance . critical accounting estimates the preparation of financial statements and related disclosures in conformity with u.s. gaap requires us to make judgments , estimates , and assumptions that affect reported amounts of assets , liabilities , net sales and expenses , and the disclosure of contingent assets and liabilities . we consider an accounting estimate critical if it : ( i ) requires management to make judgments and estimates about matters that are inherently uncertain ; and ( ii ) is important to an understanding of our financial condition and operating results . we base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances . although these estimates are based on management 's best knowledge of current events and actions that may impact us in the future , actual results could differ from those estimates . management has discussed the development , selection and disclosure of these critical accounting estimates with the audit committee of the board of directors . we believe the following accounting estimates are most critical to our business operations and to an understanding of our financial condition and results of operations and reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements . logitech international s.a. | fiscal 2018 form 10-k | 42 accruals for customer programs we record accruals for cooperative marketing arrangements , customer incentive programs , pricing programs and product returns . an allowance against accounts receivable is recorded for accruals and program activity related to our direct customers and indirect customers who receive payments for program activity through our direct customers . a liability is recorded for accruals and program activity related to our indirect customers who receive payments directly and do not have a right of offset against a receivable balance . the estimated cost of these programs is usually recorded as a reduction of revenue . if we receive a separately identifiable benefit from the customer and can reasonably estimate the fair value of that benefit , such cost is reflected in operating expenses . significant management judgments and estimates must be used to determine the cost of these programs in any accounting period . certain customer programs require management to estimate the percentage of those programs which will not be claimed or will not be earned by customers based on historical experience and on the specific terms and conditions of particular programs . the percentage of these customer programs that will not be claimed or earned is commonly referred to as `` breakage '' . cooperative marketing arrangements . we enter into customer marketing programs with many of our customers , and with certain indirect partners , allowing customers to receive a credit equal to a set percentage of their purchases of our products , or a fixed dollar credit for various marketing programs . the objective of these arrangements is to encourage advertising and promotional events to increase sales of our products . accruals for these marketing arrangements are recorded at the later of the date the revenue is recognized or the date the incentive is offered , based on negotiated terms , historical experience and inventory levels in the channel . customer incentive programs . customer incentive programs include performance-based incentives and consumer rebates . we offer performance-based incentives to our customers and indirect partners based on pre-determined performance criteria . accruals for performance-based incentives are recognized as a reduction of the sale price at the time of sale . estimates of required accruals are determined based on negotiated terms , consideration of historical experience , anticipated volume of future purchases , and inventory levels in the channel . consumer rebates are offered from time to time at our discretion for the primary benefit of end-users . accruals for the estimated costs of consumer rebates and similar incentives are recorded at the later of time of sale or when the incentive is offered , based on the specific terms and conditions . pricing programs . we have agreements with certain customers that contain terms allowing price protection credits to be issued in the event of a subsequent price reduction . at our discretion , we also offer special pricing discounts to certain customers . special pricing discounts are usually offered only for limited time periods or for sales of selected products to specific indirect partners . our decision to make price reductions is influenced by product life cycle stage , market acceptance of products , the competitive environment , new product introductions and other factors . accruals for estimated expected future pricing actions are recognized at the time of sale based on analysis of historical pricing actions by customer and by product , inventories owned by and located at distributors and retailers , current customer demand , current operating conditions , and other relevant customer and product information , such as stage of product life-cycle . returns . we grant limited rights to return products . return rights vary by customer and range from just the right to return defective product to stock rotation rights limited to a percentage of sales approved by management . estimates of expected future product returns are recognized at the time of sale based on analyses of historical return trends by customer and by product , inventories owned by and located at customers , current customer demand , current operating conditions , and other relevant customer and product information .
| during fiscal years 2018 , 2017 and 2016 , 50 % , 50 % and 48 % of our net sales were denominated in currencies other than the u.s. dollar , respectively . retail sales by region the following table presents the change in retail sales by region for fiscal year 2018 compared with fiscal year 2017 , and fiscal year 2017 compared with fiscal year 2016 : replace_table_token_9_th americas the increase in sales in fiscal year 2018 compared with fiscal year 2017 of 16 % was driven by growth in pointing devices , tablet & other accessories , video collaboration , gaming , and smart home . the increase in sales of 12 % in fiscal year 2017 compared with fiscal year 2016 was driven by growth in audio pc & wearables , mobile speakers , gaming and keyboards & combos , partially offset by declines in sales for tablet & other accessories . emea the growth rate of 10 % in fiscal year 2018 compared with fiscal year 2017 was driven by several of our product categories , with strength in video collaboration , gaming , and smart home , partially offset by pointing devices and audio pc & wearables . the increase in sales of 19 % in fiscal year 2017 compared with fiscal year 2016 was driven by several of our product categories , with strength in mobile speakers , keyboards & combos , video collaboration and gaming . we recorded a benefit of $ 14.4 million primarily due to a change in estimated breakage attributable to customer incentive , cooperative marketing and pricing program accruals in emea . asia pacific the growth of 23 % in fiscal year 2018 compared with fiscal year 2017 was primarily driven by sales increases in pointing devices , video collaboration , music and gaming . the increase in sales of 11 % in fiscal year 2017 compared with fiscal year 2016 was primarily driven by sales increases in gaming and video collaboration . logitech international s.a. | fiscal 2018 form 10-k | 48 net retail sales by product categories net retail sales by product categories for fiscal years
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the cap expired worthless on december 31 , 2012. the company recorded $ 19,780 in interest expense with respect to the interest rate cap for the year ended december 31 , 2012. fair value measurements effective january 1 , 2008 , the company adopted the accounting guidance for the fair value measurement of financial assets , which defines fair value , establishes a framework for measuring fair value , establishes a fair value measurement hierarchy , and expands fair value measurement disclosures . fair value , as defined by the accounting guidance , is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date . the fair value hierarchy established by this accounting guidance prioritizes the inputs used in valuation techniques into the following three categories ( highest to lowest priority ) : level 1 : observable inputs that reflect quoted prices ( unadjusted ) for identical assets or liabilities in active markets ; level 2 : inputs other than quoted prices included in level 1 that are observable for the asset or liability either directly or indirectly ; and level 3 : unobservable inputs . the company 's financial instruments are recorded at fair value and generally are classified within level 1 or level 2 within the fair value hierarchy using quoted market prices or quotes from market makers or broker-dealers . financial instruments classified within level 1 are valued based on quoted market prices in active markets and consist of u.s. government , federal agency , and sovereign government obligations , corporate equities , and certain money market instruments . level 2 financial instruments primarily consist of investment grade and high-yield corporate debt , convertible bonds , mortgage and asset-backed securities , municipal obligations , and certain money market instruments . financial instruments classified as level 2 are valued based on quoted prices for similar assets and liabilities in active markets and quoted prices for identical or similar assets and liabilities in markets that are not active . some financial instruments are classified within level 3 within the fair value hierarchy as observable pricing inputs are not available due to limited market activity for the asset or liability . such financial instruments include investments in hedge funds and private equity funds where the company , through its subsidiaries , is general partner , less-liquid private label mortgage and asset-backed securities , certain distressed municipal securities , and auction rate securities . a description of the valuation techniques applied and inputs used in measuring the fair value of the company 's financial instruments is located in note 4 to the consolidated financial statements for the year ended december 31 , 2012 . 47 fair value option the company has the option to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period . the company may make a fair value option election on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument . the company has elected to apply the fair value option to its loan trading portfolio which resides in opy credit corp. and is included in other assets on the consolidated balance sheet . management has elected this treatment as it is consistent with the manner in which the business is managed as well as the way that financial instruments in other parts of the business are recorded . there were no loan positions held in the secondary loan trading portfolio at december 31 , 2012 and 2011. the company also elected the fair value option for those securities sold under agreements to repurchase ( ยrepurchase agreementsย ) and securities purchased under agreements to resell ( ยreverse repurchase agreementsย ) that do not settle overnight or have an open settlement date or that are not accounted for as purchase and sale agreements ( such as repo-to-maturity transactions ) . the company has elected the fair value option for these instruments to more accurately reflect market and economic events in its earnings and to mitigate a potential imbalance in earnings caused by using different measurement attributes ( i.e . fair value versus carrying value ) for certain assets and liabilities . at december 31 , 2012 , the fair value of the reverse repurchase agreements and repurchase agreements was $ nil and $ nil , respectively . financing receivables the company 's financing receivables include customer margin loans , securities purchased under agreements to resell ( ยreverse repurchase agreementsย ) , and securities borrowed transactions . the company uses financing receivables to extend margin loans to customers , meet trade settlement requirements , and facilitate its matched-book arrangements and inventory requirements . allowance for credit losses the company 's financing receivables are secured by collateral received from clients and counterparties . in many cases , the company is permitted to sell or repledge securities held as collateral . these securities may be used to collateralize repurchase agreements , to enter into securities lending agreements , to cover short positions or fulfill the obligation of fails to deliver . the company monitors the market value of the collateral received on a daily basis and may require clients and counterparties to deposit additional collateral or return collateral pledged , when appropriate . customer receivables , primarily consisting of customer margin loans collateralized by customer-owned securities , are stated net of allowance for credit losses . the company reviews large customer accounts that do not comply with the company 's margin requirements on a case-by-case basis to determine the likelihood of collection and records an allowance for credit loss following that process . for small customer accounts that do not comply with the company 's margin requirements , the allowance for credit loss is generally recorded as the amount of unsecured or partially secured receivables . story_separator_special_tag the company also makes loans or pays advances to financial advisers as part of its hiring process . reserves are established on these receivables if the financial advisor is no longer associated with the company and the receivable has not been promptly repaid or if it is determined that it is probable the amount will not be collected . legal and regulatory reserves the company records reserves related to legal and regulatory proceedings in accounts payable and other liabilities . the determination of the amounts of these reserves requires significant judgment on the part of management . in accordance with applicable accounting guidance , the company establishes reserves for litigation and regulatory matters where available information indicates that it is probable a liability had been incurred at the date of the consolidated financial statements and the company can reasonably estimate the amount of that loss . when loss contingencies are not probable and can not be reasonably estimated , the company does not establish reserves . 48 when determining whether to record a reserve , management considers many factors including , but not limited to , the amount of the claim ; the stage and forum of the proceeding , the sophistication of the claimant , the amount of the loss , if any , in the client 's account and the possibility of wrongdoing , if any , on the part of an employee of the company ; the basis and validity of the claim ; previous results in similar cases ; and applicable legal precedents and case law . each legal and regulatory proceeding is reviewed with counsel in each accounting period and the reserve is adjusted as deemed appropriate by management . any change in the reserve amount is recorded in the results of that period . the assumptions of management in determining the estimates of reserves may be incorrect and the actual disposition of a legal or regulatory proceeding could be greater or less than the reserve amount . see ยlegal proceedings , ย note 13 to the consolidated financial statements appearing in item 8 and ยmanagement 's discussion and analysis of financial condition and results of operations ย regulatory and legal environment ย . goodwill goodwill arose upon the acquisitions of oppenheimer , old michigan corp. , josephthal & co. inc. , grand charter group incorporated and the oppenheimer divisions , as defined below . the company defines a reporting unit as an operating segment . the company 's goodwill resides in its private client division ( ยpcdย ) . goodwill of a reporting unit is subject to at least an annual test for impairment to determine if the fair value of goodwill of a reporting unit is less than its estimated carrying amount . goodwill of a reporting unit is required to be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount . the company derives the estimated carrying amount of its operating segments by estimating the amount of stockholders ' equity required to support the activities of each operating segment . due to the volatility in the financial services sector and equity markets in general , determining whether an impairment of goodwill has occurred is increasingly difficult and requires management to exercise significant judgment . goodwill recorded as at december 31 , 2012 has been tested for impairment and it has been determined that no impairment has occurred . see note 15 to the consolidated financial statements appearing in item 8 for further discussion . excess of fair value of assets acquired over cost arose from the january 2008 acquisition of certain businesses from cibc world markets corp. , including five-year contingent consideration issued as a result of such acquisition . at the end of 2012 , all contingencies expired and the company recorded a reduction of ยexcess of fair value of assets acquired over costย of $ 7 million and deferred tax liabilities of $ 5 million offset by the reversal of related customer relationship intangible assets of $ 630,000 and fixed assets of $ 65,000 on the consolidated balance sheet as of december 31 , 2012 as well as a non-cash adjustment reducing occupancy expenses in the amount of $ 11.3 million . intangible assets intangible assets arose upon the acquisition , in january 2003 , of the u.s. private client and asset management divisions of cibc world markets corp. ( the ยoppenheimer divisionsย ) and comprise customer relationships and trademarks and trade names . customer relationships of $ 4.9 million were amortized on a straight-line basis over 80 months commencing in january 2003 ( fully amortized and carried at $ nil since december 31 , 2010 ) . trademarks and trade names , carried at $ 31.7 million , which are not amortized , are subject to at least an annual test for impairment to determine if the fair value is less than their carrying amount . trademarks and trade names recorded as at december 31 , 2012 have been tested for impairment and it has been determined that no impairment has occurred . see note 15 to the consolidated financial statements appearing in item 8 for further discussion . 49 intangible assets also arose from the january 2008 acquisition of the oppenheimer divisions from cibc world markets corp. and are comprised of customer relationships and a below market lease .
| also , during the fourth quarter of 2012 , the company recorded after-tax credits of $ 1.9 million related to state investment and employment incentives for investments previously made . the net effect of these three items was an after-tax charge of $ 9.2 million for the period . the fourth quarter of 2012 was also impacted by superstorm sandy which occurred on october 29 th causing the company to vacate its two principal offices in downtown manhattan and displaced 800 of the company 's employees including substantially all of its capital markets , operations and headquarters staff for in excess of 30 days . as a result of the dislocation , the company received rent abatement credits of $ 1.7 million for its two downtown buildings and incurred rent and other costs of approximately $ 500,000 to accommodate displaced employees . 56 the following table sets forth the amount and percentage of the company 's revenue from each principal source for each of the following years ended december 31 : amounts are expressed in thousands of dollars . replace_table_token_5_th the company derives most of its revenue from the operations of its principal subsidiaries , oppenheimer and oam . although maintained as separate entities , the operations of the company 's brokerage subsidiaries both in the u.s. and other countries are closely related because oppenheimer acts as clearing broker and omnibus clearing agent in transactions initiated by these subsidiaries . except as expressly otherwise stated , the discussion below pertains to the operations of oppenheimer . the following table and discussion summarizes the changes in the major revenue and expense categories for the past two years : amounts are expressed in thousands of dollars . replace_table_token_6_th 57 fiscal 2012 compared to fiscal 2011 revenue commission revenue was $ 469.9 million in the year ended december 31 , 2012 , a decrease of 4.5 % compared to $ 492.2 million in 2011 due to a lower volume of business in the year ended december 31 , 2012 compared
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factors that could affect our rental income and or property operating expenses include : ( 1 ) changes in national , regional and local economies , due to global events such as international trade disputes , a foreign debt crisis , foreign currency volatility , as well as from domestic issues , such as government policies and regulations , tariffs , energy prices , market dynamics , rising interest rates and limited growth in consumer income ; ( 2 ) local market conditions , including an oversupply of space in , or a reduction in demand for , properties similar to those in our portfolio ; ( 3 ) competition from other available properties and e-commerce , and the attractiveness of properties in our portfolio to our tenants ; ( 4 ) ongoing disruption and or consolidation in the retail sector , the financial stability of our tenants and the overall financial condition of large retailing companies , including their ability to pay rent and expense reimbursements ; ( 5 ) in the case of percentage rents , the sales volume of our tenants ; ( 6 ) increases in property operating expenses , including common area expenses , utilities , insurance and real estate taxes , which are relatively inflexible and generally do not decrease if revenue or occupancy decrease ; ( 7 ) increases in the costs to repair , renovate and re-lease space ; ( 8 ) earthquakes , tornadoes , hurricanes , damage from rising sea levels due to climate change , other natural disasters , civil unrest , terrorist acts or acts of war , which may result in uninsured or underinsured losses ; and ( 9 ) changes in laws and governmental regulations , including those governing usage , zoning , the environment and taxes . see item 1a . โ risk factors โ for a further discussion of these and other factors that could impact our future results . story_separator_special_tag style= '' line-height:120 % ; text-align : left ; font-size:10pt ; '' > during the years ended december 31 , 2019 and 2018 , construction compensation costs of $ 14.7 million and $ 10.6 million , respectively , were capitalized to building and improvements and leasing payroll costs of $ 0.0 million and $ 8.0 million , respectively , leasing legal costs of $ 0.0 million and $ 3.9 million , respectively , and leasing commission costs of $ 6.0 million and $ 7.1 million , respectively , were capitalized to deferred charges and prepaid expenses , net . other income and expenses ( in thousands ) replace_table_token_12_th dividends and interest dividends and interest remained generally consistent for the year ended december 31 , 2019 as compared to the corresponding period in 2018. interest expense the decrease in interest expense for the year ended december 31 , 2019 of $ 25.3 million , as compared to the corresponding period in 2018 , was primarily due to lower overall debt obligations and interest rates . gain on sale of real estate assets during the year ended december 31 , 2019 , we disposed of 18 shopping centers and two partial shopping centers resulting in aggregate gain of $ 53.4 million . in addition , during the year ended december 31 , 2019 , we received aggregate net proceeds of $ 1.6 million from previously disposed assets resulting in aggregate gain of $ 1.4 million . during the year ended december 31 , 2018 , we disposed of 49 shopping centers , one partial shopping center and one land parcel resulting in aggregate gain of $ 208.7 million . in addition , during the year ended december 31 , 2018 , we received aggregate net proceeds of $ 0.5 million from previously disposed assets resulting in aggregate gain of $ 0.5 million . loss on extinguishment of debt , net during the year ended december 31 , 2019 , we repaid $ 500.0 million of an unsecured term loan under our senior unsecured credit facility agreement , as amended december 12 , 2018 ( the โ unsecured credit facility โ ) , resulting in a $ 1.6 million loss on extinguishment of debt due to the acceleration of unamortized debt issuance costs . during the year ended december 31 , 2018 , we repaid $ 881.4 million of secured loans and $ 435.0 million of unsecured term loans , and we amended and restated our unsecured credit facility and term loan agreements , resulting in a $ 37.1 million loss on extinguishment of debt , net . loss on extinguishment of debt , net includes $ 24.3 million of legal defeasance fees and $ 23.0 million of prepayment fees , partially offset by $ 10.2 million of accelerated unamortized debt premiums , net of discounts and debt issuance costs . other other expense remained generally consistent for the year ended december 31 , 2019 as compared to the corresponding period in 2018. comparison of the year ended december 31 , 2018 to the year ended december 31 , 2017 see item 7 . โ management 's discussion and analysis of financial condition and results of operations โ in our form 10-k for the year ended december 31 , 2018 , filed with the securities and exchange commission ( โ sec โ ) on february 11 , 2019 , for a discussion of the comparison of the year ended december 31 , 2018 to the year ended december 31 , 2017 . 30 liquidity and capital resources we anticipate that our cash flows from the sources listed below will provide adequate capital for the next 12 months and beyond for all anticipated uses , including all scheduled principal and interest payments on our outstanding indebtedness , current and anticipated tenant and other capital improvements , stockholder distributions to maintain our qualification as a reit and other obligations associated with conducting our business . story_separator_special_tag our primary expected sources and uses of capital are as follows : sources cash and cash equivalent balances ; operating cash flow ; available borrowings under our existing unsecured credit facility ; dispositions ; issuance of long-term debt ; and issuance of equity securities . uses maintenance capital expenditures ; leasing capital expenditures ; debt repayments ; dividend/distribution payments value-enhancing reinvestment capital expenditures ; acquisitions ; and repurchases of equity securities . we believe our current capital structure provides us with the financial flexibility and capacity to fund our current capital needs as well as future growth opportunities . we have access to multiple forms of capital , including secured property level debt , unsecured corporate level debt , preferred equity , and common equity , which will allow us to efficiently execute on our strategic and operational objectives . we currently have investment grade credit ratings from all three major credit rating agencies . as of december 31 , 2019 , we had $ 1.24 billion of available liquidity under our $ 1.25 billion revolving credit facility ( the โ revolving facility โ ) . we intend to continue to enhance our financial and operational flexibility through the additional extension of the duration of our debt . subsequent to december 31 , 2019 , we established a new at-the-market equity offering program . see note 20 โ subsequent events to our consolidated financial statements in this report for additional information . in may 2019 , we issued $ 400.0 million aggregate principal amount of 4.125 % senior notes due 2029 ( the โ 2029 notes โ ) at 99.804 % of par , the net proceeds of which were used to repay outstanding indebtedness under our unsecured credit facility and for general corporate purposes . the 2029 notes bear interest at a rate of 4.125 % per annum , payable semi-annually on may 15 and november 15 of each year , commencing november 15 , 2019. the 2029 notes will mature on may 15 , 2029. we may redeem the 2029 notes prior to maturity at our option , at any time in whole or from time to time in part , at the applicable redemption price specified in the indenture with respect to the 2029 notes . if the 2029 notes are redeemed on or after february 15 , 2029 ( three months prior to the maturity date ) , the redemption price will be equal to 100 % of the principal amount of the 2029 notes being redeemed plus accrued and unpaid interest thereon to , but not including , the redemption date . the 2029 notes are our unsecured and unsubordinated obligations and rank equally in right of payment with all of our existing and future senior unsecured and unsubordinated indebtedness . in august 2019 , we issued $ 350.0 million aggregate principal amount of 4.125 % senior notes due 2029 at 106.402 % of par , the net proceeds of which were used to repay outstanding indebtedness under our unsecured credit facility and for general corporate purposes . the notes have substantially identical terms as , constitute a further issuance of , and form a single series with , our outstanding 2029 notes . 31 in december 2017 , the board of directors authorized a share repurchase program ( the โ program โ ) for up to $ 400.0 million of our common stock . during the year ended december 31 , 2019 , we repurchased 0.8 million shares of common stock under the program at an average price per share of $ 17.43 for a total of $ 14.6 million , excluding commissions . we incurred commissions of less than $ 0.1 million in conjunction with the program during the year ended december 31 , 2019. the program expired pursuant to its terms on december 5 , 2019. subsequent to december 31 , 2019 , we established a new share repurchase program . see note 20 โ subsequent events to our consolidated financial statements in this report for additional information . in connection with our intention to continue to qualify as a reit for federal income tax purposes , we expect to continue paying regular dividends to our stockholders . our board of directors will continue to evaluate the dividend policy on a quarterly basis , evaluating sources and uses of capital , operating fundamentals , maintenance of our reit qualification and other factors our board of directors may deem relevant . we generally intend to maintain a conservative dividend payout ratio . cash dividends paid to common stockholders for the years ended december 31 , 2019 and 2018 were $ 334.9 million and $ 333.4 million , respectively . our board of directors declared a quarterly cash dividend of $ 0.285 per common share in october 2019 for the fourth quarter of 2019. the dividend was paid on january 15 , 2020 to shareholders of record on january 6 , 2020. our board of directors declared a quarterly cash dividend of $ 0.285 per common share in february 2020 for the first quarter of 2020. the dividend is payable on april 15 , 2020 to shareholders of record on april 6 , 2020. our cash flow activities are summarized as follows ( dollars in thousands ) : brixmor property group inc . replace_table_token_13_th brixmor operating partnership lp replace_table_token_14_th cash , cash equivalents and restricted cash for bpg and the operating partnership were $ 21.5 million and $ 50.8 million as of december 31 , 2019 and 2018 , respectively . operating activities net cash provided by operating activities primarily consists of cash inflows from tenant rental payments and expense reimbursements and cash outflows for property operating expenses , general and administrative expenses and interest expense .
| during the year ended december 31 , 2018 , we disposed of 62 shopping centers , two partial shopping centers and one land parcel for aggregate net proceeds of $ 957.5 million resulting in aggregate gain of $ 208.7 million and aggregate impairment of $ 37.0 million . in addition , during the year ended december 31 , 2018 , we received aggregate net proceeds of $ 0.5 million from previously disposed assets resulting in aggregate gain of $ 0.5 million . results of operations the results of operations discussion is combined for bpg and the operating partnership because there are no material differences in the results of operations between the two reporting entities . comparison of the year ended december 31 , 2019 to the year ended december 31 , 2018 revenues ( in thousands ) replace_table_token_10_th rental income the decrease in rental income for the year ended december 31 , 2019 of $ 66.7 million , as compared to the corresponding period in 2018 , was primarily due to an $ 86.7 million decrease in rental income due to net disposition activity , partially offset by a $ 20.0 million increase for the remaining portfolio . the increase for the remaining portfolio was due to ( i ) a $ 19.5 million increase in base rent ; ( ii ) an $ 8.4 million increase in straight-line rental income , net ; ( iii ) a $ 5.1 million increase in expense reimbursements ; ( iv ) a $ 2.5 million increase in ancillary and other rental income ; and ( v ) a $ 1.3 million increase in percentage rents ; partially offset by ( vi ) a $ 9.8 million increase in revenues deemed uncollectible ; ( vii ) a $ 6.8 million decrease in accretion of above- and below-market leases and tenant inducements , net ; and ( viii ) a $ 0.2 million decrease in lease termination fees . the $ 19.5 million increase in base rent for the remaining portfolio was primarily due to contractual rent increases as well as positive rent spreads for new and renewal leases and option exercises of 10.9 % during the year ended december 31 , 2019 and 11.8 % during the year ended
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the interest rate and other terms of the ngp working capital loan will be set forth in the ngp credit agreement . in addition , under the ngp agreement , ngp has agreed to provide a line of credit of up to $ 5.0 million to us following nda approval of gimoti , if any , and for a period of up to nine months thereafter . the line of credit will be extended pursuant to a credit agreement to be negotiated in good faith by the parties . ngp will receive the ngp credit fee in lieu of any interest on the line of credit ; provided that in no event shall the cumulative ngp credit fee exceed twice the amount of the principal borrowed by us . the line of credit will mature on the earlier of 30 days following the date the ngp credit fee is twice the amount of the borrowed principal and the two-year 53 anniversary of the date the principal is borrowed by us . in the event we secure financing from a third - party wholesale distributor for the purchase of gimoti for launch in excess of $ 2.5 million dollars , ngp will no longer be required to offer the l ine of credit . we have no products approved for sale , and we have not generated any revenue from product sales or other arrangements . we have primarily funded our operations through the sale of our convertible preferred stock prior to our initial public offering in september 2013 , borrowings under our bank loans and the sale of shares of our common stock on the nasdaq capital market . we have incurred losses in each year since our inception . substantially all of our operating losses resulted from expenses incurred in connection with advancing gimoti through development activities and general and administrative costs associated with our operations . we expect to continue to incur significant expenses and increasing operating losses for at least the next several years . we may never become profitable , or if we do , we may not be able to sustain profitability on a recurring basis . as of december 31 , 2018 , we had cash and cash equivalents of approximately $ 5.3 million . current cash on hand is intended to fund interactions with fda on the nda submission for gimoti , including responding to the drl from fda , pre-commercialization and pre-approval activities for gimoti , including hiring a sales force , preparing for marketing and commercial manufacturing of gimoti , and general and administrative costs to support operations . our operations have consumed substantial amounts of cash since inception . we believe , based on our current operating plan , that our existing cash and cash equivalents , along with proceeds from the ngp working capital loan and the ngp credit agreement which will be available only if gimoti is approved by fda , may extend our cash runway into 2020 , without accounting for any future gimoti product revenue , although there can be no assurance in that regard . if we are unable to receive approval of the gimoti nda , and if we are unable to secure capital under the ngp working capital loan or the ngp credit agreement , we believe that our existing cash and cash equivalents will be sufficient to fund our operations until july 2019. under either situation , we may be required to raise additional funds in order to continue as a going concern . there can be no assurance that we will be able to further develop gimoti , if required . because our business is entirely dependent on the success of gimoti , if we are unable to secure additional financing or identify and execute on other development or strategic alternatives for gimoti or our company , we will be required to curtail all of our activities and may be required to liquidate , dissolve or otherwise wind down our operations . any of these events could result in a complete loss of your investment in our securities . technology acquisition agreement in june 2007 , we acquired all worldwide rights , data , patents and other related assets associated with gimoti from questcor pharmaceuticals , inc. , or questcor , pursuant to an asset purchase agreement . we paid questcor $ 650,000 in the form of an upfront payment and $ 500,000 in may 2014 as a milestone payment based upon the initiation of the first patient dosing in our phase 3 clinical trial for gimoti . in august 2014 , mallinckrodt , plc , or mallinckrodt , acquired questcor . as a result of that acquisition , questcor transferred its rights included in the asset purchase agreement with us to mallinckrodt . in addition to the payments previously made to questcor , we may be required to make additional milestone payments totaling up to $ 52 million . in march 2018 , we amended the asset purchase agreement with mallinckrodt to defer development and approval milestone payments , such that rather than paying two milestone payments based on fda acceptance for review of the nda and final product marketing approval , we would be required to make a single $ 5 million payment one year after we receive fda approval to market gimoti . the remaining $ 47 million in milestone payments depend on gimoti 's commercial success and will only apply if gimoti receives regulatory approval . in addition , we will be required to pay to mallinckrodt a low single digit royalty on net sales of gimoti . our obligation to pay such royalties will terminate upon the expiration of the last patent right covering gimoti , which is expected to occur in 2032. financial operations overview research and development expenses we expense all research and development expenses as they are incurred . story_separator_special_tag research and development expenses primarily include : clinical trial and regulatory-related costs ; expenses incurred under agreements with contract research organizations , or cros , investigative sites and consultants that conduct our clinical trials ; manufacturing and stability testing costs and related supplies and materials ; and employee-related expenses , including salaries , benefits , travel and stock-based compensation expense . all of our research and development expenses to date have been incurred in connection with the development of gimoti . the process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming . while we submitted the nda for gimoti in june 2018 , the successful development and commercialization of gimoti is still highly uncertain . we are unable to estimate with any certainty the costs we will incur in the continued development and regulatory review of gimoti , though such costs may be significant . clinical development timelines , the probability of success and development costs can differ materially from expectations . we may never succeed in achieving marketing approval for our product candidate . 54 the costs of clinical trials may vary significantly over the life of a project owing to , but n ot limited to , the following : per patient trial costs ; the number of sites included in the trials ; the countries in which the trials are conducted ; the length of time required to enroll eligible subjects ; the number of subjects that participate in the trials ; the number of doses that subjects receive ; the cost of comparative agents used in trials ; the drop-out or discontinuation rates of subjects ; potential additional safety monitoring or other studies requested by regulatory agencies ; the duration of patient follow-up ; and the efficacy and safety profile of the product candidate . we do not yet know when gimoti may be commercially available , if at all . general and administrative expenses general and administrative expenses consist primarily of salaries and related benefits , including stock-based compensation . other general and administrative expenses include professional fees for accounting , tax , patent costs , legal services , insurance , facility costs and costs associated with being a publicly-traded company , including fees associated with investor relations and directors and officers liability insurance premiums . we expect that general and administrative expenses will increase in the future as we expand our operating activities , prepare for the growth needs associated with potential commercialization of gimoti and continue to incur additional costs associated with being a publicly-traded company and maintaining compliance with exchange listing and sec requirements . these increases will likely include higher consulting costs , legal fees , accounting fees , directors ' and officers ' liability insurance premiums and fees associated with investor relations . other income ( expense ) other income ( expense ) consists primarily of changes in the fair value of the warrant liability , which represents the change in the fair value of common stock warrants from the date of issuance to the end of the reporting period . the warrant liability was revalued each reporting period until march 2018 , when we entered into warrant amendments , or the warrant amendments , with each of the holders of our outstanding warrants to purchase common stock issued on july 25 , 2016 and august 3 , 2016 , or the warrants . we previously used the black scholes valuation model to value the related warrant liability at each reporting date . as a result of the warrant amendments , the warrants are no longer required to be accounted for as a liability and are no longer required to be revalued at each reporting period . critical accounting policies and significant judgments and estimates our management 's discussion and analysis of our financial condition and results of operations is based on our financial statements , which we have prepared in accordance with generally accepted accounting principles in the united states , or 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 revenues and expenses during the reporting periods . we evaluate these estimates and judgments on an ongoing basis . we base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances , the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources . our actual results may differ materially from these estimates under different assumptions or conditions . while our significant accounting policies are more fully described in note 2 to our financial statements appearing elsewhere in this annual report on form 10-k , we believe that the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations . stock-based compensation stock-based compensation expense for stock option grants and employee stock purchases under our employee stock purchase plan , or espp , is recorded at the estimated fair value of the award as of the grant date and is recognized as expense on a straight-line basis over 55 the employee 's requisite service period . the estimation of stock option and espp fair value requires management to make e stimates and judgments about , among other things , employee exercise behavior , forfeiture rates and volatility of our common stock . the judgments directly affect the amount of compensation expense that will be recognized . we grant stock options to purchase common stock to employees and members of the board of directors with exercise prices equal to our closing market price on the date the stock options are granted . the risk-free interest rate assumption was based on the yield of an applicable rate for u.s. treasury instruments with maturities similar to those of the expected term of the award being valued .
| costs incurred in 2017 primarily included approximately $ 2.0 million for wages , taxes and employee insurance , including approximately $ 1.0 million of stock-based compensation expense , and approximately $ 1.6 million for legal , accounting , directors and officers liability insurance and other costs associated with being a public company . other income ( expense ) . other income ( expense ) for the year ended december 31 , 2018 compared to the year ended december 31 , 2017 decreased by approximately $ 1.4 million due primarily to the revaluation of warrants . since the date of the warrant amendments in march 2018 , the warrants were no longer classified as a liability on our balance sheet , were adjusted to fair value and reclassified to additional paid-in capital , a component of stockholders ' equity . prior to the amendment , the warrants were accounted for as a liability and were required to be revalued at each reporting period . liquidity and capital resources since our inception in 2007 , we have funded our operations primarily from the sale of equity securities and borrowings under loan and security agreements . prior to our ipo , we received $ 17.7 million in net proceeds from the sale of our series a convertible preferred stock and advances of $ 5.5 million under the loan and security agreements . during 2013 , we completed our ipo and raised approximately $ 25.1 million , net of offering costs and commissions . in april 2016 , we entered into an at market issuance sales agreement , or the fbr sales agreement , with b. riley fbr , inc. ( as successor by merger to fbr capital markets & co. ) , or fbr , and filed a prospectus supplement , pursuant to which we may sell from time to time , at our option up to an aggregate of 649,074 shares of our common stock through fbr as the sales agent . through december 31 , 2016 , we sold 56,000 shares of common stock and received net proceeds of approximately $ 296,000 under the fbr sales agreement .
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furthermore , the progression of , and global response to , the covid-19 outbreak has begun to cause , and increases the risk of , further delays in construction activities and equipment deliveries related to our capital projects , including potential delays in obtaining permits from government agencies . the extent of such delays and other effects of covid-19 on our capital projects , certain of which are outside of our control , is unknown , but they may impact or delay the timing of anticipated benefits of capital projects . in light of the uncertainties regarding the duration of the covid-19 pandemic and its overall impact on the company , its operations and the global economy , we withdrew our full-year 2020 guidance issued on february 19 , 2020 and will not provide full year 2021 guidance at this time . we also continue to appropriately adjust our operational needs , including managing our expenses , capital expenditures , working capital , liquidity and cash flows . in addition , as a precautionary measure , we borrowed $ 70.0 million under the abl facility on march 24 , 2020 ( the `` abl draw '' ) in order to increase the company 's cash position and preserve financial flexibility . in june 2020 , we reduced the principal amount of the outstanding abl draw by $ 30.0 million . as of december 31 , 2020 , the company had an aggregate principal amount of $ 40.0 million drawn under the abl facility . we intend on retaining the funds in cash to preserve liquidity amid the growing uncertainty surrounding the covid-19 outbreak . we also delayed spending the $ 25.0 million that we budgeted for the development of blue creek until at least summer 2021 and temporarily suspended our new stock repurchase program . our financial approach continues to focus on cash flow management and protecting the balance sheet in order to strategically move through this period of uncertainty and mitigate potential long-term impacts to the business ( see liquidity and capital resources below ) . basis of presentation the consolidated financial statements included elsewhere in this annual report and the other financial information presented and discussed in this management 's discussion and analysis includes the accounts of warrior met coal , inc. and its subsidiaries ( the `` company '' ) . how we evaluate our operations our primary business , the mining and exporting of met coal for the steel industry , is conducted in one business segment : mining . all other operations and results are reported under the โ all other โ category as a reconciling item to consolidated amounts , which includes the business results from our sale of natural gas extracted as a byproduct from our underground coal mines and royalties from our leased properties . our natural gas and royalty businesses do not meet the criteria in asc 280 , segment reporting , to be considered as operating or reportable segments . our management uses a variety of financial and operating metrics to analyze our performance . these metrics are significant factors in assessing our operating results and profitability and include : ( i ) segment adjusted ebitda ; ( ii ) sales volumes and average selling price , which drive coal sales revenue ; ( iii ) cash cost of sales , a non-gaap financial measure ; and ( iv ) adjusted ebitda , a non-gaap financial measure . 63 replace_table_token_6_th ( 1 ) gross price realization represents a volume weighted-average calculation of our daily realized price per ton based on gross sales , which excludes demurrage and other charges , as a percentage of the platts index . segment adjusted ebitda we define segment adjusted ebitda as net ( loss ) income adjusted for other revenues , cost of other revenues , depreciation and depletion , selling , general and administrative , and certain transactions or adjustments that the ceo , our chief operating decision maker does not consider for the purposes of making decisions to allocate resources among segments or assessing segment performance . segment adjusted ebitda is used as a supplemental financial measure by management and by external users of our financial statements , such as investors , industry analysts , lenders and ratings agencies , to assess : our operating performance as compared to the operating performance of other companies in the coal industry , without regard to financing methods , historical cost basis or capital structure ; the ability of our assets to generate sufficient cash flow to pay distributions ; our ability to incur and service debt and fund capital expenditures ; and the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities , such as blue creek . sales volumes , gross price realization and average net selling price we evaluate our operations based on the volume of coal we can safely produce and sell in compliance with regulatory standards , and the prices we receive for our coal . our sales volume and sales prices are largely dependent upon the terms of our coal sales contracts , for which prices generally are set on daily index averages or a quarterly basis . the volume of coal we sell is also a function of the pricing environment in the international met coal markets and the amounts of lv and mv coal that we sell . we evaluate the price we receive for our coal on two primary metrics : first , our gross price realization and second , our average net selling price per metric ton . our gross price realization represents a volume weighted-average calculation of our daily realized price per ton based on the blended gross sales of our lv and mv coal , excluding demurrage and quality specification adjustments , as a percentage of the platts index daily price . our gross price realizations reflect the premiums and discounts we achieve on our lv and mv coal versus the platts index price because of the high quality premium products we sell into the export markets . story_separator_special_tag in addition , the premiums and discounts in a quarter or year can be impacted by a rising or falling price environment . on a quarterly basis , our blended gross selling price per metric ton may differ from the platts index price per metric ton , primarily due to our gross sales price per ton being based on a blended average of gross sales price on our lv and mv coals as compared to the platts index price and due to the fact that many of our met coal supply agreements are based on a variety of indices . 64 our average net selling price per metric ton represents our coal net sales revenue divided by total metric tons of coal sold . in addition , our average net selling price per metric ton is net of the previously mentioned demurrage and quality specification adjustments . cash cost of sales we evaluate our cash cost of sales on a cost per metric ton basis . cash cost of sales is based on reported cost of sales and includes items such as freight , royalties , manpower , fuel and other similar production and sales cost items , and may be adjusted for other items that , pursuant to gaap , are classified in the statements of operations as costs other than cost of sales , but relate directly to the costs incurred to produce met coal and sell it free-on-board at the port of mobile in alabama . our cash cost of sales per metric ton is calculated as cash cost of sales divided by the metric tons sold . cash cost of sales is used as a supplemental financial measure by management and by external users of our financial statements , such as investors , industry analysts , lenders and ratings agencies , to assess : our operating performance as compared to the operating performance of other companies in the coal industry , without regard to financing methods , historical cost basis or capital structure ; and the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities , such as blue creek . we believe that this non-gaap financial measure provides additional insight into our operating performance , and reflects how management analyzes our operating performance and compares that performance against other companies on a consistent basis for purposes of business decision making by excluding the impact of certain items that management does not believe are indicative of our core operating performance . we believe that cash costs of sales presents a useful measure of our controllable costs and our operational results by including all costs incurred to produce met coal and sell it free-on-board at the port of mobile in alabama . period-to-period comparisons of cash cost of sales are intended to help management identify and assess additional trends potentially impacting our company that may not be shown solely by period-to-period comparisons of cost of sales . cash cost of sales should not be considered an alternative to cost of sales or any other measure of financial performance or liquidity presented in accordance with gaap . cash cost of sales excludes some , but not all , items that affect cost of sales , and our presentation may vary from the presentations of other companies . as a result , cash cost of sales as presented below may not be comparable to similarly titled measures of other companies . the following table presents a reconciliation of cash cost of sales to total cost of sales , the most directly comparable gaap financial measure , on a historical basis for each of the periods indicated . replace_table_token_7_th adjusted ebitda we define adjusted ebitda as net ( loss ) income before net interest expense , income tax expense ( benefit ) , depreciation and depletion , non-cash asset retirement obligation accretion , non-cash stock compensation expense , other non-cash accretion and valuation adjustments , transaction and other costs , loss on early extinguishment of debt and other income and expenses . adjusted ebitda is used as a supplemental financial measure by management and by external users of our financial statements , such as investors , industry analysts , lenders and ratings agencies , to assess : our operating performance as compared to the operating performance of other companies in the coal industry , without regard to financing methods , historical cost basis or capital structure ; and the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities , such as blue creek . 65 we believe that the presentation of adjusted ebitda in this annual report provides information useful to investors in assessing our financial condition and results of operations . the gaap measure most directly comparable to adjusted ebitda is net ( loss ) income . adjusted ebitda should not be considered an alternative to net income or loss or any other measure of financial performance or liquidity presented in accordance with gaap . adjustments excludes some , but not all , items that affect net ( loss ) income and our presentation of adjusted ebitda may vary from that presented by other companies . the following table presents a reconciliation of adjusted ebitda to net ( loss ) income , the most directly comparable gaap financial measure , on a historical basis for each of the periods indicated . replace_table_token_8_th ( 1 ) represents non-cash accretion expense and valuation adjustment associated with our asset retirement obligations ( see note 8 to our consolidated financial statements ) . ( 2 ) represents non-cash stock compensation expense associated with equity awards . ( 3 ) represents non-cash accretion expense and valuation adjustment associated with our black lung obligations ( see note 10 to our consolidated financial statements ) . ( 4 ) represents non-recurring costs incurred by the company in connection with the offering of the notes ( see note 13 to our consolidated financial statements ) and the secondary equity offerings ( as defined in note 17 ) .
| and we demonstrated an ongoing commitment to returning capital to our stockholders , paying our regular $ 0.05 per share quarterly dividends . sales were $ 761.9 million for the year ended december 31 , 2020 , compared to $ 1.2 billion for the year ended december 31 , 2019. the $ 474.1 million decrease in revenues was primarily driven by a $ 387.9 million decrease related to a $ 57.60 decrease in the average selling price per metric ton of met coal combined with a $ 86.2 million decrease due to a 0.5 million metric ton decrease in met coal sales volume . other revenues for the year ended december 31 , 2020 were $ 20.9 million compared to $ 32.3 million for the year ended december 31 , 2019. other revenues are comprised of revenue derived from our natural gas operations , as well as earned royalty revenue . the $ 11.4 million decrease in other revenues is primarily due to a 22 % decrease in gas sales driven by a decrease in natural gas prices and production during 2020. cost of sales ( exclusive of items shown separately below ) was $ 625.2 million , or 79.9 % of total revenues for the year ended december 31 , 2020 , compared to $ 720.7 million , or 56.8 % of total revenues for the year ended december 31 , 2019. the $ 95.6 million decrease in cost of sales was primarily driven by a $ 50.1 million decrease due to a 0.5 million metric ton decrease in met coal sales volumes combined with a $ 46.1 million decrease due to a $ 6.84 per metric ton decrease in the average cash cost of sales per metric ton . the decrease in average cash cost of sales per metric ton is primarily due to our variable cost structure in our labor , royalties and logistics contracts that vary in response to changes
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alternatively , should actual demand and market conditions be more favorable than those estimated by us , gross margin could be favorably impacted as we release these reserves upon the ultimate product shipment . during fiscal years 2016 , 2015 and 2014 , we had net inventory write-downs of $ 26.2 million , $ 28.6 million and $ 35.1 million , respectively . when the company records a write-down on inventory , it establishes a new , lower cost basis for that inventory , and subsequent changes in facts and circumstances will not result in the restoration or increase in that newly established cost basis . long-lived assets we evaluate the recoverability of property , plant and equipment in accordance with accounting standards codification ( โ asc โ ) no . 360 , property , plant , and equipment ( โ asc 360 โ ) . we perform periodic reviews to determine whether facts and circumstances exist that would indicate that the carrying amounts of property , plant and equipment might not be fully recoverable . if facts and circumstances indicate that the carrying amount of property , plant and equipment might not be fully recoverable , we compare projected undiscounted net cash flows associated with the related asset or group of assets over their estimated remaining useful lives against their respective carrying amounts . in the event that the projected undiscounted cash flows are not sufficient to recover the carrying value of the assets , the assets are written down to their estimated fair values based on the expected discounted future cash flows attributable to the assets . evaluation of impairment of property , plant and equipment requires estimates in the forecast of future operating results that are used in the preparation of the expected future undiscounted cash flows . actual future operating results and the remaining economic lives of our property , plant and equipment could differ from our estimates used in assessing the recoverability of these assets . these differences could result in impairment charges , which could have a material adverse impact on our results of operations . intangible assets and goodwill we account for intangible assets in accordance with asc no . 350 , intangibles-goodwill and other ( โ asc 350 โ ) , we review goodwill and purchased intangible assets with indefinite lives for impairment annually and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable , such as when reductions in demand or significant economic slowdowns in the semiconductor industry are present . intangible asset reviews are performed when indicators exist that could indicate the carrying value may not be recoverable based on comparisons to undiscounted expected future cash flows . if this comparison indicates that there is impairment , the impaired asset is written down to fair value , which is typically calculated using : ( i ) quoted market prices or ( ii ) discounted expected future cash flows utilizing a discount rate consistent with the guidance provided in fasb concepts statement no . 7 , using cash flow information and present value in accounting measurements . impairment is based on the excess of the carrying amount over the fair value of those assets . goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired . in accordance with asc 350 we test goodwill for impairment at the reporting unit level ( operating segment or one level below an operating segment ) on an annual basis or more frequently if we believe indicators of impairment exist . during the fourth quarter of fiscal year 2015 , we changed our annual goodwill impairment testing date from the first quarter to the fourth quarter of each year . this change ensures the completion of the annual goodwill impairment test prior to the end of the annual reporting period , thereby aligning impairment testing procedures with year-end financial reporting . this change did not accelerate , delay , avoid , or cause an impairment charge , nor did this change result in adjustments to previously issued financial statements . the performance of the test involves a two-step process . the first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values , including goodwill . we generally determine the fair value of our reporting units using the income approach methodology of valuation that includes the discounted cash flow method as well as the market approach which includes the guideline company method . if the carrying amount of a reporting unit exceeds the reporting unit 's fair value , we perform the second step of the goodwill impairment test to determine the amount of impairment 24 loss . the second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit 's goodwill with the carrying value of that goodwill . accounting for income taxes we must make certain estimates and judgments in the calculation of income tax expense , determination of uncertain tax positions , and in the determination of whether deferred tax assets are more likely than not to be realized . the calculation of our income tax expense and income tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations . asc 740-10 , income taxes ( โ asc 740-10 โ ) , prescribes a recognition threshold and measurement framework for financial statement reporting and disclosure of tax positions taken or expected to be taken on a tax return . under asc 740-10 , a tax position is recognized in the financial statements when it is more likely than not , based on the technical merits , that the position will be sustained upon examination , including resolution of any related appeals or litigation processes . a tax position that meets the recognition threshold is then measured to determine the largest amount of the benefit that has a greater than 50 % likelihood of being realized upon settlement . story_separator_special_tag although we believe that our computation of tax benefits to be recognized and realized are reasonable , no assurance can be given that the final outcome will not be different from what was reflected in our income tax provisions and accruals . such differences could have a material impact on our net income and operating results in the period in which such determination is made . see note 16 : โ income taxes โ in the notes to consolidated financial statements included in part iv , item 15 ( a ) of this annual report for further information related to asc 740-10. we evaluate our deferred tax asset balance and record a valuation allowance to reduce the net deferred tax assets to the amount that is more likely than not to be realized . in the event it is determined that the deferred tax assets to be realized in the future would be in excess of the net recorded amount , an adjustment to the deferred tax asset valuation allowance would be recorded . this adjustment would increase income , or additional paid in capital , as appropriate , in the period such determination was made . likewise , should it be determined that all or part of the net deferred tax asset would not be realized in the future , an adjustment to increase the deferred tax asset valuation allowance would be charged to income in the period such determination is made . in assessing the need for a valuation allowance , historical levels of income , expectations and risks associated with estimates of future taxable income and ongoing prudent and practicable tax planning strategies are considered . realization of our deferred tax asset is dependent primarily upon future u.s. taxable income . our judgments regarding future profitability may change due to future market conditions , changes in u.s. or international tax laws and other factors . these changes , if any , may require material adjustments to the net deferred tax asset and an accompanying reduction or increase in net income in the period in which such determinations are made . litigation and contingencies from time to time , we receive notices that our products or manufacturing processes may be infringing the patent or other intellectual property rights of others , notices of stockholder litigation or other lawsuits or claims against us . we periodically assess each matter in order to determine if a contingent liability in accordance with asc no . 450 , contingencies ( โ asc 450 โ ) , should be recorded . in making this determination , management may , depending on the nature of the matter , consult with internal and external legal counsel and technical experts . we expense legal fees associated with consultations and defense of lawsuits as incurred . based on the information obtained , combined with management 's judgment regarding all of the facts and circumstances of each matter , we determine whether a contingent loss is probable and whether the amount of such loss can be estimated . should a loss be probable and estimable , we record a contingent loss in accordance with asc 450. in determining the amount of a contingent loss , we take into consideration advice received from experts in the specific matter , the current status of legal proceedings , settlement negotiations which may be ongoing , prior case history and other factors . should the judgments and estimates made by management be incorrect , we may need to record additional contingent losses that could materially adversely impact our results of operations . alternatively , if the judgments and estimates made by management are incorrect and a particular contingent loss does not occur , the contingent loss recorded would be reversed thereby favorably impacting our results of operations . story_separator_special_tag control efforts . the level of selling , general and administrative expenditures as a percentage of net revenues will vary from period to period , depending on the level of net revenues and our success in recruiting sales and administrative personnel needed to support our operations . impairment of long-lived assets impairment of long-lived assets was $ 160.6 million in fiscal year 2016 and $ 67.0 million in fiscal year 2015 , which represented 7.3 % and 2.9 % of net revenues , respectively . the $ 93.6 million increase was primarily due to a $ 157.7 million increase in classification of our wafer manufacturing facility in san antonio , texas as held for sale in the first quarter of fiscal year 2016 and therefore written down to fair value , less cost to sell . 27 impairment of long-lived assets was $ 67.0 million in fiscal year 2015 and $ 11.6 million in fiscal year 2014 , which represented 2.9 % and 0.5 % of net revenues , respectively . the $ 55.4 million increase was primarily due to the equipment impairment associated with the sensing solutions reporting unit . for further details of the asset impairments , please refer to note 10 : โ impairment of long-lived assets โ in our consolidated financial statements included in part iv , item 15 ( a ) to this annual report . impairment of goodwill and intangible assets impairment of goodwill and intangible assets was $ 27.6 million in fiscal year 2016 and $ 93.0 million in fiscal year 2015 , which represented 1.3 % and 4.0 % of net revenues , respectively . the $ 65.4 million decrease was primarily driven by a $ 93.0 million impairment to goodwill and in-process research and development for the sensing solutions reporting unit in fiscal year 2015 compared to a $ 27.6 million impairment of in-process research and development obtained in previous acquisitions , primarily from the acquisition of volterra . impairment of goodwill and intangible assets was $ 93.0 million in fiscal year 2015 and $ 2.6 million in fiscal year 2014 . the $ 90.4 million increase was primarily driven by impairments to goodwill and in-process research and development for the sensing solutions reporting unit .
| while less than 1.0 % of our sales are denominated in currencies other than u.s. dollars , we enter into foreign currency forward contracts to mitigate our risks on firm commitments 26 and net monetary assets denominated in foreign currencies . the impact of changes in foreign exchange rates on net revenues and our results of operations for fiscal years 2016 , 2015 and 2014 were immaterial . gross margin our gross margin percentage as a percentage of net revenue was 56.7 % in fiscal year 2016 compared to 55.1 % in fiscal year 2015 . our gross margin increased by 1.6 % , primarily from a $ 73.8 million , or 8.1 % , decrease , in production related costs ( 1.3 % increase to gross margin ) . these reduced production related costs were primarily due to the realization of benefits from the manufacturing transformation and cost savings initiatives , as well as due to the 4.9 % decrease in net revenue , and to a lesser extent due to the mix of products sold . our gross margin as a percentage of net revenue was 55.1 % in fiscal year 2015 compared to 56.4 % in fiscal year 2014 . our gross margin decreased by 1.3 % , primarily resulted from a $ 51.5 million increase in accelerated depreciation relating to the san jose wafer fabrication facility shut down , and , a $ 9.9 million increase in incremental amortization related to intangible assets due to a full year of amortization in fiscal year 2015 as compared to nine months of amortization in fiscal year 2014. this decrease was mitigated by a $ 19.0 million reduction in product warranty related expenses . research and development research and development expenses were $ 467.2 million and $ 521.8 million for fiscal years 2016 and 2015 , respectively , which represented 21.3 % and 22.6 % of net revenues , respectively . the $ 54.6 million decrease in research and development expenses was primarily attributable to a decrease in salaries and related expenses of $ 44.0 million as a result
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we derive the majority of our revenues from distribution of the right to use the search engine marketing ( โ sem โ ) services , sale of advertising space on our internet ad portals , sales of effective sales lead information and provision of the related data and technical services , all of which management considers as one aggregate business operation and relies upon the consolidated results of all operations in this business unit to make decisions about allocating resources and evaluating performance . our advertising and marketing services to related parties were provided in the ordinary course of business on the same terms as those provided to our unrelated customers . our service revenues from related parties were insignificant for both the years ended december 31 , 2020 and 2019 . ยท internet advertising revenues decreased to us $ 8.42 million for the year ended december 31 , 2020 , compared with approximately us $ 14.81 million for the year ended december 31 , 2019. the decreases were directly attributable to the covid-19 outbreak and business shutdown during the first fiscal quarter of 2020 in china , and slow recovery of economy in the following fiscal quarters . the decrease in revenues from our internet advertising slightly narrowed down to an approximately 42 % decrease for the last three fiscal quarters of 2020 , compared with an approximately 48 % decrease in the first fiscal quarter of 2020. we expect the performance of this business category will continue improving in fiscal 2021 . ยท revenue generated from distribution of the right to use search engine marketing service for the year ended december 31 , 2020 decreased to us $ 26.00 million , compared with approximately us $ 41.36 million for the year ended december 31 , 2019 , due to the same reason as discussed above . the performance of this business category improved after the covid-19 outbreak , with the decrease in revenues significantly narrowed down to an approximately 31 % decrease for the last three fiscal quarters of 2020 , compared with a 70 % decrease in revenues in the first fiscal quarter of 2020. we expect the performance of this business category will continue improving in fiscal 2021 . ยท for the years ended december 31 , 2020 and 2019 , we generated an approximately us $ 1.20 million and us $ 0.71 million technical service revenues related to internet advertising and marketing data analysis and management , respectively . ยท for the year ended december 31 , 2020 , we generated an approximately us $ 1.54 million ecommerce o2o advertising and marketing service revenues from the distribution of the advertising spaces in outdoor billboards we purchased from a third party . ยท for the years ended december 31 , 2020 and 2019 , we also generated an approximately us $ 1.25 million technical design and support service revenues and an approximately us $ 1.20 million non-recurring software sale revenue , respectively . 41 cost of revenues our cost of revenues consisted of costs directly related to the offering of our internet advertising , precision marketing and related data and technical services , and cost related to our ecommerce o2o advertising and marketing service . the following table sets forth our cost of revenues , disaggregated by type of services , by amount and gross profit ratio for the periods indicated , with inter-company transactions eliminated : replace_table_token_7_th cost of revenues : our total cost of revenues decreased to approximately us $ 37.78 million for the year ended december 31 , 2020 , compared with us $ 52.58 million for the year ended december 31 , 2019. our cost of revenues primarily consists of search engine marketing resources purchased from key search engines , cost of outdoor advertising resource , license fee paid for providing data and technical services , and other direct costs associated with providing our services . the decrease in our total cost of revenues for the year ended december 31 , 2020 was primarily due to the decrease in costs associated with the distribution of the right to use search engine marketing service we purchased from key search engines and cost related to providing internet advertising services on our ad portals , which was in line with the decrease in the related revenues as discussed above . ยท costs for internet advertising and data service primarily consisted of cost of internet traffic flow and technical services we purchased from other portals and technical suppliers for obtaining effective sales lead generation to promote business opportunity advertisements placed on our own ad portals . for the year ended december 31 , 2020 , our total cost of revenues for internet advertising and data service decreased to approximately us $ 6.69 million , compared with approximately us $ 13.80 million for the year ended december 31 , 2019 , which was in line with the decrease in revenues as discussed above . the gross margin rate of our internet advertising and data service improved significantly to 21 % for the year ended december 31 , 2020 , compared with 7 % for last year , which was attributable to the enhancement of our data analysis capabilities and optimization of cost control mechanism . ยท costs for distribution of the right to use search engine marketing service was direct search engine resource consumed for the right to use search engine marketing service that we purchased from key search engines and distributed to our customers . we purchased these search engine resources from well-known search engines in china , for example , baidu , qihu 360 and sohu ( sogou ) etc . we purchased the resource in relatively large amounts under our own name at a relatively lower rate compared to the market rates . we charged our clients the actual cost they consumed on search engines for the use of this service and a premium at certain percentage of that actual consumed cost . story_separator_special_tag for the year ended december 31 , 2020 , our total cost of revenues for distribution of the right to use search engine marketing service decreased to us $ 27.95 million , compared with us $ 38.78 million for last year . gross margin rate of this service for the year ended december 31 , 2020 was -8 % , as we had to sell the resource pre-purchased from key search engines at a loss to meet our working capital needs , before we consummated our 2020 financing in december , and secure our client base under the circumstances of covid-19 outbreak and slow recovery of economy after the pandemic . we are actively negotiating with our suppliers for more favorable discount , as a result , we anticipate to improve the gross margin rate for this business category in future periods . gross margin rate of this service was 6 % for the year ended december 31 , 2019 . 42 ยท for the year ended december 31 , 2020 , cost for our internet advertising related data and technical service revenues was approximately us $ 1.06 million , which represented the amortized licensee fee for the use of the related data analysis and management system during the year . ยท for the year ended december 31 , 2020 , cost for our ecommerce o2o advertising and marketing service revenues was approximately us $ 1.50 million , which represented the amortized cost for the related outdoor billboards ad spaces we pre-purchased during the year . ยท for the year ended december 31 , 2020 , we also incurred cost for providing technical design and support services of approximately us $ 0.58 million . gross profit as a result of the foregoing , our gross profit was us $ 0.63 million for the year ended december 31 , 2020 , compared with us $ 5.50 million for the year ended december 31 , 2019. our overall gross margin rate for the years ended december 31 , 2020 and 2019 was approximately 2 % and 9 % , respectively . the decrease in our overall gross margin rate was primarily attributable to the gross profit rate of -8 % incurred for our main stream of service revenues , i.e . distribution of the right to use search engine marketing services , compared with an approximately 6 % gross profit rate we achieved for this business category in last year . the revenues from distribution of the right to use search engine marketing services constituted approximately 67.7 % and 71.2 % of our total revenues for the years ended december 31 , 2020 and 2019 , respectively . operating expenses our operating expenses consist of sales and marketing expenses , general and administrative expenses and research and development expenses . the following tables set forth our operating expenses , divided into their major categories by amount and as a percentage of our total revenues for the periods indicated . replace_table_token_8_th operating expenses : our operating expenses were approximately us $ 6.33 million and us $ 7.19 million for the years ended december 31 , 2020 and 2019 , respectively . ยท sales and marketing expenses : for the year ended december 31 , 2020 , our sales and marketing expenses decreased to us $ 0.36 million from us $ 0.54 million for the year ended december 31 , 2019. our sales and marketing expenses primarily consist of advertising expenses for brand development that we pay to different media outlets for the promotion and marketing of our advertising web portals and our services , other advertising and promotional expenses , staff salaries , staff benefits , performance bonuses , travelling expenses , communication expenses and other general office expenses of our sales department . due to certain aspects of our business nature , the fluctuation of our sales and marketing expenses usually does not have a direct linear relationship with the fluctuation of our net revenues . for the year ended december 31 , 2020 , the changes in our sales and marketing expenses was primarily due to the following reasons : ( 1 ) staff salary and benefit expenses , performance based bonus and general departmental expenses decreased by approximately us $ 0.30 million , due to office shutdown during the first fiscal quarter of 2020 , resulted from the covid-19 outbreak , and slow recovery of business performance after the outbreak in the following quarters of 2020 ; and ( 2 ) the increase in share-based compensation expenses of approximately us $ 0.12 million , related to restricted shares granted and issued to our sales staff in fiscal 2020 . 43 ยท general and administrative expenses : our general and administrative expenses were approximately us $ 5.43 million and us $ 5.78 million for the years ended december 31 , 2020 and 2019 , respectively . our general and administrative expenses primarily consist of salaries and benefits of management , accounting , human resources and administrative personnel , office rentals , depreciation of office equipment , allowance for doubtful accounts , professional service fees , maintenance , utilities and other general office expenses of our supporting and administrative departments . for the year ended december 31 , 2020 , the changes in our general and administrative expenses was primarily due to the following reasons : ( 1 ) the increase in share-based compensation expenses of approximately us $ 1.49 million , due to restricted shares granted and issued in fiscal 2020 ; ( 2 ) the decrease in allowance for doubtful accounts of approximately us $ 1.50 million ; and ( 3 ) the decrease in general departmental expenses of approximately us $ 0.33 million , due to office shutdown during the first fiscal quarter of 2020 , and cost reduction plan executed by management after the covid-19 outbreak . ยท research and development expenses : our research and development expenses were approximately us $ 0.54 million and us $ 0.87 million for the years ended december 31 , 2020 and 2019 , respectively .
| we continually evaluate these estimates and assumptions based on the most recently available information , our own historical experience and various other assumptions that we believe to be reasonable under the circumstances . since the use of estimates is an integral component of the financial reporting process , actual results could differ from those estimates . we considered the policies discussed below to be critical to an understanding of our financial statements . foreign currency translation and transactions we conduct substantially all of our operations through our prc operating subsidiaries and vies , prc is the primary economic environment in which we operate . the exchange rates used to translate amounts in renminbi ( โ rmb โ ) , the functional currency of the prc , into our reporting currency , the united states dollar ( โ u.s . dollar โ or โ us $ โ ) for the purposes of preparing our consolidated financial statements are as follows : replace_table_token_3_th replace_table_token_4_th revenue recognition in accordance with asc topic 606 โ revenue from contracts with customers โ , our revenues are recognized when control of the promised goods or services are transferred to our customers , in an amount that reflects the consideration we expected to be entitled to in exchange for those goods or services . for the distribution of the right to use search engine marketing service , the provision of advertising placement services , we recognize revenues over time when we consider the services have been delivered to our customers , with the related benefits being simultaneously received and consumed by our customers . for sales of effective sale lead information and sales of software , we recognize revenues at a point in time upon control of the promised goods is delivered and accepted by our customers , and we have no performance obligation after the delivery . for technical solution services provided , we recognized revenues either at a point in time upon completion of the service performance obligation , when we had the enforceable right
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we recorded net income of $ 27.5 million for the year ended december 31 , 2019 , and net losses of $ 0.9 million and $ 104.7 million for the years ended december 31 , 2018 and 2017 , respectively . industry overview we estimate that approximately $ 4.3 billion is spent in the united states each year for prescription-based o & p products and services through o & p clinics . we believe our patient care segment currently accounts for approximately 21 % of the market , providing a comprehensive portfolio of orthotic , prosthetic , and post-operative solutions to patients in acute , post-acute , and patient care clinic settings . the o & p patient care services market is highly fragmented and is characterized by regional and local independent o & p businesses operated predominantly by independent operators , but also including two o & p product manufacturers with international patient care services operations . we do not believe that any single competitor accounts for more than approximately 2 % of the nation 's total estimated o & p clinic revenues . 33 the industry is characterized by stable , recurring revenues , primarily resulting from new patients as well as the need for periodic replacement and modification of o & p devices . we anticipate that the demand for o & p services will continue to grow as the nation 's population increases , and as a result of several trends , including the aging of the u.s. population , there will be an increase in the prevalence of disease-related disability and the demand for new and advanced devices . we believe the typical replacement time for prosthetic devices is three to five years , while the typical replacement time for orthotic devices varies , depending on the device . we estimate that approximately $ 1.7 billion is spent in the united states each year by providers of o & p patient care services for the o & p products , components , devices , and supplies used in their businesses . our products & services segment distributes to independent providers of o & p services and supplies our own patient care clinics . we estimate that our distribution sales account for approximately 8 % of the market for o & p products , components , devices , and supplies ( excluding sales to our patient care segment ) . we estimate the market for rehabilitation technologies , integrated clinical programs , and clinician training in skilled nursing facilities ( โ snfs โ ) to be approximately $ 150 million annually . we currently provide these products and services to approximately 25 % of the estimated 15,000 snfs located in the u.s. we estimate the market for rehabilitation technologies , clinical programs , and training within the broader post-acute rehabilitation markets to be approximately $ 400 million annually . we do not currently provide a meaningful amount of products and services to this broader market . business description patient care our patient care segment employs approximately 1,600 clinical prosthetists , orthotists , and pedorthists , which we refer to as clinicians , substantially all of which are certified by either the american board for certification ( โ abc โ ) or the board of certification of orthotists and prosthetists , which are the two boards that certify o & p clinicians . to facilitate timely service to our patients , we also employ technicians , fitters , and other ancillary providers to assist its clinicians in the performance of their duties . through this segment , we additionally provide network contracting services to independent providers of o & p . patients are typically referred to hanger clinic by an attending physician who determines a patient 's treatment and writes a prescription . our clinicians then consult with both the referring physician and the patient with a view toward assisting in the selection of an orthotic or prosthetic device to meet the patient 's needs . o & p devices are increasingly technologically advanced and custom designed to add functionality and comfort to patients ' lives , shorten the rehabilitation process , and lower the cost of rehabilitation . based on the prescription written by a referring physician , our clinicians examine and evaluate the patient and either design a custom device or , in the case of certain orthotic needs , utilize a non-custom device , including , in appropriate circumstances , an โ off the shelf โ device , to address the patient 's needs . when fabricating a device , our clinicians ascertain the specific requirements , componentry , and measurements necessary for the construction of the device . custom devices are constructed using componentry provided by a variety of third party manufacturers that specialize in o & p , coupled with sockets and other elements that are fabricated by our clinicians and technicians , to meet the individual patient 's physical and ambulatory needs . our clinicians and technicians typically utilize castings , electronic scans , and other techniques to fabricate items that are specialized for the patient . after fabricating the device , a fitting process is undertaken and adjustments are made to ensure the achievement of proper alignment , fit , and patient comfort . the fitting process often involves several stages to successfully achieve desired functional and cosmetic results . given the differing physical weight and size characteristics , location of injury or amputation , capability for physical activity and mobility , cosmetic , and other needs of each individual patient , each fabricated prosthesis and orthosis is customized for each particular patient . these custom devices are commonly fabricated at one of our regional or national fabrication facilities . 34 we have earned a reputation within the o & p industry for the development and use of innovative technology in our products , which has increased patient comfort and capability and can significantly enhance the rehabilitation process . frequently , our proprietary insignia scanning system is used in the fabrication process . story_separator_special_tag the insignia system scans the patient and produces an accurate computer-generated image , resulting in a faster turnaround for the patient 's device and a more professional overall experience . in recent years , we have established a centralized revenue cycle management organization that assists our clinics in pre-authorization , patient eligibility , denial management , collections , payor audit coordination , and other accounts receivable processes . the principal reimbursement sources for our services are : commercial private payors and other non-governmental organizations , which consist of individuals , rehabilitation providers , commercial insurance companies , health management organizations ( โ hmos โ ) , preferred provider organizations ( โ ppos โ ) , hospitals , vocational rehabilitation centers , workers ' compensation programs , third party administrators , and similar sources ; medicare , a federally funded health insurance program providing health insurance coverage for persons aged 65 or older and certain persons with disabilities ; medicaid , a health insurance program jointly funded by federal and state governments providing health insurance coverage for certain persons in financial need , regardless of age , which may supplement medicare benefits for persons aged 65 or older in financial need ; and the u.s. department of veterans affairs ( โ va โ ) . we typically enter into contracts with third party payors that allow us to perform o & p services for a referred patient and to be paid under the contract with the third party payor . these contracts usually have a stated term of one to three years . these contracts generally may be terminated without cause by either party on 60 to 90 days ' notice , or on 30 days ' notice if we have not complied with certain licensing , certification , program standards , medicare or medicaid requirements , or other regulatory requirements . reimbursement for services is typically based on a fee schedule negotiated with the third party payor that reflects various factors , including market conditions , geographic area , and number of persons covered . many of our commercial contracts are indexed to the commensurate medicare fee schedule that relates to the products or services being provided . government reimbursement is comprised of medicare , medicaid , and the va. these payors set maximum reimbursement levels for o & p services and products . medicare prices are adjusted each year based on the consumer price index for all urban consumers ( โ cpi-u โ ) unless congress acts to change or eliminate the adjustment . the cpi-u is adjusted further by an efficiency factor ( the โ productivity adjustment โ or the โ multi-factor productivity adjustment โ ) in order to determine the final rate adjustment each year . there can be no assurance that future adjustments will not reduce reimbursements for o & p services and products from these sources . we , and the o & p industry in general , are subject to various medicare compliance audits , including recovery audit contractor ( โ rac โ ) audits , comprehensive error rate testing ( โ cert โ ) audits , targeted probe and educate ( โ tpe โ ) audits , zone program integrity contractor ( โ zpic โ ) audits , supplemental medical review contractor ( โ smrc โ ) audits , and universal payment identification code ( โ upic โ ) audits . tpe audits are generally pre-payment audits , while rac , cert , zpic , and smrc audits are generally post-payment audits . upic audits can be both pre- or post-payment audits , with a majority currently pre-payment . tpe audits replaced the previous medicare administrative contractor audits . adverse post-payment audit determinations generally require hanger to reimburse medicare for payments previously made , while adverse pre-payment audit determinations generally result in the denial of payment . in either case , we can request a redetermination or appeal , if we believe the adverse determination is unwarranted , which can take an extensive period of time to resolve , currently up to six years or more . 35 products & services through our wholly-owned subsidiary , southern prosthetic supply , inc. ( โ sps โ ) , we distribute o & p components to independent o & p clinics and other customers . through our wholly-owned subsidiary , accelerated care plus corp. ( โ acp โ ) , our therapeutic solutions business is a leading provider of rehabilitation technologies and integrated clinical programs to skilled nursing and post-acute rehabilitation providers . our value proposition is to provide our customers with a full-service โ total solutions โ approach encompassing proven medical technology , evidence-based clinical programs , and ongoing consultative education and training . our services support increasingly advanced treatment options for a broader patient population and more medically complex conditions . we currently serve approximately 4,000 skilled nursing and post-acute providers nationwide . through our surefit subsidiary , we also manufacture and sell therapeutic footwear for diabetic patients in the podiatric market . we also operate the hanger fabrication network , which fabricates custom o & p devices for our patient care clinics as well as for independent o & p clinics . through our internal โ supply chain โ organization , we purchase , warehouse , and distribute over 450,000 skus from more than 300 different manufacturers through sps or directly to our own clinics within our patient care segment . our warehousing and distribution facilities in nevada , georgia , illinois , pennsylvania , and texas provide us with the ability to deliver products to the vast majority of our customers in the united states within two business days . our supply chain organization enables us to : centralize our purchasing and thus lower our material costs by negotiating purchasing discounts from manufacturers ; better manage our patient care clinic inventory levels and improve inventory turns ; improve inventory quality control ; encourage our patient care clinics to use the most clinically appropriate products ; and coordinate new product development efforts with key vendors .
| as more fully explained in note h - โ goodwill and intangible assets โ to our consolidated financial statements in this annual report on form 10-k , due to the continued decline in our therapeutic reporting unit forecasted outlook , we recorded an impairment of intangible assets of $ 0.2 million for the year ended december 31 , 2018 related to our therapeutic reporting unit 's indefinite-lived trade name . see the โ business environment and outlook โ section in this management 's discussion and analysis for information regarding the business environment and outlook of our products & services segment . interest expense , net . interest expense for the year ended december 31 , 2018 was $ 37.6 million , a decrease of $ 20.1 million , or 34.9 % , from $ 57.7 million for the same period in the prior year . this decrease was primarily due to lower interest rates on outstanding borrowings arising from our debt refinancing in march 2018 and secondarily reflected a $ 1.5 million decrease related to our settlement of outstanding abandoned and unclaimed property claims with the state of delaware in a manner that did not require us to pay a portion of the estimated interest we had accrued on long standing unpaid claim amounts . provision for income taxes . the provision for income taxes for the year ended december 31 , 2018 was $ 5.2 million , or 119.6 % of income from continuing operations before taxes , compared to a provision of $ 27.3 million , or ( 35.3 ) % of income before taxes for the year ended december 31 , 2017. the effective tax rate in 2018 consists principally of the 21 % federal statutory tax rate and the rate impact from state income taxes and permanent tax differences . the federal statutory tax rate in 2017 was 35 % . the increase in the effective tax rate for the year ended december 31 , 2018 compared with the year ended december 31 , 2017 is primarily attributable to the pre-tax book income loss in the year ended december 31 , 2017 and the deferred tax impact related to the change in the tax act , whereas we had pre-tax book income in the year ended december 31 , 2018. net loss . our net loss for year ended december 31 , 2018 was $ 0.9 million as compared
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