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as of february 17 , 2015 , tenants with leases totaling 152,181 rentable square feet that are scheduled to expire through december 31 , 2015 have notified us that they do not plan to renew their leases upon expiration and we can provide no assurance that additional tenants will not renew their leases upon expiration . prevailing market conditions and government tenants ' needs at the time we negotiate our leases will generally determine rental rates and demand for leased space in our properties ; and market conditions and government tenants ' needs are beyond our control . as of december 31 , 2014 , lease expirations at our properties , excluding one propert y classified as 46 discontinued operations and one property sold to its tenant at the end of its lease term in february 2015 , by year are as follows ( square feet and dollars in thousands ) : replace_table_token_7_th ( 1 ) the year of lease expiration is pursuant to current contract terms . some government tenants have the right to vacate their space before the stated expirations of their leases . as of december 31 , 2014 , government tenants occupying approximately 8.3 % of our rentable square feet and responsible for approximately 7.1 % of our annualized rental income as of december 31 , 2014 have currently exercisable rights to terminate their leases before the stated terms of their leases expire . also in 2015 , 2016 , 2017 , 2018 , 2019 , 2020 , 2022 and 2023 , early termination rights become exercisable by other tenants who currently occupy an additional approximately 3.9 % , 4.7 % , 2.7 % , 1.1 % , 4.6 % , 2.9 % , 1.2 % and 1.4 % of our rentable square feet , respectively , and contribute an additional approximately 2.3 % , 4.8 % , 2.2 % , 1.3 % , 5.1 % , 2.9 % , 0.7 % and 1.2 % of our annualized rental income , respectively , as of december 31 , 2014 . in addition , as of december 31 , 2014 , 13 of our government tenants have currently exercisable rights to terminate their leases if their respective legislature or other funding authority do es not appropriate rent amounts in their respective annual budgets . these 13 tenants occupy approximately 14.6 % of our rentable square feet and contribute approximately 15.1 % of our annualized rental income as of december 31 , 2014 . ( 2 ) leased s quare feet is pursuant to leases existing as of december 31 , 2014 , and includes ( i ) space being fitted out for tenant occupancy pursuant to our lease agreements , if any , and ( ii ) space which is leased , but is not occupied or is being offered for sublease by tenants , if any . ( 3 ) annualized rental income is defined as the annualized contractual base rents from our tenants pursuant to our lease agreements as of december 31 , 2014 , plus straight line rent adjustments and estimated recurring expense reimbursements to be paid to us , and excluding lease value amortization . acquisition and disposition activities ( dollar amounts in thousands ) during the year ended december 31 , 2014 , we acquired four properties ( five buildings ) for an aggregate purchase price of $ 167,525 , including the assumption of $ 97,524 of mortgage debt and excluding acquisition costs . we acquired these properties at a range of capitalization rates from 8.0 % to 9.3 % , with a weighted ( by purchase price ) average capitalization rate of 8.4 % . we calculate the capitalization rate for property acquisitions as the ratio of ( x ) annual straight line rental income , excluding the impact of above market and below market lease amortization , based on leases in effect on the date of acquisition , less estimated annual property operating expenses as of the date of acquisition , excluding depreciation and amortization expense , to ( y ) the acquisition purchase price , including the principal amount of assumed debt , if any , and excluding acquisition costs . we continue to explore and evaluate for possible acquisition additional properties that are majority leased to government tenants ; however , we can not assure that we will reach any agreement to acquire such properties , or that if we do reach any such agreement , that we will complete any such acquisitions . in february 2014 , we sold an office property ( one building ) located in phoenix , az with 97,145 rentable square feet for $ 5,000 , excluding closing costs . in september 2014 , we sold an office property ( one building ) located in san diego , ca with 94,272 rentable square feet for $ 12,100 , excluding closing costs . in april 2014 , we entered into an agreement to sell an office property ( one building ) located in falls church , va with 164,746 rentable square feet and a net book value of $ 12,28 2 at december 3 1 , 2014. the contract sales price is $ 16,500 , excluding closing costs . the closing of this sale is subject to conditions , including the purchaser obtaining certain zoning entitlements , and is currently expected to occur in 2015. we can provide no assurance that the sale of this property will occur . in august 2014 , a u.s. government tenant notified us that it intend ed to exercise its option to acquire the office property ( one building ) it lease d from us located in riverdale , md with 337,500 rentable square feet and a net book value of 47 $ 30 , 4 4 8 as of december 31 , 2014 , after recording a $ 2 , 0 16 loss on asset impairment during the year ended december 31 , 2014 . the sale of this property was completed in february 2015 and the sale price was $ 30,600 , excluding closing costs . story_separator_special_tag we have not identified other properties for disposition at this time . for more information about our property acquisition and disposition activities , please see “ business — acquisition policies ” and “ business — disposition policies ” in part 1 , item 1 of this annual report on form 10-k and note 5 to our consolidated financial statements included in part iv , item 15 of this annual report on form 10-k. on july 9 , 2014 , we acquired 21,500,000 sir common shares for a cash purchase price equal to approximately $ 677,500 , or $ 31.51 per share , plus approximately $ 11,300 , or $ 0.53 per share , of accrued dividends as defined in the purchase agreement , for a total of approximately $ 688,800 , before acquisition related costs . for more information about this transaction , see notes 6 and 1 1 to our consolidated financial statements included in part i v , item 1 5 of this annual report on form 10- k . segment information . we operate in two business segments : ownership of properties that are primarily leased to government tenants and our equity method investment in sir . 48 story_separator_special_tag roman ; font-size:10pt ; color : # 000000 ; '' > from properties acquired after december 31 , 2013 and $ 10,502 from properties acquired during 2013. rental income for comparable properties increased $ 2,379 due primarily to higher average occupancy during 2014. rental income includes non-cash straight line rent adjustments totaling $ 4,501 in 2014 a nd $ 2,739 in 2013 and amortization of acquired leases and assumed lease obligations totaling ( $ 868 ) in 2014 and ( $ 1,123 ) in 2013. real estate taxes . the increase in real estate taxes reflects the effects of acquired properties and an increase in real estate taxes for comparable properties . real estate taxes increased $ 815 from properties acquired after december 31 , 2013 and $ 824 from properties acquired during 2013 . real estate taxes for comparable properties increased $ 1,040 due primarily to the effect of higher tax assessments at certain of our properties . utility expenses . the increase in utility expenses reflects the effects of acquired properties and an increase in utility expense for comparable properties . utility expenses increased $ 269 from properties acquired after december 31 , 2013 and $ 728 from properties acquired during 2013. utility expenses at comparable properties increased $ 1,256 primarily due to colder than normal temperatures experienced in certain parts of the united states during the first quarter of 2014. other operating expenses . other operating expenses consist of property management fees , salaries and benefit costs of property level personnel , repairs and maintenance expense , cleaning expense and other direct costs of operating our properties . the increase in other operating expenses reflects the effects of acquired properties and an increase in expenses for comparable properties . other operating expenses increased $ 1,586 from properties acquired after december 31 , 2013 and $ 2,001 from properties acquired during 2013. other operating expenses at comparable properties increased $ 1,261 primarily as a result of increases in repair and maintenance costs , partially offset by a decrease in property insurance expenses at certain of our properties . depreciation and amortization . the increase in depreciation and amortization reflects the effect of property acquisitions and improvements made to certain of our properties since january 1 , 2013. depreciation and amortization increased $ 6,085 from properties acquired after december 31 , 2013 and $ 4,609 from properties acquired during 2013. depreciation and amortization at comparable properties increased $ 200 due primarily to improvements made to certain of our 50 properties after january 1 , 2013 , partially offset by certain depreciable leasing related assets becoming ful ly depreciated in 2013 and 2014. loss on asset impairment . we recorded a $ 2,016 loss on asset impairment in 2014 to reduce the carrying value of a property classified as held for sale to its estimated fair value less costs to sell . acquisition related costs . acquisition related costs in both 2014 and 2013 include legal and due diligence costs incurred in connection with our property acquisition activity . general and administrative . general and administrative expenses consist of fees pursuant to our business management agreement with rmr , equity compensation expense , legal and accounting fees , trustees ' fees and expenses , securities listing and transfer agency fees and other costs relating to our status as a publicly traded company . the increase in general and administrative expenses primarily reflects the increase in amounts due under our business management agreement due to our property acquisitions since january 1 , 2013 and an increase in audit , insurance and other administrative expenses in 2014. interest and other income . the increase in i nterest and other income is primarily the result of a higher average amount of investable cash in 2014 compared to 2013. interest expense . the increas e in interest expense reflects higher average outstanding debt balance s and higher weighted average interest rates on those borrowings during 2014 compared to 2013. loss on early extinguishment of debt . we recorded a $ 1,307 loss on early extinguishment of debt in 2014 in connection with our debt refinancing activities . income tax expense . the de crease in income tax expense reflects lower operating income in certain jurisdictions in 2014 compared to 2013 . loss on issuance of shares by an equity investee . loss on issuance of shares by an equity investee represents the issuance of common shares by sir during the period july 9 , 2014 , the date we acquired our sir common shares , to december 31 , 2014 at prices below our per share carrying value . equity in earnings of investees .
| noi does not represent cash generated by operating activities in accordance with gaap and should not be considered as an alternative to net income , operating income or cash flow from operating activities , determined in accordance with gaap , or as an indicator of our financial performance or liquidity , nor is this measure 49 necessarily indicative of sufficient cash flow to fund all of our needs . this measure should be considered in conjunction with net income , operating income and cash flow from operating activities as presented in our consolidated statements of income and comprehensive income and consolidated statements of cash flows . other reits and real estate companies may calculate noi differently than we do . ( 4 ) we calculate ffo and normalized ffo as shown above . ffo is calculated on the basis defined by the national association of real estate investment trusts , or nareit , which is net income , calculated in accordance with gaap , plus real estate depreciation and amortization and the difference between ffo attributable to our equity investment in sir and our equity in earnings of sir but excluding impairment charges on real estate assets , carrying value adjustments of real estate assets held for sale , any gain or loss on sale of properties , as well as certain other adjustments currently not applicable to us . our calculation of normalized ffo differs from nareit 's definition of ffo because we include the difference between ffo and normalized ffo attributable to our equity investment in sir , include business management incentive fees , if any , only in the fourth quarter versus the quarter they are recognized as expense in accordance with gaap and exclude acquisition related costs , loss on early extinguishment of debt and loss on issuance of shares by an equity investee . we consider ffo and normalized ffo to be appropriate measures of operating performance for a reit , along with net income , operating income and cash flow from operating activities . we believe that ffo and normalized ffo provide useful information to investors because by excluding the effects of certain historical amounts , such
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the growth rate for net income and diluted earnings per share was positively impacted by comparison to the prior year , which reflected settlement of a state income tax matter . this settlement reduced diluted earnings per share by approximately $ 0.04 per share for fiscal 2013 . dividends of $ 510.6 million were paid to stockholders , representing 81 % of net income . non-gaap financial measure in addition to reporting operating income , a united states ( “ u.s. ” ) generally accepted accounting principle ( “ gaap ” ) measure , we present operating income , net of certain items , which is a non-gaap measure . we believe operating income , net of certain items , is an appropriate additional measure , as it is an indicator of our core business operations performance period over period . it is also the basis of the measure used internally for establishing the following year 's targets and measuring management 's performance in connection with certain performance-based compensation payments and awards . operating income , net of certain items , excludes interest on funds held for clients . interest on funds held for clients is an adjustment to operating income due to the volatility of interest rates , which are not within the control of management . operating income , net of certain items , is not calculated through the application of gaap and is not the required form of disclosure by the securities and exchange commission ( “ sec ” ) . as such , it should not be considered as a substitute for the gaap measure of operating income and , therefore , should not be used in isolation , but in conjunction with the gaap measure . the use of any non-gaap measure may produce results that vary from the gaap measure and may not be comparable to a similarly defined non-gaap measure used by other companies . business outlook our client base totaled approximately 580,000 clients as of may 31 , 2014 , compared to approximately 570,000 clients as of may 31 , 2013 , and approximately 567,000 clients as of may 31 , 2012 . our client base increased approximately 2 % for fiscal 2014 , compared to approximately 1 % for both fiscal 2013 and fiscal 2012 . for fiscal 2014 , payroll services client retention was at a record level of approximately 82 % of our beginning of the year client base . our client satisfaction results remained high , which we believe is a result of our focus on providing innovative technology solutions and outstanding personal service to our clients to maximize client retention . our ancillary services provide services to employers and employees beyond payroll , but effectively leverage payroll processing data and , therefore , are beneficial to our operating margin . our online hr administration services are often included as part of the saas solutions for mid-market clients . the following statistics demonstrate the growth in selected hrs ancillary service offerings : replace_table_token_6_th we continue to position ourselves to capitalize on the opportunities arising from the shift to saas solutions as we invest heavily in product development relating to our saas capabilities and mobile applications . our paychex next generation suite of innovative products and services includes a saas platform that combines the latest technology with superior customer service to provide human resource administrators a streamlined and integrated approach to workforce management . with this , all paychex services , including payroll , time and attendance , hr , benefits , training , and performance management , are accessible on a single cloud-based platform with paychex single sign-on . we believe continued investment in our technology is a key building block for future success . in fiscal 2014 , we broadened our portfolio of value-added services , offering the following new accounting and finance services : paychex accounting online is a cloud-based accounting service that is being created and delivered via a strategic partnership and investment in kashoo , a leading provider of cloud accounting services . this saas solution complements our industry-leading payroll and hr solutions by expanding our suite of services for new businesses and entrepreneurs . this is a revenue sharing arrangement with kashoo . 16 biz2credit is a leading online credit resource for small businesses we partnered with to offer the paychex small business loan resource center . this is an online resource that gives business owners access to more than 1,200 lenders offering a variety of loan options that fit their specific financing needs . this partnership underscores our commitment to help small businesses succeed by giving them access to funds they need to start , grow , and manage their business . we earn a referral fee from this partnership . paychex payment processing services is a full suite of payment processing solutions , including credit and debit card processing , mobile and online payment services , and point-of-sale solutions , designed to meet the evolving needs of today 's small businesses . this service is being offered in partnership with elavon , a leading global payments provider . this is a revenue sharing arrangement with elavon . we introduced our new comprehensive solutions to help employers and employees with certain mandates under u.s. health care reform legislation . these offerings include paychex employer shared responsibility service designed to make it easier for business owners to determine if the employer shared responsibility ( “ esr ” ) provision applies to them , and what actions they may need to take . we also offer our new esr complete analysis and monitoring services for those clients that want a more robust solution . the paychex benefit account product allows employers to offer flexible savings accounts , health savings accounts , and health reimbursement accounts on a single platform with one debit card for their flexibility . the new health care reform section on our website is designed to provide answers , information , and solutions that employers need to prepare for and take action on health care reform . story_separator_special_tag we focused on product expansion in new markets and geographies by increasing our presence in germany and expanding into south america . we completed a business acquisition of a small payroll provider in germany . while not material to our consolidated financial results , this acquisition will increase our revenue and client base in germany and help us gain a greater share of the payroll market in that country . in south america , we are utilizing a joint venture arrangement in brazil . brazil is a significant market with a growing economy , approximately five million small businesses , and , with recent regulatory changes , a significant opportunity for outsourcing payroll and human resource services . the decision to expand into brazil and further expand in germany represents our focus on growth , specifically targeting product expansion through new markets and geographies . we continue to strengthen our position as an expert in our industry by serving as a source of education and information to clients , small businesses , and other interested parties . we provide free webinars , white papers , and other information on our website to aid existing and prospective clients with the impact of regulatory changes . the paychex insurance agency , inc. website , www.paychexinsurance.com , helps small business owners navigate the area of insurance coverage and both this website and www.paychex.com have sections dedicated to the topic of health care reform . financial position and liquidity our financial position as of may 31 , 2014 remained strong with cash and total corporate investments of $ 936.8 million and no debt . our investment strategy focuses on protecting principal and optimizing liquidity . yields on high quality financial instruments remain low , negatively impacting our income earned on funds held for clients and corporate investments . we invest predominately in municipal bonds including general obligation bonds , pre-refunded bonds that are secured by a u.s. government escrow , and essential services revenue bonds . during fiscal 2014 , our primary short-term investment vehicles were high quality variable rate demand notes ( “ vrdns ” ) and bank demand deposit accounts . a substantial portion of our portfolio is invested in high credit quality securities with aaa and aa ratings and a-1/p-1 ratings on short-term securities . we limit the amounts that can be invested in any single issuer and invest in short- to intermediate-term instruments whose fair value is less sensitive to interest rate changes . we believe that our investments as of may 31 , 2014 were not other-than-temporarily impaired , nor has any event occurred subsequent to that date that would indicate any other-than-temporary impairment . our primary source of cash is our ongoing operations . cash flow from operations was $ 880.9 million for fiscal 2014 . historically , we have funded our operations , capital purchases , business acquisitions , share repurchases , and dividend payments from our operating activities . our positive cash flows in fiscal 2014 allowed us to support our business growth and to pay substantial dividends to our stockholders . during fiscal 2014 , dividends paid to stockholders were 81 % of net income . it is anticipated that cash and total corporate investments as of may 31 , 2014 , along with projected operating cash flows , will support our normal business operations , capital purchases , business acquisitions , share repurchases , and dividend payments for the foreseeable future . 17 for further analysis of our results of operations for fiscal years 2014 , 2013 , and 2012 , and our financial position as of may 31 , 2014 , refer to the tables and analysis in the “ results of operations ” and “ liquidity and capital resources ” sections of this item 7 and the discussion in the “ critical accounting policies ” section of this item 7. outlook our outlook for the fiscal year ending may 31 , 2015 ( “ fiscal 2015 ” ) is based upon current market , economic and interest rate conditions continuing with no significant changes . our expected fiscal 2015 payroll revenue growth rate is based upon anticipated client base growth and increases in revenue per check . hrs revenue and total service revenue growth reflect the change to classify certain peo direct costs as operating expenses and not as a reduction in service revenue . our fiscal 2015 guidance is as follows : replace_table_token_7_th operating income , net of certain items , as a percent of total service revenue , is expected to be in the range of 37 % to 38 % for fiscal 2015 . the effective income tax rate for fiscal 2015 is expected to be consistent with that experienced in fiscal 2014. interest on funds held for clients for fiscal 2015 is expected to be relatively flat , as it continues to be impacted by the low interest rate environment , with funds reinvested at lower yields . the average rate of return on our combined funds held for clients and corporate investment portfolios is expected to be 0.9 % for fiscal 2015 . as of may 31 , 2014 , the long-term investment portfolio had an average yield-to-maturity of 1.6 % and an average duration of 3.0 years . in the next twelve months , approximately 15 % of this portfolio will mature , and it is currently anticipated that these proceeds will be reinvested at an interest rate of approximately 1.6 % . investment income is expected to benefit from ongoing investment of cash generated from operations . purchases of property and equipment for fiscal 2015 are expected to be in the range of $ 110 million to $ 120 million . this includes costs for internally developed software as we continue to invest in our service supporting technology . fiscal 2015 depreciation expense is projected to be in the range of $ 95 million to $ 100 million , and we project amortization of intangible assets for fiscal 2015 to be in the range of $ 15 million to $ 20 million .
| had the direct costs of certain benefit plans been reported as a reduction in service revenue , the following would have been reflected for fiscal 2014 : replace_table_token_9_th we invest in highly liquid , investment-grade fixed income securities and do not utilize derivative instruments to manage interest rate risk . as of may 31 , 2014 , we had no exposure to high-risk or illiquid investments and had insignificant exposure to european investments . details regarding our combined funds held for clients and corporate investment portfolios are as follows : replace_table_token_10_th replace_table_token_11_th ( 1 ) the net unrealized gain on our investment portfolios was approximately $ 26.9 million as of july 16 , 2014 . 19 ( 2 ) the federal funds rate was a range of zero to 0.25 % as of may 31 , 2014 , 2013 , and 2012 . ( 3 ) these items exclude the impact of vrdns , as they are tied to short-term interest rates . payroll service revenue : payroll service revenue was $ 1.6 billion for fiscal 2014 and $ 1.5 billion for fiscal 2013 , reflecting growth of 4 % and 2 % , respectively , compared to the prior fiscal year periods . both fiscal 2014 and fiscal 2013 revenue benefited from increases in revenue per check , client base , and checks per payroll . revenue per check was positively impacted by price increases , partially offset by discounting , together with increased product penetration . for fiscal 2014 , our total payroll client base growth was approximately 2 % , compared to 1 % for both fiscal 2013 and fiscal 2012 . checks per payroll have increased for seventeen consecutive quarters . payroll service revenue for fiscal 2013 was modestly affected by the impact of hurricane sandy in the fall of 2012 and one less payroll processing day overall due to the leap year in fiscal 2012. client retention reached record levels for fiscal 2014 , at approximately 82 % of the beginning of the year client base , compared to exceeding 81 % of the beginning of the year client base in the prior year . human resource services revenue : hrs revenue was $ 878.9 million for fiscal 2014 and
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million of negative operating efficiency variances were incurred . the total impact of $ 13.2 million was charged directly to expense during 2020. we expect to see margin improvement in 2021 as production activity at our facilities increases and we anticipate the benefit of increased productivity . selling , general and administrative ( “ sg & a ” ) expenses decreased by $ 0.6 million in 2020 despite approximately $ 0.6 million of severance costs recorded in the second quarter . the decrease in sg & a was due to cost reduction initiatives enacted in the second half of 2020 in response to our decrease in volume . during 2020 , we generated $ 23.8 million of cash from our operations , primarily from reducing our working capital and our spending in response to lower volumes . we used $ 9.2 million of cash on capital expenditures , which is a decrease of $ 8.2 million compared to 2019 , and we used $ 14.7 million of cash in financing activities . our financing activities consisted primarily of $ 24.8 million in net debt and finance lease payments , partially offset by proceeds from a paycheck protection program note in the amount of $ 10.0 million . our operating facilities are integrated , and therefore our chief operating decision maker ( “ codm ” ) views the company as one business unit . our codm sets performance goals , assesses performance and makes decisions about resource allocations on a consolidated basis . as a result of these factors , as well as the nature of the financial information available which is reviewed by our codm , we maintain one reportable segment . covid-19 pandemic while the company 's four plants continued to operate throughout 2020 , covid-19 related challenges continued to negatively impact the efficiency of our operations . these challenges are expected to continue into 2021. the pandemic has impacted and will continue to impact the company 's backlog , end markets , overall operations , cash flows and financial results . the scope and nature of these impacts , most of which are beyond the company 's control , continue to evolve . the ultimate extent of the effects of the covid-19 pandemic on the company , and the end markets we serve , is highly uncertain and will depend on future developments . as such , the effects could exist for an extended period , even after the pandemic may end . 13 story_separator_special_tag million due to the timing of sales and collections activity . accounts payable decreased by $ 1.4 million and other accrued liabilities decreased by $ 2.1 million . all other operating activities used $ 7.2 million of cash in 2019 , primarily driven by a decrease in accrued employment costs and an increase in prepaid expense . net cash used in investing activities our capital spending was $ 9.2 million during 2020 and $ 17.4 million during 2019 , consistent with our overall spend reduction initiatives in 2020. net cash used in financing activities during 2020 , we used $ 24.8 million of cash to make net payments on our debt , partially offset by $ 10.0 of proceeds from a paycheck protection program note . we believe that our cash flows from continuing operations , as well as available borrowings under our credit facility , are adequate to satisfy our working capital , capital expenditure requirements , and other contractual obligations for the foreseeable future , including at least the next 12 months . raw materials and supplies the cost of raw materials represents approximately 35 % of the cost of products sold in 2020. the major raw materials used in our operations include nickel , molybdenum , vanadium , chrome , iron and carbon scrap . additionally , our bridgeville facility uses graphite electrodes as a consumable supply in the melting process . the average price of several of our major raw materials , including iron , molybdenum , vanadium , and chrome , decreased in 2020 compared to the prior year . the average price of nickel in 2020 was relatively flat compared to the prior year . we maintain sales price surcharge to mitigate the risk of substantial raw material cost fluctuations . the market values for these raw materials and others continue to fluctuate based on supply and demand , market disruptions and other factors . over time , our surcharge will effectively offset changes in raw material costs ; however , during a period of rising or falling prices the timing will cause variation between reporting periods . credit facility on august 3 , 2018 , we entered into the credit agreement with pnc bank , national association , as administrative agent and co-collateral agent , bank of america , n.a. , as co-collateral agent , and pnc capital markets llc , as sole lead arranger and sole bookrunner . the credit agreement provides for a senior secured revolving credit facility not to exceed $ 110.0 million ( “ revolving credit facility ” ) and a senior secured term loan facility ( “ term loan ” ) in the amount of $ 10.0 million ( together with the revolving credit facility , the “ facilities ” ) . the company was in compliance with all applicable covenants at december 31 , 2020 . 18 the facilities , which expire on august 3 , 2023 ( the ‘ expiration date ” ) , are collateralized by a first lien in substantially all of the assets of the company and its subsidiaries , except that no real property is collateral under the facilities other than company 's real property in north jackson , ohio . availability under the credit agreement is based on eligible accounts receivable and inventory . story_separator_special_tag further , the company must maintain undrawn availability under the credit agreement at certain times of at least an amount equal to payments due on the notes issued in connection with the acquisition of the north jackson facility , as defined in the credit agreement , plus 12.5 % of the maximum borrowing amount of $ 110.0 million “ ( minimum liquidity ” ) . this requirement exists until the notes are paid in full , refinanced or extended . at december 31 , 2020 , the company was in compliance with the minimum liquidity calculation . the company is required to pay a commitment fee of 0.25 % based on the daily unused portion of the revolving credit facility . with respect to the term loan , the company must pay quarterly installments of the principal of approximately $ 0.4 million , plus accrued and unpaid interest , on the first day of each fiscal quarter beginning on september 30 , 2018. to the extent not previously paid , the term loan will become due and payable in full on the expiration date . amounts outstanding under the facilities , at the company 's option , will bear interest at either a base rate or a libor based rate , in either case calculated in accordance with the terms of the credit agreement . interest under the credit agreement is payable monthly . we elected to use the libor based rate for the majority of the debt outstanding under the facilities during 2020. at december 31 , 2020 , the libor based rate was 2.16 % on our revolving credit facility and 2.66 % for the term loan . the credit agreement contains customary affirmative and negative covenants . if a triggering event occurs as defined in the credit agreement , the company must maintain a fixed charge coverage ratio of not less than 1.10 to 1.0 measured on a rolling four quarter basis and calculated in accordance with the terms of the credit agreement . at december 31 , 2020 and 2019 , we had net credit agreement related deferred financing costs of approximately $ 0.5 million and $ 0.7 million , respectively . we amortized $ 0.2 million of those deferred financing costs during each of the years ended december 31 , 2020 and 2019. we did not record any additional deferred financing costs to the consolidated balance sheet during 2020 or 2019. paycheck protection program note on april 16 , 2020 , the company entered into a promissory note , dated april 15 , 2020 , with pnc bank , national association , evidencing an unsecured loan with a principal amount of $ 10.0 million made to the company pursuant to the paycheck protection program ( the “ ppp term note ” ) under the coronavirus aid , relief , and economic security act ( the “ cares act ” ) . the ppp term note is guaranteed by the united states small business administration . the ppp term note bears interest at a fixed annual rate of 1.00 % , with the first six months of interest deferred . according to the terms of the ppp term note , the company would begin to make 18 equal monthly payments of principal and interest in november 2020 with the final payment due in april 2022. the ppp term note may be accelerated upon the occurrence of an event of default . the company applied for forgiveness of the ppp term note during the third quarter of 2020. as of december 31 , 2020 , the company has not made any principal or interest payments related to the ppp term note . the company anticipates forgiveness of the entire amount of the ppp term note ; however , we are unable to estimate the timing of the completion of the forgiveness process . we have elected to classify the entire principal balance of the ppp term note within long-term debt , net on the consolidated balance sheet as of december 31 , 2020. under the existing terms of the ppp term note , if no forgiveness were granted approximately $ 7.7 million of the principal amount would be due within twelve months . the proceeds may be used to maintain payroll or make certain covered interest payments , lease payments and utility payments . under the terms of the cares act , the company may be granted forgiveness for all or a portion of loan granted under the ppp , with such forgiveness to be determined , subject to limitations , based on the use of the loan proceeds for payment of payroll costs and any payments of certain covered lease and utility payments . notes in connection with the acquisition of the north jackson facility in 2011 , we issued $ 20.0 million in notes to the sellers of the facility as partial consideration in the transaction . on january 21 , 2016 , the company entered into amended and restated notes in the aggregate principal amount of $ 20.0 million , each in favor of gorbert inc. ( “ holder ” ) . the company 's obligations under the notes are collateralized by a second 19 lien on the same assets of the company that collateralize the obligations of the company under the facilities . the holder had the right to elect at any time on or prior to august 17 , 2017 to convert all or any portion of the outstanding principal amount of the notes . the holder 's conversion rights expired and are no longer subject to exercise . the notes were originally scheduled to mature on march 17 , 2019. on march 30 , 2018 , the company provided notification of its intent to extend the maturity date to march 17 , 2020 in accordance with the terms of the notes .
| interest expense and deferred financing amortization : our interest expense was $ 2.8 million in 2020 compared to $ 3.8 million in 2019 due in part to lower total debt balances year over year and due in part to lower interest rates on our variable rate debt . the interest rates on our variable rate debt under our credit agreement , which is described further below under “ liquidity and capital resources – credit facility , ” are primarily determined by a libor-based rate plus an applicable margin , and the libor rate was lower in 2020 compared to 2019. other income : other income was $ 1.1 million in 2020 compared to $ 0.5 million in 2019. the increase is related to increased insurance recoveries during 2020 . ( benefit ) from income taxes : the 2020 income tax benefit is $ 5.2 million compared to a 2019 income tax benefit of $ 0.5 million . the difference is primarily due to our 2020 pretax loss . net ( loss ) income : we had a net loss of $ 19.0 million in 2020 compared to net income of $ 4.3 million in 2019 due to the significant decrease in sales volume and the direct charges due to lower plant activity in 2020 . 15 201 9 results compared to 201 8 replace_table_token_7_th market segment information : replace_table_token_8_th melt type information : replace_table_token_9_th the majority of our products are sold to service centers rather than the ultimate end market customers . the end market information in this annual report is our estimate based upon our knowledge of our customers and the grade of material sold to them , which they will in-turn sell to the ultimate end market customer . 16 end market information : replace_table_token_10_th net sales : net sales for the year ended december 31 , 2019 decreased $ 12.9 million , or 5.0 % , compared to 2018. the decrease in our sales reflects approximately a 7 % decrease in consolidated
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restructuring activities and associated costs during 2016 are anticipated to deliver annual run-rate savings of approximately $ 18.2 million with payback periods ranging from one to three years among the plans . we 23 anticipate completion of the current restructuring programs by early 2018. refer to note 7 – restructuring charges , within the notes to consolidated financial statements in item 8 of this form 10-k for additional information . impairment charges non-cash asset impairment charges were $ 51.4 million for 2016 compared with $ 45.9 million for 2015 . in 2016 , these charges were primarily related to plant closures and sales of businesses within the rigid industrial packaging & services and flexible products & services segments and information technology software identified as obsolete . charges in 2015 related to venezuelan property , plants , and equipment , information technology software identified as obsolete and plant closures within the rigid industrial packaging & services segment . refer to note 10 – financial instruments and fair value measurements , within the notes to consolidated financial statements in item 8 of this form 10-k for additional information . timberland gains there were no gains on timberland sales for 2016 compared with $ 24.3 million for 2015 . gain on disposal of properties , plants and equipment , net the gain on disposal of properties , plants , and equipment , net was $ 10.3 million and $ 7.0 million for 2016 and 2015 , respectively . see note 5 to the consolidated financial statements included in item 8 of this form 10-k for additional information . loss on disposal of businesses , net the loss on disposal of businesses was $ 14.5 million and $ 9.2 million for 2016 and 2015 , respectively . see note 2 to the consolidated financial statements included in item 8 of this form 10-k for additional information . operating profit operating profit was $ 225.6 million for 2016 compared with $ 192.8 million for 2015 . the $ 32.8 million increase consisted of increases of $ 57.5 million and $ 21.1 million in the rigid industrial packaging & services and the flexible products & services segments , respectively , partially offset by decreases of $ 20.2 million and $ 25.6 million in the paper packaging & services and land management segments , respectively . the primary factors that contributed to the $ 32.8 million increase , when compared to 2015 , were improvements in gross profit margin , lower sg & a expenses , lower restructuring charges of $ 13.1 million , partially offset by lower timberland gains of $ 24.3 million , all described above . ebitda ebitda was $ 345.1 million and $ 325.0 million for 2016 and 2015 , respectively . the increase in ebitda was primarily due to the same factors impacting operating profit described above . depreciation , depletion and amortization expense was $ 127.7 million for 2016 compared with $ 134.6 million for 2015 . the decrease in depreciation , depletion and amortization expense was primarily due to foreign currency translation and the impact of divestitures , partially offset by an increase in the paper packaging & services segment , primarily due to the completion of the riverville modernization project completed in the second quarter of 2015. trends in fiscal year 2017 , we expect our results to benefit from further execution of our transformation efforts . these improvements are expected to be achieved despite the continuation of a sluggish global industrial economy and continued strengthening of the u.s. dollar relative to other currencies adversely impacting our results . segment review rigid industrial packaging & services key factors influencing profitability in the rigid industrial packaging & services segment are : selling prices , product mix , customer demand and sales volumes ; raw material costs ; energy and transportation costs ; 24 benefits from executing the greif business system ; restructuring charges ; divestiture of businesses and facilities ; and impact of foreign currency translation . net sales decreased 10.1 percent to $ 2,324.2 million in 2016 from $ 2,586.4 million in 2015 . the decrease in net sales was primarily due to the negative impact of foreign currency translation of 7.6 percent , primarily attributable to the remeasurement of our venezuelan operations in august of 2015 , and a net volume decrease , primarily due to the impact of divestitures , partially offset by the impact of prices and product mix . gross profit was $ 489.4 million for 2016 compared with $ 463.4 million for 2015 . the $ 26.0 million increase in gross profit was primarily due to the positive impact of strategic volume and pricing actions , cost containment efforts , decreases in raw material costs , and a $ 6.0 million net charge in 2015 related to the devaluation of inventory through costs of products sold in the venezuelan operation of $ 9.3 million , net of operational gross margin contribution of the venezuelan operation of $ 3.3 million . gross profit margin increased to 21.1 percent from 17.9 percent in 2015. gross profit margin increased from 17.3 percent to 22.8 percent in north america , from 17.3 percent to 21.4 percent in asia pacific , from 17.8 percent to 18.2 percent in europe , middle east , and africa and from 11.0 percent to 15.0 percent in latin america from 2015 to 2016 , respectively . operating profit was $ 143.9 million for 2016 compared with $ 86.4 million for 2015 . the $ 57.5 million increase was primarily attributable to the same factors impacting gross profit , a $ 25.4 million reduction in sg & a expenses and a reduction in restructuring costs of $ 10.6 million , partially offset by an increase of $ 4.6 million in loss on sales of properties , plants and equipment and businesses , net . story_separator_special_tag on a geographic basis , operating profit increased $ 29.4 million in north america , $ 22.5 million in latin america , $ 3.6 million in europe , middle east and africa , $ 1.1 million in asia pacific , and $ 0.9 million in our closures and reconditioning businesses . ebitda was $ 223.8 million for 2016 compared with $ 179.5 million for 2015 . the $ 44.3 million increase was due to the same factors that impacted the segment 's operating profit , as described above . depreciation , depletion and amortization expense was $ 84.6 million for 2016 compared with $ 94.0 million for 2015 . the reduction in depreciation , depletion and amortization expense was primarily due to impact of divestitures . paper packaging & services key factors influencing profitability in the paper packaging & services segment are : selling prices , product mix , customer demand and sales volumes ; raw material costs , primarily old corrugated containers ; energy and transportation costs ; and benefits from executing the greif business system . net sales increased 1.6 percent to $ 687.1 million for 2016 compared with $ 676.1 million for 2015 . net volumes increased 6.1 percent from 2015 to 2016 , primarily related to increased containerboard output largely due to the riverville mill modernization project completed in the second quarter of 2015 , and the addition of two product lines in the corrugator business . these increases were partially offset by selling price decreases of 4.6 percent , primarily due to a reduction in published containerboard index prices impacting 2016. gross profit was $ 144.5 million for 2016 compared with $ 163.5 million for 2015 . gross profit margin was 21.0 percent and 24.2 percent for 2016 and 2015 , respectively . this decrease was due to an increase in input costs , primarily old corrugated container costs , during 2016 compared to 2015 and the decrease in selling prices described above . operating profit was $ 89.1 million for 2016 compared with $ 109.3 million for 2015 . the decrease was primarily due to the same factors impacting net sales and gross profit , as described above . ebitda was $ 120.7 million for 2016 compared with $ 138.4 million for 2015 . the decrease in ebitda was primarily due to the same factors impacting net sales and gross profit , as described above . depreciation , depletion and amortization expense was $ 31.6 million and $ 28.7 million for 2016 and 2015 , respectively . the increase in depreciation , depletion and amortization was primarily due to the completion of the riverville modernization project in the second quarter of 2015 . 25 flexible products & services key factors influencing profitability in the flexible products & services segment are : selling prices , product mix , customer demand and sales volumes ; raw material costs , primarily resin ; energy and transportation costs ; benefits from executing the greif business system ; restructuring charges ; divestiture of businesses and facilities ; and impact of foreign currency translation . net sales decreased 10.7 percent to $ 288.1 million for 2016 compared with $ 322.6 million for 2015 . this decrease was attributable to volume decreases of 6.7 percent and the negative impact of foreign currency translation of 3.5 percent for 2016 compared with 2015 . gross profit was $ 42.0 million for 2016 compared with $ 33.8 million for 2015 . this increase was mainly due to improved margins as a result of strategic volume and pricing decisions and reductions in fixed and variable productions costs , partially offset by $ 1.2 million in costs associated with the move to an in-house labor model in turkey . gross profit margin increased to 14.6 percent for 2016 from 10.5 percent for 2015 . operating loss was $ 15.5 million for 2016 compared with an operating loss of $ 36.6 million for 2015 . this improvement in operating loss was primarily due to the same factors impacting the segment 's gross profit , as well as sg & a cost savings of $ 12.3 million realized as part of our transformation efforts . ebitda was negative $ 11.3 million for 2016 compared with negative $ 29.9 million for 2015 . this improvement was due to the same factors that impacted the segment 's operating loss , as described above . depreciation , depletion and amortization expense was $ 7.7 million for 2016 compared with $ 8.6 million for 2015 , respectively . land management as of october 31 , 2016 , our land management segment consisted of 244,548 acres of timber properties in the southeastern united states . key factors influencing profitability in the land management segment are : planned level of timber sales ; selling prices and customer demand ; gains on timberland sales ; and gains on the disposal of development , surplus and hbu properties ( “ special use property ” ) . in order to maximize the value of our timber properties , we continue to review our current portfolio and explore the development of certain of these properties . this process has led us to characterize our property as follows : surplus property , meaning land that can not be efficiently or effectively managed by us , whether due to parcel size , lack of productivity , location , access limitations or for other reasons . hbu property , meaning land that in its current state has a higher market value for uses other than growing and selling timber . development property , meaning hbu land that , with additional investment , may have a significantly higher market value than its hbu market value . core timberland , meaning land that is best suited for growing and selling timber .
| operating profit was $ 86.4 million for 2015 compared with $ 170.1 million for 2014. the $ 83.7 million decrease was primarily attributable to the approximately $ 20.6 million negative impact of foreign currency translation , higher restructuring and non-cash asset impairment charges of $ 51.8 million , and the same factors impacting the decline in gross profit , partially offset by a decrease of $ 7.6 million on loss on sale of properties , plants , equipment and businesses , net and reductions in sg & a as a result of our transformation efforts . on a geographic basis , for 2015 , operating profit increased $ 10.6 million in asia pacific and decreased $ 39.8 million in europe , $ 36.7 million in north america , and $ 25.9 million in latin america . the improvement in asia pacific 31 was primarily due to improvements in gross profit margin discussed above as well as an increase in gain on sale of properties , plants and equipment and businesses , net of $ 8.3 million . the decrease in europe was primarily due to currency translation and higher non-cash asset impairment and restructuring charges of $ 21.4 million , partially offset by an increase in gain on sales of properties , plants and equipment and businesses , net of $ 11.0 million . the decrease in north america included a decrease in gain on sales of properties , plants and equipment and business , net of $ 14.2 million , an increase in non-cash asset impairment charges of $ 8.8 million , and an increase in restructuring charges of $ 7.1 million . excluding the impact of the above-noted items , operating profit in north america decreased $ 6.6 million for 2015 compared to 2014. the decrease in latin america was primarily due to the impact of the venezuela inventory adjustment and non-cash asset impairment charges totaling $ 24.5 million . ebitda was $ 179.5 million for 2015 compared with $ 273.6 million for 2014. the $ 94.1 million decrease was due to the same factors that impacted the segment 's operating profit , as described above . depreciation , depletion and amortization
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loans receivable held for investment increased $ 113.9 million to $ 1.29 billion at december 31 , 2017. the increase in total loans receivable was primarily attributable to increases in the one- to four-family , multi-family , commercial real estate , commercial , and construction and land loan categories . offsetting those increases , the home equity and consumer categories decreased slightly . allowance for loan losses . the allowance for loan losses decreased $ 2.0 million to $ 14.1 million at december 31 , 2017 from $ 16.0 million at december 31 , 2016. the decrease primarily resulted from the negative provision due to improvement of key loan quality metrics decreasing the allowance related to the loans collectively and specifically reviewed . the overall decrease compared to the balance at december 31 , 2016 occurred in all categories and primarily related to the one- to four-family and multi-family categories . see note 3 of our consolidated financial statements for further discussion on the allowance for loan losses . federal home loan bank stock . total federal home loan bank stock increased $ 3.6 million to $ 16.9 million at december 31 , 2017. during the year ended december 31 , 2017 , $ 9.7 million of stock was purchased when entering into new short-term and long-term fhlb borrowings . a total of $ 6.1 million of stock was sold as short-term fhlb borrowings matured and our ownership requirement decreased accordingly . cash surrender value of life insurance . total cash surrender value of life insurance increased $ 4.5 million , or 7.3 % , from december 31 , 2016. during the year ended december 31 , 2017 , the company purchased a $ 2.5 million bank owned life insurance policy , along with continued earnings aiding in increasing the policy values and annual premiums paid . real estate owned . total real estate owned decreased by $ 1.6 million , or 25.5 % , to $ 4.6 million at december 31 , 2017 , compared to $ 6.1 million at december 31 , 2016. during the year ended december 31 , 2017 , $ 2.2 million was transferred from loans to real estate owned upon completion of foreclosure . during the same period , sales of real estate owned totaled $ 3.2 million . write-downs totaled $ 514,000 during the year ended december 31 , 2017. deposits . deposits increased by $ 18.0 million to $ 967.4 million at december 31 , 2017 , from $ 949.4 million at december 31 , 2016 . the increase was driven by an increase of $ 22.4 million in time deposits and a $ 9.2 million increase in demand deposits offset by a decrease of $ 13.7 million in money market and savings deposits . borrowings . total borrowings decreased $ 1.0 million to $ 386.3 million at december 31 , 2017 , from $ 387.2 million at december 31 , 2016. the company borrowed additional fhlb advances to replace the fhlb advances and repurchase agreements that matured . external short term borrowings at the mortgage banking segment increased a total of $ 3.1 million at december 31 , 2017 from december 31 , 2016 to fund loans held for sale . other liabilities . other liabilities decreased $ 2.9 million at december 31 , 2017 compared to december 31 , 2016. the decrease related to fewer outstanding checks related to real estate tax obligations paid in the fourth quarter . shareholders ' equity . shareholders ' equity increased by $ 1.4 million , or 0.3 % , to $ 412.1 million at december 31 , 2017 from $ 410.7 million at december 31 , 2016. the increase in shareholders ' equity was primarily due to net income , additional paid in capital as stock options were exercised , and the vesting of esop shares . these increases were partially offset by the repurchase of stock , regular and special dividends declared , along with accumulated other comprehensive income decreasing as the fair value of the security portfolio decreased . comparison of community banking segment operations for the years ended december 31 , 2017 and 2016 net income from our community banking segment for the year ended december 31 , 2017 totaled $ 16.4 million compared to net income of $ 14.0 million for the year ended december 31 , 2016. net interest income increased $ 7.7 million to $ 50.6 million for the year ended december 31 , 2017 compared to $ 42.9 million for the year ended december 31 , 2016 due to an increase in average loan balances and a reduction in our overall cost of funding . the long-term borrowings that matured during 2017 and 2016 were replaced with a lower cost mix of funding , including long and short-term borrowings and deposits raised through our retail network . provision for loan losses decreased $ 1.5 million as asset quality metrics continued to improve . noninterest income decreased $ 677,000 for the year ended december 31 , 2017 as loan prepayment fees decreased and there was a $ 107,000 loss on sale of securities partially offset by an increase in the cash surrender value of life insurance . compensation , payroll taxes , and other employee benefits expense increased $ 303,000 to $ 17.5 million primarily due to increases in salary expense along with an increase in esop expense , offset by a decrease in health insurance cost . fdic premiums and real estate owned expense decreased as asset quality improved and we experienced a reduction of foreclosed properties . occupancy , office furniture , and equipment decreased due primarily to lower depreciation expense . those decreases were partially offset by an increase in other noninterest expense resulting from an increase in loan originations . income tax expense increased $ 5.2 million to $ 12.2 million for the year ended december 31 , 2017. the increase was primarily due to higher pretax income and the deferred tax revaluation . story_separator_special_tag as a result of the tax cuts and jobs act that was enacted into law on december 22 , 2017 , the company revalued its net deferred tax asset to reflect the reduction in its federal corporate income tax rate from 35 % to 21 % . this revaluation resulted in a one-time income tax expense of approximately $ 2.7 million during the fourth quarter of 2017 . - 35 - comparison of mortgage banking segment operations for the years ended december 31 , 2017 and 2016 net income from our mortgage banking segment for the year ended december 31 , 2017 totaled $ 9.6 million compared to net income of $ 12.3 million for the year ended december 31 , 2016. we originated $ 2.46 billion in mortgage loans held for sale during the year ended december 31 , 2017 , which was an increase of $ 79.4 million , or 3.3 % , from the $ 2.38 billion originated during the year ended december 31 , 2016. the increase in loan production volume was driven by a 12.2 % increase in mortgage purchase products offset by a 31.6 % decrease in refinance products . the loans sold volume also increased $ 213.5 million to $ 2.53 million during the year ended december 31 , 2017. total mortgage banking income decreased $ 1.0 million , or 0.8 % , to $ 120.0 million during the year ended december 31 , 2017 compared to $ 121.1 million during the year ended december 31 , 2016. margins decreased approximately 3.3 % for the year ended december 31 , 2017 compared to december 31 , 2016. our overall margin can be affected by the mix of both loan type ( conventional loans versus governmental ) and loan purpose ( purchase versus refinance ) . conventional loans include loans that conform to fannie mae and freddie mac standards , whereas governmental loans are those loans guaranteed by the federal government , such as a federal housing authority or u.s. department of agriculture loan . loans originated for the purchase of a residential property , which generally yield a higher margin than loans originated for refinancing existing loans , comprised 88.8 % of total originations during the year ended december 31 , 2017 , compared to 82.9 % of total originations during the year ended december 31 , 2016. the mix of loan type trended slightly towards more governmental loans and less conventional loans comprising 35.5 % and 64.5 % of all loan originations , respectively , during the year ended december 31 , 2017 , compared 34.9 % and 65.1 % of all loan originations , respectively , during the year ended december 31 , 2016. during the year ended december 31 , 2017 , mortgage servicing rights related to $ 295.1 million in loans receivable with a book value of $ 2.3 million were sold at a gain of $ 178,000. during the year ended december 31 , 2016 , no mortgage servicing rights were sold . total compensation , payroll taxes and other employee benefits increased $ 1.8 million , or 2.3 % , to $ 80.1 million for the year ended december 31 , 2017 compared to $ 78.3 million for the year ended december 31 , 2016. the increase in compensation within our mortgage banking segment correlated to the increase in loan production due to the commission-based compensation structure in place for our mortgage banking loan officers along with the additional branches brought on during the year . occupancy , office furniture , and equipment expense increased as we added branches during the year . other noninterest expense increased $ 1.4 million to $ 19.0 million as volume-based expenses increased and profitability at the branches decreased . comparison of consolidated waterstone financial , inc. results of operations for the years ended december 31 , 2017 and 2016 replace_table_token_19_th - 36 - average balance sheets , interest and yields/costs the following table set forth average balance sheets , annualized average yields and costs , and certain other information for the periods indicated . non-accrual loans were included in the computation of the average balances of loans receivable and held for sale . the yields set forth below include the effect of deferred fees , discounts and premiums that are amortized or accreted to interest income or expense . yields on interest-earning assets are computed on a fully tax-equivalent yield , where applicable . replace_table_token_20_th ( 1 ) includes net deferred loan fee amortization income of $ 689,000 , $ 720,000 and $ 573,000 for the years ended december 31 , 2017 , 2016 and 2015 , respectively . ( 2 ) average balance of available for sale securities is based on amortized historical cost . ( 3 ) interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 35 % for all periods presented . the yields on debt securities , federal funds sold and short-term investments before tax-equivalent adjustments were 1.82 % , 1.76 % , and 1.35 % for the years ended december 31 , 2017 , 2016 , and 2015 , respectively . ( 4 ) net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities and is presented on a fully tax equivalent basis .. ( 5 ) net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities . ( 6 ) net interest margin represents net interest income divided by average total interest-earning assets . - 37 - rate/volume analysis the following table sets forth the effects of changing rates and volumes on our net interest income for the periods indicated . the rate column shows the effects attributable to changes in rate ( changes in rate multiplied by prior volume ) . the volume column shows the effects attributable to changes in volume ( changes in volume multiplied by prior rate ) . the net column represents the sum of the prior columns .
| - 33 - critical accounting policies critical accounting policies are those that involve significant judgments and assumptions by management and that have , or could have , a material impact on our income or the carrying value of our assets . allowance for loan losses . waterstone bank establishes valuation allowances on loans deemed to be impaired . a loan is considered impaired when , based on current information and events , it is probable that waterstone bank will not be able to collect all amounts due according to the contractual terms of the loan agreement . a valuation allowance is established for an amount equal to the impairment when the carrying amount of the loan exceeds the present value of the expected future cash flows , discounted at the loan 's original effective interest rate or the fair value of the underlying collateral ( specific component ) . the company recognizes the change in present value of expected future cash flows on impaired loans attributable to the passage of time as bad debt expense . on an ongoing basis , at least quarterly for financial reporting purposes , the fair value of collateral dependent impaired loans and real estate owned is determined or reaffirmed by the following procedures : ● obtaining updated real estate appraisals or performing updated discounted cash flow analysis ; ● confirming that the physical condition of the real estate has not significantly changed since the last valuation date ; ● comparing the estimated current book value to that of updated sales values experienced on similar real estate owned ; ● comparing the estimated current book value to that of updated values seen on more current appraisals of similar properties ; and ● comparing the estimated current book value to that of updated listed sales prices on our real estate owned and that of similar properties ( not owned by the company ) . waterstone bank also establishes valuation allowances based on an evaluation of the various
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overview and strategy we serve as a holding company for the bank , which is our primary asset and only operating subsidiary . we follow a business plan that emphasizes the delivery of customized banking services in our market area to customers who desire a high level of personalized service and responsiveness . the bank conducts a traditional banking business , making commercial loans , consumer loans and residential and commercial real estate loans . in addition , the bank offers various non-deposit products through non-proprietary relationships with third party vendors . the bank relies upon deposits as the primary funding source for its assets . the bank offers traditional deposit products . many of our customer relationships start with referrals from existing customers . we then seek to cross sell our products to customers to grow the customer relationship . for example , we will frequently offer an interest rate concession on credit products for customers that maintain a non-interest bearing deposit account at the bank . this strategy has lowered our funding costs and helped slow the growth of our interest expense even as we have substantially increased our total deposits . it has also helped fuel our significant loan growth . we believe that the bank 's significant growth and increasing profitability demonstrate the need for and success of our brand of banking . 35 our results of operations depend primarily on our net interest income , which is the difference between the interest earned on our interest-earning assets and the interest paid on funds borrowed to support those assets , primarily deposits . net interest margin is the difference between the weighted average rate received on interest-earning assets and the weighted average rate paid to fund those interest-earning assets , which is also affected by the average level of interest-earning assets as compared with that of interest-bearing liabilities . net income is also affected by the amount of non-interest income and non-interest expenses . story_separator_special_tag style= '' margin:1.8mm 0 0 ; '' > ( 5 ) represents difference between the average yield on interest earnings assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis . ( 6 ) represents net interest income on a fully taxable equivalent basis divided by average total interest-earning assets . rate/volume analysis the following table presents , by category , the major factors that contributed to the changes in net interest income . changes due to both volume and rate have been allocated in proportion to the relationship of the dollar amount change in each . replace_table_token_9_th provision for loan losses in determining the provision for loan losses , management considers national and local economic trends and 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 ; effects of changes in lending policies , trends in volume and terms of loans ; levels and trends in delinquencies , impaired loans and net charge-offs and the results of independent third party loan and lease review . for the year ended december 31 , 2014 , the provision for loan losses was $ 4.7 million , an increase of $ 4.3 million , compared to the provision for loan losses of $ 0.4 million for the same period in 2013. this increase resulted from organic loan growth during 2014 , the maturity and extension of acquired portfolio loans during the second half of 2014 and an increase in net loan charge-offs . for the year ended december 31 , 2013 , the provision for loan losses was $ 350,000 , an increase of $ 25,000 , compared to the provision for loan losses of $ 325,000 for the same period in 2012. the provision remained relatively flat reflective of the low level of net loan charge-offs and a decline in nonaccrual loans during 2013 . 38 noninterest income noninterest income for the full-year 2014 increased by $ 0.6 million , or 9.4 % to $ 7.5 million from $ 6.9 million in 2013. the increase was primarily the result of higher net investment securities gains , increasing by $ 1.1 million to $ 2.8 million for the year ended december 31 , 2014 from $ 1.7 million for the year ended december 31 , 2013 , partially offset by a slight decline in deposit , loan and other income of $ 0.2 million to $ 2.8 million and a decline in annuity and insurance commissions of $ 0.1 million to $ 0.4 million for the year ended december 31 , 2014. the decline in fee income was the result of the company de-emphasizing service charges , focusing instead on customer growth and retention . this strategy was particularly important during the merger conversion process as the implementation of certain fees and other charges were intentionally delayed or waived . for the year 2013 , noninterest income decreased $ 0.4 million compared to the same period in 2012 , primarily as a result of lower net securities gains of $ 0.3 million and $ 0.9 million related to a bargain gain on saddle river acquisition in 2012 , offset in part by increased service charges , commissions and fees on deposit accounts , annuity and insurance commissions , bank owned life insurance and loan related fees . noninterest expense noninterest expenses for the full-year 2014 increased by $ 29.5 million , or 116.8 % to $ 54.8 million from $ 25.3 million in 2013. the increase was primarily due to the impact of the merger , including merger-related charges of $ 12.4 million . in addition , at the end of the third quarter of 2014 , the company repurchased $ 70.0 million of putable federal home loan bank advances which resulted in a loss on debt extinguishment of $ 4.6 million . the repurchase is expected to reduce interest expense and improve the bank 's interest rate risk profile in future periods . story_separator_special_tag noninterest expenses were largely unchanged in 2013 from 2012 , increasing 0.3 % . excluding the repurchase agreement prepayment and termination fee and merger-related expenses recognized in 2012 , noninterest expenses increased $ 1.6 million or 6.6 % , primarily related to a growth in salaries and employee benefits , occupancy and equipment expense and advertising and promotion expense resulting from the operation of the saddle river , oakland and englewood branches for all of 2013. income taxes income tax expense was $ 8.8 million for the full-year 2014 compared to $ 7.5 million for the full-year 2013 and $ 7.7 million for the full-year 2012. the effective tax rates were 32.3 % for 2014 , 27.3 % for 2013 and 30.5 % for 2012. the increased effective tax rate in 2014 from 2013 resulted from nondeductible merger-related expenses incurred in 2014 as well as an increase in income subject to state taxes , while the decline in the effective tax rate in 2013 from 2012 was largely due to higher levels of tax-exempt income and lower income subject to state taxes . for a more detailed description of income taxes see note 12 of the notes to consolidated financial statements . financial condition overview at december 31 , 2014 , the statement of financial condition reflected the merger . the company 's total assets were $ 3.4 billion , an increase of $ 1.8 billion from december 31 , 2013. loans were $ 2.5 billion , an increase of $ 1.6 billion from december 31 , 2013. deposits were $ 2.5 billion , an increase of $ 1.1 billion from december 31 , 2013. loan portfolio the bank 's lending activities are generally oriented to small-to-medium sized businesses , high net worth individuals , professional practices and consumer and retail customers living and working in the bank 's market area of bergen , union , morris , essex , hudson , mercer and monmouth counties , new jersey . the bank has not made loans to borrowers outside of the united states . the bank 39 believes that its strategy of high-quality customer service , competitive rate structures and selective marketing have enabled it to gain market share . commercial loans are loans made for business purposes and are primarily secured by collateral such as cash balances with the bank , marketable securities held by or under the control of the bank , business assets including accounts receivable , taxi medallions , inventory and equipment and liens on commercial and residential real estate . commercial construction loans are loans to finance the construction of commercial or residential properties secured by first liens on such properties . commercial real estate loans include loans secured by first liens on completed commercial properties , including multi- family properties , to purchase or refinance such properties . residential mortgages include loans secured by first liens on residential real estate , and are generally made to existing customers of the bank to purchase or refinance primary and secondary residences . home equity loans and lines of credit include loans secured by first or second liens on residential real estate for primary or secondary residences . consumer loans are made to individuals who qualify for auto loans , cash reserve , credit cards and installment loans . during 2014 and 2013 , loan portfolio growth was positively impacted in several ways including ( i ) an increase in demand for small business lines of credit , and business term loans as economic conditions have stabilized and begun to improve , ( ii ) industry consolidation and lending restrictions involving larger competitors allowing the bank to gain market share , ( iii ) an increase in refinancing strategies employed by borrowers during the current low rate environment , and ( iv ) the bank 's success in attracting highly experienced commercial loan officers with substantial local market knowledge . gross loans at december 31 , 2014 totaled $ 2.5 billion , an increase of $ 1.6 billion , or 164.4 % , over gross loans at december 31 , 2013 of $ 960.6 million . the increase in gross loans was mostly attributed to the merger , as legacy connectone loans totaled $ 1.3 billion at acquisition . the remaing increase was the result of organic loan growth of $ 0.3 million . the largest component of our loan portfolio at december 31 , 2014 and december 31 , 2013 was commercial real estate loans . our commercial real estate loans at december 31 , 2014 were $ 1.6 billion , an increase of $ 1.1 billion , or 204.6 % , over commercial real estate loans at december 31 , 2013 of $ 536.5 million . our commercial loans were $ 499.8 million at december 31 , 2014 , an increase of $ 270.1 million , or 117.6 % , over commercial loans at december 31 , 2013 of $ 229.7 million . our commercial construction loans at december 31 , 2014 were $ 167.4 million , an increase of $ 124.6 million , or 291.7 % , over commercial construction loans at december 31 , 2013 of $ 42.7 million . our residential real estate loans were $ 234.7 million at december 31 , 2014 , an increase of $ 84.1 million , or 55.9 % , over residential real estate loans at december 31 , 2013 of $ 150.6 million . our consumer loans at december 31 , 2014 were $ 2.9 million , an increase of $ 1.8 million , 165.6 % , over consumer loans of $ 1.1 million at december 31 , 2013. the growth in our loan portfolio reflects the success of our business strategy , in particular emphasizing high-quality customer service strategy , which has led to continued customer referrals .
| on a fraudulent wire transfer , and increased income tax expense of $ 1.4 million resulting from nondeductible merger-related expenses incurred in 2014. net income for the year ended december 31 , 2013 was $ 19.9 million , an increase of $ 2.4 million , or 13.8 % , compared to net income of $ 17.5 million for 2012. net income available to common shareholders for the year ended december 31 , 2013 was $ 19.8 million , an increase of $ 2.6 million , or 14.9 % , compared to net income available to common shareholders of $ 17.2 million for 2012. diluted earnings per share were $ 1.21 for 2013 , a 13.2 % increase from $ 1.05 for 2012. the increase in net income from 2012 to 2013 was resulted primarily from increased net interest income , which grew $ 2.7 million to $ 46.2 million in 2013. net interest income fully taxable equivalent net interest income for 2014 totaled $ 81.8 million , an increase of $ 33.1 million , or 67.9 % , from 2013. the increase in net interest income was due to an increase in average interest-earning assets , which grew by 54.9 % to $ 2.3 billion principally as a result of the merger , as well as a 27 basis-point widening of the net interest margin to 3.57 % due to net accretion of purchase accounting fair value adjustments recognized on acquired loans , securities , time deposits and borrowings and a reduction in the average rate paid on borrowings resulting from a $ 70 million debt extinguishment and subsequent refinancing accomplished at the end of the third quarter of 2014. average total loans increased by 86.7 % to $ 1.7 billion in 2014 from $ 908.8 million in 2013 . 36 fully taxable equivalent net interest income for 2013 totaled $ 48.7 million , an increase of $ 3.3 million , or 7.3 % , from 2012. the increase in net
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13.1 selected financial data , management 's discussion and analysis of financial condition and results of operations and financial statements of the registrant as contained in the registrant 's 2011 annual report to stockholders . 21.1 list of subsidiaries of the company . 23.1 consent of ernst & young llp . 31.1 certification by the chief executive officer pursuant to rule 13a-14 ( a ) of the securities exchange act of 1934 , as adopted pursuant to section 302 of the sarbanes-oxley act of 2002 . 31.2 certification by the chief financial officer pursuant to rule 13a-14 ( a ) of the securities exchange act of 1934 , as adopted pursuant to section 302 of the sarbanes-oxley act of 2002 . 32 certification by the chief executive officer and chief financial officer pursuant to 18 u.s.c . section 1350 , as adopted pursuant to section 906 of the sarbanes-oxley act of 2002 . 101 the following materials from the registrant 's annual report on form 10-k for the year ended december 31 , 2011 , formatted in xbrl ( extensible business reporting language ) : ( 1 ) the consolidated balance sheets , ( 2 ) the consolidated statements of operations and comprehensive income , ( 3 ) the consolidated statements of cash flows , and ( 4 ) notes to consolidated financial statements . * represents a management contract , or compensatory plan , contract or arrangement required to be filed pursuant to regulation s-k. 68 story_separator_special_tag the information required by this item is incorporated herein by reference to the management 's discussion and analysis of financial condition and results of operations section of our 2011 annual report to stockholders filed as exhibit 13.1 to this form 10-k. item 7a . qualitative and quantitative disclosure about market risk the information required by this item is incorporated herein by reference to the management 's discussion and analysis of financial condition and results of operations section of our 2011 annual report to stockholders under the caption `` liquidity and capital resources market risk , '' filed as exhibit 13.1 to this form 10-k. item 8. financial statements and supplementary data reference is made to the index to financial statements contained in item 15. item 9. changes in and disagreements with accountants on accounting and financial disclosure none . item 9a . controls and procedures evaluation of disclosure controls and procedures . we maintain disclosure controls and procedures ( as defined in rules 13a-15 ( e ) under the securities exchange act of 1934 ( the `` exchange act '' ) ) that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the exchange act is recorded , processed , summarized and reported within the time periods specified in the sec 's rules and forms , and that such information is accumulated and communicated to our management , including our chief executive officer and chief financial officer , as appropriate to allow timely decisions regarding required disclosures . because of inherent limitations , disclosure controls and procedures , no matter how well designed and operated , can provide only reasonable , and not absolute , assurance that the objectives of disclosure controls and procedures are met . our management , with the participation of our chief executive officer and chief financial officer , evaluated the effectiveness of the design and operation of our disclosure controls and procedures . based on that evaluation , our chief executive officer and chief financial officer concluded that , as of the end of the period covered by this report , our disclosure controls and procedures are effective at a reasonable assurance level . management 's report on internal control over financial reporting . our management 's report on internal control over financial reporting is set forth in our 2011 annual report to stockholders filed as exhibit 13.1 to this form 10-k and is incorporated herein by reference . changes in internal control over financial reporting . there was no change in our internal control over financial reporting ( as defined in rule 13a-15 ( f ) ) that occurred during the fourth quarter of 2011 that has materially affected , or is reasonably likely to materially affect , our internal control over financial reporting . item 9b . other information during the fourth quarter of the year covered by this report , the audit committee of our board of directors approved certain audit , audit-related and non-audit tax compliance and tax consulting services to be provided by ernst & young , llp , the company 's independent registered public accounting firm . this disclosure is made pursuant to section 10a ( i ) ( 2 ) of the securities exchange act of 1934 , as added by section 202 of the sarbanes-oxley act of 2002 . 50 part iii item 10. directors , executive officers and corporate governance the information required by this item is incorporated herein by reference to the definitive proxy statement for our 2012 annual meeting of stockholders to be filed with the commission pursuant to regulation 14a and the information included under the caption `` executive officers of the registrant '' in part i hereof . item 11. executive compensation the information required by this item is incorporated herein by reference to the definitive proxy statement for our 2012 annual meeting of stockholders to be filed with the commission pursuant to regulation 14a . item 12. security ownership of certain beneficial owners and management and related stockholder matters the information required by this item is incorporated herein by reference to the definitive proxy statement for our 2012 annual meeting of stockholders to be filed with the commission pursuant to regulation 14a . item 13. certain relationships and related transactions and director independence the information required by this item is incorporated herein by reference to the definitive proxy statement for our 2012 annual meeting of stockholders to be filed with story_separator_special_tag 13.1 selected financial data , management 's discussion and analysis of financial condition and results of operations and financial statements of the registrant as contained in the registrant 's 2011 annual report to stockholders . 21.1 list of subsidiaries of the company . 23.1 consent of ernst & young llp . 31.1 certification by the chief executive officer pursuant to rule 13a-14 ( a ) of the securities exchange act of 1934 , as adopted pursuant to section 302 of the sarbanes-oxley act of 2002 . 31.2 certification by the chief financial officer pursuant to rule 13a-14 ( a ) of the securities exchange act of 1934 , as adopted pursuant to section 302 of the sarbanes-oxley act of 2002 . 32 certification by the chief executive officer and chief financial officer pursuant to 18 u.s.c . section 1350 , as adopted pursuant to section 906 of the sarbanes-oxley act of 2002 . 101 the following materials from the registrant 's annual report on form 10-k for the year ended december 31 , 2011 , formatted in xbrl ( extensible business reporting language ) : ( 1 ) the consolidated balance sheets , ( 2 ) the consolidated statements of operations and comprehensive income , ( 3 ) the consolidated statements of cash flows , and ( 4 ) notes to consolidated financial statements . * represents a management contract , or compensatory plan , contract or arrangement required to be filed pursuant to regulation s-k. 68 story_separator_special_tag the information required by this item is incorporated herein by reference to the management 's discussion and analysis of financial condition and results of operations section of our 2011 annual report to stockholders filed as exhibit 13.1 to this form 10-k. item 7a . qualitative and quantitative disclosure about market risk the information required by this item is incorporated herein by reference to the management 's discussion and analysis of financial condition and results of operations section of our 2011 annual report to stockholders under the caption `` liquidity and capital resources market risk , '' filed as exhibit 13.1 to this form 10-k. item 8. financial statements and supplementary data reference is made to the index to financial statements contained in item 15. item 9. changes in and disagreements with accountants on accounting and financial disclosure none . item 9a . controls and procedures evaluation of disclosure controls and procedures . we maintain disclosure controls and procedures ( as defined in rules 13a-15 ( e ) under the securities exchange act of 1934 ( the `` exchange act '' ) ) that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the exchange act is recorded , processed , summarized and reported within the time periods specified in the sec 's rules and forms , and that such information is accumulated and communicated to our management , including our chief executive officer and chief financial officer , as appropriate to allow timely decisions regarding required disclosures . because of inherent limitations , disclosure controls and procedures , no matter how well designed and operated , can provide only reasonable , and not absolute , assurance that the objectives of disclosure controls and procedures are met . our management , with the participation of our chief executive officer and chief financial officer , evaluated the effectiveness of the design and operation of our disclosure controls and procedures . based on that evaluation , our chief executive officer and chief financial officer concluded that , as of the end of the period covered by this report , our disclosure controls and procedures are effective at a reasonable assurance level . management 's report on internal control over financial reporting . our management 's report on internal control over financial reporting is set forth in our 2011 annual report to stockholders filed as exhibit 13.1 to this form 10-k and is incorporated herein by reference . changes in internal control over financial reporting . there was no change in our internal control over financial reporting ( as defined in rule 13a-15 ( f ) ) that occurred during the fourth quarter of 2011 that has materially affected , or is reasonably likely to materially affect , our internal control over financial reporting . item 9b . other information during the fourth quarter of the year covered by this report , the audit committee of our board of directors approved certain audit , audit-related and non-audit tax compliance and tax consulting services to be provided by ernst & young , llp , the company 's independent registered public accounting firm . this disclosure is made pursuant to section 10a ( i ) ( 2 ) of the securities exchange act of 1934 , as added by section 202 of the sarbanes-oxley act of 2002 . 50 part iii item 10. directors , executive officers and corporate governance the information required by this item is incorporated herein by reference to the definitive proxy statement for our 2012 annual meeting of stockholders to be filed with the commission pursuant to regulation 14a and the information included under the caption `` executive officers of the registrant '' in part i hereof . item 11. executive compensation the information required by this item is incorporated herein by reference to the definitive proxy statement for our 2012 annual meeting of stockholders to be filed with the commission pursuant to regulation 14a . item 12. security ownership of certain beneficial owners and management and related stockholder matters the information required by this item is incorporated herein by reference to the definitive proxy statement for our 2012 annual meeting of stockholders to be filed with the commission pursuant to regulation 14a . item 13. certain relationships and related transactions and director independence the information required by this item is incorporated herein by reference to the definitive proxy statement for our 2012 annual meeting of stockholders to be filed with
| consolidated financial statements simon property group , inc. and subsidiaries ' consolidated financial statements and independent registered public accounting firm 's reports are included in our 2011 annual report to stockholders , filed as exhibit 13.1 to this form 10-k and are incorporated herein by reference .
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we have recorded a u.s. deferred tax liability for foreign earnings which are not indefinitely reinvested . we treat global intangible low-taxed income ( “ gilti ” ) as a periodic charge in the year in which it arises and therefore do not record deferred taxes for basis differences associated with gilti . in the event that the actual outcome from future tax consequences differs from management estimates and assumptions or management plans and positions are amended , the resulting change to the provision for income taxes could have a material impact on the consolidated results of operations and financial position . ( see note 1 and note 11 of the notes to consolidated financial statements ) . impairment of long-lived assets long-lived tangible and intangible assets subject to depreciation or amortization are tested for recoverability when changes in circumstances indicate the carrying value of these assets may not be recoverable . a test for recoverability is also performed when management has committed to a plan to dispose of a reporting unit or asset group . assets to be held and used are tested for recoverability when indications of impairment are evident . recoverability of a long-lived tangible or intangible asset is evaluated by comparing its carrying value to the future estimated undiscounted cash flows expected to be generated by the asset or asset group . if the asset is not recoverable , then the asset is considered impaired and adjusted to fair value which is then depreciated or amortized over its remaining useful life . assets to be disposed of are recorded at the lesser of carrying value or fair value less costs of disposal . in assessing potential impairment for long-lived assets , we consider forecasted financial performance based , in large part , on management business plans and projected financial information which are subject to a high degree of management judgment and complexity . future adverse changes in market conditions or adverse operating results of the underlying assets could result in having to record additional impairment charges not previously recognized . 22 results of operations factors that may influence results of operations the following paragraphs describe factors that have influenced results of operations for the year ended december 31 , 2020 , that management believes are important to provide an understanding of the business and results of operations or that may influence operations in the future . global covid-19 pandemic the covid-19 pandemic continues to disrupt the united states and global economy , and we can not predict when a full economic recovery will occur . consistent with actions taken by governmental authorities and in response to reduced customer demand , in late march 2020 , we idled manufacturing operations in certain regions around the world , other than china , where manufacturing operations began to resume in march 2020. during the year , we experienced supplier and customer disruption , which adversely affected our results of operations and cash flows in 2020. in europe and north america , sales began declining in the second half of march as the pandemic led to customer plant closures . the situation grew more challenging in the second and third quarters of fiscal 2020 , as customer closures affected much of our operations . although much of the united states and the global economies have reopened , many public health experts warn there may be additional covid-19 surges in 2021. further surges in the covid-19 infection rates could result in the reinstatement of directives and mandates requiring businesses to again curtail or cease normal operations , just as some jurisdictions rolled back reopening plans in the summer of 2020 during one of the initial covid-19 surges . thus , the spread of covid-19 and the responses thereto have created a disruption in the manufacturing , delivery , and overall supply chain of automobile manufacturers and suppliers , as well as disruption within the power industry . global vehicle production decreased significantly , and some vehicle manufacturers completely shut down manufacturing operations in some countries and regions , including the united states and europe . the rapid development and fluidity of the situation precludes any prediction as to the ultimate impact covid-19 will have on our business , financial condition , results of operations , and cash flows , which will depend largely on future developments directly or indirectly relating to the duration and scope of the covid-19 outbreak . we have undertaken a number of permanent and temporary actions to manage the evolving situation , including the continuation of previously announced cost savings initiatives . initiatives announced in 2019 : streamlining facilities and reducing overall selling , general and administrative costs ; eliminated the quarterly dividend ; reduced capital expenditures ; issued $ 100 million of preferred stock and used net proceeds for debt repayment ; and refinanced senior credit facilities to extend maturities and provide additional liquidity . additional actions taken in 2020 in response to the economic effects of the pandemic : in march 2020 , we drew down $ 60 million in cash under our senior secured revolver to strengthen our near-term cash position . this debt was repaid immediately following the sale of the life sciences business in october 2020. beginning in april 2020 , executives reduced their base salaries by 20 % to 25 % , non-executive employee salaries were reduced by 5 % to 15 % . in october 2020 , these salary reductions were repaid , and salaries were reinstated to their original levels . the 401 ( k ) employer match was suspended through december 2020. non-employee board members deferred their cash compensation to later in the year . story_separator_special_tag employee merit increases were not made in 2020 , bonus payouts were deferred to later in the year , and the gainsharing plan for 2020 was suspended through december 2020. travel was significantly reduced beginning in the first quarter of 2020. in response to government orders and reduced demand , we adjusted production and work week hours , reduced or suspended non-critical discretionary spending , and furloughed personnel , many of whom are eligible to participate in government supported programs . inventory levels and collection of receivables are being closely monitored . we entered into rent deferral arrangements with landlords of several of our leased facilities . 23 as allowed by the cares act , we deferred payments of the employer share of u. s. payroll taxes and will begin making payments in 2021 through 2022. in july 2020 , we amended our credit agreement with truist bank ; jpmorgan chase bank , n.a . ; keybank national association ; and hometrust bank ( as amended , the “ credit agreement ” ) to waive compliance with the financial leverage ratio covenant for the second and third quarters of 2020. further actions taken or expected in 2021 : we expect to restructure our debt by refinancing our term loans and revolver . we expect to terminate our existing interest rate swap . we are taking advantage of other provisions of the cares act that could result in reduced income tax obligation and a positive impact on cash . we continue to focus on further general cost reduction actions . while managing decreased demand in many regions across the globe , we are now operating at all of our business locations . we are coordinating with our customers and suppliers to make the necessary preparations . we are focused on the safety of our employees , customers and suppliers when re-starting . we have developed and implemented processes to ensure a safe environment for our employees and any visitors to our facilities , including providing personal protective equipment to our employees , establishing social distancing protocols and temperature checks . these processes include recommendations based on guidelines from the centers for disease control and prevention and the world health organization as well as from our experience with ramp-ups at our plants in china , the united states , mexico , poland , france , and brazil . the health and safety of our employees remains our top priority . discontinued operations in august 2020 , we entered into a stock purchase agreement ( the “ spa ” ) with affiliates of american securities llc for the sale of our life sciences business for an aggregate purchase price of up to $ 825 million , which includes a $ 755 million cash base purchase price and a potential earnout payment of up to $ 70 million . the cash base purchase price was subject to certain adjustments and was payable at the closing of the transaction , which occurred on october 6 , 2020. the earnout payment is subject to the performance of the life sciences business during the year ending december 31 , 2022 , measured by adjusted ebitda targets , as defined by the spa . the life sciences business includes facilities that are engaged in the production of a variety of components , assemblies , and instruments , such as surgical knives , bioresorbable implants , surgical staples , cases and trays , orthopaedic implants and tools , laparoscopic devices , and drug delivery devices for the orthopaedics and medical/surgical end markets . the sale of the life sciences business furthers management 's strategy to improve liquidity and creates the financial flexibility to pursue key growth areas in the mobile solutions and power solutions segments . after working capital and other closing adjustments , the final cash purchase price was approximately $ 753.3 million . we received cash proceeds at closing of $ 757.2 million and recorded a $ 3.9 million payable at december 31 , 2020 , for the balance . we prepaid $ 700.0 million in the aggregate on the senior secured term loan and the incremental term loan immediately following the sale . we also paid in full the outstanding balance on the senior secured revolver . we recognized a gain on sale of $ 214.9 million , net of income taxes . under the terms of a transition services agreement , we are providing certain support services for up to 180 days from the closing date of the sale . in accordance with asc 205-20 , presentation of financial statements - discontinued operations , the operating results of the life sciences business are classified as discontinued operations . the presentation of discontinued operations includes revenues and expenses of the discontinued operations and will also include any gain on the disposition of the business , all net of tax , as one line item on the consolidated statements of operations and comprehensive income ( loss ) . the consolidated statements of operations and comprehensive income ( loss ) for all periods presented have been revised to reflect this presentation . accordingly , the results of the life sciences business have been excluded from continuing operations and segment results for all periods presented in the consolidated financial statements and the accompanying notes unless otherwise stated . the consolidated statements of cash flows include cash flows of the life sciences business in each line item unless otherwise stated . our credit facility required us to use proceeds from the sale of the life sciences business to prepay a portion of our existing debt . we paid $ 700 million in the aggregate on our term loans as described in note 12. the prepayment was applied to debt in accordance with the prepayment provisions of the credit agreement immediately after the transaction closed on october 6 , 2020. average quarterly interest rates were multiplied by the required prepayment amounts to calculate interest expense to be reclassified to discontinued operations for all periods presented .
| cost of sales decreased by $ 20.9 million , or 5 % , in 2019 compared to 2018 , primarily due to the relative contribution margin impact of sales in the mobile solutions group . the decrease in cost of sales was partially offset by favorable foreign exchange effects of $ 5.2 million . selling , general , and administrative expense . selling , general and administrative expense decreased by $ 3.9 million during the year ended december 31 , 2019 , compared to the year ended december 31 , 2018 , primarily due to lower costs for professional services as a result of cost savings initiatives . depreciation and amortization . depreciation and amortization increased by $ 1.9 million during the year ended december 31 , 2019 , compared to the year ended december 31 , 2018 , consistent with capital expenditure activity . goodwill impairment . goodwill impairment decreased by $ 182.5 million during the year ended december 31 , 2019 , compared to the year ended december 31 , 2018 , as a result of goodwill impairment charges at mobile solutions and power solutions . other operating expense , net . other operating expense , net , decreased by $ 6.0 million during the year ended december 31 , 2019 , compared to the year ended december 31 , 2018 , primarily due to a reduction in asset impairment charges . interest expense . interest expense increase by $ 1.7 million during the year ended december 31 , 2019 , compared to the year ended december 31 , 2018 , primarily due to higher average interest rates , increased borrowings under the senior secured revolver during 2019 , and unfavorable interest rate swap settlements . replace_table_token_8_th other expense , net . other expense , net , decreased during the year ended december 31 , 2019 , compared to the year ended december 31 , 2018 , primarily due to a decrease in interest income from short-term investments in 2018 and currency effects on intercompany loans . benefit ( provision ) for income taxes . our effective tax rate from continuing operations was ( 1.0 ) % for the year ended december 31 , 2019 , compared to 0.7 % for
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operating expenses since our inception , we have devoted substantial resources to our various clinical trials and other research and development efforts , which are conducted both internally and through third parties . from time to time , we also license or acquire additional technologies and compounds to be incorporated into our development pipeline . our operating expenses include the following costs : cost of product sales our cost of product sales primarily includes costs to manufacture and acquire products sold to customers , royalty and milestone payments under license agreements granting us rights to sell related products , direct and indirect distribution costs incurred in the sale of products , and the costs of inventory reserves for current and projected obsolescence . these costs also include share-based compensation and salary-related expenses for direct manufacturing and indirect support personnel , quality review and release for commercial distribution , direct materials and supplies , depreciation , facilities-related expenses and other overhead costs . our cost of product sales for adcirca increased significantly as a percentage of adcirca revenues beginning december 1 , 2017 as a result of increased royalty and milestone payments , from five percent to an effective rate of approximately 42.5 percent , contained in our amended license agreement with lilly . research and development our research and development expenses primarily include costs associated with the research and development of products and post-marketing research commitments . these costs also include share-based compensation and salary-related expenses for research and development functions , professional fees for preclinical and clinical studies , costs associated with clinical manufacturing , facilities-related expenses , regulatory costs and costs associated with pre-fda approval payments to third-party contract manufacturers . expenses also include costs for third-party arrangements , including upfront fees and milestone payments required under license arrangements for therapies under development . we have incurred , and expect to continue to incur , increased clinical trial-related expenses , driven by the recent 62 expansion of our pipeline programs , which we expect will result in the enrollment of several large clinical studies . selling , general and administrative our selling , general and administrative expenses primarily include costs associated with the commercialization of approved products and general and administrative costs to support our operations . selling expenses also include share-based compensation , salary-related expenses , product marketing and sales operations costs , and other costs incurred to support our sales efforts . general and administrative expenses also include our core corporate support functions such as human resources , finance and legal , external costs to support our core business such as insurance premiums , legal fees and other professional service fees . share-based compensation historically , we granted stock options under our amended and restated equity incentive plan ( the 1999 plan ) and awards under our share tracking awards plans ( stap ) . in june 2015 , our shareholders approved the united therapeutics corporation 2015 stock incentive plan ( the 2015 plan ) , which authorized the issuance of up to 6,150,000 shares of our common stock , and in june 2018 , our shareholders approved a 2,900,000 share increase in the number of shares issuable under the 2015 plan . following approval of the 2015 plan , we ceased granting awards under the stap and the 1999 plan , and we modified our equity compensation programs to grant stock options to employees and non-employee directors . in june 2016 and october 2017 , we also began issuing restricted stock units to non-employee directors and employees , respectively . the grant date fair values of stock options and restricted stock units are recognized as share-based compensation expense ratably over their vesting periods . the fair values of stap awards and stock option grants are measured using inputs and assumptions under the black-scholes-merton model . the fair value of restricted stock units is measured using our stock price on the date of grant . although we no longer grant stap awards , we had approximately 2.9 million stap awards outstanding as of december 31 , 2018. we account for stap awards as liabilities because they are settled in cash . as such , we must re-measure the fair value of stap awards at the end of each financial reporting period until the awards are no longer outstanding . changes in our stap liability resulting from such re-measurements are recorded as adjustments to share-based compensation ( benefit ) expense and can create substantial volatility within our operating expenses from period to period . the following factors , among others , have a significant impact on the amount of share-based compensation ( benefit ) expense recognized in connection with stap awards from period to period : ( 1 ) volatility in the price of our common stock ( specifically , increases in the price of our common stock will generally result in an increase in our stap liability and related compensation expense , while decreases in our stock price will generally result in a reduction in our stap liability and related compensation expense ) ; ( 2 ) changes in the number of outstanding awards ; and ( 3 ) changes in the number of vested and unvested awards . future prospects as noted above , in 2019 we expect revenues will decrease as compared to 2018 , largely due to the anticipated impact of a full year of competition from generic versions of adcirca , the first of which launched in august 2018 , and potentially , to a lesser degree , anticipated generic competition for remodulin in 2019 in the u.s. and europe . story_separator_special_tag we believe we can return to revenue growth , potentially as 63 early as 2020 , by commercializing six key therapeutic platforms in our pipeline , each of which is comprised of multiple enabling technologies : platform enabling technologies remodulin ( parenteral treprostinil ) remunity , implantable system for remodulin , trevyent , remolife tyvaso ( inhaled treprostinil ) beat study , increase study , perfect study , spiresta , treprostinil technosphere orenitram ( oral treprostinil ) freedom-ev results , southpaw unituxin ( dinutuximab ) distinct study ( small cell lung cancer ) , humanized dinutuximab , and additional gd2-expressing tumors new chemical entities and new biologics ralinepag , esuberaprost , sm04646 , sapphire ( gene therapy ) , unexisome ( exosome product for the treatment of bronchopulmonary dysplasia ) organ manufacturing and transplantation xenotransplantation , three-dimensional organ printing , regenerative medicine , ex-vivo lung perfusion we believe this diverse portfolio of six therapeutic platforms with multiple enabling technologies each will lead to significant revenue growth over the medium- and longer-term . for further details regarding our research and development initiatives , please see item 1businessresearch and development . our ability to achieve these objectives , grow our business and maintain profitability will depend on many factors , including among others : ( 1 ) the timing and outcome of preclinical research , clinical trials and regulatory approvals for products we develop ; ( 2 ) the timing and degree of our success in commercially launching new products ; ( 3 ) the demand for our products ; ( 4 ) the price of our products and the reimbursement of our products by public and private health insurance organizations ; ( 5 ) the competition we face within our industry , including competition from generic companies ; ( 6 ) our ability to effectively manage our business in an increasingly complex legal and regulatory environment ; ( 7 ) our ability to defend against challenges to our patents ; and ( 8 ) the risks identified in part i , item 1arisk factors , included in this report . we operate in a highly competitive market in which a small number of large pharmaceutical companies control a majority of available pah therapies . these pharmaceutical companies are well established in the market and possess greater financial , technical and marketing resources than we do . in addition , there are a number of investigational products in late-stage development that , if approved , may erode the market share of our existing commercial therapies and make market acceptance more difficult to achieve for any therapies we attempt to market in the future . 64 story_separator_special_tag replace_table_token_5_th replace_table_token_6_th replace_table_token_7_th 67 cost of product sales the table below summarizes cost of product sales by major category ( dollars in millions ) : replace_table_token_8_th ( 1 ) refer to share-based compensation section below for discussion . cost of product sales . the increase in cost of product sales of $ 98.8 million for the year ended december 31 , 2018 , as compared to the same period in 2017 , was primarily attributable to a $ 96.9 million increase in royalty expense for adcirca . as a result of an amendment to our license agreement with lilly , our royalty rate on net product sales of adcirca increased from five percent to an effective rate of approximately 42.5 percent effective december 1 , 2017. the increase in cost of product sales of $ 31.0 million for the year ended december 31 , 2017 , as compared to the same period in 2016 , was primarily attributable to a $ 21.9 million increase in royalty expense for adcirca noted above . the remaining increase in cost of product sales was primarily attributable to an increase in sales . research and development expense the table below summarizes research and development expense by major category ( dollars in millions ) : replace_table_token_9_th ( 1 ) refer to share-based compensation section below for discussion . research and development projects . the increase in research and development project expenses of $ 113.6 million for the year ended december 31 , 2018 , as compared to the same period in 2017 , was driven by the continued investment in our product pipeline , which includes multiple phase iii clinical trials in cardiopulmonary diseases and oncology as well as programs in regenerative medicine and organ manufacturing . research and development expense for the treatment of cardiopulmonary diseases increased by $ 95.9 million for the year ended december 31 , 2018 , as compared to the same period in 2017 , due to up-front payments of $ 55.0 million under our licensing and research agreements with mannkind and $ 10.0 million under our licensing agreement with samumed , increased spending of $ 22.9 million on the development of drug delivery devices , including the implantable system for remodulin and remunity , and increased spending on several clinical and non-clinical studies . research and development expense for cancer-related projects increased by $ 13.9 million for the year ended december 31 , 2018 , as compared to the same period in 2017 , due to an increase in spending on the distinct study . research and development expenses for organ manufacturing projects increased by 68 $ 3.9 million for the year ended december 31 , 2018 , as compared to the same period in 2017 , due to increased preclinical work on technologies designed to increase the supply and distribution of transplantable organs and tissues . the increase in research and development projects of $ 98.8 million for the year ended december 31 , 2017 , as compared to the same period in 2016 , was driven by the expansion of our pipeline programs to treat cardiopulmonary disease and cancer and to develop technologies in organ manufacturing .
| these increases were partially offset by the impact of replacing $ 6.2 million of commercial tyvaso product that our specialty pharmaceutical distributor previously used in connection with a clinical trial ; and the one-time $ 3.5 million impact of a change in contractual minimum inventory levels with a u.s. distributor , as discussed below . adcirca net product sales decreased by $ 96.0 million in 2018 as compared to 2017. this decrease was primarily due to a decrease in bottles sold due to the launch of a generic version of adcirca in august 2018 , and was partially offset by price increases that were implemented by lilly in may 2017 and january 2018. in addition , we increased our allowance for product returns for adcirca by $ 16.4 million in 2018 based on our estimates of inventory held by distributors and other downstream customers that would expire unsold as a result of the increased use of a generic version of adcirca . see the tables in the gross-to-net deductions section below for more information on the liability balances related to our allowance for product returns . orenitram net product sales increased by $ 19.3 million in 2018 , as compared to 2017 , primarily due to an increase in the number of patients being treated with orenitram , a price increase that was 65 implemented in january 2018 , and the one-time $ 3.7 million impact of a change in contractual minimum inventory levels with a u.s. distributor , as discussed below . unituxin net product sales increased by $ 8.8 million in 2018 , as compared to 2017 , primarily due to an increase in the number of vials sold and price increases that were implemented in april and december 2017. during the fourth quarter of 2017 , we amended our agreements with one of our u.s. specialty pharmacy distributors , in part to make the monthly minimum inventory requirement consistent across remodulin , tyvaso , and orenitram . this change resulted in a one-time decrease
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the suspension is expected to continue until the contract committee has completed its work and provided recommendations to our board , our board has had an opportunity to consider and act upon such recommendations , and our board has fully assessed the financial impacts of member withdrawals and or the offering of alternative contracts . at our september 2019 board meeting , our board also authorized the contract committee to consider alternative methods to determine the withdrawal number with a goal of completing such work and presenting it to our board by april 2020. in july 2019 , we reached a settlement with dmea that provides for their withdrawal from membership in us as permitted by our bylaws , the resolution of all litigation with dmea regarding various matters , the transfer of certain transmission assets to dmea , the forfeiture by dmea of the current balance of dmea 's patronage capital allocation , and the payment to us of a withdrawal payment . the amount of the withdrawal payment was the product of the negotiated settlement with dmea and is unique to dmea because of the amounts associated with the transmission assets being transferred and patronage capital , and the date of withdrawal of dmea from us . the specific terms of the settlement will be set forth in a withdrawal agreement , which will be subject to receipt of certain approvals and other conditions . the settlement agreement provides for the parties to cooperate to complete dmea 's withdrawal effective may 1 , 2020 , but we expect the withdrawal effective date to occur at a later date agreed to by the parties . in november 2019 , lpea filed a formal complaint with the copuc alleging that we have hindered lpea 's ability to seek withdrawal from us . lpea alleges , among other things , that our board 's temporary suspension of providing members with withdrawal numbers is unlawful . lpea seeks for the copuc to issue an order related to our temporary suspension and for the copuc to establish the withdrawal number . in november 2019 , united filed a formal complaint with the copuc alleging that we have hindered united 's ability to explore its power supply options by either withdrawing from us or continuing as a member under a partial requirements contract . united alleges , among other things , that we have failed to provide a just , reasonable , and non-discriminatory withdrawal number . united seeks for the copuc to issue an order establishing a withdrawal number . the copuc has consolidated the proceeding . a five-day evidentiary hearing is scheduled to begin on march 23 , 2020. see “ legal proceedings. ” responsible energy plan in july 2019 , we announced that we are pursuing a responsible energy plan to transition to a cleaner generation portfolio while ensuring reliability , increasing member flexibility , all with a goal to lower wholesale rates to our members . in january 2020 , we announced the actions of our responsible energy plan , which will advance our cleaner generation portfolio and programs to serve our members . some of the actions of the responsible energy plan include : · reducing emissions by eliminating 100 percent of emissions from our new mexico coal-fired generating facilities by the end of 2020 and from our colorado coal-fired generating facilities by 2030 . 45 · increasing clean energy by bringing over 1 gigawatt of wind and solar resources online by 2024 , meaning 50 percent of the energy consumed by our members customers is expected to come from renewables by 2024 . · increasing member flexibility to develop more local , self-supplied renewable energy . · extending benefits of a clean grid across the economy through expanded electric vehicle infrastructure and beneficial electrification . see “ business – members – responsible energy plan. ” early retirements of generating facilities as part of our responsible energy plan , in january 2020 , our board approved the early retirement of escalante station by the end of 2020 and craig station units 2 and 3 and the colowyo mine by 2030. the early retirement of craig station unit 1 by december 31 , 2025 remains unchanged . in the first quarter of 2020 , in accordance with accounting requirements , we will recognize a one-time impairment loss of approximately $ 282 million associated with the early retirement of escalante station . the shortened lives of craig station units 2 and 3 increases annual depreciation expense in the amount of approximately $ 6.6 million and $ 21.1 million , respectively ; however , such recovery of increased expense through rates is subject to approval by ferc . the shortened life of colowyo mine increases annual depreciation , amortization and depletion expense in the amount of approximately $ 12.7 million ; however , such recovery of increased expense through rates is subject to approval by ferc . in connection with such early retirements , our board continues to evaluate the creation of regulatory assets and use of regulatory liabilities to ensure our member rates remain stable , if not lower , during this transition . a creation of regulatory asset to defer expenses associated with these early retirements or the utilization of regulatory liabilities would require ferc approval . critical accounting policies the preparation of our financial statements in conformity with gaap requires that our management make estimates and assumptions that affect the amounts reported in our consolidated financial statements . we base these estimates and assumptions on information available as of the date of the financial statements and they are not necessarily indicative of the results to be expected for the year . we consider the following accounting policies to be critical accounting policies due to the estimation involved or due to the particular significance they have on our consolidated financial statements . accounting for rate regulation . we are a rate-regulated entity and , as a result , are subject to the accounting requirements of accounting for regulated operations . story_separator_special_tag in accordance with these accounting requirements , some revenues and expenses have been deferred at the discretion of our board if it is probable that these amounts will be refunded or recovered through future rates . regulatory assets are costs we expect to recover from members based on rates approved by the applicable authority . regulatory liabilities represent probable future reductions in rates associated with amounts that are expected to be refunded to members based on rates approved by the applicable authority . on september 3 , 2019 , we became a ferc-jurisdictional public utility and our board 's rate setting authority , including the use of regulatory assets and liabilities , is now subject to ferc approval . estimates of recovering deferred costs and returning deferred credits are based on specific ratemaking decisions by ferc or precedent for each item . we recognize regulatory assets as expenses and regulatory liabilities as operating revenue , other income , or a reduction in expenses concurrent with their recovery in rates . leases . prior to the adoption of accounting standards update 2016-02 , leases ( topic 842 ) , the determination of whether a lease should be classified as a capital lease , and thereby recorded on the balance sheet , required management to make various assumptions , including the discount rate , the fair market value of the leased assets and the estimated useful life . we were the lessor under a power sales arrangement that was required to be accounted for as an 46 operating lease because it conveyed the right to use our power generating equipment for a stated period of time . the lease revenue from this arrangement is included in other operating revenue on our consolidated statements of operations . we were the lessee under a power purchase arrangement that was required to be accounted for as an operating lease because it conveyed to us the right to use power generating equipment for a stated period of time . it is included in lease expense on our consolidated statements of operations . asset retirement and environmental reclamation obligations . we account for current obligations associated with the future retirement of tangible long‑lived assets and environmental reclamation in accordance with the accounting guidance relating to asset retirement and environmental obligations . this guidance requires that legal obligations associated with the retirement of long‑lived assets be recognized at fair value at the time the liability is incurred and capitalized as part of the related long‑lived asset . over time , the liability is adjusted to its present value by recognizing accretion expense and the capitalized cost of the long‑lived asset is depreciated in a manner consistent with the depreciation of the underlying physical asset . in the absence of quoted market prices , we determine fair value by using present value techniques in which estimates of future cash flows associated with retirement activities are discounted using a credit adjusted risk‑free rate and market risk premium . upon settlement of an asset retirement obligation , we will apply payment against the estimated liability and incur a gain or loss if the actual retirement costs differ from the estimated recorded liability . environmental reclamation costs are accrued based on management 's best estimate at the end of each period of the costs expected to be incurred . such cost estimates may include ongoing care , maintenance and monitoring costs . changes in reclamation estimates are reflected in earnings in the period an estimate is revised . estimates of future expenditures for environmental reclamation obligations are not discounted . factors affecting results master indenture our master indenture requires us to establish , subject to any necessary regulatory approvals , rates annually that are reasonably expected to achieve a dsr of at least 1.10 on an annual basis and permits us to incur additional secured obligations as long as after giving effect to the additional secured obligation , we will continue to meet the dsr requirement on both a historic and pro forma basis . our dsr is calculated by dividing ( x ) our net margins available for debt service ( as defined in our master indenture ) , which is equal to our net margins for a period plus amounts deducted for the period to pay or make provision for interest on debt ( including capitalized interest other than allowance for funds used during construction ) , lease expense , income tax expense , amortization of debt discount or premium , and depreciation and certain other non-cash items by ( y ) our annual debt service requirement ( as defined in our master indenture ) , which is generally equal to the principal of , premium , if any , and interest ( whether capitalized or expensed ) on all of our debt and lease payments which become due in the applicable fiscal year or 12‑month period at maturity or stated maturity , subject to special calculation rules applicable to specific types of debt ( such as balloon debt ) . for purposes of the dsr calculation , we are permitted to exclude from the annual debt service requirement principal and interest on debt if the debt is paid or to be paid from defeasance obligations which have been irrevocably deposited or set aside in trust for payment of such debt . our failure to achieve the required dsr is not a default under the master indenture as long as a plan is timely adopted and being implemented and no payment default has occurred .
| the following is a comparison of our operating revenues and energy sales in mwh by type of purchaser for 2019 and 2018 ( dollars in thousands ) : replace_table_token_11_th · non-member electric sales revenue increased primarily due to rate stabilization measures and more favorable pricing for term sales during the year . in accordance with our board policy for financial goals and capital credits , we recognized $ 6.2 million of previously deferred revenue during the twelve months ended december 31 , 2019 compared to a revenue deferral of non-member electric sales of $ 51.7 million during the same period in 2018. excluding the effect of these rate stabilization measures , non-member electric sales revenue increased $ 2.8 million , or 3.2 percent , to $ 89.2 million in 2019 compared to $ 86.4 million in 2018. although non-member sales ( in mwhs ) decreased , the average non-member rate increased 9.9 percent during the twelve months ended december 31 , 2019 compared to the same period in 2018. operating expenses our operating expenses are primarily comprised of the costs that we incur to supply and transmit our members ' electric power requirements through a portfolio of resources , including generation and transmission facilities , long-term purchase contracts and short-term energy purchases and the costs associated with any sales of power to non-members . 50 the following is a summary of the components of our operating expenses for 2019 and 2018 ( dollars in thousands ) : replace_table_token_12_th · purchase power expense decreased primarily due to energy demands being met by increased generation from our generating facilities . purchased power decreased ( in mwhs ) 6.2 percent for the twelve months ended december 31 , 2019 compared to the same period in 2018. this decrease was partially offset by a 2.2 percent increase in the average price of purchased power during the twelve months ended december 31 , 2019 compared to the same period in 2018 . · fuel expense includes coal , natural gas , and other fuel consumed at the generating stations . fuel expense increased primarily due
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the $ 1.2 million decrease in systems segment service revenue was the result of a decrease in royalty revenue from a large us defense program supplier which was approximately $ 3.0 million for the year ended september 30 , 2010 , versus approximately $ 1.6 million for the year ended september 30 , 2011 , for a total decrease of approximately $ 1.4 million . offsetting this decrease , maintenance and repair revenue in the systems segment increased by approximately $ 0.2 million when comparing fiscal year 2011 to fiscal year 2010. service revenue in the service and system integration segment service overall was largely consistent year over year , only decreasing by approximately $ 0.3 million . 18 cost of sales , gross profit and gross margins the following table details our cost of sales by operating segment for fiscal years ended september 30 , 2011 and 2010 : replace_table_token_8_th replace_table_token_9_th 19 total cost of sales decreased by approximately $ 15.6 million when comparing the fiscal year ended september 30 , 2011 versus the fiscal year ended september 30 , 2010. this decrease in cost of sales of 21 % overall , compares with a decrease in sales of 18 % . cost of sales in the systems segment was essentially unchanged , having decreased by less than $ 0.1 million , when comparing the current fiscal year with the prior year fiscal year , while sales in the systems segment decreased by approximately $ 0.5 million , or 6 % . this occurred because more of fiscal year 2010 revenues consisted of royalties versus fiscal year 2011 , and because royalty revenues carries no cost of sales , cost of sales did not decrease in proportion to the decrease in sales . this is also reflected in the decrease in the gross profit and the gross profit margins as shown in the table above . cost of sales in the service and system integration segment decreased by approximately $ 15.6 million , which is a 22 % decrease when comparing the current fiscal year with the prior fiscal year . while this trend is relatively consistent with the decrease in sales over the prior year , the rate of decrease of 22 % in cost of sales is greater than the rate of decrease in sales , which was 20 % . the reason for this is two-fold . first , on the product sales side we experienced smaller deal size with better margins ( i.e. , higher relative selling prices per unit ) . in the prior year , a higher percentage of our sales were to higher-volume-lower-margin customers , particularly in the us division . secondly , we had better utilization of service resources in the fiscal year ended september 30 , 2011 versus the prior year , which resulted in lower cost as a percent of revenue . this is also reflected in the higher gross margin percentages for fiscal year 2011 as shown in the table above . the overall gross profit margin for the fiscal year ended september 30 , 2011 was 22 % compared to 19 % for the fiscal year ended september 30 , 2010. the gross profit margin in the systems segment decreased to 65 % from 67 % as described above . the gross margin in the service and system integration segment increased from 14 % for the fiscal year ended september 30 , 2010 to 17 % for the fiscal year ended september 30 , 2011. this increase in gross profit margin for the service and system integration segment was also due to the reasons described in the preceding paragraph . engineering and development expenses the following table details engineering and development expenses by operating segment for fiscal years ended september 30 , 2011 and 2010 : replace_table_token_10_th the decrease in engineering and development expenses displayed above was due to lower engineering consulting expenditures in connection with the development of the next generation of multicomputer products in the systems segment . selling , general and administrative the following table details selling , general and administrative ( “ sg & a ” ) expense by operating segment for fiscal years ending september 30 , 2011 and 2010 : replace_table_token_11_th the decrease in selling , general and administrative ( “ sg & a ” ) expenses displayed above was predominantly in the service and system integration segment . the decrease was due to lower commission expense of approximately $ 0.4 million resulting from lower gross profit and lower sales , lower salaries and fringe benefit costs of approximately $ 0.2 million due to reductions of sales personnel , offset by a charge for $ 0.1 million for a contingency loss , relating to the bankruptcy of a former customer in the us division of the segment . in the european segments , sg & a expenses increased by approximately $ 0.2 million , which was driven primarily from foreign exchange fluctuation of the stronger euro and british pound versus the dollar on average for the year ended september 30 , 2011 , versus 2010 . 20 other income/expenses the following table details other income/ ( expense ) for fiscal years ended september 30 , 2011 and 2010 : replace_table_token_12_th total other income ( expense ) , net , changed from other , net income of $ 7 thousand for fiscal year 2010 , to other net expense of approximately $ 0.1 million for fiscal year 2011. this change was primarily due to lower interest income and greater losses on foreign exchange transactions for fiscal 2011 versus fiscal 2010. income taxes for the year ended september 30 , 2011 , the company recorded an income tax provision of $ 0.3 million reflecting an effective income tax rate of 48 % compared to an income tax provision of $ 0.2 million for the fiscal year ended september 30 , 2010 , which reflected an effective tax rate of 20 % . story_separator_special_tag the effective tax rate for the year ended september 30 , 2010 , was impacted favorably by the de-recognition of a liability of approximately $ 0.3 million for an unrecognized tax benefit , which the company had recorded pursuant to accounting principles regarding uncertain tax positions . this de-recognition was the result of the lapsing of the statute of limitations and the completion of an audit by the internal revenue service , which did not result in any adjustments . in assessing the realizability of deferred tax assets , we considered our taxable future earnings and the expected timing of the reversal of temporary differences . accordingly , we have recorded a valuation allowance which reduces the gross deferred tax asset to an amount which we believe will more likely than not be realized . our inability to project future profitability beyond fiscal year 2012 in the u.s. and cumulative losses incurred in recent years in the uk represent sufficient negative evidence to record a valuation allowance against certain deferred tax assets . we maintained a substantial valuation allowance against our uk deferred tax assets as we have experienced cumulative losses and do not have any indication that the operation will be profitable in the future to an extent that will allow us to utilize much of our net operating loss carryforwards . to the extent that actual experience deviates from our assumptions , our projections would be affected and hence our assessment of realizability of our deferred tax asset may change . our german subsidiary has no valuation allowance recorded against its gross deferred tax assets because it has projected sufficient future income that we believe it is more likely than not will be realized . liquidity and capital resources our primary source of liquidity is our cash and cash equivalents , which increased by approximately $ 0.4 million to $ 15.9 million as of september 30 , 2011. this compares to $ 15.5 million as of september 30 , 2010. at september 30 , 2011 , the company 's cash equivalents of $ 3.5 million were held in money market funds . significant sources of cash for the fiscal year ended september 30 , 2011 were net income of approximately $ 0.4 million , depreciation and amortization of approximately $ 0.5 million , a decrease in refundable income taxes of approximately $ 0.5 million and a increase in accounts payable and accrued expenses of approximately $ 2.2 million . the significant uses of cash during the period were an increase in accounts receivable of approximately $ 1.2 million , an increase in inventories of approximately $ 0.9 million , the repurchase of cspi common stock of approximately $ 0.6 million , the purchase of property , plant and equipment for approximately $ 0.3 million and a decrease in income taxes payable of approximately $ 0.3 million . as of september 30 , 2011 and september 30 , 2010 , cash held by our foreign subsidiaries located in germany and the uk totaled approximately $ 5.6 million and $ 6.0 million , respectively . this cash is included in our total cash and cash equivalents reported above . we consider this cash to be permanently reinvested into these foreign locations because repatriating it would result in unfavorable tax consequences . consequently , it is not available for activities that would require it to be repatriated to the u.s. if cash generated from operations is insufficient to satisfy working capital requirements , we may need to access funds through bank loans or other means . there is no assurance that we will be able to raise any such capital on terms acceptable to us , on a timely basis or at all . if we are unable to secure additional financing , we may not be able to complete development or enhancement of products , take advantage of future opportunities , respond to competition or continue to effectively operate our business . based on our current plans and business conditions , management believes that the company 's available cash and cash equivalents , the cash generated from operations and availability on our lines of credit will be sufficient to provide for the company 's working capital and capital expenditure requirements for the foreseeable future . 21 critical accounting policies our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states . the preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , revenues and expenses . on an on-going basis , we evaluate our estimates , including those related to uncollectible receivables , inventory valuation , goodwill and intangibles , income taxes , deferred compensation , revenue recognition , retirement plans , restructuring costs and contingencies . we base our estimates on historical performance 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 . we believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements : revenue recognition ; valuation allowances , specifically the allowance for doubtful accounts and net deferred tax asset valuation allowance ; inventory valuation ; intangibles ; and pension and retirement plans . revenue recognition the company recognizes product revenue from customers at the time of transfer of title and risk of loss which is generally at the time of shipment , provided that persuasive evidence of an arrangement exists , the price is fixed or determinable and collectability of sales proceeds is reasonably assured . we include freight billed to our customers as sales and the related freight costs as cost of sales .
| it should be noted that despite the significant decrease in total revenue of $ 16.5 million , operating income and net income decreased by significantly lesser amounts , as referred to above . this is because the overall gross profit margin for the fiscal year ended september 30 , 2011 was 22 % compared to 19 % for the fiscal year ended september 30 , 2010. the gross margin in the service and system integration segment increased from 14 % for the fiscal year ended september 30 , 2010 to 17 % for the fiscal year ended september 30 , 2011. this increase in gross profit margin for the service and system integration segment was due to smaller orders with better margins ( i.e. , higher relative selling prices per unit ) , on the product sales side . in the prior year , a higher percentage of our sales were to higher-volume-lower-margin customers , particularly in the us division . secondly , we had better utilization of service resources in the fiscal year ended september 30 , 2011 versus the prior year , which resulted in lower service cost of sales as a percent of revenue in fiscal 2011. in the service and system integration segment product gross margin improved by two percentage points , and services gross margin improved by five percentage points , for an overall increase in the gross profit margin for the segment of three percentage points . the gross margin in the systems segment decreased to 65 % from 67 % as described above . this decrease in systems segment gross margin had a lesser impact on the overall gross margin , because systems segment revenues are a far lower percentage of total revenues versus the service and system integration segment . also , in fiscal 2011 , we were engaged in research and development efforts in the systems segment making significant progress with on-going development of our newest product lines , the fast cluster series 3000
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on january 8 , 2013 , we acquired the remaining 37 % interest of our majority-owned subsidiary , brightcove kabushiki kaisha , or brightcove kk , a japanese joint venture which was formed on july 18 , 2008. the purchase price of the remaining equity interest was approximately $ 1.1 million and was funded by cash on hand . given that we own 100 % of brightcove kk , we will continue to consolidate brightcove kk for financial reporting purposes , however , commencing on january 8 , 2013 , we no longer record a non-controlling interest in the consolidated statements of operations . on january 31 , 2014 , we acquired substantially all of the assets of unicorn media , inc. and certain of its subsidiaries , or unicorn , a provider of cloud video ad insertion technology , for total consideration of approximately $ 39.7 million , which was funded by cash on hand of $ 9.1 million and 2,850,547 shares of our common stock . the results of operations of unicorn have been consolidated with our results of operations beginning on january 31 , 2014 , the closing date of the transaction . key metrics we regularly review a number of metrics , including the following key metrics , to evaluate our business , measure our performance , identify trends affecting our business , formulate financial projections and make strategic decisions . number of customers . we define our number of customers at the end of a particular quarter as the number of customers generating subscription revenue at the end of the quarter . we believe the number of customers is a key indicator of our market penetration , the productivity of our sales organization and the value that our products bring to our customers . we classify our customers by including them in either premium or volume offerings . our premium offerings include our premium video cloud customers ( enterprise and pro editions ) , our zencoder customers ( other than month-to-month and pay-as-you-go customers ) , our once customers , our perform customers , our video marketing suite customers , our lift customers , our ott flow customers and our enterprise video suite customers . our volume offerings include our video cloud express customers and our zencoder customers on month-to-month contracts and pay-as-you-go contracts . as of december 31 , 2016 , we had 4,571 customers , of which 2,564 used our volume offerings and 2,007 used our premium offerings . as of december 31 , 2015 , we had 5,047 customers , of which 3,184 used our volume offerings and 1,863 used our premium offerings . during 2013 , we shifted our go-to-market focus and growth strategy to expanding our premium customer base , as we believe our premium customers represent a greater opportunity for our solutions . volume customers decreased during 2015 and 2016 primarily due to our discontinuation of the promotional video cloud express offering . as a result , we have experienced attrition of this base level offering without a corresponding addition of customers . we expect customers using our volume offerings to continue to decrease in 2017 as we continue to focus on the market for our premium solutions and adjust video cloud express price levels . recurring dollar retention rate . we assess our ability to retain customers using a metric we refer to as our recurring dollar retention rate . we calculate the recurring dollar retention rate by dividing the 36 retained recurring value of subscription revenue for a period by the previous recurring value of subscription revenue for the same period . we define retained recurring value of subscription revenue as the committed subscription fees for all contracts that renew in a given period , including any increase or decrease in contract value . we define previous recurring value of subscription revenue as the recurring value from committed subscription fees for all contracts that expire in that same period . we typically calculate our recurring dollar retention rate on a monthly basis . recurring dollar retention rate provides visibility into our ongoing revenue . during the years ended december 31 , 2016 and 2015 , the recurring dollar retention rate was 96 % and 95 % , respectively . average annual subscription revenue per premium customer . we define average annual subscription revenue per premium customer as the total subscription revenue from premium customers for an annual period , excluding professional services revenue , divided by the average number of premium customers for that period . we believe that this metric is important in understanding subscription revenue for our premium offerings in addition to the relative size of premium customer arrangements . the following table includes our key metrics for the periods presented : replace_table_token_6_th components of consolidated statements of operations revenue subscription and support revenue we generate subscription and support revenue from the sale of our products . video cloud is offered in two product lines . the first product line is comprised of our premium product editions , pro and enterprise . all pro and enterprise editions include functionality to publish and distribute video to internet-connected devices . the enterprise edition provides additional features and functionality such as a multi-account environment and ip-restricted players . customer arrangements are typically one year contracts , which include a subscription to video cloud , basic support and a pre-determined amount of video streams , bandwidth , and managed content . we also offer gold support or platinum support to our premium customers for an additional fee , which includes extended phone support . the pricing for our premium editions is based on the number of users , accounts and usage , which is comprised of video streams , bandwidth and managed content . should a customer 's usage exceed the contractual entitlements , the contract will provide the rate at which the customer must pay for actual usage above the contractual entitlements . the second product line is comprised of our volume product edition , which we refer to as our express edition . story_separator_special_tag our express edition targets small and medium-sized businesses , or smbs . the express edition provides customers with the same basic functionality that is offered in our premium product editions but has been designed for customers who have lower usage requirements and do not typically seek advanced features and functionality . we are discontinuing the lower level pricing options for the express edition and expect the total number of customers using the express edition to continue to decrease . customers who purchase the express edition generally enter into month-to-month agreements . express customers are generally billed on a monthly basis and pay via a credit card . 37 zencoder is offered to customers on a subscription basis , with either committed contracts or pay-as-you-go contracts . the pricing is based on usage , which is comprised of minutes of video processed . the committed contracts include a fixed number of minutes of video processed . should a customer 's usage exceed the contractual entitlements , the contract will provide the rate at which the customer must pay for actual usage above the contractual entitlements . zencoder customers are considered premium customers other than zencoder customers on month-to-month contracts or pay-as-you-go contracts , which are considered volume customers . once is offered to customers on a subscription basis , with varying levels of functionality , usage entitlements and support based on the size and complexity of a customer 's needs . perform is offered to customers on a subscription basis . customer arrangements are typically one-year contracts , which include a subscription to perform , basic support and a pre-determined amount of video streams . we also offer gold support or platinum support to our perform customers for an additional fee , which includes extended phone support . the pricing for perform is based on the number of users , accounts and usage , which is comprised of video streams . should a customer 's usage exceed the contractual entitlements , the contract will provide the rate at which the customer must pay for actual usage above the contractual entitlements . video marketing suite and enterprise video suite are offered to customers on a subscription basis in starter , pro and enterprise editions . the pro and enterprise customer arrangements are typically one-year contracts , which typically include a subscription to video cloud , gallery , brightcove social ( for video marketing suite customers ) or brightcove live ( for enterprise video suite customers ) , basic support and a pre-determined amount of video streams or plays , bandwidth and managed content or videos . we also generally offer gold support or platinum support to these customers for an additional fee , which includes extended phone support . the pricing for our pro and enterprise editions is based on the number of users , accounts and usage , which is comprised of video streams or plays , bandwidth and managed content or videos . should a customer 's usage exceed the contractual entitlements , the contract will provide the rate at which the customer must pay for actual usage above the contractual entitlements . the starter edition provides customers with the same basic functionality that is offered in our pro and enterprise editions but has been designed for customers who have lower usage requirements and do not typically seek advanced features and functionality . customers who purchase the starter edition may enter into one-year agreements or month-to-month agreements . starter customers with month-to-month agreements are generally billed on a monthly basis and pay via a credit card . lift is offered to customers on a subscription basis . customer arrangements are typically one year contracts , which include a subscription to lift , basic support and a pre-determined amount of video streams . we also offer gold support or platinum support to our lift customers for an additional fee , which includes extended phone support . the pricing for lift is based on the number of users , accounts and usage , which is comprised of video streams . should a customer 's usage exceed the contractual entitlements , the contract will provide the rate at which the customer must pay for actual usage above the contractual entitlements . ott flow is offered to customers on a subscription basis , with varying levels of functionality , usage entitlements and support based on the size and complexity of a customer 's needs . customer arrangements are typically one-year contracts . all once , perform , video marketing suite , enterprise video suite , lift and ott flow customers are considered premium customers . professional services and other revenue professional services and other revenue consists of services such as implementation , software customizations and project management for customers who subscribe to our premium editions . these arrangements are priced either on a fixed fee basis with a portion due upon contract signing and the remainder due when the related services have been completed , or on a time and materials basis . 38 our backlog consists of the total future value of our committed customer contracts , whether billed or unbilled . as of december 31 , 2016 , we had backlog of approximately $ 86 million compared to backlog of approximately $ 76 million as of december 31 , 2015. of the approximately $ 86 million in backlog as of december 31 , 2016 , between $ 69 million and $ 71 million is expected to be recognized as revenue during the year ended december 31 , 2017. because revenue for any period is a function of revenue recognized from backlog at the beginning of the period as well as from contract renewals and new customer contracts executed during the period , backlog at the beginning of any period is not necessarily indicative of future performance . our presentation of backlog may differ from that of other companies in our industry . cost of revenue cost of subscription , support and professional services revenue primarily consists of costs related to supporting and hosting our product offerings and delivering our professional services .
| we expect operating income to improve from increased sales to both new and existing customers and from improved efficiencies throughout our organization as we continue to grow and scale our operations . as of december 31 , 2016 , we had $ 36.8 million of unrestricted cash and cash equivalents , an increase of $ 9.2 million from $ 27.6 million at december 31 , 2015 , due primarily to $ 11.1 million of cash provided by operating activities , $ 4.6 million in proceeds from exercises of stock options and $ 604,000 in proceeds from an equipment financing . these increases were offset in part by $ 3.9 million in capitalization of internal-use software costs , $ 1.3 million in capital expenditures and $ 850,000 in payments under capital lease obligations . revenue replace_table_token_9_th during 2016 , revenue increased by $ 15.6 million , or 12 % , compared to 2015 , primarily due to an increase in revenue from our premium offerings , which consist of subscription and support revenue , as well as professional services and other revenue . the increase in premium revenue of $ 17.1million , or 14 % , is partially the result of an 8 % increase in the number of premium customers from 1,863 at december 31 , 2015 to 2,007 at december 31 , 2016 and a 6 % increase in the average annual subscription revenue per premium customer during 2016. in addition , during 2016 , professional services and other revenue increased by $ 4.5 million compared to 2015. during 2016 , volume revenue decreased by $ 1.5 million , or 17 % , compared to 2015 , as we continue to focus on the market for our premium solutions . replace_table_token_10_th 47 during 2016 , subscription and support revenue increased by $ 11.0 million , or 8 % , compared to 2015. the increase was primarily related to the continued growth of our customer base for our premium offerings , including sales to both new and existing customers , and a 6 % increase in the average annual subscription revenue per premium customer during 2016. in addition , professional services and other
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the timing and the outcome of the negotiations between the united kingdom and the eu in connection with brexit are both highly uncertain and information regarding the long-term consequences of the vote is expected to become clearer over time . the company will continue to monitor the potential impact of brexit on its consolidated statements of financial condition and results of operations . 31 business outlook blackrock 's framework for long-term value creation is predicated on generating differentiated organic growth , leveraging scale to increase operating margins over time , and returning capital to shareholders on a consistent basis . blackrock 's diversified platform , in terms of style , product , client and geography , enables it to generate more stable cash flows through market cycles , positioning blackrock to invest for the long-term by striking an appropriate balance between investing for future growth and prudent discretionary expense management . blackrock 's highly diversified multi-product platform was created to meet the needs of its clients in all market environments . blackrock is positioned to provide active and index investment solutions across asset classes and geographies and leverage blackrock solutions ' world-class risk management , analytics and advisory capabilities on behalf of clients . blackrock serves a diverse mix of institutional and retail clients across the globe , including investors in ishares , maintaining differentiated client relationships and a fiduciary focus . blackrock 's retail strategy is focused on an outcome-oriented approach to creating client solutions , including active , index and alternative products , enhanced distribution and technology offerings . in the united states , blackrock is leveraging its integrated wholesaler force to further penetrate distribution platforms and gain share among registered investment advisors . internationally , blackrock continues to diversify the range of investment solutions available to clients , penetrate new distribution channels and position effectively for regulatory change . ishares growth strategy is centered on increasing global ishares market share and driving global market expansion . blackrock intends to achieve these goals by pursuing global growth themes in client and product segments including core investments , fixed income , smart beta , financial instruments and precision exposures . blackrock believes institutional results will be driven by enhancing blackrock 's solutions-oriented approach ; deepening client relationships through product diversification and higher value-add capabilities ; and leveraging blackrock solutions ' analytical and risk management expertise . story_separator_special_tag style= '' font-style : normal ; '' > excluded the net noncash benefit of $ 54 million described above . general and administration expense for 2014 excluded the $ 50 million related to the reduction of the indemnification asset described above . income tax expense for 2014 included a $ 73 million net benefit and excluded a $ 50 million tax benefit associated with the reduction of the same indemnification asset and $ 9 million of net noncash benefits described above . diluted earnings per common share rose $ 0.26 , or 1 % , from 2014. see non-gaap financial measures for further information on as adjusted items . for further discussion of blackrock 's revenue , expense , nonoperating results and income tax expense , see discussion of financial results herein . non-gaap financial measures blackrock reports its financial results in accordance with gaap ; however , management believes evaluating the company 's ongoing operating results may be enhanced if investors have additional non-gaap financial measures . management reviews non-gaap financial measures to assess ongoing operations and , for the reasons described below , considers them to be effective indicators , for both management and investors , of blackrock 's financial performance over time . management also uses non-gaap financial measures as a benchmark to compare its performance with other companies and to enhance the comparability of this information for the reporting periods presented . non-gaap measures may pose limitations because they do not include all of blackrock 's revenue and expense . blackrock 's management does not advocate that investors consider such non-gaap financial measures in isolation from , or as a substitute for , financial information prepared in accordance with gaap . management uses both gaap and non-gaap financial measures in evaluating blackrock 's financial performance . adjustments to gaap financial measures ( “ non-gaap adjustments ” ) include certain items management deems nonrecurring or that occur infrequently , transactions that ultimately will not impact blackrock 's book value or certain tax items that do not impact cash flow . 33 computations for all periods are derived from the consolidated statements of income as follows : ( 1 ) operating income , as adjusted , and operating margin , as adjusted : management believes operating income , as adjusted , and operating margin , as adjusted , are effective indicators of blackrock 's financial performance over time and , therefore , provide useful disclosure to investors . replace_table_token_20_th operating income , as adjusted , includes non-gaap expense adjustments . the portion of compensation expense associated with certain long-term incentive plans ( “ ltip ” ) funded , or to be funded , through share distributions to participants of blackrock stock held by pnc has been excluded because it ultimately does not impact blackrock 's book value . compensation expense associated with appreciation ( depreciation ) on investments related to certain blackrock deferred compensation plans has been excluded , as returns on investments set aside for these plans , which substantially offset this expense , are reported in nonoperating income ( expense ) . in 2016 , a restructuring charge primarily comprised of severance and accelerated amortization expense of previously granted deferred compensation awards has been excluded to provide more meaningful analysis of blackrock 's ongoing operations and to ensure comparability among periods presented . in 2014 , general and administration expense relating to the reduction of an indemnification asset has been excluded since it is directly offset by a tax benefit of the same amount and , consequently , does not impact blackrock 's book value . operating income used for measuring operating margin , as adjusted , is equal to operating income , as adjusted , excluding the impact of product launch costs ( e.g . story_separator_special_tag closed-end fund launch costs ) and related commissions . management believes the exclusion of such costs and related commissions is useful because these costs can fluctuate considerably and revenue associated with the expenditure of these costs will not fully impact blackrock 's results until future periods . revenue used for operating margin , as adjusted , excludes distribution and servicing costs paid to related parties and other third parties . management believes such costs represent a benchmark for the amount of revenue passed through to external parties who distribute the company 's products . in addition , management believes the exclusion of such costs is useful because it creates consistency in the treatment for certain contracts for similar services , which due to the terms of the contracts , are accounted for under gaap on a net basis within investment advisory , administration fees and securities lending revenue . amortization of deferred sales commissions is excluded from revenue used for operating margin measurement , as adjusted , because such costs , over time , substantially offset distribution fee revenue the company earns . for each of these items , blackrock excludes from revenue used for operating margin , as adjusted , the costs related to each of these items as a proxy for such offsetting revenue . ( 2 ) nonoperating income ( expense ) , less net income ( loss ) attributable to nci , as adjusted : nonoperating income ( expense ) , less net income ( loss ) attributable to nci , as adjusted , equals nonoperating income ( expense ) , gaap basis , less net income ( loss ) attributable to nci , adjusted for compensation expense associated with ( appreciation ) depreciation on investments related to certain blackrock deferred compensation plans . the compensation expense offset is recorded in operating income . this compensation expense has been included in nonoperating income ( expense ) , less net income ( loss ) attributable to nci , as adjusted , to offset returns on investments set aside for these plans , which are reported in nonoperating income ( expense ) , gaap basis . management believes nonoperating income ( expense ) , less net income ( loss ) attributable to nci , as adjusted , provides comparability of information among reporting periods and is an effective measure for reviewing blackrock 's nonoperating contribution to results . replace_table_token_21_th 34 ( 3 ) n et income attributable to blackrock , as adjusted : replace_table_token_22_th management believes net income attributable to blackrock , inc. , as adjusted , and diluted earnings per common share , as adjusted , are useful measures of blackrock 's profitability and financial performance . net income attributable to blackrock , inc. , as adjusted , equals net income attributable to blackrock , inc. , gaap basis , adjusted for significant nonrecurring items , charges that ultimately will not impact blackrock 's book value or certain tax items that do not impact cash flow . see aforementioned discussion regarding operating income , as adjusted , and operating margin , as adjusted , for information on the pnc ltip funding obligation and the restructuring charge . for each period presented , the non-gaap adjustment related to the restructuring charge and pnc ltip funding obligation was tax effected at the respective blended rates applicable to the adjustments . amounts for income tax matters represent net noncash ( benefits ) expense primarily associated with the revaluation of certain deferred tax liabilities related to intangible assets and goodwill . amounts have been excluded from the as adjusted results as these items will not have a cash flow impact and to ensure comparability among periods presented . per share amounts reflect net income attributable to blackrock , as adjusted divided by diluted weighted average common shares outstanding . ( 4 ) nonvoting participating preferred stock is considered to be a common stock equivalent for purposes of determining basic and diluted earnings per share calculations . 35 assets under management aum for reporting purposes generally is based upon how investment advisory and administration fees are calculated for each portfolio . net asset values , total assets , committed assets or other measures may be used to determine portfolio aum . aum and net inflows ( outflows ) by client type replace_table_token_23_th aum and net inflows ( outflows ) by product type replace_table_token_24_th aum and net inflows ( outflows ) by investment style replace_table_token_25_th ( 1 ) advisory aum represents long-term portfolio liquidation assignments . ( 2 ) amounts include commodity ishares . the following table presents the component changes in blackrock 's aum for 2016 , 2015 and 2014. replace_table_token_26_th ( 1 ) advisory aum represents long-term portfolio liquidation assignments . ( 2 ) amount for 2016 represents $ 80.6 billion of aum acquired in the bofa global capital management transaction in april 2016. amounts for 2015 represent $ 1.3 billion of aum acquired in the acquisition of certain assets of bkca in march 2015 , $ 560 million of aum acquired in the infraestructura institucional acquisition in october 2015 and $ 366 million of aum acquired in the futureadvisor acquisition in october 2015. the futureadvisor acquisition amount does not include aum that was held in ishares holdings . ( 3 ) foreign exchange reflects the impact of translating non-u.s. dollar denominated aum into u.s. dollars for reporting purposes . 36 blackrock has historically grown aum through organic growth and acquisitions . management believes that the company will be able to continue to grow aum organically by focusing on s trong investment performance , efficient delivery of beta for index products , client service , developing new products and optimizing distribution capabilities . component changes in aum for 2016 the following table presents the component changes in aum by client type and product type for 2016. replace_table_token_27_th ( 1 ) amount represents aum acquired in the bofa global capital management transaction in april 2016 . ( 2 ) foreign exchange reflects the impact of translating non-u.s. dollar denominated aum into u.s. dollars for reporting purposes .
| income tax expense for 2015 included a $ 54 million net noncash benefit associated with the revaluation of certain deferred income tax liabilities and nonrecurring tax benefits of $ 75 million . 32 diluted earnings per common share decreased $ 0.75 , or 4 % , compared with the prior year period , reflecting lower nonoperating income and a higher tax rate in 2016 , partially offset by the benefit of share repurchases . as adjusted . operating income of $ 4,674 million decreased $ 21 million , and operating margin of 43.7 % increased 80 bps , from 2015. the pre-tax restructuring charge of $ 76 million described above was excluded from as adjusted results . income tax expense for 2016 and 2015 excluded the previously described net noncash benefits of $ 30 million and $ 54 million , respectively , and included the nonrecurring tax benefits described above . diluted earnings per common share decreased $ 0.31 , or 2 % , from 2015 . 2015 compared with 2014 gaap . operating income of $ 4,664 million increased $ 190 million and operating margin of 40.9 % increased 50 bps from 2014. operating income reflected growth in base fees and performance fees , partially offset by higher expense . the company 's 2015 expense reflected higher revenue-related expense , including compensation , and distribution and servicing costs , partially offset by lower general and administration expense , and lower amortization of intangible assets . in connection with the barclays global investors ( “ bgi ” ) acquisition , blackrock recorded a $ 50 million indemnification asset for unrecognized tax benefits . due to the resolution of outstanding tax matters in 2014 , blackrock recorded $ 50 million of general and administration expense in 2014 to reflect the reduction of the indemnification asset and an offsetting $ 50 million tax benefit . results for 2014 also included $ 11 million of closed-end fund launch costs . nonoperating income ( expense ) , less net income ( loss ) attributable to nci , decreased $ 20 million from 2014 due to lower net gains on investments in 2015. income tax expense for 2015 included a $ 54 million
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the provision for income taxes decreased by $ 2.2 million from $ 7.3 million in 2017 to $ 5.1 million during the year ended december 31 , 2018. total assets at december 31 , 2018 were $ 824 million , an increase of $ 79 million from $ 745 million at december 31 , 2017. this increase included increases of $ 80.3 million in net loans ( $ 79.6 million in gross loans ) , $ 34.0 million in investment securities , $ 2.9 million in premises and equipment and $ 2.8 million in other assets . these items were partially offset by a decrease of $ 40.8 million in cash and due from banks and $ 0.2 million in oreo . gross loans increased by $ 79.6 million , or 16 % , from $ 486.6 million at december 31 , 2017 to $ 566.2 million at december 31 , 2018. the increase in loan balances includes $ 31.4 million in commercial real estate loans , $ 16.7 million in automobile loans , $ 15.0 million in construction and land development loans , $ 10.3 million in agricultural loans and $ 9.9 million in commercial loans . these increases were partially offset by declines in other loan categories the largest of which was a decrease of $ 3.3 million in equity lines of credit . total deposits increased by $ 63.9 million , or 10 % , from $ 662.7 million at december 31 , 2017 to $ 726.6 million at december 31 , 2018. the increase in deposits includes $ 45 million in deposits at our carson city , nevada branch which we purchased from mutual of omaha bank on october 26 , 2018. at december 31 , 2018 , 42 % of the company 's deposits were in the form of non-interest-bearing demand deposits . at december 31 , 2017 , 43 % of the company 's deposits were in the form of non-interest-bearing demand deposits . the increase in deposits of $ 63.9 million includes increases of $ 22.0 million in money market accounts , $ 21.8 million in demand deposits , $ 10.9 million in time deposits , $ 5.9 million in interest-bearing demand deposits and $ 3.3 million in savings accounts . the increase in time deposits relates to the carson city branch acquisition as does much of the increase in money market accounts . the company has no brokered deposits . total shareholders ' equity increased by $ 11.2 million from $ 55.7 million at december 31 , 2017 to $ 66.9 million at december 31 , 2018. the largest component of the $ 11.2 million increase was earnings during the twelve-month period totaling $ 14.0 million . during 2018 the company paid two 18 cents per share semi-annual cash dividends which had the effect of reducing shareholders ' equity by $ 1.8 million . the return on average assets was 1.83 % for 2018 , up from 1.18 % for 2017. the return on average equity was 23.3 % for 2018 , up from 15.4 % for 2017 . 22 story_separator_special_tag average balances increased by $ 4.0 million from $ 54.6 million in 2016 to $ 58.6 million during the year ended december 31 , 2017. interest expense on savings accounts increased by $ 47 thousand as we continued to experience strong growth in this category of deposits . average savings deposits increased by $ 26.4 million from $ 133.3 million during 2016 to $ 159.7 million during 2017. the average rate paid on savings accounts increased slightly from 16 basis points during 2016 to 17 basis points in 2017. interest expense on time deposits declined by $ 12 thousand from $ 157 thousand during 2016 to $ 145 thousand during 2017. average time deposits declined by $ 3.4 million from $ 50.8 million during 2016 to $ 47.4 million during the year ended december 31 , 2017. we attribute much of this decline to migration into other types of deposits given the low rates and lack of liquidity associated with time deposits . the average rate paid on time deposits was 0.31 % during both 2016 and 2017. interest expense on other interest-bearing liabilities decreased by $ 51 thousand from $ 486 thousand during the year ended december 31 , 2016 to $ 435 thousand during the current twelve-month period . interest expense on the company 's note payable decreased by $ 105 thousand to $ 28 thousand during the twelve months ended december 31 , 2017. this decrease was related to a decrease in average borrowings on this note from $ 3.3 million during the 2016 to $ 700 thousand during 2017. the note payable was paid off in april of 2017. interest expense on junior subordinated debentures , which increased by $ 53 thousand to $ 401 thousand , fluctuates with changes in the 3-month london interbank offered rate ( libor ) rate . as a result of the changes noted above , the net interest margin for 2017 increased to 4.35 % , from 4.21 % during 2016. provision for loan losses during the year ended december 31 , 2018 we recorded a provision for loan losses of $ 1.0 million up $ 400 thousand from $ 600 thousand during the year ended december 31 , 2017. see “ analysis of asset quality and allowance for loan losses ” for further discussion of loan quality trends and the provision for loan losses . the allowance for loan losses is maintained at a level that management believes will be appropriate to absorb inherent losses on existing loans based on an evaluation of the collectability of the loans and prior loan loss experience . the evaluations take into consideration such factors as changes in the nature and volume of the portfolio , overall portfolio quality , review of specific problem loans , and current economic conditions that may affect the borrower 's ability to repay their loan . story_separator_special_tag the allowance for loan losses is based on estimates , and ultimate losses may vary from the current estimates . these estimates are reviewed periodically and , as adjustments become necessary , they are reported in earnings in the periods in which they become known . based on information currently available , management believes that the allowance for loan losses is appropriate to absorb potential risks in the portfolio . however , no assurance can be given that the company may not sustain charge-offs which are in excess of the allowance in any given period . 26 non-interest income the following table sets forth the components of non-interest income for the years ended december 31 , 2018 , 2017 and 2016. replace_table_token_8_th 201 8 compared to 201 7 . during the year ended december 31 , 2018 , non-interest income totaled $ 8.9 million , an increase of $ 601 thousand from the twelve months ended december 31 , 2017. included in this increase were two items of a non-recurring nature . a $ 209 thousand gain was recorded upon the prospective adoption of a newly effective accounting pronouncement impacting the measurement of equity securities , which in our case consists of stock in our correspondent banks , without a readily determinable fair market value , and the loss on sale of investment securities declined by $ 150 thousand to $ 8 thousand in 2018. other significant increases in non-interest income included $ 109 thousand in service charges on deposit accounts , $ 187 thousand in interchange income and $ 69 thousand in loan service fees . we attribute these increases primarily to growth in the bank . the largest decrease in non-interest income was a $ 136 thousand decline in gains on sale of loans . the decline in gain on sale relates to a decline in the average premium received on sale . gains on sale of loans mostly relate to sales of sba 7 ( a ) loans . gains on sale of loans decreased from $ 2.0 million during 2017 to $ 1.9 million during the twelve months ended december 31 , 2018. proceeds from sba loan sales totaled $ 41.7 million during 2018 and $ 36.6 million during the twelve months ended december 31 , 2017. loans originated for sale totaled $ 38.9 million during the twelve months ended december 31 , 2018 and $ 31.3 million during 2017. loan servicing income , which increased by $ 69 thousand , represents servicing income received on the guaranteed portion of sba loans sold into the secondary market . at december 31 , 2018 we were servicing $ 122 million in guaranteed portions of loans , an increase of $ 9 million from $ 113 million at december 31 , 2017 . 2017 compared to 2016. during the year ended december 31 , 2017 , non-interest income totaled $ 8.3 million , an increase of $ 628 thousand from the twelve months ended december 31 , 2016. the largest components of this increase were increases of $ 423 thousand in service charge income , $ 269 thousand gain on sale of loans and $ 89 thousand in loan servicing income . the increase in service charge income includes significant increases in interchange income on debit card transactions , an increase in overdraft income and an increase in service charges on deposit accounts . interchange income benefited from an increase in the size of the bank as well as an increase in marketing efforts directed to this product , while overdraft income and service charges on deposit accounts benefited both from an increase in the size of the bank as well as an increase in rates charged for various services beginning in october of 2016. gains on sale of loans increased from $ 1.8 million during 2016 to $ 2.0 million during the twelve months ended december 31 , 2017. proceeds from sba loan sales totaled $ 36.6 million during 2017 and $ 30.7 million during the twelve months ended december 31 , 2016. loans originated for sale totaled $ 31.3 million during the twelve months ended december 31 , 2017 and $ 30.4 million during 2016. loan servicing income , which increased by $ 89 thousand , represents servicing income received on the guaranteed portion of sba loans sold into the secondary market . at december 31 , 2017 we were servicing $ 113 million in guaranteed portions of loans , an increase of $ 16 million from $ 97 million at december 31 , 2016. the largest decrease in non-interest income was a $ 126 increase in loss on sale of investment securities from $ 32 thousand in 2016 to $ 158 thousand in 2017 . 27 non-interest expense the following table sets forth the components of other non-interest expense for the years ended december 31 , 2018 , 2017 and 2016. replace_table_token_9_th 201 8 compared to 201 7 . non-interest expense increased by $ 1.7 million to $ 21.8 million during the twelve months ended december 31 , 2018 , up from $ 20.1 million during 2017. the three largest components of this increase were increases of $ 633 thousand in salaries and benefits , $ 313 thousand in professional fees and $ 352 thousand in other . the largest components of the increase in salary and benefit expense were increases of $ 762 thousand in salary expense and $ 386 thousand in bonus expense . salary expense increased to $ 9.5 million related to additions to staff and merit and promotion increases . total full time equivalent ( fte ) employees increased from 142 at december 31 , 2017 to 155 at december 31 , 2018. this increase includes 4 fte at our carson city branch . the additional nine fte includes additions to staff to support branch and lending activities as well as additional administrative personnel .
| ( 2 ) the rate change in net interest income represents the change in rate multiplied by the previous year 's average balance . ( 3 ) the mix change in net interest income represents the change in average balance multiplied by the change in rate . 201 8 compared to 201 7 . net interest income is the difference between interest income and interest expense . net interest income was $ 33.1 million for the year ended december 31 , 2018 , up $ 5.2 million , or 18 % , from $ 27.9 million during 2017. the $ 5.2 million included an increase of $ 5.4 million , or 18.5 % , in interest income , from $ 28.9 million during 2017 to $ 34.3 million during the current year and an increase of $ 219 thousand in interest expense . interest and fees on loans increased by $ 4.0 million , interest on investment securities increased by $ 1.5 million . interest on deposits decreased by $ 64 thousand . the increases in interest on loans and investments include both an increase in average balance and an increase in average yield . interest and fees on loans was $ 29.8 million during 2018. the average loan balances were $ 518.6 million for 2018 , up $ 46.9 million from the $ 471.7 million during 2017. the following table compares loan balances by type at december 31 , 2018 and 2017. replace_table_token_7_th 24 the average yield on loans was 5.74 % for 2018 up 27 basis points from 5.47 % for 2017. we attribute much of the increase in yield to an increase in the average prime rate of 81 basis points . at december 31 , 2018 approximately 28 % of the company 's loan portfolio was comprised of loans tied to the prime rate or an equivalent rate . interest on investment securities increased by $ 1.5 million as a result of an increase in yield of 41 basis points from
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we believe that we have been organized and have operated so that we have qualified , and will continue to qualify , to be treated for u.s. federal income tax purposes as a partnership and not as an association or a publicly traded partnership taxable as a corporation . as of december 31 , 2014 , our diluted book value per share was $ 23.09 as compared to $ 23.99 as of december 31 , 2013. trends and recent market developments key trends and recent market developments for the u.s. mortgage market include the following : federal reserve and monetary policy— after measured monthly reductions in net asset purchases , the federal reserve concluded its quantitative easing purchase program at the end of october 2014 , but also announced that it will continue to reinvest principal payments from existing holdings ; housing and mortgage market statistics— data released by s & p indices for its s & p/case-shiller home price indices for december 2014 showed , consistent with recent months , that the pace of year-over-year home price appreciation slowed ; meanwhile the freddie mac survey 30-year mortgage rate ended 2014 at 3.87 % , down from 4.53 % at the beginning of the year . subsequent to year end , the freddie mac survey 30-year mortgage rate fell even further , reaching as low as 3.59 % as of february 5 , 2015 ; gse developments— in 2014 and early 2015 , the fhfa and the gses announced multiple program and policy changes and clarifications intended to increase mortgage credit availability . notably , on january 7 , 2015 , president 54 obama announced a reduction in fha mortgage insurance premiums , or `` mips , '' effectively reducing the cost of impacted mortgages by 50 basis points . the fhfa has announced significant changes to the gses ' representation and warranty framework , with the goal of encouraging lenders to serve a wider audience while still supporting safe gse operations . during 2015 the fhfa will continue to work with fannie mae and freddie mac to build a common securitization platform to be utilized by both agencies to issue a single security , which the fhfa believes will improve the liquidity of gse securities and housing finance markets more broadly ; portfolio overview and outlook— non-agency rmbs performed well over the year and continued to be supported by overall positive trends in home prices as well as a declining level of foreclosure inventory . over the course of the year , we continued to implement our diversification strategy , becoming more active in other non-agency asset classes such as clos , european non-dollar denominated mbs and abs , residential and commercial mortgage loans , u.s. consumer whole loans and abs , and distressed corporate debt . we also made our first investments in mortgage-related entities , including two mortgage originators . even though interest rates declined steadily over the course of 2014 , prepayment rates remained relatively muted . market volatility picked up towards the end of the year and in the early part of 2015 , reflecting the uncertainty in the global economy and the longer term direction of u.s. interest rates . federal reserve and monetary policy since december 2013 , the federal reserve has announced eight incremental reductions in its purchases of agency rmbs and u.s. treasury securities under its accommodative monetary policies , concluding its purchase program at the end of october 2014. prior to these incremental reductions , and since september 2012 , the federal reserve had been purchasing long-dated u.s. treasury securities and agency rmbs assets at the pace of $ 85 billion per month , comprised of $ 45 billion of u.s. treasury securities and $ 40 billion of agency rmbs . the federal reserve has announced that it will continue to reinvest principal payments from its holdings into additional asset purchases . in its january 2015 statement , the federal open market committee , or `` fomc , '' maintained the target range for the federal funds rate at 0 % to 0.25 % . the fomc also indicated that based on its assessment of labor market conditions , inflationary pressures and expectations , and other factors , it can be patient in beginning to normalize monetary policy . the fomc also indicated that it will continue to monitor progress toward its inflation and economic objectives , and that it could raise rates sooner than currently anticipated if progress is faster than expected , or maintain low rates for a longer period than anticipated if progress is slower than expected . currently , the fomc anticipates that economic conditions may warrant keeping the target rate below normal long-run levels for `` some time , '' even once employment and inflation have reached levels consistent with the federal reserve 's mandate . since the federal reserve 's initial taper announcement in december 2013 , long-term interest rates have generally declined . as of december 31 , 2014 , the 10-year u.s. treasury yield was 2.17 % as compared to 3.03 % as of december 31 , 2013. subsequent to quarter end , the 10-year u.s. treasury yield fell briefly below 2 % in january and february 2015 , but rose to 2.24 % as of march 6 , 2015. prices of agency rmbs also rallied over the course of 2014. for example , the price of tba 30-year fannie mae 3.5s , a widely traded agency rmbs , was 104.28 as of december 31 , 2014 , as compared to 99.34 as of december 31 , 2013. notwithstanding the downward trend in interest rates , we believe that there remains substantial risk that interest rates could begin to rise again . the focus of market participants has shifted from the timing of the tapering of federal reserve asset purchases to the timing of a tightening of monetary policy through interest rate increases , driven by employment and economic growth in the united states . story_separator_special_tag the risk of rising interest rates reinforces the importance of our ability to hedge interest rate risk in both our agency rmbs and non-agency mbs portfolios using a variety of tools , including tbas , interest rate swaps , and various other instruments . housing and mortgage market statistics the following table demonstrates the decline in residential mortgage delinquencies and foreclosure inventory on a national level , as reported by corelogic in its january 2015 and november 2014 national foreclosure reports : as of number of units ( 1 ) december 2014 december 2013 seriously delinquent mortgages 1,561 1,990 foreclosure inventory 564 840 ( 1 ) shown in thousands of units . note : seriously delinquent mortgages are ninety days and over in delinquency and include foreclosures and real estate owned , or `` reo , '' property . 55 as the above table indicates , both the number of seriously delinquent mortgages and the number of homes in foreclosure have declined significantly over the past year . this decline supports the thesis that as many homeowners have re-established equity in their homes through recovering real estate prices , they have become less likely to become delinquent and default on their mortgages . monthly housing starts provide another indicator of market fundamentals . the following table shows the trailing three-month average housing starts for the periods referenced : replace_table_token_6_th ( 1 ) shown in thousands of units . source : u.s. census bureau as of december 2014 , on a year-over-year basis , while multi-family housing starts during the trailing three months declined by approximately 1.4 % from december 2013 , single-family housing starts increased by 6.5 % , during the same period . even though home prices have recovered meaningfully over the last few years , this recovery has only recently translated into notable growth in single-family housing starts . the recovery in home prices may have initially been driven more by the active purchase of foreclosure inventory by institutional investors , as opposed to by an increase in demand for traditional owner-occupied single-family housing . data released by s & p indices for its s & p/case-shiller home price indices for december 2014 showed that , on average , home prices had increased from december 2013 by 4.3 % and 4.5 % for its 10- and 20-city composites , respectively . the home price indices flattened out in 2014 , as the pace of home price appreciation in 2013 was not repeated in 2014. according to the report , home prices remain below the peak levels of 2006 , but , on average , are back to their autumn 2004 levels for both the 10- and 20-city composites . finally , as indicated in the table above , as of december 2014 , the national inventory of foreclosed homes fell to 564,000 units , a 33 % decline when compared to december 2013 ; this represented the thirty-eighth consecutive month with a year-over-year decline and the lowest level since november 2008. as a result , there are much fewer unsold foreclosed homes overhanging the housing market than there were a year ago . we believe that near-term home price trends are more likely to be driven by fundamental factors such as economic growth , mortgage rates , and affordability , rather than by technical factors such as shadow inventory . shadow inventory represents the number of properties that are seriously delinquent , in foreclosure , or held as reo by mortgage servicers , but not currently listed on multiple listing services . the freddie mac survey 30-year fixed mortgage rate ended the year at 3.87 % , reflecting a 66-basis point decline from the beginning of 2014. subsequent to the end of the year , the rate fell even further , reaching as low as 3.59 % as of february 5 , 2015. the refinance index published by the mortgage bankers association , or `` mba , '' was essentially flat during 2014 on a seasonally adjusted basis , but has been consistently higher since year end . the index spiked significantly in january 2015 , peaking at 2,746.10 on january 16 , 2015 , an almost 90 % increase over its average level during 2014. similarly , the mba 's market composite index , a measure of mortgage application volume , was also essentially flat over 2014 on a seasonally adjusted basis , but has been consistently higher since year end , peaking at 561.90 on january 16 , 2015 , a 55 % increase over its average level during 2014 . 56 the table below illustrates the relationship between the freddie mac survey 30-year fixed mortgage rate and the mba refinance index since september 2012. generally speaking , over the period from september 2012 through september 2013 , mortgage rates and the level of refinancing activity were nearly linearly correlated . however , following september 2013 and through december 2014 , there has been a decoupling of these two time series . as the figure below shows , by december 2014 the mba refinance index was meaningfully lower than one might have expected given the nearly linear relationship that had existed between the two indices from september 2012 to september 2013. however , the increases in refinancings in october 2014 and january 2015 clearly reflect the decline in average mortgage rates during the same periods . 57 while the number of refinancing applications has been consistently low relative to interest rates since september 2013 , the table below illustrates that the average refinanced loan size has steadily increased over that same time period , with a 38.0 % increase from september 2013 through january 2015. in the october 2014 and january 2015 refinancing spikes , average refinanced loan size also spiked significantly . these trends suggest strongly that higher balance loans are becoming increasingly more prepayment sensitive relative to lower balance loans . on march 6 , 2015 , the u.s. bureau of labor statistics , or `` bls , '' reported that , as of february 2015 the u.s. unemployment rate declined to 5.5 % .
| interest income includes coupon payments received and accrued on our holdings , the net accretion and amortization of purchase discounts and premiums on those holdings and interest on our cash balances , including those balances held by our counterparties as collateral . on a year-over-year basis , interest income from our agency portfolio increased , mainly in connection with the increase in our average portfolio holdings . for the year ended december 31 , 2014 , interest income from our agency rmbs was $ 33.2 million , while for the year ended december 31 , 2013 , interest income was $ 31.0 million . for the year ended december 31 , 2014 , interest income from our non-agency portfolio was $ 58.4 million , while for the year ended december 31 , 2013 , interest income was $ 54.7 million . the increase was driven by a slight increase in our non-agency average portfolio holdings , as well as an increase in the portfolio 's yields based on improvements in cash flows of the underlying securities and or loans . the following table details our interest income , average holdings , and weighted average yield based on amortized cost for the year ended december 31 , 2014 and 2013 : replace_table_token_10_th ( 1 ) amounts exclude interest income on cash and cash equivalents ( including when posted as margin ) and long u.s. treasury securities . base management fees for the years ended december 31 , 2014 and 2013 , base management fee incurred , which is based on total equity at the end of each quarter , was $ 10.8 million and $ 9.1 million , respectively . the increase in the base management fee was due to our larger capital base year over year . interest expense interest expense includes interest on funds borrowed under reverse repos , securitized debt , coupon interest on securities sold short , the related net accretion and amortization of purchase discounts and premiums on those short holdings , and interest on our counterparties ' cash collateral held by us .
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leases qualify as finance leases if the lease transfers ownership of the asset at the end of the lease term , the lease grants an option to purchase the asset that we are reasonably certain to exercise , the lease term is for a major part of the remaining economic life of the asset , or the present value of the lease payments exceeds substantially all of the fair value of the asset . leases that do not qualify as finance leases are deemed to be operating leases . on the consolidated statements of operations , operating leases are expensed through operating lease rent while financing leases are expensed through amortization and interest expense . we incur a variety of costs in the development and leasing of our properties . after the determination is made to capitalize a cost , it is allocated to the specific component of a project that is benefited . determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment . the costs of land and building under development include specifically identifiable costs . the capitalized costs include , but are not limited to , pre-construction costs essential to the development of the property , development costs , construction costs , interest costs , real estate taxes , salaries and related costs and other costs incurred during the period of development . we consider a construction project as substantially completed and held available for occupancy upon the completion of tenant improvements , but no later than one year after major construction activity ceases . we cease capitalization on the portions substantially completed and occupied or held available for occupancy , and capitalize only those costs associated with the portions under construction . on a periodic basis , we assess whether there are any indications that the value of our real estate properties may be other than temporarily impaired or that their carrying value may not be recoverable . a property 's value is considered impaired if management 's estimate of the aggregate future cash flows ( undiscounted ) to be generated by the property is less than the carrying value of the property . to the extent impairment has occurred , the loss will be measured as the excess of the carrying amount of the property over the calculated fair value of the property . we also evaluate our real estate properties for impairment when a property has been classified as held for sale . real estate assets held for sale are valued at the lower of their carrying value or fair value less costs to sell and depreciation expense is no longer recorded . see note 4 , `` properties held for sale and dispositions . '' investments in unconsolidated joint ventures we account for our investments in unconsolidated joint ventures under the equity method of accounting in cases where we exercise significant influence over , but do not control , these entities and are not considered to be the primary beneficiary . we consolidate those joint ventures that we control or which are variable interest entities ( each , a `` vie '' ) and where we are considered to be the primary beneficiary . in all these joint ventures , the rights of the joint venture partner are both protective as well as participating . unless we are determined to be the primary beneficiary in a vie , these participating rights preclude us from consolidating these vie entities . these investments are recorded initially at cost , as investments in unconsolidated joint ventures , and subsequently adjusted for equity in net income ( loss ) and cash contributions and distributions . equity in net income ( loss ) from unconsolidated joint ventures is allocated based on our ownership or economic interest in each joint venture and includes adjustments related to basis differences that were identified as part of the initial accounting for the investment . when a capital event ( as defined in each joint venture agreement ) such as a refinancing occurs , if return thresholds are met , future equity income will be allocated at our increased economic interest . we recognize incentive income from unconsolidated real estate joint ventures as income to the extent it is earned and not subject to a clawback feature . distributions we receive from unconsolidated real estate joint ventures in excess of our basis in the investment are recorded as offsets to our investment balance if we remain liable for 37 future obligations of the joint venture or may otherwise be committed to provide future additional financial support . most of the joint venture debt is non-recourse to us . the company has performance guarantees under a master lease at one joint venture . see note 6 , `` investments in unconsolidated joint ventures . '' we assess our investments in unconsolidated joint ventures for recoverability , and if it is determined that a loss in value of the investment is other than temporary , we write down the investment to its fair value . we evaluate our equity investments for impairment based on the joint ventures ' projected discounted cash flows . we do not believe that the values of any of our equity investments were impaired at december 31 , 2019 . we may originate loans for real estate acquisition , development and construction ( `` adc loans '' ) where we expect to receive some of the residual profit from such projects . when the risk and rewards of these arrangements are essentially the same as an investor or joint venture partner , we account for these arrangements as real estate investments under the equity method of accounting for investments . otherwise , we account for these arrangements consistent with the accounting for our debt and preferred equity investments . revenue recognition rental revenue is recognized on a straight-line basis over the term of the lease . the excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in deferred rents receivable on the consolidated balance sheets . story_separator_special_tag rental revenue is recognized if collectability is probable . if collectability of substantially all of the lease payments is assessed as not probable , any difference between the rental revenue recognized to date and the lease payments that have been collected is recognized as a current-period adjustment to rental revenue . we record a gain on sale of real estate when title is conveyed to the buyer , subject to the buyer 's financial commitment being sufficient to provide economic substance to the sale and provided that we have no substantial economic involvement with the buyer . interest income on debt and preferred equity investments is accrued based on the contractual terms of the instruments and when , in the opinion of management , it is deemed collectible . some debt and preferred equity investments provide for accrual of interest at specified rates , which differ from current payment terms . interest is recognized on such loans at the accrual rate subject to management 's determination that accrued interest is ultimately collectible , based on the underlying collateral and operations of the borrower . if management can not make this determination , interest income above the current pay rate is recognized only upon actual receipt . deferred origination fees , original issue discounts and loan origination costs , if any , are recognized as an adjustment to the interest income over the terms of the related investments using the effective interest method . fees received in connection with loan commitments are also deferred until the loan is funded and are then recognized over the term of the loan as an adjustment to yield . debt and preferred equity investments are placed on a non-accrual status at the earlier of the date at which payments become 90 days past due or when , in the opinion of management , a full recovery of interest income becomes doubtful . interest income recognition on any non-accrual debt or preferred equity investment is resumed when such non-accrual debt or preferred equity investment becomes contractually current and performance is demonstrated to be resumed . interest is recorded as income on impaired loans only to the extent cash is received . we may syndicate a portion of the loans that we originate or sell the loans individually . when a transaction meets the criteria for sale accounting , we derecognize the loan sold and recognize gain or loss based on the difference between the sales price and the carrying value of the loan sold . any related unamortized deferred origination fees , original issue discounts , loan origination costs , discounts or premiums at the time of sale are recognized as an adjustment to the gain or loss on sale , which is included in investment income on the consolidated statement of operations . any fees received at the time of sale or syndication are recognized as part of investment income . asset management fees are recognized on a straight-line basis over the term of the asset management agreement . allowance for loan loss and other investment reserves the expense for loan loss and other investment reserves in connection with debt and preferred equity investments is the charge to earnings to adjust the allowance for possible losses to the level that we estimate to be adequate , based on level 3 data , considering delinquencies , loss experience and collateral quality . the company evaluates debt and preferred equity investments that are classified as held to maturity for possible impairment or credit deterioration associated with the performance and or value of the underlying collateral property as well as the financial and operating capability of the borrower/sponsor . quarterly , the company assigns each loan a risk rating . based on a 3-point scale , loans are rated “ 1 ” through “ 3 , ” from less risk to greater risk , which ratings are defined as follows : 1 - low risk assets - low probability of loss , 2 - watch list assets - higher potential for loss , 3 - high risk assets - loss more likely than not . 38 when it is probable that we will be unable to collect all amounts contractually due , the investment is considered impaired . a valuation allowance is measured based upon the excess of the carrying value of the investment over the fair value of the collateral . any deficiency between the carrying value of an asset and the calculated value of the collateral is charged to expense . we continue to assess or adjust our estimates based on circumstances of a loan and the underlying collateral . if additional information reflects increased recovery of our investment , we will adjust our reserves accordingly . debt and preferred equity investments that are classified as held for sale are carried at the lower of cost or fair market value using available market information obtained through consultation with dealers or other originators of such investments as well as discounted cash flow models based on level 3 data pursuant to asc 820-10. as circumstances change , management may conclude not to sell an investment designated as held for sale . in such situations , the investment will be reclassified at its net carrying value to debt and preferred equity investments held to maturity . for these reclassified investments , the difference between the current carrying value and the expected cash to be collected at maturity will be accreted into income over the remaining term of the investment .
| 40 the following table presents a summary of the commenced leasing activity for the year ended december 31 , 2019 in our manhattan and suburban portfolio : usable sf rentable sf new cash rent ( per rentable sf ) ( 1 ) prev . escalated rent ( per rentable sf ) ( 2 ) ti/lc per rentable sf free rent ( in months ) average lease term ( in years ) manhattan space available at beginning of the year 1,306,846 property no longer in redevelopment 96,857 sold vacancies ( 16,837 )
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while management has concluded that the current evaluation of collateral values is reasonable , if collateral values were significantly lower , the company 's allowance for loan loss policy would also require additional provision for loan losses . on january 1 , 2020 , the company adopted accounting standards update 2016-13 , financial instruments - credit losses ( topic 326 ) : measurement of credit losses on financial instruments ( “ cecl ” ) . while certain key assumptions to be used in nbt 's cecl model and methodologies are being finalized , as well as certain review controls , the day-one impact of adopting cecl is not expected to be material to the company 's total capital . management expects that the cecl model may create more volatility in the level of our allowance for loan losses from quarter to quarter as changes in the level of allowance for loan losses will be dependent upon , among other things , macroeconomic forecasts and conditions , loan portfolio volumes and credit quality . 30 management is required to make various assumptions in valuing the company 's pension assets and liabilities . these assumptions include the expected rate of return on plan assets , the discount rate and the rate of increase in future compensation levels . changes to these assumptions could impact earnings in future periods . the company takes into account the plan asset mix , funding obligations and expert opinions in determining the various rates used to estimate pension expense . the company also considers the citigroup pension liability index , market interest rates and discounted cash flows in setting the appropriate discount rate . in addition , the company reviews expected inflationary and merit increases to compensation in determining the rate of increase in future compensation levels . the company is subject to examinations from various taxing authorities . such examinations may result in challenges to the tax return treatment applied by the company to specific transactions . management believes that the assumptions and judgments used to record tax-related assets or liabilities have been appropriate . should tax laws change or the taxing authorities determine that management 's assumptions were inappropriate , an adjustment may be required which could have a material effect on the company 's results of operations . the company 's policies on the allowance for loan losses , pension accounting and provision for income taxes are disclosed in note 1 to the consolidated financial statements . a more detailed description of the allowance for loan losses is included in the section captioned “ risk management – credit risk ” in item 7. management 's discussion and analysis of financial condition and results of operations of this form 10-k. all significant pension accounting assumptions and income tax assumptions are disclosed in notes 13 and 12 to the consolidated financial statements , respectively . all accounting policies are important and as such , the company encourages the reader to review each of the policies included in note 1 to obtain a better understanding of how the company 's financial performance is reported . non-gaap measures this annual report on form 10-k contains financial information determined by methods other than in accordance with accounting principles generally accepted in the united states of america ( `` gaap '' ) . these measures adjust gaap measures to exclude the effects of acquisition-related intangible amortization expense on earnings , equity and assets as well as providing a fte yield on securities and loans . where non-gaap disclosures are used in this annual report on form 10-k , the comparable gaap measure , as well as a reconciliation to the comparable gaap measure , is provided in the accompanying tables . management believes that these non-gaap measures provide useful information that is important to an understanding of the results of the company 's core business as well as provide information standard in the financial institution industry . non-gaap measures should not be considered a substitute for financial measures determined in accordance with gaap and investors should consider the company 's performance and financial condition as reported under gaap and all other relevant information when assessing the performance or financial condition of the company . story_separator_special_tag individuals most secured by automobiles and other personal property . although automobile loans have generally been originated through dealers , all applications submitted through dealers are subject to the company 's normal underwriting and loan approval procedures . the specialty lending portfolio includes unsecured consumer loans across a national footprint originated through our relationship with national technology-driven consumer lending companies that began over 10 years ago as the result of our investment in springstone financial llc ( `` springstone '' ) . advances of credit through this specialty lending business line are to prime borrowers and are subject to the company 's underwriting standards . as of december 31 , 2019 , there were $ 149.4 million in construction and development loans included in total loans . risks associated with the commercial real estate portfolio include the ability of borrowers to pay interest and principal during the loan 's term , as well as the ability of the borrowers to refinance at the end of the loan term . the following table , maturities and sensitivities of certain loans to changes in interest rates , summarizes the maturities of the commercial and commercial real estate loan portfolios and the sensitivity of those loans to interest rate fluctuations at december 31 , 2019. scheduled repayments are reported in the maturity category in which the contractual payment is due . story_separator_special_tag 34 maturities and sensitivities of certain loans to changes in interest rates replace_table_token_11_th securities and corresponding interest and dividend income the average balance of securities available for sale ( `` afs '' ) decreased $ 248.1 million , or 20.5 % , from 2018 to 2019. the fte yield on average afs securities was 2.43 % for 2019 compared to 2.24 % in 2018. the average balance of securities held to maturity ( `` htm '' ) increased from $ 567.1 million in 2018 to $ 725.4 million in 2019. at december 31 , 2019 , htm securities were comprised primarily of tax-exempt municipal securities and government-sponsored collateralized mortgage obligations ( `` cmos '' ) . the fte yield on htm securities increased from 2.58 % in 2018 to 2.81 % in 2019. the average balance of federal reserve bank and fhlb stock decreased to $ 43.4 million in 2019 from $ 48.2 million in 2018. the fte yield from investments in federal reserve bank and fhlb stock increased from 6.39 % in 2018 to 6.64 % in 2019. securities portfolio replace_table_token_12_th the company 's mortgage-backed securities , u.s. agency notes and cmos are all guaranteed by fannie mae , freddie mac , the fhlb , federal farm credit banks or ginnie mae ( “ gnma ” ) . gnma securities are considered similar in credit quality to u.s. treasury securities , as they are backed by the full faith and credit of the u.s. government . currently , there are no subprime mortgages in our investment portfolio . the following tables set forth information with regard to contractual maturities of debt securities at december 31 , 2019 : replace_table_token_13_th 35 funding sources and corresponding interest expense the company utilizes traditional deposit products such as time , savings , now , money market and demand deposits as its primary source for funding . other sources , such as short-term fhlb advances , federal funds purchased , securities sold under agreements to repurchase , brokered time deposits and long-term fhlb borrowings are utilized as necessary to support the company 's growth in assets and to achieve interest rate sensitivity objectives . the average balance of interest-bearing liabilities increased $ 35.6 million from 2018 and totaled $ 6.0 billion in 2019. the rate paid on interest-bearing liabilities increased from 0.65 % in 2018 to 0.94 % in 2019. this increase in rates and increase in average balances caused an increase in interest expense of $ 17.4 million , or 44.9 % , from $ 38.6 million in 2018 to $ 56.0 million in 2019. deposits average interest bearing deposits increased $ 189.0 million , or 3.8 % , from 2018 to 2019 , due primarily to organic deposit growth . average money market deposits increased $ 242.3 million , or 14.2 % during 2019 compared to 2018. this growth in money market deposits was driven principally by increases in accounts from commercial customers . average now accounts decreased $ 95.6 million , or 8.0 % during 2019 as compared to 2018. the average balance of savings accounts decreased $ 1.9 million , or 0.1 % during 2019 compared to 2018. the average balance of time deposits increased $ 44.2 million , or 5.1 % , from 2018 to 2019. the average balance of demand deposits increased $ 30.3 million , or 1.3 % , during 2019 compared to 2018. this growth in demand deposits was driven principally by increases in accounts from retail , municipal and commercial customers . the rate paid on average interest-bearing deposits was 0.77 % for 2019 and 0.44 % for 2018. the rate paid for money market deposit accounts increased from 0.49 % during 2018 to 1.14 % during 2019. the rate paid for now deposit accounts decreased from 0.16 % in 2018 to 0.14 % in 2019. the rate paid for savings deposits was 0.06 % for 2019 and 2018. the rate paid for time deposits increased from 1.29 % during 2018 to 1.70 % during 2019. the following table presents the maturity distribution of time deposits of $ 250,000 or more : ( in thousands ) december 31 , 2019 within three months $ 16,060 after three but within twelve months 77,039 after one but within three years 39,124 over three years 8,182 total $ 140,405 borrowings average short-term borrowings decreased to $ 573.9 million in 2019 from $ 727.6 million in 2018. the average rate paid on short-term borrowings increased from 1.45 % in 2018 to 1.69 % in 2019. average long-term debt increased from $ 80.2 million in 2018 to $ 80.5 million in 2019. the average balance of junior subordinated debt remained at $ 101.2 million in 2019. the average rate paid for junior subordinated debt in 2019 was 4.37 % , up from 4.09 % in 2018. short-term borrowings consist of federal funds purchased and securities sold under repurchase agreements , which generally represent overnight borrowing transactions and other short-term borrowings , primarily fhlb advances , with original maturities of one year or less . the company has unused lines of credit with the fhlb and access to brokered deposits available for short-term financing of approximately $ 2.4 billion and $ 1.9 billion at december 31 , 2019 and 2018 , respectively . securities collateralizing repurchase agreements are held in safekeeping by nonaffiliated financial institutions and are under the company 's control . long-term debt , which is comprised primarily of fhlb advances , are collateralized by the fhlb stock owned by the company , certain of its mortgage-backed securities and a blanket lien on its residential real estate mortgage loans . 36 noninterest income noninterest income is a significant source of revenue for the company and an important factor in the company 's results of operations .
| 31 , 2018. significant non-recurring transactions occurring in the third quarter of 2019 included a $ 4.0 million gain on the sale of visa class b common stock and a $ 3.1 million expense primarily related to branch optimization strategies . significant non-recurring transactions occurring in the fourth quarter 2018 included a one-time tax benefit of $ 5.5 million related to tax return accounting method changes and $ 6.6 million in losses on securities sold due to the restructuring of a portion of the investment securities portfolio . 31 return on average tangible common equity is a non-gaap measure and excludes amortization of intangible assets ( net of tax ) from net income and average tangible equity calculated as follows : replace_table_token_7_th 2020 outlook the company 's 2019 earnings reflected the company 's continued ability to manage through the existing economic conditions and challenges in the financial services industry , while investing in the company 's future . during 2019 , the company , along with other financial services companies , experienced pressure in the second half of the year from lower short-term rates and a flatter yield curve . significant items that may have an impact on 2020 results include : ● continued modest economic growth may result in interest rates remaining low or falling further . this would result in principal and interest payments on currently outstanding loans and investments being reinvested at lower rates . while low market rates would likely reduce borrowing costs from current levels , already-low deposit costs would likely fall less . the benefit of lower funding costs could potentially not be large enough to offset the impact of lower rates on our earning assets . the magnitude and timing of interest rate changes , if any , along with the shape of the yield curve , will impact net interest income in 2020 . ● slower economic growth could reduce demand for credit , slowing loan growth . ● the company 's continued focus on long-term strategies including growth in
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63 the table below analyzes the performance of farmer mac 's underlying business apart from the effects of the two initiatives . table 2 replace_table_token_20_th ( 1 ) the change in net credit related income was primarily attributable to the after-tax difference between the net release from/provision for the allowance for losses , which was a $ 2.1 million after-tax release in 2014 , $ 0.3 million after-tax provision in 2013 , and $ 1.2 million after-tax provision in 2012 . ( 2 ) represents other income , hedging costs , and other miscellaneous items . the decrease in core earnings excluding indicated items in 2014 relative to 2013 was due in large part to several unique items that decreased net effective spread , gains on available-for-sale investment securities and gains on repurchase of debt , and other tax benefits , as well as an increase in operating expenses . the decrease in gains on sale of available-for-sale investment securities and gains on repurchase of debt was a result of a $ 2.0 million after-tax gain from the sale of a single investment security in 2013 on which farmer mac also realized tax benefits of $ 1.1 million , as well as a $ 1.0 million after-tax gain from the repurchase of debt , neither of which recurred in 2014. the reduction in other tax benefits was a result of a $ 2.1 million recognition of tax benefits from applying capital loss carryforwards to capital gains recognized on investment securities in 2013 , compared to $ 0.9 million of similar tax benefits in 2014. the increase in operating expenses in 2014 compared to 2013 was primarily attributable to an increase in compensation expense and other costs related to corporate initiatives . for additional information on year-to-year changes in core earnings and core earnings excluding indicated items , see `` —results of operations . '' farmer mac 's net effective spread was $ 103.2 million ( 83 basis points ) in 2014 , compared to $ 105.3 million ( 86 basis points ) in 2013 and $ 106.6 million ( 95 basis points ) in 2012. the decrease in net effective spread in 2014 compared to 2013 and 2012 is primarily attributable to the loss of $ 2.1 million in preferred dividend income ( 2 basis points ) resulting from the october 2014 redemption of cobank preferred stock . the reduction in net effective spread in 2014 and 2013 compared to 2012 was attributable to the effects of double financing of certain assets and repayments of existing investment securities and farm & ranch loans with higher spreads relative to the new securities and loans added throughout 2013 and 2014. the double financing resulted from the early recasting of certain rural utilities loans and the early refinancing of maturing agvantage securities during first quarter 2014 and fourth quarter 2013 , which led to a $ 1.3 million decrease ( 1 basis point ) in net effective spread in 2014 and a $ 0.7 million decrease ( 1 basis point ) in 2013. the original funding for those recast and refinanced assets matured at the end of first quarter 2014. in the absence of the redemption of the cobank preferred stock and the 64 impact of the double financing , net effective spread in 2014 would have increased relative to 2013 as farmer mac increased its spreads on certain farm & ranch loan products in second quarter 2014 and also benefited from a decrease in the amount of unscheduled prepayments on the loans in its portfolio and the fact that new loans purchased in 2014 generally earned higher spreads than the spreads on the loans that did prepay during the year . business volume farmer mac added $ 2.8 billion of new business volume during 2014. the new business volume included purchases of agvantage securities of $ 1.3 billion , farm & ranch loan purchases of $ 697.8 million , farm & ranch ltspcs of $ 369.9 million , and usda securities purchases of $ 335.4 million . taking into account maturities and paydowns on existing assets , farmer mac 's outstanding business volume was $ 14.6 billion as of december 31 , 2014 , an increase of $ 647.4 million from december 31 , 2013 and an increase of $ 1.6 billion compared to december 31 , 2012. capital as of december 31 , 2014 , farmer mac 's core capital level was $ 766.3 million , $ 345.0 million above the minimum capital level required by farmer mac 's charter . as of december 31 , 2013 , farmer mac 's core capital level was $ 590.7 million , which was $ 192.2 million above the minimum capital requirement . farmer mac enhanced its tier 1 capital position through issuances of the series b preferred stock and the series c preferred stock during the first half of 2014 and also increased its retained earnings in 2014. based on this strengthened capital position and consistent with farmer mac 's recapitalization plans , farmer mac intends to use the proceeds of the recent preferred stock offerings and cash on hand for farmer mac ii llc to redeem all of the outstanding farmer mac ii llc preferred stock on march 30 , 2015 , the initial redemption date for those securities , which will trigger a redemption of all outstanding falcons on the same day . farmer mac does not currently anticipate that any further issuance of preferred stock will be needed to fund the planned redemption of the farmer mac ii llc preferred stock , which does not constitute a tier 1 capital-eligible security . credit quality farmer mac continues to maintain very favorable credit metrics . during 2014 , farmer mac reduced its allowance for losses by $ 3.2 million , primarily due to the continued decline in the balance of its ethanol portfolio resulting from loan maturities and prepayments , as well as a general improvement in the quality of the ethanol loans remaining in farmer mac 's portfolio . story_separator_special_tag as of december 31 , 2014 , farmer mac 's 90-day delinquencies were $ 18.9 million ( 0.35 percent of the farm & ranch portfolio ) , down from $ 28.3 million ( 0.55 percent of the farm & ranch portfolio ) as of december 31 , 2013 , and $ 33.3 million ( 0.70 percent of the farm & ranch portfolio ) as of december 31 , 2012. critical accounting policies and estimates the preparation of farmer mac 's consolidated financial statements in conformity with gaap requires the use of estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes for the periods presented . actual results could differ from those estimates . the critical accounting policies that are both important to the portrayal of farmer mac 's financial condition and results of operations and require complex , subjective judgments are the accounting policies for the allowance for losses and fair value measurement . 65 allowance for losses farmer mac maintains an allowance for losses to cover estimated probable losses incurred as of the balance sheet date on loans held for investment ( `` allowance for loan losses '' ) and loans that underlie off-balance sheet farmer mac guaranteed securities and ltspcs ( `` reserve for losses '' ) based on available information . for purposes of this accounting policy , the allowance for loan losses and the reserve for losses are described collectively as the `` allowance for losses '' because the estimation methodology is identical for loans that are held for investment and for loans that underlie off-balance sheet farmer mac guaranteed securities and ltspcs . disaggregation by commodity type is performed , where appropriate , in analyzing the need for an allowance for losses . the allowance for loan losses is increased through periodic provisions for loan losses that are charged against net interest income and the reserve for losses is increased through provisions for losses that are charged to non-interest expense . both the allowance for loan losses and reserve for losses are reduced by charge-offs for actual losses , net of recoveries . charge-offs represent losses on the outstanding principal balance , any interest payments previously accrued or advanced , and expected costs of liquidation . negative provisions , or releases of allowance for losses , are recorded in the event that the estimate of probable losses as of the end of a period is lower than the estimate at the beginning of the period . the total allowance for losses consists of a general allowance for losses and a specific allowance for individually identified impaired loans . general allowance for losses farm & ranch farmer mac 's methodology for determining its general allowance for losses incorporates farmer mac 's automated loan classification system . that system scores loans based on criteria such as historical repayment performance , indicators of current financial condition , loan seasoning , loan size , and loan-to-value ratio . for purposes of the loss allowance methodology , the loans in farmer mac 's portfolio of loans and loans underlying off-balance sheet farm & ranch guaranteed securities and ltspcs have been scored and classified for each calendar quarter since first quarter 2000. the allowance methodology captures the migration of loan scores across concurrent and overlapping three-year time horizons and calculates loss rates separately within each loan classification for ( 1 ) loans held for investment and ( 2 ) loans underlying off-balance sheet farm & ranch guaranteed securities and ltspcs . the calculated loss rates are applied to the current classification distribution of unimpaired loans in farmer mac 's portfolio to estimate probable losses , based on the assumption that the historical credit losses and trends used to calculate loss rates will continue in the future . management evaluates this assumption by taking into consideration various factors , including : economic conditions ; geographic and agricultural commodity/product concentrations in the portfolio ; the credit profile of the portfolio ; delinquency trends of the portfolio ; historical charge-off and recovery activities of the portfolio ; and other factors to capture current portfolio trends and characteristics that differ from historical experience . 66 management believes that this methodology produces a reasonable estimate of probable losses , as of the balance sheet date , for all loans included in the farm & ranch line of business , including loans held for investment and loans underlying off-balance sheet farm & ranch guaranteed securities and ltspcs . rural utilities farmer mac separately evaluates the rural utilities loans it holds for investment to estimate any probable losses inherent in those assets . farmer mac has not provided an allowance for losses for the portfolio segment related to the rural utilities program based on the credit quality of the collateral supporting rural utilities assets . specific allowance for impaired loans farmer mac individually analyzes certain loans in its portfolio for impairment . farmer mac 's individually impaired loans generally include loans 90 days or more past due , in foreclosure , restructured , in bankruptcy , and certain performing loans that have previously been delinquent or are secured by real estate that produces agricultural commodities or products that are currently under stress . for individually identified impaired loans with an updated appraisal , other updated collateral valuation , or management 's estimate of discounted collateral value , this analysis compares the measurement of the fair value of the collateral to the total recorded investment in the loan . the total recorded investment in the loan includes principal , interest , and advances , net of any charge-offs . in the event that an individually analyzed loan 's collateral value does not equal or exceed its total recorded investment , farmer mac provides a specific allowance for loss in the amount of the difference between the recorded investment and fair value , less estimated costs to liquidate the collateral . estimated selling costs are based on historical selling costs incurred by farmer mac or management 's best estimate of selling costs for a particular property .
| million . the increase in total equity during 2014 was the result of the issuances of $ 75.0 million of series b preferred stock in march 2014 and $ 75.0 million of series c preferred stock in june 2014 , an increase in retained earnings , and an increase in accumulated other comprehensive income due to increases in the fair value of available-for-sale securities . these increases in the fair value of available-for-sale securities were driven primarily by lower u.s. treasury rates . risk management credit risk – loans and guarantees . farmer mac is exposed to credit risk resulting from the inability of borrowers to repay their loans in conjunction with a deficiency in the value of the collateral relative to the outstanding balance of the loan and the costs of liquidation . farmer mac is exposed to credit risk on : loans held ; loans underlying farmer mac guaranteed securities ; and loans underlying ltspcs . farmer mac generally assumes 100 percent of the credit risk on loans held in the farm & ranch and rural utilities lines of business and loans underlying ltspcs and farmer mac guaranteed securities in the farm & ranch line of business . farmer mac has direct credit exposure to loans in non-agvantage transactions and indirect credit exposure to loans that secure agvantage transactions because agvantage securities represent a general obligation of an issuer that is in turn secured by qualified loans . the credit exposure of farmer mac and farmer mac ii llc on usda securities , including those underlying farmer mac guaranteed usda securities , is covered by the full faith and credit of the united states . therefore , farmer mac believes that farmer mac and farmer mac ii llc have little or no credit risk exposure in the usda guarantees line of business because of the usda guarantee . as of december 31 , 2014 , neither farmer mac nor farmer
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offshore projects contracted at high prices in 2007 and 2008 were manufactured in low cost environments in 2010 , resulting in high margins ( 29.6 % ) for the group . as these projects were completed and replaced with lower priced projects , 2011 margins declined 310 basis points from the prior year . for the fourth quarter of 2011 the segment produced revenues of $ 2,316 million , representing an 18 % improvement from the third quarter and a 32 % improvement from the fourth quarter of 2010. segment operating profit was $ 597 million and operating margins were 25.8 % during the fourth quarter . operating leverage or flow-through was 21 % sequentially , and 17 % year-over-year , lower than the 30 % that is typical for the group owing to the mix effect described above . revenue out of backlog grew 26 % sequentially and 40 % year-over-year . non-backlog revenue , which is predominantly aftermarket spares and services , declined four percent sequentially and increased 11 % from the fourth quarter of 2010. orders for three deepwater floating rigs , six jackup drilling packages , and higher land drilling rig , pressure pumping and stimulation equipment demand contributed to total order additions to backlog of $ 1,668 million during the fourth quarter , capping a year in which orders for the segment set a new record of $ 10.8 billion . interest in offshore rig construction has remained strong as announced dayrates for deepwater offshore rigs appears to be increasing , rig building costs have stabilized , and financing appears to be available for most established drillers . the company booked an order for seven drillships for brazil in the third quarter of 2011 , and continues to tender additional new offshore rig projects for petrobras to shipyards and drilling contractors , which are to be built in brazil . however , further potential bookings of any additional offshore rigs for brazil are likely to continue to be subject to delays . 38 index to financial statements the petroleum services & supplies segment generated $ 5.7 billion in revenue and $ 1.1 billion in operating profit , or 19.0 % of sales , for the full year 2011. compared to the prior year revenue increased 35 % , and operating leverage or flow-through ( the change in operating profit divided by the change in revenue ) was 33 % . for the fourth quarter of 2011 the segment generated total sales of $ 1,570 million in the fourth quarter of 2011 , up 8 % from the third quarter of 2011 and up 38 % from the fourth quarter of 2010. operating profit was $ 295 million or 18.8 % of sales during the fourth quarter of 2011. year-over-year operating leverage or flow-through from the fourth quarter of 2010 to the fourth quarter of 2011 was 29 % . the ameron acquisition was completed on october 5 , 2011 and its composite pipe segment is being integrated into the group 's fiberglass and composite pipe products . sequential revenue growth was evenly spread across most major areas , albeit with mix shifts from product to product . europe , russia and the far east posted some of the largest sequential gains , along with good sequential improvement in the u.s. centered in the liquids rich shale plays like the bakken and the eagle ford . wellsite services and downhole tools posted strong sequential sales growth on higher sales in the eastern hemisphere , canada , and u.s. shales . drill pipe orders were steady for the quarter , but margins were down as more greentubes were purchased from third party suppliers at higher prices , rather than from the company 's joint venture supplier of greentubes . the distribution & transmission segment generated $ 1.9 billion in revenue and $ 135 million in operating profit or 7.2 % of sales during 2011. revenues improved 21 % from 2010 , and flow-through or operating leverage was 17 % from 2010 to 2011. for the fourth quarter of 2011 revenues were $ 560 million , up 17 % from the third quarter of 2011 and up 32 % from the fourth quarter of 2010. operating profit of $ 45 million for the fourth quarter produced operating margins of 8.0 % for the quarter , and operating leverage or flow-through was 10 % from the third quarter of 2011 and 11 % from the fourth quarter of 2010. results for the fourth quarter included the ameron water transmission and infrastructure products segments from october 5 , 2011 onward , which were modestly dilutive to the group 's margins . the legacy distribution portion of the segment saw revenues up slightly , with strong flow-throughs , due to excellent performance in canada . international was up slightly and the us was down slightly due to rig moves towards liquids plays , together with related drill site construction delays and weather issues in a few markets . approximately 74 % of the group 's fourth quarter sales were into north american markets and 26 % into international markets . outlook following the credit market downturn , global recession , and lower commodity prices of 2009 , we saw signs of stabilization and recovery in many of our markets in 2010 and into 2011 , led by higher drilling activity in north america and slowly improving international drilling activity . order levels for new drilling rigs has rebounded sharply , and the rig technology segment continues to experience a high level of interest in new capital equipment . rig dayrates appear to be improving for certain classes of newer technology rigs , and appear to be trending higher for deepwater offshore rigs . we expect lower pricing in our backlog to lead to modest declines in rig technology margins in the first half of 2012 , until recently won offshore rig construction orders begin to generate revenues at higher margins . story_separator_special_tag our outlook for the company 's petroleum services & supplies segment and distribution & transmission segment remains closely tied to the rig count , particularly in north america . if the oil rig count growth seen over the past few quarters continues to increase and more than offset gas rig declines , we expect these segments to benefit from higher demand for the services , consumables and capital items they supply . however , if continued curtailment of gas drilling leads overall rig counts lower , as has been the case for the past few months , then pricing and volumes may come under pressure . the company believes it is well positioned , and should benefit from its strong balance sheet and capitalization , access to credit , and a high level of contracted orders which are expected to continue to generate earnings during 2012. the company has a long history of cost-control and downsizing in response to depressed market conditions , and of executing strategic acquisitions during difficult periods . such a period may present opportunities to the company to effect new organic growth and acquisition initiatives , and we remain hopeful that a downturn will generate new opportunities . still the recovery of the world economy continues to move forward with a great deal of uncertainty as the world watches the sovereign debt crises in several european countries unfold , market turbulence and general global economic worries . if such global economic uncertaintanties develop adversely , world oil and gas prices could be impacted which in turn could negatively impact the worldwide rig count and the company 's future financial results . 39 index to financial statements results of operations years ended december 31 , 2011 and december 31 , 2010 the following table summarizes the company 's revenue and operating profit by operating segment in 2011 and 2010 ( in millions ) : replace_table_token_6_th rig technology rig technology revenue for the year ended december 31 , 2011 was $ 7,788 million , an increase of $ 823 million ( 11.8 % ) compared to 2010. deepwater offshore drilling world-wide and active shale plays in the u.s. continue to be the driving force for the increase in revenue for this segment resulting in both increased rig construction as well as demand for aftermarket spare parts and services . in addition , strategic acquisitions in the u.s. and singapore contributed to the increase in revenue for this segment . operating profit from rig technology was $ 2,053 million for the year ended december 31 , 2011 , a decrease of $ 11 million ( 0.5 % ) over the same period of 2010. operating profit percentage decreased to 26.4 % , from 29.6 % in 2010 primarily due to decrease in the average margin of revenue out of backlog as contracts signed during 2009 and 2010 contain less favorable margins compared to contracts won during the order ramp-up from 2005 to 2008. this decrease in margins was partially offset by the increase in demand for aftermarket spare parts and services . the rig technology segment monitors its capital equipment backlog to plan its business . new orders are added to backlog only when the company receives a firm written order for major drilling rig components or a signed contract related to a construction project . the capital equipment backlog was $ 10.2 billion at december 31 , 2011 , an increase of $ 5.2 billion ( 104.0 % ) from backlog of $ 5.0 billion at december 31 , 2010. the $ 5.2 billion increase in backlog included the largest order in the company 's history in the amount of approximately $ 1.5 billion won during the third quarter of 2011 . $ 6.6 billion of the current backlog is expected to be delivered in 2012. petroleum services & supplies revenue from petroleum services & supplies was $ 5,654 million for 2011 compared to $ 4,182 million for 2010 , an increase of $ 1,472 million ( 35.2 % ) . the increase was primarily attributable to shale plays leading to a strong north american market with a 21.7 % increase in u.s. rig activity and a 20.5 % increase in canada rig activity compared to 2010. north american shale plays continue to be a driving force in the increase in revenues across most business units within this segment . in addition , strategic acquisitions in the u.s. , the u.k. , the netherlands , singapore , malaysia and brazil contributed to the increase in revenue for this segment . 40 index to financial statements operating profit from petroleum services & supplies was $ 1,072 million for 2011 compared to $ 585 million for 2010 , an increase of $ 487 million ( 83.2 % ) . operating profit percentage increased to 19.0 % up from 14.0 % in 2010. this increase is primarily due to increased volume with a strong north american demand fueled by an increase in rig count as well as continued favorable pricing within most business units within the segment . the increase was partially offset by lower levels of activity in the middle east due to continued unrest in that region . this unrest resulted in the write-down , in the first quarter , of libyan assets of $ 15 million , mostly related to accounts receivable affected by sanctions enacted during the quarter along with the write off of certain inventory and fixed assets in the country . the company 's rig technology and distribution & transmission segments incurred $ 2 million of such asset write-downs during the first quarter for a total of $ 17 million in libyan asset write-downs incurred by the company .
| excluding transaction and restructuring charges from all periods , fourth quarter 2011 earnings were $ 1.37 per fully diluted share , compared to $ 1.26 per fully diluted share in the third quarter of 2011 and $ 1.05 per fully diluted share in the fourth quarter of 2010. operating profit excluding transaction charges was $ 860 million or 20.2 % of sales in the fourth quarter of 2011 , compared to $ 778 million or 20.8 % of sales in the third quarter of 2011 excluding transaction charges . operating profit excluding transaction and restructuring charges was $ 625 million or 19.7 % of sales for the fourth quarter of 2010. oil and gas equipment and services market worldwide developed economies turned down sharply late in 2008 as looming housing-related asset write-downs at major financial institutions paralyzed credit markets and sparked a serious global banking crisis . major central banks responded vigorously through 2009 , but a credit-driven worldwide economic recession developed nonetheless . developed economies struggled to recover throughout 2010 and 2011 , facing additional economic weakness related to potential sovereign debt defaults in europe . as a result , commodity prices , including oil and gas prices , have been volatile . after rising steadily for six years to peak at around $ 140 per barrel earlier in 2008 , oil prices collapsed back to average $ 43 per barrel ( west texas intermediate crude ) during the first quarter of 2009 , but slowly recovered into the $ 90 to $ 100 per barrel range by the end of 2010 where they held relatively steady throughout 2011 ( the fourth quarter of 2011 averaged $ 93.99 per barrel ) . after averaging $ 6 to $ 9 an mmbtu 2004-2008 , north american gas prices declined to average $ 3.17 per mmbtu in the third quarter of 2009. gas prices recovered modestly , trading up above $ 5 six months later , but then slowly settled into the $ 3 to $ 4 per mmbtu since . the fourth quarter of 2011 averaged $ 3.32 per mmbtu ; however , north american gas turned down sharply around year end 2011 , trading below $ 2.50 per mmbtu , reflecting rising supplies of gas produced from new unconventional shale reservoirs . the
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· engaging a third party consulting firm to assist in assessing , designing , implementing , and monitoring controls related to financial statement preparation , it general controls , journal entries , and significant operating processes . · organizing regular story_separator_special_tag the discussion and analysis below includes certain forward-looking statements that are subject to risks , uncertainties and other factors , as described in `` risk factors '' and elsewhere in this annual report on form 10-k , that could cause our actual growth , results of operations , performance , financial position and business prospects and opportunities for this fiscal year and the periods that follow to differ materially from those expressed in , or implied by , those forward-looking statements . corporate overview since inception we have devoted substantially all of our efforts establishing a new business and while operations have commenced we have generated no revenue from our limited operations . we are a holding company for a diagnostic medical device company and a clinical trial company specializing in discovering , developing and commercializing diagnostic medical devices with initial applications in the area of diabetes . we are a holding corporation that owns one hundred percent ( 100 % ) of a diagnostic medical device company specializing in discovering , developing and commercializing specialty medical devices . we were organized on december 24 , 2013 under the laws of the state of nevada . we own one hundred percent ( 100 % ) of region green limited , a british virgin islands corporation formed on december 12 , 2013. region green limited owns one hundred percent ( 100 % ) of the stock in dermal diagnostic ( holdings ) limited , an england and wales corporation formed on december 11 , 2013. dermal diagnostics ( holdings ) limited owns one hundred percent ( 100 % ) of the stock in ddl , an england and wales corporation formed on january 20 , 2009 , and one hundred percent ( 100 % ) of the stock in tcl , an england and wales corporation formed on january 12 , 2011. in december 2013 , we restructured the company and re-domiciled as a domestic corporation in the united states . the corporate re-organization was accomplished to preserve the tax advantages under the laws of the england and wales tax laws for the benefit of the shareholders of both ddl and tcl . 29 affiliated company relationships pharma was incorporated in november 2005. through october 2013 , all technology development and related transactions were incurred by pharma . as new technology platforms were invented and developed , additional companies were set up to contain these new technology platforms to aid in the process of raising further investments to progress the development of these subsequent technologies . however , due to the small size of the operations , low number of employees and laboratory and office space required , only one payroll was maintained initially . invoices were posted in pharma and recharges were made as required . prior to the year ended march 31 , 2016 , recharges included a proportion of the overhead allocated based on management 's assessment . management believes that the allocation methodologies are reasonable . dr. d. f chowdhury and mr. bashir timol are officers of pharma . however , pharma plans a management restructuring and a new management team is planned to be recruited in due course , aligned with commercial launch plans . the current management at ddl , including dr. d. f. chowdhury will allocate 15 % of their time to oversee the current operations at pharma and the implementation of the new management team and to provide ongoing support in an advisory role . pharma is a drug delivery company , which means that its activities are entirely related to the delivery of drugs to the body of a human or animal subject . ddl is a diagnostic company , which means it is entirely focused on extracting molecules from the human or animal subject and analyzing it to make a diagnosis or to monitor the level of a particular molecule such as glucose . these are two independent businesses engaged in different activities , therefore there is no conflict of interest between the two and management does not see any conflicts arising from the allocations of some of ddl management time to overseeing the operations of pharma . for the years ended march 31 , 2017 and 2016 , pharma paid dr. chowdhury $ 105,168 and $ 90,370 respectively . these payments were solely for work that dr. chowdhury performed for pharma in his capacity as manager . these amounts have not been recharged to nemaura medical inc. and are not included in our financial statements . results of operations management 's plans and basis of presentation the company has experienced recurring losses and negative cash flows from operations . at march 31 , 2017 , the company had approximate cash and fixed rate cash account balances of $ 7,138,000 , working capital of $ 1,978,000 , total stockholders ' equity of $ 5,367,000 and an accumulated deficit of $ 7,153,000. to date , the company has in large part relied on equity financing to fund its operations . additional funding has come from related party contributions . the company expects to continue to incur losses from operations for the near-term and these losses could be significant as product development , regulatory activities , clinical trials and other commercial and product development related expenses are incurred . story_separator_special_tag management 's strategic assessment includes the following potential options : ● obtaining regulatory approval for the sugarbeat device ● pursuing additional capital raising opportunities ; ● exploring licensing opportunities ; and ● developing the sugarbeat device for commercialization . 30 story_separator_special_tag following : – establish commercial manufacturing operations for commercial supply of the sugarbeat device and patches . – complete clinical studies for ce approval of the body worn miniaturised device with bluetooth connectivity . in november 2015 we received proceeds of $ 10,000,000 in connection with the private placement of 5 million shares and warrants for up to 10 million shares of our common stock . 32 operating activities net cash consumed by our operating activities for the year ended march 31 , 2017 was $ 1,192,828 which reflected our net loss of $ 1,551,266 , and offset by an increase in accounts payable , liability due to related parties and accrued expenses of $ 252,638 , and by a decrease in prepayments and other receivables of $ 85,367. net cash consumed by our operating activities for the year ended march 31 , 2016 was $ 1,209,365 which reflected our net loss of $ 1,539,637 , a decrease in accounts payable and accrued expenses of $ 160,983 and offset by a decrease in prepayments and other receivables of $ 224,392 and decrease in prepayment to related party of $ 249,459. net cash consumed by our operating activities for the year ended march 31 , 2015 was $ 1,432,863 which reflected our net loss of $ 1,319,840 and an increase in prepayments and other receivables of $ 407,805 and offset by an increase in accounts payable and accrued expenses of $ 117,226 and $ 170,000 respectively . net cash used in investing activities was $ 6,306,089 for the year ended march 31 , 2017 , which reflected the expenditures made in developing intellectual property , primarily related to patent filings of $ 73,070 and property and equipment of $ 6,519 and $ 6,226,500 invested in fixed rate savings account . net cash used in investing activities was $ 87,564 for the year ended march 31 , 2016 , which reflected the expenditures made in developing intellectual property , primarily related to patent filings of $ 78,197 and property and equipment of $ 9,367. net cash used in investing activities was $ 6,740 for the year ended march 31 , 2015 , which reflected the decrease in restricted cash of $ 85,462 and the purchase of intellectual property of $ 76,745 and property and equipment of $ 15,457. net cash provided by financing activities was $ 10,299,434 for the year ended march 31 , 2016. net cash provided by financing activities represents proceeds from the issuance of common stock for cash of $ 10,000,000 and costs paid for by a related party of $ 299,434. for the years ended march 31 , 2017 and 2015 , there were no financing activities . off-balance sheet arrangements we have no off-balance sheet arrangements , including unrecorded derivative instruments that have or are reasonably likely to have a current or future material effect on our financial condition , changes in financial condition , revenues or expenses , results of operations , liquidity , capital expenditures or capital resources . critical accounting policies the preparation of financial statements in conformity with accounting principles generally accepted in the united states of america ( gaap ) requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes . future events and their effects can not be determined with absolute certainty . therefore , the determination of estimates requires the exercise of judgment . actual results inevitably will differ from those estimates , and such differences may be material to the financial statements . the most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with research and development , income taxes and intangible assets . 33 the company 's financial position , results of operations and cash flows are impacted by the accounting policies the company has adopted . in order to get a full understanding of the company 's financial statements , one must have a clear understanding of the accounting policies employed . a summary of the company 's critical accounting policies follows : research and development expenses : the company charges research development expenses to operations as incurred . research and development expenses primarily consist of salaries and related expenses for personnel and outside contractor and consulting services . other research and development expenses include the costs of materials and supplies used in research and development , prototype manufacturing , clinical studies , related information technology and an allocation of facilities costs . income taxes : income taxes are accounted for under the asset and liability method . deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases , and operating loss carry forwards . deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled . the effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date . a valuation allowance is provided to reduce the carrying amount of deferred income tax assets if it is considered more likely than not that some portion , or all , of the deferred income tax assets will not be realized . the company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained . recognized income tax positions are measured at the largest amount that is greater than 50 % likely of being realized . changes in recognition or measurement
| we expect general and administrative expenses to remain at similar levels going forward in the long term , as there will continue to be professional , consultancy and legal fees associated with planned fundraising . other comprehensive income for the years ended march 31 , 2017 and 2016 other comprehensive ( loss ) /income was ( $ 760,999 ) and $ 135,813 respectively , arising from foreign currency translation adjustments . 31 year ended march 31 , 2016 compared to the year ended march 31 , 2015 revenue there was no revenue recognized in the years ended march 31 , 2016 and march 31 , 2015. in 2014 , we received an upfront non-refundable cash payment of approximately $ 1.67 million in connection with an exclusive marketing rights agreement with an unrelated third party that provides the third party the exclusive right to market and promote the sugarbeat device and related patch under its own brand in the united kingdom and the republic of ireland . we have deferred this licensing revenue until we complete our continuing performance obligations , which include securing successful ce marking of the sugarbeat patch , and we expect to record the revenue in income over an approximately 10 year term from the date ce marking approval is obtained . although the revenue is deferred at march 31 , 2016 and 2015 , the cash payment became immediately available and was being used to fund our operations , including research and development costs associated with obtaining the ce marking approval . research and development expenses research and development expenses were $ 1,028,224 and $ 824,503 for the years ended march 31 , 2016 and 2015 , respectively . the increase was due to increased sub contractor activities for improvements made to the sugarbeat device . we expect research and development expenses to continue to be a significant cost in future periods as we continue our clinical studies of our sugarbeat device and pursue strategic opportunities . general and administrative expenses general and administrative expenses were $ 511,413
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a property value is considered impaired only if management 's estimate of current and projected operating cash flows ( undiscounted and unleveraged ) of the property over its anticipated hold period is less than the net carrying value of the property . such cash flow projections consider factors such as expected future operating income , trends and prospects , as well as the effects of demand , competition and other factors . to the extent impairment has occurred , the carrying value of the property would be adjusted to reflect the estimated fair value of the property . when a real estate asset is identified by management as held-for-sale , the company ceases depreciation of the asset and estimates the sales price of such asset net of selling costs . if , in management 's opinion , the net sales price of the asset is less than the net book value of such asset , an adjustment to the carrying value would be recorded to reflect the estimated fair value of the property . investments in unconsolidated joint ventures the company accounts for its investments in unconsolidated joint ventures under the equity method of accounting as the company exercises significant influence , but does not control , these entities . these investments are recorded initially at cost and are subsequently adjusted for cash contributions and distributions . earnings for each investment are recognized in accordance with each respective investment agreement and , where applicable , are based upon an allocation of the investment 's net assets at book value as if the investment was hypothetically liquidated at the end of each reporting period . the company 's joint ventures and other real estate investments primarily consist of co-investments with institutional and other joint venture partners in open-air shopping center properties , consistent with its core business . these joint ventures typically obtain non-recourse third-party financing on their property investments , thus contractually limiting the company 's exposure to losses to the amount of its equity investment , and , due to the lender 's exposure to losses , a lender typically will require a minimum level of equity in order to mitigate its risk . from time to time the joint ventures will obtain unsecured debt , which may be guaranteed by the joint venture . the company 's exposure to losses associated with its unconsolidated joint ventures is primarily limited to its carrying value in these investments . on a continuous basis , management assesses whether there are any indicators , including property operating performance and general market conditions , that the value of the company 's investments in unconsolidated joint ventures may be impaired . an investment 's value is impaired only if management 's estimate of the fair value of the investment is less than the carrying value of the investment and such difference is deemed to be other-than-temporary . to the extent impairment has occurred , the loss shall be measured as the excess of the carrying amount of the investment over the estimated fair value of the investment . the company 's estimated fair values are based upon a discounted cash flow model for each joint venture that includes all estimated cash inflows and outflows over a specified holding period and , where applicable , any estimated debt premiums . capitalization rates , discount rates and credit spreads utilized in these models are based upon rates that the company believes to be within a reasonable range of current market rates . realizability of deferred tax assets and uncertain tax positions the company is subject to federal , state and local income taxes on the income from its activities relating to its trs activities and subject to local taxes on certain non-u.s. investments . the company accounts for income taxes using the asset and liability method , which requires that deferred tax assets and liabilities be recognized based on future tax consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis . deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which temporary differences are expected to be recovered or settled . the effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the changes are enacted . a reduction of the carrying amounts of deferred tax assets by a valuation allowance is required , if based on the evidence available , it is more likely than not ( a likelihood of more than 50 percent ) that some portion or all of the deferred tax assets will not be realized . the valuation allowance , which requires significant judgement from management , should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized . the company 's reported net earnings are directly affected by management 's judgement in determining a valuation allowance . the company recognizes and measures benefits for uncertain tax positions , which requires significant judgment from management . although the company believes it has adequately reserved for any uncertain tax positions , no assurance can be given that the final tax outcome of these matters will not be different . the company adjusts these reserves in light of changing facts and circumstances , such as the closing of a tax audit or the refinement of an estimate . changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in the company 's income tax expense in the period in which a change is made , which could have a material impact on operating results ( see footnote 21 of the notes to consolidated financial statements included in this form 10-k ) . 21 executive overview kimco realty corporation is one of north america 's largest publicly traded owners and operators of open-air shopping centers . story_separator_special_tag as of december 31 , 2017 , the company had interests in 493 shopping center properties aggregating 83.2 million square feet of gla located in 29 states , puerto rico and canada . in addition , the company had 372 other property interests , primarily through the company 's preferred equity investments and other real estate investments , totaling 5.8 million square feet of gla . the executive officers are engaged in the day-to-day management and operation of real estate exclusively with the company , with nearly all operating functions , including leasing , asset management , maintenance , construction , legal , finance and accounting , administered by the company . the following highlights the company 's significant transactions , events and results that occurred during the year ended december 31 , 2017 : financial and portfolio information : ● net income ava ilable to the company 's common shareholders was $ 372.5 million , or $ 0.87 per diluted share for the year ended december 31 , 2017 , as compared to $ 332.6 million , or $ 0.79 per diluted share for the corresponding period in 2016 . ● funds from operations ( “ ffo ” ) increased to $ 655.6 million or $ 1.55 per diluted share for the year ended december 31 , 2017 from $ 555.7 million or $ 1.32 per diluted share for the year ended december 31 , 2016 ( see additional disclosure on ffo beginning on page 36 ) . ● ffo as adjusted increased to $ 644.2 million or $ 1.52 per diluted share for the year ended december 31 , 2017 from $ 629.4 million or $ 1.50 per diluted share for the year ended december 31 , 2016 , ( see additional disclosure on ffo beginning on page 36 ) . ● s ame property net operating income ( “ same property noi ” ) increased 1.7 % for the year ended december 31 , 2017 , as compared to the corresponding period in 2016 ( see additional disclosure on same property noi beginning on page 37 ) . ● executed 1,196 new leases , renewals and options totaling approximately 8.9 million square feet in the consolidated operating portfolio . ● the company 's consolidated operating portfolio occupancy at december 31 , 2017 was 95.9 % as compared to 95.2 % at december 31 , 2016. acquisition activity ( see footnotes 3 and 7 of the notes to consolidated financial statements included in this form 10-k ) : ● acquired four consolidated operating properties and six parcels comprising an aggregate 1.9 million square feet of gla , for an aggregate purchase price of $ 368.2 million including the assumption of $ 43.0 million of non-recourse mortgage debt encumbering one property . ● acquired the controlling interest , in separate transactions , from joint ventures in which , the company previously held noncontrolling ownership interests , in three operating properties comprising an aggregate 0.9 million square feet of gla , for an aggregate gross purchase price of $ 320.1 million , including the assumption of $ 206.0 million of non-recourse mortgage debt encumbering one of the properties . the company recognized an aggregate gain on change in control of interests of $ 71.2 million from the fair value adjustment in connection with these transactions . disposition activity ( see footnote 5 of the notes to consolidated financial statements included in this form 10-k ) : ● during 2017 , the company disposed of 25 consolidated operating properties and nine parcels , in separate transactions , for an aggregate sales price of $ 352.2 million . these transactions resulted in ( i ) an aggregate gain of $ 93.5 million and ( ii ) aggregate impairment charges of $ 17.1 million . 22 capital activity ( for additional details see liquidity and capital resources below ) : ● during the years ended december 31 , 2017 , the company repaid the following notes ( dollars in millions ) : replace_table_token_7_th ● in february 2017 , the company closed on a $ 2.25 billion unsecured revolving credit facility ( the “ credit facility ” ) with a group of banks , which is scheduled to expire in march 2021 , which accrues interest at a rate of libor plus 87.5 basis points ( 2.28 % as of december 31 , 2017 ) with two additional six-month options to extend the maturity date , at the company 's discretion , to march 2022 . ● a lso during 2017 , the company ( i ) assumed/consolidated $ 257.5 million of individual non-recourse mortgage debt ( including a fair market value adjustment of $ 8.5 million ) related to two operating properties , ( ii ) paid off $ 692.9 million of mortgage debt ( including fair market value adjustments of $ 5.8 million ) that encumbered 27 operating properties and ( iii ) obtained a $ 206.0 million non-recourse mortgage relating to one operating property . ● as a result of the above activity , the company extended its debt maturity profile , including extension options , as follows : ● as of december 31 , 2017 , the weighted average interest rate was 3.84 % and the weighted average maturity profile was 10.7 years . the company faces external factors which may influence its future results from operations . the convenience and availability of e-commerce has continued to have an impact on the retail sector , which could affect our ability to increase or maintain rental rates and our ability to renew expiring leases and or lease available space . to mitigate the effect of e-commerce on its business , the company 's strategy has been to attract local area customers to its properties by providing a diverse and robust tenant base across a variety of retailers , including grocery stores , national or regional discount department stores or drugstores , which offer day-to-day necessities rather than high-priced luxury items .
| million primarily due to ( i ) an increase of $ 8.4 million related to the acquisition and consolidation of operating properties during 2017 and 2016 , and ( ii ) an overall net increase of $ 5.0 million primarily due to refunds received during 2016 , partially offset by ( iii ) a decrease of $ 2.8 million resulting from properties sold during 2017 and 2016 . 24 impairment c harges - during the years ended december 31 , 2017 and 2016 , the company recognized impairment charges related to adjustments to property carrying values of $ 67.3 million and $ 93.3 million , respectively , for which the company 's estimated fair values were primarily based upon ( i ) signed contracts or letters of intent from third party offers or ( ii ) discounted cash flow models . these adjustments to property carrying values were recognized in connection with the company 's efforts to market certain properties and management 's assessment as to the likelihood and timing of such potential transactions . also , the company has re-evaluated its long-term plan for a property due to unfavorable local market conditions . certain of the calculations to determine fair value utilized unobservable inputs and as such are classified as level 3 of the fair value hierarchy . for additional disclosure , see footnote 15 of the notes to consolidated financial statements included in this form 10-k. depreciation and a mortization - the increase in depreciation and amortization of $ 5.5 million is primarily due to ( i ) an increase of $ 21.8 million related to the acquisition/consolidation of operating properties during 2017 and 2016 , and ( ii ) an increase of $ 15.2 million related to write-offs relating to the company 's redevelopment projects in 2017 and 2016 , partially offset by ( iii ) a decrease of $ 31.5 million resulting from property dispositions and tenant vacates in 2017 and 2016. other ( e xpense ) / i ncome , n et - the change in other ( expense ) /income ,
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we believe that continued growth of saas , term-based license and maintenance and support revenue will lead to a more predictable revenue model and increase our visibility to future period total revenues . nevertheless , our revenue and our gross margins vary depending on the type of solution we sell . as a result , a shift in the sales mix of our solutions could affect our performance relative to historical results . identitynow and our sailpoint identity services are provided in exchange for a subscription fee and offers customers access to these solutions and infrastructure support for the duration of their subscription agreement . our standard subscription agreement for our saas offerings has a duration of three years . for our identityiq solutions , our customers typically purchase a perpetual software license , which includes one year of maintenance and support . our maintenance provides software maintenance as well as access to our technical support services during the maintenance term . after the initial maintenance period , customers with perpetual licenses may renew their maintenance and support agreement for an additional fee . pricing for each of our solutions is dependent on the number of digital identities of employees , contractors , business partners , software bots and other human and non-human users that the customer is entitled to govern with the solution . we also package and price our identitynow and identityiq solutions into modules . each module has unique functionalities , and our customers are able to purchase one or more modules , depending on their needs . we also offer advanced integration modules for key applications and systems which can be purchased in addition to our base solution modules . they are also priced based on 31 table o f contents the total number of identities , as are our sailpoint identity services . thus , our revenue from any customer is generally determined by the number of identities that the customer is entitled to govern as well as the number of modules purchased by the customer for our identityiq and identitynow solutions and which , if any , of the sailpoint identity services that the customer purchases . in addition to our solutions , we offer professional services to our customers and partners to configure and optimize the use of our solutions as well as training services related to the configuration and operation of our platform . most of our professional services activity is in support of our partners , who perform a significant majority of all initial and follow-on implementation work for our customers . most of our consulting services are priced on a time-and-materials basis ; our training services are provided through multiple pricing models , including on a per-person basis for instructor led courses and a flat-rate basis for our e-learning courses . as part of our growth strategy , on february 22 , 2021 , we acquired intello inc. ( “ intello ” ) , which is an early-stage saas management company that helps organizations to discover , manage , and secure saas applications . see note 19 “ subsequent events ” in our notes to our consolidated financial statements included in this annual report for more information . key factors affecting our performance our historical financial performance has been , and we expect our financial performance in the future to be , driven by our ability to : add new customers within existing markets . there is significant opportunity to expand our footprint in our existing markets through new , greenfield deployments and displacement of our competitors ' legacy solutions . we plan to grow our sales organization , expand and leverage our channel partners and enhance our marketing efforts . g enerate additional sales to existing customers . we believe that our existing customer base provides us with a significant opportunity to drive incremental sales . in most cases , our customers initially purchase a subset of the modules or offerings we provide based on their immediate need . we focus on generating more revenue from the modules that our customers have already purchased from us as our customers grow the number of identities our solutions manage and govern and as our customers deploy our solutions across other business units or geographies within their organizations . this is especially true when it comes to our new and expanded saas offerings , including ai and cloud governance . over time , we also identify up-selling and cross-selling opportunities and seek to sell additional modules and offerings to our existing customers . retain customers . we believe that our ability to retain our subscription-based customer contracts is an important component of our growth strategy and reflects the long-term value of our customer relationships . in order to maintain high renewal rates , we invest in the quality and reliability of our solutions and our customer service and support functions to help drive high levels of customer success . expand into new markets . we expect to continue to invest significantly in sales , marketing and customer service , as well as our indirect channel partner network , to expand into new geographies and vertical markets . we believe that our market opportunity is large and growing and that the global cyber security market represents a significant growth opportunity for us . in 2020 , we generated only 28 % of our revenue outside of the united states . we plan to leverage our existing strong relationships with global system integrators and channel partners to grow our presence in europe , asia pacific and other international markets . impact of covid-19 in light of the ongoing spread of covid-19 in the united states and abroad , including the emergence of new variants of the coronavirus , government and public health authorities continue to recommend social distancing and impose various quarantine and isolation measures on large portions of the population , including measures directed at businesses . story_separator_special_tag while intended to protect human life , these restrictions have had and are expected to continue to have serious adverse impacts on domestic and foreign economies of uncertain duration . we have made certain adjustments to our operations as we continue to provide our offerings to new and existing customers in response to these measures . for example , as a result of the covid-19 pandemic , we shifted all customer events to virtual-only experiences beginning in early 2020 and expect this trend to continue for the foreseeable future , and we have transitioned to providing consulting services virtually as well . while we believe that the pandemic has not had an immediate material adverse impact on our financial performance , our business may yet be negatively impacted by the covid-19 pandemic as the duration of the pandemic and the scope of its effects ultimately remain unknown . for example , the conditions caused by the covid-19 pandemic may materially adversely affect the rate of it spending by our current and prospective customers , including our customers ' ability or willingness to 32 table o f contents purchase our offerings , delay prospective customers ' purchasing decisions , delay the provisioning of our offerings , or cause customers to fail to make timely payments . we have seen an immaterial number of customer requests , and may continue to see similar requests , to lengthen payment terms or reduce the value or duration of subscription contracts , but this has not resulted in a material adverse impact on our renewal rates . while we have not been able to provide on-site consulting services to our customers during the pandemic due to local and regional restrictions , this has not resulted in any meaningful adverse impact on our ability to deliver such services because a significant portion of our consulting services have historically been provided remotely and most on-site projects transitioned to a remote delivery model . notwithstanding the potential and actual adverse impacts described above , as the pandemic has caused more of our customers to shift to a virtual workforce , we believe the value and scalability of our identity platform has become even more evident . we believe that the pandemic has not had a material adverse impact on our financial performance , and indeed , our revenue and customer base grew throughout 2020 and our travel and facilities expenses for the year were down . while we expect to see a return to higher levels of travel and facilities expenses in 2021 , we also expect to continue to see healthy demand for our solutions for the near-term given the aforementioned virtual workforce shift . nevertheless , we recognize that the uncertainty related to covid-19 may result in increased volatility in the financial projections we use as the basis for estimates and assumptions used in our financial statements . the challenges posed by covid-19 on our business and our customers ' businesses may evolve rapidly , and the speed , trajectory and strength of a recovery in general economic conditions remains highly uncertain and could be slowed or reversed by a number of factors , including the recent emergence of new strains of the coronavirus and the effectiveness of vaccines for the disease as they continue to be developed and distributed . consequently , we will continue to evaluate our financial position and results of operations in light of future developments , particularly those relating to covid-19 . see the section titled “ risk factors ” elsewhere in this annual report on form 10-k for information regarding the possible effects of covid-19 on our business . key business metrics in addition to our financial information prepared in accordance with accounting principles generally accepted in the united states of america ( `` gaap '' ) , we monitor the following key metrics to help us measure and evaluate the effectiveness of our operations : replace_table_token_3_th number of customers . we believe that the size of our customer base is an indicator of our market penetration and that our net customer additions are an indicator of the growth of our business and our future revenue opportunity . we define a customer as a distinct entity , division or business unit of an organization that receives support or has the right to use our cloud-based solutions as of the specified measurement date . revenue from any single customer is determined by the number of identities the customer is entitled to govern as well as the number of modules and solutions purchased . our customer base increased by 284 , or 19 % , from 1,469 customers at december 31 , 2019 to 1,753 customers at december 31 , 2020. total annual recurring revenue ( “ total arr ” ) . we use total arr to monitor the growth of our recurring business as we continue to shift to a subscription model . total arr represents the annualized value of the active portion of saas , term-based license , maintenance and support contracts and other subscription services at the end of the reporting period . we calculate total arr by dividing the active contract value by the number of days in the active portion of the overall contract term and then multiplying by 365. total arr should be viewed independently of revenue and deferred revenue as total arr is an operating metric and is not intended to be combined with or replace these items . total arr is not a forecast of future revenue , which can be impacted by contract start and end dates and renewal rates , and does not include revenue from perpetual licenses , training , professional services or other sources of revenue that are not deemed to be recurring in nature . we no longer consider subscription revenue as a percentage of total revenue to be a key metric , and accordingly we do not expect to disclose this metric going forward .
| during the years ended december 31 , 2020 and 2019 , maintenance and support revenue from new customers was $ 8.3 million and $ 7.4 million , and maintenance and support revenue from existing customers was $ 118.5 million and $ 93.0 million for the respective periods . services and other revenue . services and other revenue increased by $ 5.2 million , or 12 % for the year ended december 31 , 2020 compared to the year ended december 31 , 2019. this increase is primarily a result of an increase in the number of customers using our consulting and training services . geographic regions . our customers in the united states contributed the largest portion of our revenue in each year ended december 31 , 2020 and 2019 because we have more market momentum related to our larger and more established sales force , sales pipeline and brand recognition and awareness in the united states as compared to our other regions . revenue is classified by the following major geographic areas : ( i ) united states , ( ii ) europe , the middle east and africa ( “ emea ” ) and ( iii ) rest of the world . we continue to invest in increasing the size of our international sales force and strengthening partnerships with global system integrators and resellers worldwide . for the year ended december 31 , 2020 , revenue in the united states , emea and the rest of the world increased year-over-year . 38 table o f contents the following table sets forth our consolidated total revenue by geography and the respective percentage of total revenue for the periods presented : replace_table_token_8_th ( 1 ) no single country outside of the united states represented more than 10 % of our revenue . gross profit and gross margin replace_table_token_9_th licenses . license gross profit increased by $ 17.8 million , or 18 % , during the year ended december 31 , 2020 compared to the year ended december 31 , 2019. the increase in gross profit was the result of increased license revenues with only minor increases in third party royalties . subscription . subscription gross profit increased by $ 37.5 million , or 32 % , during the year ended december 31 , 2020 compared
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these expenses consist primarily of the costs associated with our research and development activities , including conducting preclinical studies and clinical trials , fees to professional service providers for analytical testing , independent monitoring or other administration of our clinical trials and obtaining and evaluating data from our clinical trials and non-clinical studies , as well as costs of contract manufacturing services for clinical trial material , and costs of materials used in clinical trials and research and development . our research and development expenses include : employee salaries and related expenses , including stock-based compensation and benefits for our employees involved in our drug discovery and development activities ; external research and development expense incurred under agreements with third-party contract research organizations ( cros ) and investigative sites ; manufacturing expenses and material for third-party manufacturing ; and , overhead costs such as rent , utilities and depreciation . 56 we expect our future research and development spending will also be dependent upon such factors as the results from our clinical trials , the availability of reimbursement of research and development spending , the number of product candidates under development , the size , structure and duration of any clinical programs that we may initiate , and the costs associated with manufacturing our product candidates on a large-scale basis for later stage clinical trials . we may experience interruption of key clinical trial activities , such as patient enrollment and clinical trial site monitoring , and key non-clinical activities due to covid-19 . while programs are still in the pre-clinical trial phase , we do not provide a breakdown of the initial associated expenses , as we are often evaluating multiple product candidates simultaneously . costs are reported in preclinical research and discovery until the program enters the clinic . our principal research and development expenses by program for the year ended december 31 , 2020 and 2019 are shown in the following table : replace_table_token_1_th research and development expenses decreased by $ 6.9 million , to $ 17.9 million for the year ended december 31 , 2020 from $ 24.8 million for the year ended december 31 , 2019. expenses decreased primarily related to decreased spending on programs discontinued in 2019. pre-clinical program , general research and discovery costs decreased primarily due to decreased spending on outside testing and manufacturing for alg.apv-527 . this decrease was offset by an increase in spending in apvo436 for the year ended december 31 , 2020 , related to increased clinical trial costs . general and administrative expenses general and administrative expenses consist primarily of personnel-related costs and professional fees in support of our executive , business development , finance , accounting , information technology , legal and human resource functions . other costs include facility costs not otherwise included in research and development expenses . for the year ended december 31 , 2020 general and administrative expenses decreased by $ 2.2 million , or 14 % , to $ 14.0 million from $ 16.2 million for the year ended december 31 , 2019. this decrease was primarily due to reduced personnel and professional services costs . other expense other expense consists primarily of gains or losses realized on foreign currency revaluation , costs related to debt extinguishment , accrued exit fees on debt , and interest on debt . other expense was $ 3.4 million for the year ended december 31 , 2020 and $ 2.1 million for the year ended december 31 , 2019. this increase is primarily due to a loss on extinguishment of debt of $ 2.1 million , which consisted of interest , exit , prepayment , and legal fees recognized during the first quarter of 2020. discontinued operations the accompanying consolidated financial statements include discontinued operations from two separate transactions : the sale of hyperimmune business to saol international limited in september 2017 , from which milestone payments were recognized in 2019 , and the sale of aptevo biotherapeutics llc ( aptevo biotherapeutics ) in 2020 . 57 the following table represents the components attributable to aptevo biotherapeutics presented as income from discontinued operations in the consolidated statements of operations ( in thousands ) : replace_table_token_2_th income from discontinued operations was $ 13.2 million for the year ended december 31 , 2020 and $ 2.6 million for the year ended december 31 , 2019. on february 28 , 2020 , we entered into an llc purchase agreement with medexus , pursuant to which we sold all of the issued and outstanding limited liability company interests of aptevo biotherapeutics , our former wholly-owned subsidiary which owns the ixinity and related hemophilia b business . as a result of the transaction , medexus obtained all rights , title , and interest to the ixinity product and intellectual property . in addition , aptevo biotherapeutics personnel responsible for the sale and marketing of ixinity also transitioned to medexus as part of the transaction . in addition to the payment received at closing , we may also earn milestone and deferred payments from medexus in the future . pursuant to the llc purchase agreement , we agreed to provide certain transition services for a limited period of time following the closing . we used $ 22.1 million of the $ 30 million in proceeds to repay in full our term debt facility with midcap financial , including $ 20 million of principal and $ 2.1 million in an end of facility fee , accrued interest , legal fees , and prepayment fees . for the year ended december 31 , 2019 , income from discontinued operations was primarily due to the receipt of the $ 4.3 million milestone payment from saol international limited , in conjunction with the sale in september 2017 of our hyperimmune business . income taxes during the periods prior to the spin-off from emergent , the company did not file separate tax returns as it was included in the tax returns of emergent entities within the respective tax jurisdictions . story_separator_special_tag the income tax provision included in these financial statements was calculated using a separate return basis , as if the company was a separate taxpayer . under this approach , the company determines its current taxes , deferred tax assets and liabilities and related tax expense as if it were filing separate tax returns in each tax jurisdiction . we did not have an income tax benefit or income tax expense from continuing operations in the years ended december 31 , 2020 and december 31 , 2019. off-balance sheet arrangements we did not have any off-balance sheet arrangements at december 31 , 2020. liquidity and capital resources cash flows the following table provides information regarding our cash flows for year ended december 31 , 2020 and 2019 : replace_table_token_3_th 58 net cash used in operating activities for the year ended december 31 , 2020 was primarily due to our net operating loss of $ 17.8 million , the gain on sale of aptevo biotherapeutics of $ 14.3 million , and changes in working capital accounts . net cash used in operating activities for the year ended december 31 , 2019 was primarily due to our net operating loss of $ 40.4 million , and changes in working capital accounts . net cash provided by investing activities for the year ended december 31 , 2020 , was primarily due to the cash received from the sale of aptevo biotherapeutics , net of transaction fees . for the year ended december 31 , 2019 , the net cash provided by investing activities was primarily due to the receipt of the $ 4.25 million milestone payment from saol international limited , in conjunction with the sale in september 2017 of our hyperimmune business , net of the purchase of property and equipment . net cash provided by financing activities for the year ended december 31 , 2020 was primarily due to $ 21.2 million received from the exercises of warrants and common stock , and proceeds of $ 24.7 million from the credit agreement we entered into with midcap financial on august 5 , 2020 , which was offset by the $ 22.1 million repayment of long-term debt in the first quarter of 2020 . net cash provided by financing activities for the year ended december 31 , 2019 was primarily due to $ 20.3 million received from the issuance of common stock and related warrants and the exercise of warrants . sources of liquidity equity distribution agreement on december 14 , 2020 , we entered into an equity distribution agreement with piper sandler & co ( piper sandler ) . the equity distribution agreement provides that , upon the terms and subject to the conditions set forth therein , we may issue and sell through piper sandler , acting as sales agent , shares of our common stock having an aggregate offering price of up to $ 50 million . we have no obligation to sell any such shares under the equity distribution agreement . the sale of the shares of our common stock by piper sandler will be effected pursuant to a registration statement on form s-3 which we filed on november 9 , 2017 and updated on december 14 , 2020. the equity distribution agreement will terminate upon the issuance and sale of all shares under the equity distribution agreement or upon the earlier termination thereof at any time by us or piper sandler upon notice to the other party . registration statement we previously filed a registration statement with the securities and exchange commission on november 13 , 2017 , amended on december 6 , 2017 and declared effective on december 15 , 2017 ( the prior registration statement ) . the prior registration statement registered the offer and sale of an indeterminate number of shares of common stock and preferred stock , an indeterminate principal amount of debt securities and an indeterminate number of warrants to purchase common stock , preferred stock , and various series of debt securities and or warrants to purchase any of such securities , having an aggregate initial offering price of $ 150 million , of which an aggregate of $ 127.8 million remained unsold as of the december 14 , 2020. on december 14 , 2020 , we filed a new registration statement covering the offering , issuance , and sale up to $ 200 million in common stock , preferred stock , and various series of debt securities and or warrants to purchase any of such securities , which included the unsold securities from the prior registration statement . purchase agreement on december 20 , 2018 , we entered into the purchase agreement , and a registration rights agreement with lincoln park . pursuant to the purchase agreement , lincoln park has committed to purchase up to $ 35.0 million worth of our common stock over a 36-month period commencing on february 13 , 2019 , the date the registration statement covering the resale of the shares was declared effective by the sec . pursuant to this purchase agreement , we issued 13,991 commitment shares of common stock in the first quarter of 2019 and none in the year ended december 31 , 2020 . 59 under the purchase agreement , on any business day selected by us , we may direct lincoln park to purchase shares of our common stock provided that lincoln park 's maximum commitment on any single day does not exceed $ 2.0 million . the purchase price per share will be based off of prevailing market prices of our common stock immediately preceding the time of sale ; provided , however , that we can not direct any such purchase if the prevailing market price is less than $ 1.00. in addition , we may also direct lincoln park to purchase other amounts as accelerated purchases or as additional accelerated purchases if the closing sale price of our common stock exceeds certain threshold prices as set forth in the purchase agreement .
| royalties are earned at the rate of 2 % of net revenue through the earlier of june 2022 or completion of the ixinity pediatric trial being run by medexus . after that , the royalty rate will increase to 5 % . the royalty term runs for up to fifteen years , until early 2035 , and payments are due quarterly . additionally , milestone payments totaling up to $ 11 million may be earned from medexus related to certain regulatory and commercial achievements . on august 5 , 2020 , we entered into a credit and security agreement ( credit agreement ) , with midcap financial . the credit agreement provided us with up to $ 25 million of available borrowing capacity . the full $ 25 million was drawn on the closing date of the credit agreement . the midcap financial loan has a 48-month term , is interest-only for the first 18 months , with straight-line amortization for the remaining 30 months and bears interest at a rate of one month libor plus 6.25 % per annum , subject to a 1.50 % libor floor and a 2.50 % libor cap . the loan includes additional repayment provisions should either or both of the royalties or milestones related to ixinity or royalties related to ruxience be sold during the term of the loan . as of december 2020 , we have advanced alg.apv-527 into phase 1 clinical development in a co-development 50/50 partnership . aptevo and alligator plan to file a clinical trial application ( cta ) in europe in 2021 and to subsequently commence first in human dosing in the fourth quarter of 2021. for the year ended december 31 , 2020 , certain of the holders of the company 's warrants exercised warrants with a strike price of $ 18.20 per share , resulting in the issuance of approximately 1.2 million shares of the company 's common stock and aggregate proceeds to the company of approximately $ 21.2 million . as of december
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in turn , this could have a material adverse effect on our business , financial condition and results of operations and , in particular , this could have a material adverse effect on the value and liquidity of securities in our investment portfolio . natural catastrophe risk we monitor our natural catastrophe risk globally for all perils and regions , in each case , where we believe there is significant exposure . 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 available to arch . we reserve the right to change this threshold at any time . based on in-force exposure estimated as of january 1 , 2016 , our modeled peak zone catastrophe exposure is a windstorm affecting the northeastern u.s. , with a net probable maximum pre-tax loss of $ 489 million , followed by windstorms affecting the gulf of mexico and florida tri-county with net probable maximum pre-tax losses of $ 444 million and $ 362 million , respectively . our exposures to other perils , such as u.s. earthquake and international events , were less than the exposures arising from u.s. windstorms and hurricanes in both periods . as of january 1 , 2016 , our modeled peak zone earthquake exposure ( los angeles area earthquake ) represented approximately 58 % of our peak zone catastrophe exposure , and our modeled peak zone international exposure ( japan earthquake ) was 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 total shareholders ' equity available to arch 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 . actual losses may also 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 factors—risk relating to our industry ” and “ management 's discussion and analysis of financial condition and results of operations—natural and man-made catastrophic events. ” 82 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 available to arch 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 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 $ 47.95 at december 31 , 2015 , a 5.2 % increase from $ 45.58 at december 31 , 2014 . the growth in 2015 was primarily generated through underwriting returns . operating return on average common equity operating return on average common equity ( “ operating roae ” ) represents annualized after-tax operating income available to arch common shareholders divided by the average of beginning and ending common shareholders ' equity available to arch during the period . after-tax operating income available to arch common shareholders , a “ non-gaap measure ” as defined in the sec rules , represents net income available to arch 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 , and net foreign exchange gains or losses , net of income taxes . management uses operating roae as a key measure of the return generated to arch common shareholders and has set an objective to achieve an average operating roae of 15 % or greater over the insurance cycle , as opposed to any one calendar year , which it believes to be an attractive return to common shareholders given the risks we assume . see “ comment on non-gaap financial measures. ” our operating roae was 9.7 % for 2015 , compared to 11.1 % for 2014 and 11.7 % for 2013 . the operating roae for 2015 primarily reflected a lower level of underwriting income , reflecting current market conditions and changes in mix of business , compared to the 2014 and 2013 periods . story_separator_special_tag total return on investments total return on investments includes 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 arch 's investment portfolio . total return is calculated on a pre-tax basis and before investment expenses excluding amounts reflected in the ‘ other ' segment , and reflects the effect of financial market conditions along with foreign currency fluctuations . management uses total return on investments as a key measure of the return generated to arch common shareholders on the capital held in the business , and compares the return generated by our investment portfolio against benchmark returns which we measured our portfolio against during the periods . the following table summarizes the pre-tax total return ( before investment expenses ) of investment managed by arch compared to the benchmark return ( both based in u.s. dollars ) against which we measured our portfolio during the periods : replace_table_token_15_th ( 1 ) our investment expenses were approximately 0.35 % , 0.28 % and 0.26 % , respectively , of average invested assets in 2015 , 2014 and 2013 . total return for our investment portfolio outperformed that of the benchmark return index in 2015 and primarily reflected returns on our investment grade fixed income portfolio and equities , partially offset by negative returns on non-investment grade fixed income and alternatives . total return was impacted by strengthening of the u.s. dollar against the euro , canadian dollar , british pound sterling and other major currencies on non-u.s. dollar denominated investments 83 during 2015 . excluding foreign exchange , total return was 1.62 % for 2015 , compared to 4.26 % for 2014 and 1.13 % for 2013 . 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 , we generally only adjust the composition of the benchmark return index to reflect changes in our investment portfolio 's currency mix and or liability duration . 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 , 2015 , the benchmark return index had an average credit quality of “ aa2 ” by moody 's investors service ( “ moody 's ” ) , an estimated duration of 3.51 years and included weightings to the following indices : weighting the bank of america merrill lynch 1-10 year aa u.s. corporate & yankees index 21.250 % the bank of america merrill lynch 1-5 year u.s. treasury index 13.000 the bank of america merrill lynch u.s. mortgage backed securities index 10.000 the bank of america merrill lynch 3-5 year fixed rate asset backed securities index 7.000 the bank of america merrill lynch 1-10 year u.s. municipal securities index 7.000 the bank of america merrill lynch u.s. high yield constrained index 5.500 the bank of america merrill lynch 0-3 month u.s. treasury bill index 5.000 barclays capital cmbs investment grade , aaa rated index 5.000 barclays capital agency bullet 1-10 year index 5.000 msci all country world gross total return index 5.000 the bank of america merrill lynch 1-10 year euro government index 4.500 the bank of america merrill lynch 5-10 year u.s. treasury index 3.250 the bank of america merrill lynch 1-5 year u.k. gilt index 3.000 the bank of america merrill lynch 1-10 year australian governments index 2.500 the bank of america merrill lynch 1-5 year canada government index 1.500 the bank of america merrill lynch euro government index 1.000 the bank of america merrill lynch 20+ year canada government index 0.500 total 100.000 % 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 arch common shareholders , which is defined as net income available to arch 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 , and net foreign exchange gains or losses , net of income taxes . the presentation of after-tax operating income available to arch common shareholders is a “ non-gaap financial measure ” as defined in regulation g. the reconciliation of such measure to net income available to arch 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 , 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 the change in the carrying value of investments accounted for using the fair value option in net realized 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 .
| the simulation results noted above are informational only , and no assurance can be given that our ultimate losses will not be significantly different than the simulation results shown above , and such differences could directly and significantly impact earnings favorably or unfavorably in the period they are determined . we do not have significant exposure to pre-2002 liabilities , such as asbestos-related illnesses and other long-tail liabilities . it is difficult to provide meaningful trend information for certain liability/casualty coverages for which the claim-tail may be especially long , as claims are often reported and ultimately paid or settled years , or even decades , after the related loss events occur . any estimates and assumptions made as part of the reserving process could prove to be inaccurate due to several factors , including the fact that relatively limited historical information has been reported to us through december 31 , 2015 . mortgage operations supplemental information the mortgage segment 's insurance in force ( “ iif ” ) and risk in force ( “ rif ” ) were as follows for the last four quarters : replace_table_token_39_th ( 1 ) represents the aggregate dollar amount of each insured 's mortgage loan 's original principal balance . ( 2 ) represents the aggregate dollar amount of each insured 's mortgage loan 's current principal balance multiplied by the insurance coverage percentage specified in the policy for insurance policies issued and after contract limits and or loss ratio caps for credit risk-sharing or reinsurance transactions . ( 3 ) includes gse credit risk-sharing products and international insurance business . 109 for each quarter end in 2015 , the following table provides supplemental disclosures for our u.s. mortgage insurance operations ' risk in force : replace_table_token_40_th ( 1 ) represents the end of period rif divided by end of period iif . ( 2 ) represents the percentage of iif at the beginning of a 12-month period that remained in force at the end of the period . ( 3 ) represents total current ( non-delinquent ) rif , net of reinsurance , divided by total statutory capital . ratio calculated for arch mortgage insurance company only ( estimate for december 31 , 2015 ) . ceded reinsurance in the normal course of business ,
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our career advice and job placement counselors also assist in determining career interests , arranging and preparing students for job interviews , providing support with interview preparation , resume building and garnering references . additionally , this group tracks student success after graduation to help build career networks and job opportunities for future graduates and validate a school 's return on investment . we also provide our education clients with strategic advisory services and analysis that help them manage their institutions more efficiently and effectively . these include strategic marketing assessments , key analytics , financial and operating efficiency evaluations to aid in decision making , and data and it services that enable clients to better analyze and manage data , and improving communications with students . · cloud-based saas offerings – the company believes it can better differentiate its technology-enabled solutions platform by adding key student-facing , cloud-based technologies and back-end data analytics that better support student success and maximize student outcomes . our technology roadmap is aimed at providing solutions and developing data-driven business intelligence that enable school clients to create better learning outcomes , more efficiently and effectively engage students , and develop data-driven business intelligence offerings that help them better understand and support students . the company intends to leverage both internal resources and partnerships for development of saas-and cloud-based technology . 26 subsequent events the following events occurred after august 31 , 2015 , through december 7 , 2015 , the date on which the financial statements for the year ended august 31 , 2015 were issued : on september 1 , 2015 , the company entered into a strategic alliance agreement with loudcloud systems , inc. , a company based in dallas , texas . the agreement allows for the companies to sell and market one another 's products/services to their respective client bases . on september 16 , 2015 , the company closed a stock purchase agreement with neil rogers ( “ rogers ” ) for an aggregate purchase price of $ 500,000 for a total of 500,000 shares of common stock . the company agreed that $ 190,000 of the cash consideration is subject to the effectiveness of a registration statement for the issued shares . on september 16 , 2015 , pursuant to the termination of a registration rights agreement between the company , rogers , and byrne united s.a. ( “ byrne ” ) , the company agreed to issue 625,000 shares of common stock to rogers and 625,000 shares of common stock to byrne . the company made the above offerings to byrne and rogers in an offshore transaction relying on regulation s and or section 4 ( a ) ( 2 ) of the securities act as byrne and rogers are non-u.s. persons ( as that term is defined in regulation s of the securities act ) . on september 23 , 2015 , the company entered into a services agreement with lipman hearne , inc. to provide enrollment management support services to the university of the pacific . on september 24 , 2015 , pcs link , inc. dba greenwood & hall ( “ pcs link ” ) , a subsidiary of greenwood hall , inc. , the company , and opus bank ( “ opus ” ) agreed to terms for a third amendment , waiver and ratification agreement ( “ opus amendment ” ) amending the amended and restated credit agreement , as amended , between the parties dated as of july 18 , 2014 ( “ opus credit agreement ” ) . the opus amendment amends the opus credit agreement as follows : · opus shall have no obligation to advance any further credit to pcs link , either by way of overdraft coverage or advances on any loans currently outstanding . · the maturity date ( “ maturity date ” ) means the earlier of ( i ) april 15 , 2016 , ( ii ) the date on which the issuance of securities occurs resulting in aggregate proceeds not less than the outstanding debt owed opus , or ( iii ) the date on which the sale of all of the capital stock or substantially all of the assets of pcs link occurs . · by october 2 , 2015 , pcs link will issue equity and or unsecured debt resulting in aggregate gross proceeds not less than $ 1,250,000 . · pcs link shall have no further obligation to comply with the financial covenants . · pcs link shall not be required to make any principal payments until the maturity date . all accrued principal , along with all accrued and unpaid interest , shall be due and payable in full on the maturity date . · the outstanding balance of pcs link shall accrue interest at the rate of 8 % per annum beginning on august 1 , 2015. pcs link shall make such interest payments on a monthly basis commencing as of september 1 , 2015 . · opus will receive 1,200,000 warrants for shares of common stock at an exercise price of $ 1.00 per share , not to include anti-dilution or cash-less exercise provision . opus 's existing warrant with an issue date of july 18 , 2014 shall be surrendered upon issuance of the 1,200,000 warrants . 27 the company did not raised the required equity or unsecured debt and , as of december 14 , 2015 , has not cured this event of default . in conjunction with the opus amendment , the following terms were agreed to with california united bank and colgan financial group : california united bank ( “ cub ” ) : · cub will provide the company a forbearance period beginning september 1 , 2015 and continuing through april 15,2016 ( the “ forbearance period ” ) and extend the maturity of its facility to april 15 , 2016 . · cub will receive during the forbearance period monthly interest payments of interest in full for the period starting september 1 , 2015 . story_separator_special_tag · cub shall be paid deferred interest due upon the company raising $ 2,000,000 in working capital , but only if the company has satisfied its obligations in accordance with company 's prepared cash projections . · cub will receive a full payoff of all its outstanding principal , interest ( including accrued and unpaid interest as of the date of this letter ) , fees , and expenses ( including , but not limited to , cub 's outside counsel legal fees and costs ) by april 15 , 2016 or at the successful consummation of any public offering , strategic private investments , or take private scenario , whichever occurs first . · cub will receive 523,587 warrants for shares of common stock at an exercise price of $ 1.00 per share , not to include anti-dilution or cash-less exercise provision . colgan financial group ( “ cfg ” ) : · cfg will provide the company a forbearance period beginning september 1 , 2015 and continuing through april 15,2016 and extend the maturity of its facility to april 15 , 2016 . · payment obligation of quarterly interest payments due under the note from the date hereof through the forbearance termination date is modified so that ( i ) until borrower has raised an additional $ 2,000,000 in working capital since august 12 , 2015 and satisfied its obligations in accordance with its cash projections , interest shall continue to accrue in accordance with the note , and upon completion of such additional capital raise , the amount of such accrued and unpaid interest shall be added to the principal amount of the note as of the date of completion of such capital raise and shall accrue interest and be payable thereafter ; and ( ii ) upon completion of such capital raise , interest shall continue to accrue thereafter and be payable at fifty percent ( 50 % ) of the amount of interest due among all notes with lender shall not exceed in the aggregate eleven thousand one-hundred seventy-six and 50/100 dollars ( $ 11,176.50 ) per month , and the remaining unpaid balance of such accrued interest shall be paid in full on the opus maturity date . · cfg will receive 20,000 warrants for shares of common stock at an exercise price of $ 1.00 per share , not to include anti-dilution or cash-less exercise provision . · the conversion price for eighty thousand dollars ( $ 80,000 ) of the outstanding principal will be ten cents ( $ 0.10 ) per share on october 16 , 2015 , the company entered into a non-binding letter of intent with uvize , inc. , a company based in boulder , colorado , relating to a possible acquisition of uvize by the company . on october 21 , 2015 , the company entered into a services agreement with technical college of the lowcountry to provide student lifecycle management services for the college . on october 28 , 2015 , the company entered into an expanded agreement with florence darlington technical college to provide professional services . on november 5 , 2015 , troy university extended its services agreement with the company through december 31 , 2016. on november 6 , 2015 the company issued an unsecured promissory note in the amount of $ 125,000. the note bears interest at a rate of 10 % per annum and is due may 1 , 2016. on december 12 , 2015 , the company accepted the resignation of brett johnson , the company 's president . 28 restructuring the company instituted a major restructuring effort in early 2013. the purposes of the restructuring were to ( a ) prepare the company so it could scale its growth significantly in coming years , ( b ) improved efficiencies , ( c ) enhance its management team and ( d ) shed unprofitable elements of its operations . the restructuring included major changes to the company 's executive team , discontinuing major segments of the company 's operations that were deemed unprofitable , and substantially enhancing the company 's operations and it infrastructure . the restructuring effort was costly in terms of reduced revenue , associated expenditures , and opportunity costs . while the restructuring was substantially complete by the end of 2013 , the efforts had a negative impact on the company 's financial performance in 2014. we believe the company has successfully completed its restructuring and will begin to see the benefits of the restructuring during the 2015 calendar year . going concern as more fully described in note 1 to the financial statements appearing later in this report , our independent registered public accounting firm has included an explanatory paragraph in their report on our financial statements included with this report for the year ended august 31 , 2015 related to the uncertainty of our ability to continue as a going concern . the company has an accumulated deficit and a working capital deficit as of august 31 , 2015 and incurred a loss from continuing operations during fiscal 2015. these conditions raise substantial doubt about the company 's ability to continue as a going concern . the company has historically funded its activities through cash generated from operations , debt financing , and advances from shareholders . during the twelve ( 12 ) months ended august 31 , 2015 , the company received a net amount of approximately $ 3.2 million from debt and equity financing . management intends to restore profitability by continuing to grow our operations and customer base . if the company is not successful in becoming profitable , it may have to further delay or reduce expenses , or curtail operations . the accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that could result should the company not continue as a going concern . as a result , there is uncertainty about our ability to continue as a going concern .
| the following is a summary of the company 's cash flows provided by operating , investing and financing activities for the twelve months ended august 31 , 2015 and eight months ended august 31 , 2014. replace_table_token_3_th net cash used in operating activities from continuing operations was $ 3,363,812 compared with net cash used by operating activities from continuing operations of $ 3,413,521 during the eight months ended august 31 , 2014. the primary factor resulting in the change in cash provided by operating activities from continuing operations was the reduced costs which were somewhat offset by an increase in non-cash expenses related to stock-based compensation . net cash provided by financing activities during 2015 amounted to $ 3,217,428 compared with net cash used in financing activities during 2014 of $ 3,814,694. debt of companies opus bank in may 2014 , the company entered into a credit agreement and related term loan and line of credit with opus bank ( “ opus ” ) . pursuant to the terms of the agreement , the company issued a promissory note in the amount of $ 2,000,000 , the proceeds of which were required to be used to finance repayment of the amounts owed to tca . monthly payments of principal and interest are required through the maturity date in may 2017. the amounts owed to colgan financial group ( “ cfg ” ) and california united bank ( “ cub ” ) are subordinated to amounts owed to opus under the credit agreement and related debt facilities . amounts outstanding under the credit agreement are secured by substantially all assets of the company . on april 13 , 2015 , the company and its lenders executed a second amendment ( “ second amendment ” ) of the company 's credit facilities ( the “ credit agreement ” ) with opus ratified by cub and cfg ( collectively “ lenders ” ) . the second amendment was designed to provide the company with increased cash and credit availability as the company seeks to expand and
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these include the establishment of a new regulatory body known as the bureau of consumer financial protection , which will operate as an independent entity within the federal reserve system and is authorized to issue rules for consumer protection , some of which likely will significantly restrain banks ' profitability , including our banks . dodd-frank # 24 also directs the federal banking authorities to issue new capital requirements for banks and holding companies which must be at least as strict as the existing capital requirements and may be much more onerous . see the discussion under “ important proposed changes to regulatory capital and liquidity standards ” on page 46 of this report . dodd-frank also provided that any new issuances of trust preferred securities ( trups ) by bank holding companies with between $ 500 million and $ 15 billion in assets will no longer be able to qualify as tier 1 capital , although previously issued and outstanding trups of such small-to-medium-sized bank holding companies , including arrow 's $ 20 million of trups that are currently outstanding , will continue to qualify as tier 1 capital until maturity or redemption . many of the regulations required to be promulgated by bank regulators in order to give effect to dodd-frank 's provisions have yet to be promulgated or are pending final approval by the regulators , and will have phase-in periods even after final promulgation . the following are some of the dodd-frank legal changes that are likely to have a material impact , positive or negative , as the case may be , on us and our customers : 1. fdic deposit insurance has been substantially expanded . 2. the fdic insurance assessment on banks is now asset-based , not deposit-based , which actually reduces insurance costs for most smaller institutions , like arrow . under the new method , our premiums were reduced from $ 513 thousand of fdic and fico assessments for the first quarter of 2011 ( the last quarter under the old deposit-based method of assessment ) , to $ 267 thousand of expense for the second quarter of 2011 , a decline of 48 % . ) 3. expansion of consumer protection regulations likely will add to our regulatory compliance expense and reduce our income . 4. limitation on debit card interchange fees , which technically applies only to the very large banks having more than $ 10 billion in assets , will most likely have a negative impact on the fee income of smaller banks like ours , due to competitive pressures . rules still in the formulation process include those related to short-term borrowing disclosures , retention of a portion of loans initiated and sold and executive compensation . several of these issues are highly controversial , and the implementing regulations to be forthcoming will be the focus of much discussion and concern . for further information on the impact of the dodd-frank act and other recent legislation developments , see “ recent legislative developments ” on page 8 of this report , above . ( ii ) health care reform : in march 2010 , comprehensive healthcare reform legislation was passed under the patient protection and affordable care act , as amended by the health care and education reconciliation act of 2010 ( collectively , the `` act '' ) . included among the major provisions of the act , is a change in tax treatment of the federal drug subsidy paid with respect to eligible retirees . the act contains provisions that may impact the company 's accounting for some of its benefit plans in future periods . however , we do not currently expect that impact to be material . the exact extent of the act 's impact , if any , can not be determined until final regulations are promulgated and additional interpretations of the act become available . the company will continue to monitor the effect of the act on its benefit plans . liquidity and access to credit markets : we did not experience any liquidity problems or special concerns during 2010 and 2011 , and have not in 2012 through the date of this report . the terms of our lines of credit with our correspondent banks , the fhlbny and the federal reserve bank , have not changed , except for some increases in the maximum borrowing capacity ( see our general liquidity discussion on page 46 ) . in general , we rely on asset-based liquidity ( i.e. , funds in overnight investments and cash flow from maturing investments and loans ) with liability-based liquidity as a secondary source ( overnight borrowing arrangements with our correspondent banks , fhlbny overnight and term credit arrangement advances and the federal reserve bank discount window , as our main sources ) . during the recent financial crisis , many financial institutions , small and large , relied extensively on the fed 's discount window to support their liquidity positions , but we did not . in a few well-publicized instances at the height of the crisis , liquidity was such a problem for particular institutions that they experienced a run on deposits , even though there was no reasonable expectation that depositors would lose any of their insured deposits . we maintain , and periodically test , a contingent liquidity plan whose purpose is to ensure that we can generate an adequate amount of available funds to meet a wide variety of potential liquidity crises , including a severe crisis . fdic special assessment & prepayment in 2009 : the fdic announced during the second quarter of 2009 that they would levy a special assessment on all fdic insured financial institutions to rebuild the fdic 's insurance fund which was significantly depleted by bank failures during the crisis . story_separator_special_tag for most insured banks ( including ours ) , the special assessment was set as a designated percentage ( 0.05 % ) of the institution 's adjusted assets ( total assets less tier 1 capital ) , as opposed to a percentage of covered deposits which is how the fdic had historically set regular assessments . institutions were instructed to estimate and accrue the special assessment expense in the second quarter of 2009. we determined that our expense was $ 787 thousand , which we accrued on june 30 , 2009. during the third quarter of 2009 the fdic announced that it would not impose any additional special assessments in the remainder of 2009 , but would generate additional cash for the insurance fund by requiring insured institutions to prepay in the fourth quarter of 2009 their projected regular assessments for the fourth quarter of 2009 and all of 2010 , 2011 and 2012. our prepayment amount was $ 6.8 million , which is being amortized , as required by bank regulatory guidance , into expense during the relevant periods to which such assessment relates . as a result of dodd-frank , beginning with the second quarter of 2011 , the calculation of regular fdic insurance premiums for insured institutions has changed so as to be based on adjusted assets ( as defined ) rather than deposits , which had the effect of imposing fdic insurance fees not only on deposits but on other sources of funding as well , including repurchase agreements . the rate , however , given the larger base ( assets ) on which insurance premiums are now assessed , will be a lower percentage than the rate that applied under the old deposit-based assessments . the fdic calculated the first asset-based assessment ( for the second quarter of 2011 , but recognized during the third quarter of 2011 ) , based on june 30 , 2011 reported assets . because our banks , like most small banks , have a much higher ratio of deposits to assets than the large banks maintain , we expected our fdic premiums to actually decrease considerably . # 25 visa transactions from 2008 to 2011 : on march 28 , 2008 , visa inc. distributed to its member banks , including glens falls national , by way of a mandatory redemption of 38.7 % of the visa class b shares held by the member banks , some of the proceeds realized by visa from the initial public offering and sale of its class a shares just then completed . with another portion of the ipo proceeds , visa established a $ 3 billion escrow fund to cover certain , but not all , of its continuing litigation liabilities under various antitrust claims , which its member banks would otherwise be required to bear . accordingly , during the first quarter of 2008 , we recorded the following transactions : a pre-tax gain of $ 749 thousand from the mandatory redemption by visa from us of 38.7 % of our class b visa inc. shares , reflected as an increase in noninterest income . a reversal of $ 306 thousand of the $ 600 thousand accrual previously recorded by us at december 31 , 2007 , representing our then estimated proportional share of visa litigation costs , which reversal was reflected as a reduction in 2008 other operating expense . in october 2008 , visa announced that it had settled a lawsuit with discover financial services , which was part of the covered litigation ( including several cases ) for which the visa member banks remained contingently liable and for which visa had established its escrow fund . since that time , visa has deposited the following additional amounts into the escrow fund for covered litigation : $ 1.1 billion in december 2008 , $ 700 million in july 2009 , $ 500 million in may 2010 , $ 800 million in october 2010 , $ 400 million in march 2011 and $ 1.6 billion in february 2012. these developments reduced our proportionate exposure for covered litigation but also reduced the ultimate value of our remaining class b visa shares , as visa 's settlement of covered litigation claims directly reduces the value of member banks ' class b stock . however , even before visa made these additional provisions against its covered litigation expenses , we did not recognize any dollar value for our remaining class b shares , in accordance with sec guidance . in summary , we did not recognize any income or expense in any of the periods presented as a result of visa 's periodic deposits of additional amounts into the escrow fund or settlements of covered litigation with amounts drawn out of the fund . in october 2011 , visa announced that the so-called interchange litigation was expected to go to trial sometime in the fall of 2012. at that time , visa was not able to predict when the litigation would be resolved . the estimation of our proportionate share of any potential losses on visa 's part , in excess of the escrow fund , related to the remaining covered litigation is extremely difficult and involves a high degree of uncertainty . management has determined that the remaining $ 294 thousand liability included in “ other liabilities ” on our december 31 , 2011 consolidated balance sheet represents the fair value of our proportionate share of the remaining covered visa litigation obligations in excess of the escrow fund at that date , but this value is subject to change depending upon future developments in the covered litigation .
| even if the new , enhanced capital requirements set forth in the proposed basel iii accords , currently under consideration by the group of 20 advanced nations including the united states , were presently in effect , arrow and its banks would meet all of these new , enhanced capital standards . see “ capital resources - new capital standards to be promulgated ” and “ current capital standards ” on page 47 , and “ important proposed changes to regulatory capital and liquidity standards ” on page 46. economic recession and loan quality : during the early stages of the economic crisis in late 2008 and early 2009 , our market area of northeastern new york was relatively sheltered from the widespread collapse in real estate values and general surge in unemployment . this may have been due , in part , to the fact that our market area had been less affected by the preceding real estate “ bubble ” than other areas of the u.s. as the recession became stronger and deeper through late 2009 , even northeastern new york began to feel the impact of the worsening national economy reflected in a slow-down in regional real estate sales and increasing unemployment rates . from year-end 2009 and through most of 2010 , we experienced a very modest decline in the credit quality of our loan portfolio , although by standard measures our portfolio continued to be significantly stronger than the average for our peer group of u.s. bank holding companies with $ 1 billion to $ 3 billion in total assets ( see page 3 for peer group information ) . by year-end 2010 , however , our loan quality began to stabilize , a trend that continued through 2011. during this period , although nonperforming loans increased slightly , charge-offs decreased . nonperforming loans were $ 7.6 million at december 31 , 2011 , an increase of $ 2.7 million from year-end 2010. the increase was primarily attributable to one large commercial loan that we modified during 2011 while it was
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lloyds , our largest fi partner in the united kingdom ( `` u.k. '' ) , contributed approximately 10 % , 9 % , 8 % and 6 % of our average fi maus in 2016 , 2017 , 2018 and the fourth quarter of 2018 , respectively . digital insight corporation , a subsidiary of ncr corporation ( `` digital insight '' ) contributed 13 % , 11 % , 10 % and 8 % of our average fi maus and pnc contributed 10 % , 8 % , 10 % and 8 % of our average fi maus in 2016 , 2017 , 2018 and the fourth quarter of 2018 , respectively . recent developments on may 3 , 2018 and may 7 , 2018 , respectively , we entered into a master agreement and schedule # 1 to the master agreement ( collectively , the “ chase agreement ” ) with chase , pursuant to which we have agreed to a national roll-out of cardlytics direct to chase customers . under the agreement , we will provide chase with access to cardlytics direct for an initial term beginning on the date cardlytics direct is made generally available to chase 's customers and ending seven years from that date . chase may terminate the agreement at any time upon 90 days ' written notice . we will share billings that we generate from the sale of advertising within the chase digital channels with chase . on august 7 , 2018 , we entered into hosted technology services schedule two ( the “ wells fargo agreement ” ) with wells fargo bank , national association ( “ wells fargo ” ) , pursuant to which we have agreed to a national roll-out of cardlytics direct to wells fargo customers . the initial term of the agreement ends on july 1 , 2022. wells fargo may terminate the agreement at any time upon 180 days ' written notice . we will share revenue that we generate from the sale of advertising within the wells fargo digital channels with wells fargo . on september 28 , 2018 , we renewed our spending rewards agreement ( the “ lloyds agreement ” ) with lloyds , pursuant to which we agreed to continue to provide cardlytics direct to lloyds customers through december 31 , 2020. lloyds may terminate the agreement at any time upon 9 months ' written notice . we will share revenue that we generate from the sale of advertising within the lloyds digital channels with lloyds . included in the renewal of our agreement with lloyds are certain amendments that are retroactively applied as of january 1 , 2018 , which resulted in a $ 0.8 million gain recorded during the third quarter of 2018 in fi share and other third-party costs on our consolidated statement of operations . 40 fi partner commitments agreements with certain fi partners require us to fund the development of specific enhancements , pay for certain implementation fees , or make milestone payments upon the deployment of our solution . certain of these agreements provide for future reductions in fi share due to the fi partner . during 2018 , scheduled development payments to a certain fi partner totaled $ 9.3 million , which is expected to be offset by recoveries through fi share payment reductions of $ 4.6 million in 2019. we have a minimum fi share commitment with a certain fi partner totaling $ 10.0 million over a 12-month period following the completion of certain milestones , which were not met as of december 31 , 2018. we currently expect the milestones to be achieved in the first half of 2019 and expect a fi share commitment shortfall of between $ 5.0 million and $ 6.0 million . any expected shortfall will be accrued during the 12-month period following the completion of the milestones . common stock warrants issued in connection with the series g stock financing in connection with the issuance of our series g redeemable convertible preferred stock , we issued warrants to purchase an aggregate number of shares of our common stock , which was determined based on the volume weighted average closing price of our common stock for the 30 trading days up to and including august 7 , 2018. based on this calculation , in august 2018 , we issued warrants to purchase 792,434 shares of common stock at an exercise price of $ 0.0004 per share to the cash investors of our series g financing , pursuant to our series g stock purchase agreement . the warrants had a valuation of $ 15.3 million upon issuance and were subsequently exercised , resulting in the issuance of 792,434 shares of our common stock . reverse stock split on january 26 , 2018 , our board of directors approved an amended and restated certificate of incorporation to ( 1 ) effect a reverse split on outstanding shares of our common stock and redeemable convertible preferred stock on a one-for-four basis ( the “ reverse stock split ” ) , ( 2 ) modify the threshold for automatic conversion of our preferred stock into shares of our common stock in connection with an initial public offering to eliminate the requirement of gross proceeds to the company of not less than $ 70.0 million and ( 3 ) authorize us to issue up to 100,000,000 shares of common stock , $ 0.0001 par value per share and 25,000,000 shares of redeemable convertible preferred stock , $ 0.0001 par value per share ( collectively , the “ charter amendment ” ) . the authorized shares and par values of our common stock and redeemable convertible preferred stock were not adjusted as a result of the reverse stock split . story_separator_special_tag the charter amendment was approved by the company 's stockholders on january 26 , 2018 and became effective upon the filing of the charter amendment with the state of delaware on january 26 , 2018. all issued and outstanding common stock and preferred stock and related share and per share amounts contained in these financial statements have been retroactively adjusted to reflect the reverse stock split for all periods presented . our business model cardlytics direct cardlytics direct is our proprietary native bank advertising channel that enables marketers to reach consumers through their trusted and frequently visited digital banking channels . working with a marketer , we design a campaign that targets customers based on their purchase history . the consumer is offered an incentive to make a purchase from the marketer within a specified period . we use a portion of the fees that we collect from marketers to provide these consumer incentives to our fis ' customers after they make qualifying purchases ( `` consumer incentives '' ) . leveraging our powerful predictive analytics , we are able to create compelling consumer incentives that have the potential to increase return on advertising spend for marketers . we have generated substantially all of our revenue from sales of cardlytics direct since inception . we price cardlytics direct marketing in two primary ways : ( 1 ) cost per served sale ( `` cps '' ) and ( 2 ) cost per redemption ( `` cpr '' ) . we developed our pricing models with the needs of marketers in mind . given our ability to measure the actual performance of cardlytics direct in driving sales , we are able to offer marketers performance-based pricing models where they only pay us based on actual sales influenced by marketing through our native bank channel . we price cardlytics direct utilizing other pricing models , which may change over time as we acquire new customers and expand the sale of cardlytics direct into new industry verticals . these pricing models are designed to ensure that marketers realize an actual return on their advertising spend with us . 41 cps . our primary and fastest growing pricing model is cps , which we created to meet the media buying preferences of marketers . we generate revenue by charging a percentage ( the `` cps rate '' ) , of all purchases from the marketer by consumers ( 1 ) who are served marketing and ( 2 ) subsequently make a purchase from the marketer during the campaign period , regardless of whether consumers select the marketing and thereby become eligible to earn the applicable consumer incentive . we set cps rates for marketers based on our expectation of the marketer 's return on spend for the relevant campaign . additionally , we set the amount of the consumer incentives payable for each campaign based on our estimation of our ability to drive incremental sales for the marketer . we seek to optimize the level of consumer incentives to retain a greater portion of billings . however , if the amount of consumer incentives exceeds the amount of billings that we are paid by the applicable marketer we are still responsible for paying the total consumer incentive . this has occurred infrequently and has been immaterial in amount for each of the periods presented . cpr . our initial pricing model is cpr , where marketers specify and fund the consumer incentive and pay us a separate negotiated , fixed marketing fee ( the `` cpr fee '' ) , for each purchase that we generate . we generate revenue if the consumer ( 1 ) is served marketing , ( 2 ) selects the marketing and thereby becomes eligible to earn the applicable consumer incentive and ( 3 ) makes a qualifying purchase from the marketer during the campaign period . we set the cpr fee for marketers based on our estimation of the marketers ' return on spend for the relevant campaign . the cpr fee is either a percentage of qualifying purchases or a flat amount . we pay our fi partners an fi share , which is a negotiated and fixed percentage of our billings to marketers less any consumer incentives that we pay to the fis ' customers and certain third-party data costs . other platform solutions our other platform solutions enabled marketers and marketing service providers to leverage the power of purchase intelligence outside the bank channel . we have shifted the majority of our efforts and resources to support the growth of cardlytics direct . as a result , we do not expect to generate substantial , if any , revenue from other platform solutions for the foreseeable future , and we expect other platform solutions revenue to decline in future periods compared to prior periods . during 2016 , 2017 and 2018 , other platform solutions revenue was $ 15.0 million , $ 8.0 million and $ 1.4 million , respectively . accordingly , our total revenue may decline in future periods if we are unable to generate sufficient offsetting revenue from sales of cardlytics direct . key factors affecting our performance our historical financial performance has been , and we expect our financial performance in the future will be , primarily driven by the following factors : ability to increase spend from existing marketers and acquire new marketers in new and existing verticals . our performance depends on our ability to continue to increase adoption of our solutions within our existing marketer base and attract new marketers in new and existing verticals that invest meaningfully in marketing through our solutions . our ability to increase adoption among existing marketers is particularly important in light of our land-and-expand business model . we believe that we have the opportunity to expand our marketer base with a focus on attracting new brands , retailers , service providers and new categories of marketers that will invest significantly in the use of purchase intelligence .
| other platform solutions fi share and other third-party costs decreased during 2018 as we discontinued delivering other platform solutions as a managed service as of july 31 , 2017. warrants to purchase shares of common stock vested upon the completion of our ipo in february 2018 , resulting in a non-cash expense of $ 2.5 million based on the vesting-date fair value of our common stock underlying these warrants . since the performance conditions were directly related to revenue-producing activities , we recognized this non-cash expense in fi share and other third-party costs on our consolidated statement of operations . refer to note 10—fair value measurement to our consolidated financial statements for additional information regarding the valuation of the warrants that vested upon the consummation of our ipo . 49 delivery costs replace_table_token_12_th delivery costs increased by $ 3.6 million during 2018 compared to 2017 primarily due to a $ 2.5 million increase in personnel costs associated with additional headcount to host cardlytics direct for certain new fi partners , a $ 0.6 million increase in hosting-related it costs , a $ 0.4 million increase in stock-based compensation expense and a $ 0.1 million increase in professional fees . sales and marketing expense replace_table_token_13_th sales and marketing expense increased by $ 10.0 million during 2018 compared to 2017 primarily due to a $ 7.5 million increase in stock-based compensation expense , a $ 2.0 million increase in personnel costs associated with additional headcount , a $ 0.1 million increase in recruiting fees , a $ 0.1 million increase in travel costs and $ 0.1 million increase in software costs . research and development expense replace_table_token_14_th research and development expense increased by $ 4.1 million during 2018 compared to 2017 primarily due to a $ 3.1 million increase in stock-based compensation expense , a $ 1.0 million increase in personnel costs associated with higher research and development headcount , a $ 0.3 million increase in recruiting fees and a $ 0.1 million increase in it costs , partially offset by a $ 0.5 million decrease in outsourcing costs . general and administrative expense replace_table_token_15_th general and administrative expense increased by $ 14.1 million during 2018 compared to 2017 primarily
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a large portion of management time is focused on maximizing revenues and managing expenses at our self-storage facilities , which is the primary driver of growth in our net income and cash flow from operations and contributed 92 % of our revenues for the year ended december 31 , 2011. the remainder of our operations is comprised of our european self-storage segment through our investment in shurgard europe , our commercial segment through our investment in ps business parks , inc. ( “ psb ” ) , and the operations not allocated to any segment , each of which is described in note 11 to our december 31 , 2011 financial statements . the self-storage industry is subject to general economic conditions , particularly conditions that affect the spending habits of consumers and moving trends . due to the recessionary pressures in the u.s. , rental income was negatively impacted in 2009. demand began to improve in 2010 and , as a result , rental income trends improved each quarter in 2010 and 2011 , trending positive on a year-over-year basis since the third quarter of 2010. while trends have been improving , there can be no assurance that these trends will continue . our ability to effectively deploy capital to expand our asset base is an important component of our long-term growth . during the year ended december 31 , 2010 , we acquired 42 self-storage facilities for $ 239.6 million . during the year ended december 31 , 2011 , we acquired 11 self-storage facilities for $ 80.4 million , noncontrolling interests in subsidiaries owning self-storage facilities for $ 175.5 million , and we invested $ 116.6 million in shurgard europe to fund its acquisition of the remaining interests it did not own in 72 self-storage facilities . we believe that there may be opportunities to acquire additional self-storage facilities from third parties in 2012 , because we continue to see self-storage facilities come to market . however , there is significant competition for facilities marketed in many of the geographic locations we find attractive . as a result , there can be no assurance that we will be able to acquire facilities on terms we find attractive . due to the challenging operating environment , we have substantially curtailed our development activities . we continue to have a nominal development pipeline at december 31 , 2011. other investments we have made in the past , and may make in the future , include i ) further investment in shurgard europe to allow it to develop or acquire facilities , ii ) further investment in psb , and iii ) the early retirement of debt or redemption of preferred securities . there can be no assurance that these other investment alternatives will be attractive in the long-term , or will be even be available as investment alternatives . 29 we believe that we are not dependent upon raising capital to fund our operations or meet our obligations , due to our low levels of debt and significant cash from operations available for principal payments on debt and reinvestment ( see “ liquidity and capital resources ” below ) . however , access to capital is important to growing our asset base . we choose between the issuance of common and preferred securities based upon the relative cost of capital . for at least the last ten years , we have raised cash proceeds for growth and other corporate purposes primarily through the issuance of preferred securities , while we have issued common stock only in connection with mergers and the acquisition of interests in real estate entities . our ability to raise capital at favorable costs is dependent upon capital market conditions . when market conditions were favorable , we have generally been able to raise capital as necessary ; however , there can be no assurance that future market conditions will permit us to raise capital at favorable costs . during the years ended december 31 , 2011 and 2010 , we issued approximately $ 862.5 million and $ 270.0 million , respectively , of preferred securities , and on january 12 , 2012 , we issued another $ 460.0 million of preferred securities . at december 31 , 2011 , we had approximately $ 139.0 million of cash and we have access to a $ 300 million line of credit which expires march 27 , 2012 and is expected to be extended , subject to agreeing to satisfactory renewal terms . at december 31 , 2011 , we have no significant commitments until 2013 , when $ 264.9 million of existing debt comes due . on january 12 , 2012 we received net proceeds of $ 446.2 million in connection with the issuance of our series s cumulative preferred shares . on february 9 , 2012 , we paid $ 206.7 million ( excluding accrued dividends ) to redeem our series l cumulative preferred shares . on february 21 , 2012 , we paid $ 141.3 million ( excluding accrued dividends ) to redeem our series e cumulative preferred shares . on march 19 , 2012 , we will pay $ 8.8 million ( excluding accrued dividends ) to redeem our series y cumulative preferred shares . as of february 24 , 2012 , we are under contract to acquire a portfolio of six self-storage properties , located in california , florida ( two ) , massachusetts , new jersey and pennsylvania , for an aggregate purchase price of $ 42 million , cash . we expect the pending acquisition of these properties will close in the first quarter of 2012. the pending acquisition is subject to various conditions and contingencies and there can be no assurance that it will be completed . story_separator_special_tag ffo to be one measure of the performance of real estate companies . story_separator_special_tag in addition , we believe that ffo is helpful to investors as an additional measure of the performance of a reit , because net income includes the impact of depreciation , which assumes that the value of real estate diminishes predictably over time , while we believe that the value of real estate fluctuates due to market conditions and in response to inflation . ffo computations do not consider scheduled principal payments on debt , capital improvements , distributions and other obligations of the company . ffo is not a substitute for our cash flow or net income as a measure of our liquidity or operating performance or our ability to pay dividends . other reits may not compute ffo in the same manner ; accordingly , ffo may not be comparable among reits . the following table reconciles from our net income to funds from operations , and sets forth the calculations of ffo per share . 31 replace_table_token_7_th 32 real estate operations self-storage operations : our self-storage operations are by far the largest component of our operating activities , representing more than 91 % of our revenues for the years ended december 31 , 2011 , 2010 and 2009 , respectively . management analyzes the results of the company 's consolidated self-storage operations in two-groups : ( i ) the same store facilities , representing the facilities in the domestic self-storage segment that we have owned and have been operating on a stabilized basis since january 1 , 2009 , and ( ii ) all other facilities in the domestic self-storage segment , which are primarily those consolidated facilities that we have not owned and operated at a stabilized basis since january 1 , 2009 such as newly acquired , newly developed , or recently expanded facilities . replace_table_token_8_th ( a ) see “ net operating income or noi ” below . net income with respect to our self-storage operations increased by $ 79.4 million or 11.9 % during the year ended december 31 , 2011 , when compared to the same period in 2010. this was due to a 6.6 % increase in net operating income with respect to our same store facilities due to increased revenues driven by higher occupancy and higher realized rents per occupied square foot , and a 43.3 % increase in net operating income with respect to the non same store facilities , due primarily to the impact of the properties acquired in 2010 and 2011. this was partially offset by a $ 4.7 million increase in depreciation and amortization , due primarily to increased depreciation with respect to the facilities acquired in 2011 and 2010. net income with respect to our self-storage operations increased by $ 0.8 million or 0.1 % during the year ended december 31 , 2010 , when compared to the same period in 2009. this was due to a 0.2 % increase in net operating income with respect to our same store facilities due to increased revenues driven by higher occupancy partially offset by lower realized rents per occupied square foot , and a 39.6 % increase in net operating income with respect to the non same store facilities , due primarily to the impact of the 42 facilities acquired in 2010. this was partially offset by a $ 14.6 million increase in depreciation and amortization , due primarily to increased amortization of tenant intangible assets with respect to the facilities acquired in 2010 . 33 same store facilities the “ same store facilities ” represents those 1,931 facilities that are stabilized and owned since january 1 , 2009 and therefore provide meaningful comparisons for 2009 , 2010 , and 2011. the following table summarizes the historical operating results of these 1,931 facilities ( 121.6 million net rentable square feet ) that represent approximately 94 % of the aggregate net rentable square feet of our u.s. consolidated self-storage portfolio at december 31 , 2011. replace_table_token_9_th a ) revenues and cost of operations do not include ancillary revenues and expenses generated at the facilities with respect to tenant reinsurance , retail sales and truck rentals . “ other costs of management ” included in cost of operations principally represents all the indirect costs incurred in the operations of the facilities . indirect costs principally include supervisory costs and corporate overhead cost incurred to support the operating activities of the facilities . 34 b ) see “ net operating income ” below for a reconciliation of this non-gaap measure to our net income in our statements of income for the years ended december 31 , 2011 , 2010 and 2009. c ) square foot occupancies represent weighted average occupancy levels over the entire period . d ) realized annual rent per occupied square foot is computed by annualizing the result of dividing rental income ( which excludes late charges and administrative fees ) by the weighted average occupied square feet for the period . realized annual rent per occupied square foot takes into consideration promotional discounts that reduce rental income from the contractual amounts due . e ) late charges and administrative fees are excluded from the computation of realized annual rent per occupied square foot and revpaf . exclusion of these amounts provides a better measure of our ongoing level of revenue , by excluding the volatility of late charges , which are dependent principally upon the level of tenant delinquency , and administrative fees , which are charged upon move-in volumes and are therefore dependent principally upon the absolute level of move-ins for a period . f ) realized annual rent per available foot or “ revpaf ” is computed by dividing rental income ( which excludes late charges and administrative fees ) by the total available net rentable square feet for the period . g ) in place annual rent per occupied square foot represents annualized contractual rents per occupied square foot without reductions for promotional discounts and excludes late charges and administrative fees .
| this decrease is primarily due to ( i ) a foreign currency exchange loss of $ 42.3 million during the year ended december 31 , 2010 compared to a gain of $ 9.7 million during the same period in 2009 , ( ii ) an aggregate $ 35.8 million increase in income allocated to the shareholders of redeemed securities , ( including our equity share of psb 's redemptions ) in applying eitf d-42 to the redemption of securities in the year ended december 31 , 2010 , as compared to a $ 94.5 million decrease in income allocated to shareholders of redeemed securities ( including our equity share of psb 's redemptions ) , in applying eitf d-42 to the redemption of securities in the same period in 2009 and ( iii ) a gain on disposition of real estate assets of $ 30.3 million related to an equity offering by psb recorded in the year ended december 31 , 2009 . 30 funds from operations for the year ended december 31 , 2011 , funds from operations ( “ ffo ” ) was $ 5.67 per common share on a diluted basis as compared to $ 4.72 per diluted common share for the same period in 2010 , representing an increase of $ 0.95 per diluted common share . for the year ended december 31 , 2011 , ffo was impacted by a foreign currency exchange loss of $ 7.3 million ( compared to a $ 42.3 million loss for the same period in 2010 ) and a $ 32.6 million net charge related to our redemptions of equity securities , including our equity share from psb , in applying eitf d-42 ( compared to $ 35.8 million for the same period in 2010 ) . for the year ended december 31 , 2010 , ffo was $ 4.72 per common share on a diluted basis as compared to $ 5.61 per diluted common share on a diluted basis for the same period in 2009 , representing a decrease of $ 0.89 per diluted common share . for the year ended december 31 , 2010 , ffo was impacted by a $ 35.8 million reduction in applying eitf d-42 to the redemption of preferred shares and our equity shares , series a , including our equity share of psb 's redemptions ( compared to an aggregate $ 94.5 million increase recorded for our redemptions , and our equity share of psb 's redemptions , of preferred equity in the same period in 2009 ) and a foreign currency exchange loss totaling $ 42.3 million ( compared to a gain
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casper terminal acquisition on november 17 , 2015 , we completed our acquisition of all of the membership interests of casper crude to rail , llc , or the casper terminal , from casper crude to rail holdings , llc . the casper crude oil terminal , located in casper , wyoming , primarily consists of unit train-capable railcar loading capacity in excess of 100,000 bpd , six customer-dedicated storage tanks with 900,000 bbls of total capacity and a six-mile , 24-inch diameter pipeline with a direct connection from spectra energy partners ' express pipeline . initial public offering of common units and related transactions on october 15 , 2014 , we completed the ipo of 9,120,000 of our common units for proceeds of approximately $ 145 million after underwriting discounts , commissions and structuring fees . on the same date , we entered into a five-year , $ 300 million senior secured credit agreement , which we refer to as the credit facility , comprised of a $ 200 million revolving credit facility , which we refer to as the revolving credit facility , and a $ 100 million term loan , which we refer to as the term loan facility , with citibank , n.a. , as administrative agent , and a syndicate of lenders . the credit facility is a five-year committed facility that matures on october 15 , 2019 , unless amended or extended . we also completed other transactions in connection with the closing of our ipo pursuant to which usd conveyed to us its ownership interests in each of its subsidiaries that own or operate the hardisty , san antonio and west colton terminals and the railcar business . in exchange for these ownership interests , we : ( 1 ) issued to usd group llc 1,093,545 of our common units and all 10,463,545 of our subordinated units , ( 2 ) assumed $ 30 million of borrowings under a senior secured credit agreement payable to bank of oklahoma and ( 3 ) granted usd group llc the right to receive a $ 100 million distribution . additionally , we issued our general partner 427,083 general partner units , representing a 2.0 % general partner interest in us , as well as all of our incentive distribution rights . we used the net proceeds from our ipo as follows ( in millions ) : net proceeds from the ipo $ 145.0 less : reimbursement of usd group llc for ipo expenses ( 7.5 ) payment of debt issuance costs ( 2.9 ) repayment of bank of oklahoma debt ( 30.0 ) repayment of bank indebtedness of subsidiary ( 67.8 ) net cash retained $ 36.8 as discussed above , we borrowed the canadian equivalent of u.s. $ 100 million on our term loan facility , which we distributed to usdg pursuant to the right we granted them in connection with our ipo . how we generate revenue we conduct our business through two distinct reporting segments : terminalling services and fleet services . we have established these reporting segments as strategic business units to facilitate the achievement of our long-term objectives , to aid in resource allocation decisions and to assess operational performance . 57 terminalling services we generate substantially all of our operating cash flow by charging fixed fees for handling energy-related products and providing related services . we do not take ownership of the underlying products that we handle nor do we receive any payments from our customers based on the value of such products . thus , we have no direct exposure to risks associated with fluctuating commodity prices , although these risks could indirectly influence our activities and results of operations over the long term . hardisty terminal services agreements . we have entered into terminal services agreements with seven high-quality , primarily investment grade counterparties or their subsidiaries : cenovus energy , gibson , j. aron & company , phillips 66 , suncor energy , total and usd marketing llc . substantially all of the terminalling capacity at our hardisty terminal is contracted under multi-year , take-or-pay terminal services agreements subject to inflation-based escalators with a volume-weighted average remaining contract life of approximately 3.5 years as of december 31 , 2015. furthermore , approximately 83 % of the contracted utilization at our hardisty terminal is contracted with subsidiaries of five investment grade companies . all of our counterparties are obligated to pay a minimum monthly commitment fee and can load a maximum allotted number of unit trains or barrels per month . if a customer loads fewer unit trains or barrels than its maximum allotted amount in any given month , that customer will receive a credit for up to six months . this credit may be used to offset fees on throughput volumes in excess of the customer 's minimum monthly commitments in future periods to the extent capacity is available for the excess volume . we will receive a per-barrel fee on any volumes handled in excess of the customers ' maximum allowed volume , to the extent the additional volume is not subject to the credit discussed above . if a force majeure event occurs , a customer 's obligation to pay us may be suspended , in which case the length of the contract term will be extended by the same duration as the force majeure event . casper terminal services agreements . our casper terminal is supported by take-or-pay terminal services agreements with high quality , primarily investment grade refiners . the initial term of the agreements varies from three to five years , with extension or renewal options for one to three additional years , and a volume-weighted average remaining contract life of 2.8 years as of december 31 , 2015. under these terminal services agreements , our customers are obligated to pay the greater of a minimum monthly commitment fee or a throughput fee based on the actual volume of crude oil loaded . story_separator_special_tag if a customer loads fewer unit trains or barrels than its maximum allotted amount in any given month , that customer will receive a credit which may used to offset future throughput fees in excess of the minimum monthly commitment fees , to the extent capacity is available for the excess volume . unused credits generally expire if not used within a one to six month period , typically at the end of each calendar quarter . ethanol terminal services agreements . we have entered into terminal services agreements with subsidiaries of an investment grade company for our san antonio and west colton terminals pursuant to which those customers pay us fixed fees per gallon of ethanol transloaded at each terminal . the san antonio terminal services agreement is scheduled to expire in february 2017 , subject to one 18-month extension option . the agreement entitles the customer to 100 % of the terminal 's capacity , subject to our right to seek additional customers if minimum volume usage thresholds are not met . in january 2016 , our customer announced an intention to construct a new ethanol terminalling facility near austin , texas , which they expect will be operational by december 2016. we are currently assessing what impact , if any , this announcement will have on our customer 's desire to renew its agreement with us , as well as considering other opportunities available to us at the san antonio terminal . the west colton terminal services agreement has been in place since july 2009 and is terminable at any time by either party . we are seeking permits to construct an approximately one-mile pipeline directly from our west colton terminal to kinder morgan inc. 's gasoline blending terminals , which , if approved and constructed , may result in long-term volume commitments and cash flows . fleet services we provide our customers with railcars and fleet services related to the transportation of liquid hydrocarbons and biofuels by rail on a multi-year , take-or-pay basis under master fleet services agreements for periods ranging from five to nine years . we do not own any railcars . as of december 31 , 2015 , our fleet consisted of 3,306 railcars which we leased from various railcar manufacturers and financial entities , including 2,108 c & i railcars . we have assigned certain payment and performance and obligations under the leases and master fleet services agreements for 2,653 of these railcars to related parties associated with usd on an arms-length basis , but have retained certain rights and 58 obligations with respect to the servicing of these railcars . approximately 75 % of our current railcar fleet is dedicated to customers of our hardisty terminal , including related parties of usd . the remaining 25 % of our railcar fleet is dedicated to a customer of terminals belonging to subsidiaries previously sold by our predecessor . the master fleet services agreements we have with certain of our hardisty terminal customers have a weighted-average remaining contract life of 5.6 years as of december 31 , 2015. in the aggregate , our master fleet services agreements have a weighted-average remaining contract life of 4.5 years as of december 31 , 2015. under the master fleet services agreements , we provide customers with railcar-specific fleet services , which may include , among other things , the provision of relevant administrative and billing services , the maintenance of railcars in accordance with standard industry practice and applicable law , the management and tracking of the movement of railcars , the regulatory and administrative reporting and compliance as required in connection with the movement of railcars , and the negotiation for and sourcing of railcars . our customers typically pay monthly fees per railcar for these services to us and our assignees , which include a component for railcar use and a component for fleet services . historically , we contracted with railroads on behalf of some of our customers to arrange for the movement of railcars from our terminals to the destinations selected by our customers . we were the contracting party with the railroads for those shipments and were responsible to the railroads for the related fees charged by the railroads , for which we were reimbursed by our customers . both the fees charged by the railroads to us and the reimbursement of these fees by our customers are included in our consolidated statements of operations in the revenues and operating costs line items entitled “ freight and other reimbursables. ” how we evaluate our operations our management uses a variety of financial and operating metrics to evaluate our performance . these metrics are significant factors in assessing our operating results and profitability and include : ( i ) volumes ; ( ii ) adjusted ebitda and dcf ; and ( iii ) operating and maintenance expenses . we define adjusted ebitda and dcf below . volumes the amount of terminalling services revenue we generate depends on both minimum customer commitment fees and the volumes of crude oil and biofuels that we handle at our terminals in excess of those minimum commitments . these volumes are primarily affected by the supply of and demand for crude oil , refined products and biofuels in the markets served directly or indirectly by our assets , as well as the spreads between the benchmark prices for these products . although customers at our hardisty and casper terminals have committed to minimum monthly fees under their terminal services agreements with us , which will generate the vast majority of our terminalling services revenue , our results of operations will also be impacted by : our customers ' utilization of our terminals in excess of their minimum monthly commitment fees ; our ability to identify and execute accretive acquisitions and organic expansion projects and capture our customers ' incremental volumes ; and our ability to renew contracts with existing customers , enter into contracts with new customers , increase customer commitments and throughput volumes at our terminals and provide additional ancillary services at those terminals .
| our operating income for the year ended december 31 , 2015 , also included a full year of additional costs related to our omnibus agreement and public partnership expenses that we did not incur prior to our ipo in october 2014. our operating results for the year ended december 31 , 2015 , were favorably affected by gains on our foreign currency derivative instrument contracts , which we entered into in may 2014 and june 2015. the gains from our derivative contracts were largely offset by the continued deterioration of the canadian dollar relative to the u.s. dollar from december 31 , 2014 to december 31 , 2015 , which reduced the operating results of our canadian subsidiaries when translated into u.s. dollars . a more comprehensive discussion of our operating results by segment is presented below . year ended december 31 , 2014 compared to the year ended december 31 , 2013 the change in our operating results for the year ended december 31 , 2014 , as compared with our operating results for the year ended december 31 , 2013 , was largely driven by the commencement of operations at our hardisty terminal facility in june 2014. our hardisty terminal operations contributed approximately $ 2.2 million to the operating income of our terminalling services business , which was partially offset by lower operating income in our fleet services business and additional selling , general and administrative costs , primarily related to our omnibus agreement and public partnership expenses that we do not allocate to our segments . additionally our operating results for the year ended december 31 , 2014 were negatively affected by additional interest expense associated with amounts outstanding under the terms of our credit agreement that we entered in connection with our ipo and foreign currency transaction losses related to our canadian operations , partially offset by gains on our derivative instrument contracts which we entered into in may 2014. a more comprehensive discussion of our operating results by segment is presented below . 67 results of operations - by segment terminalling services the following table sets forth the operating results of our terminalling services business and the approximate average daily throughput volumes of our terminals for each of the years ended december 31 , 2015 , 2014 and 2013 . replace_table_token_5_th year ended december 31 , 2015 compared to the year ended december 31 , 2014 terminalling services revenue revenue generated by our terminalling services segment increased $ 42.0 million to $ 64.5 million for the year ended december 31 , 2015 , from $ 22.5 million for the year ended december 31 ,
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current year results included unfavorable currency translation effects of $ 0.7 million primarily due to a sharp decline in the korean won partially offset by a favorable impact of a stronger japanese yen . gross profit was $ 125.4 million or 29.1 % of sales in 2009 , compared to $ 143.7 million or 27.1 % of sales in 2008. the increase in gross profit margin percentage in 2009 primarily resulted from cost savings related to manufacturing plant consolidations and reductions in operating expenses . higher restructuring and other costs related to plant transfer activities and a pension settlement charge of $ 5.7 million during 2008 also contributed to the margin improvement change in 2009. the company recorded approximately $ 4.2 million of restructuring charges in cost of sales in 2009 due primarily to the reorganization of the company 's european and asian operations . the european restructuring charges included the transfer of its manufacturing operations from dünsen , germany to piedras negras , mexico . the asian restructuring included the planned closure of a manufacturing facility in taiwan . the 2009 restructuring charges to cost of sales were approximately $ 4.6 million lower than restructuring charges to cost of sales for 2008. the company continues to focus heavily on research and development ( r & d ) to develop new solutions for customers and expand product offerings . during 2009 , the company continued moving r & d operations to lower cost locations closer to its customers . r & d operations are now in canada , china , germany , the philippines , and mexico as well as the united states . total operating expense was $ 111.7 million or 26.0 % of net sales for 2009 compared to $ 135.2 million or 25.5 % of net sales for 2008. the reduction in operating expenses primarily reflects cost savings initiatives implemented in late 2008 and early 2009 including headcount reductions , consolidation of asian and european sites and transfer of certain activities to low-cost asian locations . 20 operating income was $ 13.7 million or 3.2 % of net sales in 2009 compared to $ 8.5 million or 1.6 % of net sales in the prior year . the increase in operating income in the current year was due primarily to the cost reductions and lower restructuring charges described above partially offset by lower sales . interest expense decreased to $ 2.4 million in 2009 compared to $ 3.4 million for 2008 primarily due to a $ 1.1 million loss on an interest rate swap transaction recognized in 2008. other expense ( income ) , net , consisting of interest income , royalties , non-operating income and foreign currency items , was $ 0.5 million of expense in 2009 compared to $ 5.6 million of income in 2008. the decrease primarily reflected an unfavorable net change of approximately $ 3.8 million in foreign currency translation effects ( primarily due to the weakening of the korean won against the u.s. dollar ) and a $ 1.1 million refund received in 2008 related to a recovery of japanese output taxes paid in 2007. income before income taxes was $ 10.8 million in 2009 compared to $ 10.6 million in 2008. income tax expense was $ 1.4 million in 2009 compared to $ 2.6 million in 2008. the 2009 effective income tax rate was 13.2 % compared to 24.5 % in 2008. the decrease in the 2009 effective tax rate reflects the mix of income earned in lower tax jurisdictions in 2009 as well as the release of $ 2.6 million of contingent income tax reserves due to the lapsing of statute of limitations and the close-out of open audit years by local tax authorities . results of operations 2008 compared with 2007 net sales decreased slightly in 2008 to $ 530.9 million compared to $ 536.1 million in 2007. these results reflected sales declines in the automotive segment of $ 8.2 million or 6 % to $ 126.9 million , along with a decrease in sales in the electronics segment of $ 6.4 million or 2 % to $ 342.5 million , largely offset by an increase in sales in the electrical segment of $ 9.4 million or 18 % to $ 61.5 million . the decrease in automotive sales was due primarily to the weakened passenger car market across all geographies , resulting in sharp declines in global car production , particularly in the fourth quarter of 2008 , as oems took extended plant shutdowns . the negative impact from declines in volume were partially offset by favorable currency effects of $ 5.0 million , mainly due to the strong the euro , which experienced a higher annual average translation rate of 1.475 in 2008 compared to 1.369 in 2007. the decrease in electronics sales primarily reflected weaker demand as consumers continued to lose confidence in the economy and cut back on spending , particularly in the fourth quarter of 2008. in addition , many customers in asia , particularly contract manufacturers and original design manufacturers , had extensive plant shutdowns , and electronics distributors reduced inventories in response to weak demand and the uncertain outlook for 2009. the negative impact from declines in volume were partially offset by net favorable currency effects of $ 1.8 million , largely due to the strength of the euro and to a lesser extent the yen , partially offset by the negative impact from sales denominated in korean won , which experienced a drop of more than 13 % in the annual average translation rate in 2008 compared to 2007. the increase in electrical sales was due in part to new oem business and price increases over the prior year and improvements in the industrial market . story_separator_special_tag in addition , current year sales include $ 3.9 million from startco engineering ltd. ( startco ) , acquired at the beginning of the fourth quarter of 2008 , and $ 1.3 million from shock block corporation ( shock block ) , acquired during the first quarter of 2008. on a geographic basis , sales in the americas decreased $ 2.5 million or 1 % in 2008 compared to 2007 due to decreased automotive sales of $ 8.4 million and lower electronics sales of $ 3.5 million , partially offset by increased electrical sales of $ 9.4 million . automotive and electronics sales declined sharply in the fourth quarter of 2008 as economic concerns led to a deterioration in consumer confidence and reduced spending . as a result , 21 the automotive oems sharply cut production rates and shut down assembly lines for much of december and electronics distributors reduced inventories . the electrical sales increase was due primarily to price increases over the prior year and sales from newly-acquired companies . europe sales remained steady in 2008 compared to 2007 , reflecting a modest increase of $ 0.4 million . 2008 results reflected favorable currency effects of $ 9.6 million offset by lower automotive sales due to a sharp decline in fourth quarter car production , which was down 22 % year-over-year , and lower electronics sales due to decreased demand from electronics distributors . asia-pacific sales decreased $ 3.1 million or 1 % in 2008 compared to the prior year mainly due to lower electronics sales , which reflected weakness across all major end markets , from consumer products to it infrastructure spending for telecom equipment . this decrease was partially offset by higher automotive sales , which reflected continued share gain in the growing asian markets outside of japan . current year results included unfavorable currency translation effects of $ 3.1 million primarily due to a sharp decline in the korean won . gross profit was $ 143.7 million or 27.1 % of sales in 2008 compared to $ 171.5 million or 32.0 % of sales in 2007. the decline in gross profit margin percentage in 2008 reflected a $ 5.7 million non-cash charge related to settlement of the ireland pension plan . the decrease also reflected a $ 3.2 million charge related to impairment of certain manufacturing assets in china along with higher costs for transportation , materials and utilities driven primarily by the increase in the price of oil and commodity metals for much of 2008. higher costs related to plant transfer activities also contributed to the margin decline . the company also recorded approximately $ 8.8 million of restructuring charges in cost of sales in the current year , primarily due to the closure of the matamoros , mexico manufacturing facility , along with severance and retention expense at the irving , texas , des plaines , illinois and swindon , u.k. facilities , compared to $ 7.6 million of restructuring charges in the prior year primarily related to the closure of the des plaines , illinois manufacturing facility , along with severance and retention expense in ireland and germany . total operating expense was $ 135.2 million or 25.5 % of net sales for 2008 compared to $ 120.2 million or 22.4 % of net sales for 2007. fiscal year 2007 included an $ 8.0 million gain on the sale of property in ireland . in addition , selling , general and administrative expenses increased $ 3.9 million to $ 107.2 million in 2008 from $ 103.3 million in 2007 due primarily to currency effects . research and development costs increased $ 2.4 million to $ 24.1 million in 2008 compared to $ 21.7 million in 2007 due to increased spending on new product development for the electronics and automotive markets . operating income was $ 8.5 million or 1.6 % of net sales in 2008 compared to $ 51.3 million or 9.6 % of net sales in the prior year . the decrease in operating income in the current year was due primarily to the special charges described above , reduced operating leverage and higher costs due to transfer-related activities and higher commodity prices . interest expense increased to $ 3.4 million in 2008 compared to $ 1.6 million for 2007 primarily due to a $ 1.1 million loss on an interest rate swap transaction recognized in 2008 , as well as increased costs due to higher long-term debt resulting from the $ 80.0 million term loan agreement the company entered into on september 29 , 2008. other expense ( income ) , net , consisting of interest income , royalties , non-operating income and foreign currency items , was $ 5.6 million in 2008 compared to $ 1.5 million in the prior year . the increase reflected a net improvement of approximately $ 3.9 million in foreign currency translation effects ( primarily due to the strengthening of the us dollar against the korean won , philippine peso and euro ) and a $ 1.1 million refund received in 2008 related to an exemption from japanese output taxes paid in 2007 , partially offset by a 22 $ 2.8 million non-cash charge related to marking down the company 's available-for-sale investment in polytronics to its lower market value , as the loss was deemed other than temporary . income before income taxes was $ 10.6 million in 2008 compared to $ 51.3 million in 2007. income tax expense was $ 2.6 million in 2008 compared to $ 14.5 million in the prior year . the 2008 effective income tax rate was 24.5 % compared to 28.2 % in 2007. the decrease in the 2008 effective tax rate reflects the mix of income earned in lower tax jurisdictions partially offset by a $ 1.1 million unfavorable impact from recognizing an other-than-temporary loss on the company 's available-for-sale investment in polytronics , for which no tax benefit is available on the capital loss . liquidity and capital resources the company historically has financed capital expenditures through cash flows from operations .
| under certain circumstances ( usually in a competitive situation or large volume opportunity ) , a distributor will request authorization to reduce its price to its buyer . if the company approves such a reduction , the distributor is authorized to debit its account for the difference between the contracted price and the lower approved price . the company establishes reserves for this program based on historic activity and actual authorizations for the debit and recognizes these debits as a reduction of revenue . the company has a return to stock policy whereby a customer with previous authorization from littelfuse management can return previously purchased goods for full or partial credit . the company establishes an estimated allowance for these returns based on historic activity . sales revenue and cost of sales are reduced to anticipate estimated returns . the company properly meets all of the criteria for recognizing revenue when the right of return exists . specifically , the company meets those requirements because : 1. the company 's selling price is fixed or determinable at the date of the sale . 2. the company has policies and procedures to accept only credit worthy customers with the ability to pay the company . 3. the company 's customers are obligated to pay the company under the contract and the obligation is not contingent on the resale of the product . ( all ship and debit and returns to stock require specific circumstances and authorization . ) 4. the risk ownership transfers to the company 's customers upon shipment and is not changed in the event of theft , physical destruction or damage of the product . 29 5. the company bills at the ship date and establishes a reserve to reduce revenue from the in transit time until the product is delivered for fob destination sales . 6. the company 's customers acquiring the product for resale have economic substance apart from that provided by littelfuse . all distributors are independent of the company . 7. the company does not have any obligations for future performance to
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the company achieved gross profit of $ 39.5 million for fiscal 2017 , reflecting a 3.5 % improvement compared to the prior year 's gross profit of $ 38.2 million . the company 's gross profit margin of 40.1 % in fiscal 2017 reflects a decrease from the prior year 's gross profit margin of 40.3 % due to product mix and higher manufacturing and period costs . operating expenses for fiscal 2017 were $ 33.2 million , representing a 3.1 % increase from the prior year 's operating expenses of $ 32.2 million . specifically , selling and marketing expenses of $ 19.0 million in fiscal 2017 increased 3.9 % from prior year 's amount of $ 18.2 million . selling and marketing expense for both fiscal 2017 and 2016 represent 19.3 % of net revenue . fiscal 2017 g & a expenses increased by 12.9 % from prior year to $ 7.9 million primarily attributable to an increase in professional and outside service fees related to non-recurring costs associated with the trojanlabel acquisition . the increases in selling , marketing and g & a expenses for fiscal 2017 were somewhat offset by a decrease in r & d costs . r & d costs in fiscal 2017 of $ 6.3 million decreased 9.1 % from $ 6.9 million in fiscal 2016 , primarily due to a decrease in outside service costs related to the development and integration of the ritec products . the r & d spending level for fiscal 2017 represents 6.4 % of net revenue , a decrease compared to prior year 's level of 7.3 % . other income in fiscal 2017 was $ 0.3 million compared to $ 1.0 million in the prior year . in addition to interest income , other income for fiscal 2017 includes a $ 0.4 million gain on sale of a property we owned in england 22 and $ 0.1 million related to an amount retained from the ritec escrow , offset by $ 0.2 million of foreign exchange loss for the year . other income in fiscal 2016 included $ 0.2 million of income recognized from a settlement in an escrow account related to our 2014 acquisition of the aerospace printer line from the miltope corporation . during fiscal 2017 the company recognized a $ 2.4 million income tax expense and had an effective tax rate of 36.0 % . income tax expense for fiscal 2017 included a $ 0.2 million tax expense related to non-deductible transaction costs for the trojanlabel acquisition and a $ 0.2 million tax expense related to the increase for unrecognized tax benefits . this compares to an income tax expense of $ 2.4 million in fiscal 2016 and related effective tax rate of 34.5 % . fiscal 2016 income tax expense included a $ 0.1 million tax expense related to an increase in valuation allowance . net income for fiscal 2017 was $ 4.2 million , providing a return of 4.3 % on revenue and earnings of $ 0.56 per diluted share . on a comparable basis , net income for fiscal 2016 was $ 4.5 million , a return on revenue of 4.8 % and earnings of $ 0.61 per diluted share . segment analysis we report two segments consistent with our product revenue groups : product identification and test & measurement ( t & m ) . segment performance is evaluated based on the operating segment 's profit before corporate and financial administration expenses . the following table summarizes selected financial information by segment . replace_table_token_6_th product identification revenue from the product identification segment increased 16.9 % in fiscal 2018 with revenue of $ 81.7 million compared to revenue of $ 69.9 million in the prior year . both the hardware and supplies product lines saw strong growth in fiscal 2018 , with increases of 23.5 % and 15.2 % , respectively , as compared to the prior year . the increase in hardware revenue for the current year was primarily due to the contribution from the trojanlabel line of presses . the supplies revenue increase in the current year was a result of supplies revenue from the newly acquired trojanlabel business and continued strong demand for digital color printer ink as well as label and tag products supplies . product identification current year segment operating profit was $ 10.6 million , reflecting a profit margin of 12.9 % , compared to prior year segment profit of $ 9.8 million and related profit margin of 14.1 % . the decrease in product identification current year segment operating profit margin is due to unfavorable product mix and increased operating costs . revenue from the product identification segment increased 4.1 % in fiscal 2017 with revenue of $ 69.9 million compared to revenue of $ 67.1 million in the prior year . fiscal 2017 revenue reflected the continued 23 growth from the product identification supplies products line which posted a 7.2 % growth rate over the prior year due to the strong demand for label and tag products as well as digital color printer ink supplies products . product identification fiscal 2017 segment operating profit was $ 9.8 million , reflecting a profit margin of 14.1 % , a 5.6 % increase from prior year segment profit of $ 9.3 million and related profit margin of 13.9 % . the increase in product identification segment operating profit and related margin for fiscal 2017 as compared to fiscal 2016 is due to higher revenue and product mix . test & measurement revenue from the t & m product group was $ 31.7 million for fiscal 2018 , an 11.0 % increase compared to revenue of $ 28.6 million in the prior year . both the hardware and supplies product lines saw sustained growth in fiscal 2018 , with the overall increase primarily attributable to the contribution of revenue from the entry into the arrangement with honeywell in september of the current year . t & m 's segment operating profit for the current fiscal year was $ 3.8 million which resulted in a 11.8 story_separator_special_tag % profit margin compared to the prior year 's segment operating profit of $ 4.4 million and related operating margin of 15.4 % . the lower segment operating profit and related margin were due to product mix and higher operating costs . revenue from the t & m product group was $ 28.6 million for fiscal 2017 , a 3.8 % increase compared to revenue of $ 27.5 million in the prior year . the increase is primarily attributable to the increase in revenue of aerospace printer sales due to fulfillment of orders received in previous years . revenue growth for fiscal 2017 was tempered by lower sales in the data acquisition product line . t & m 's fiscal 2017 segment operating profit was $ 4.4 million which resulted in a 15.4 % profit margin compared to the prior year 's segment operating profit of $ 3.7 million and related operating margin of 13.3 % . the higher segment operating profit and related margin in fiscal 2017 were due to product mix . liquidity and capital resources based upon our current working capital position , current operating plans and expected business conditions , we expect to fund our short and long-term working capital needs and capital expenditures primarily using internal funds , and we believe that cash provided by operations will be sufficient to meet our operating and capital needs for at least the next 12 months . we may also utilize amounts available under our secured credit facility , as described below , to fund a portion of our capital expenditures , contractual contingent consideration obligations , and future acquisitions . on february 28 , 2017 , we entered into a credit agreement with bank of america , n.a. , which provided for a secured credit facility consisting of a $ 9.2 million term loan to our wholly owned danish subsidiary , ani aps , and a $ 10.0 million revolving credit facility for the company . on september 28 , 2017 , the company entered into the first amendment to the credit agreement to permit the honeywell asset purchase and license agreement and temporarily increase the amount available for borrowing under the revolving credit line from $ 10.0 million to $ 15.0 million . the company used $ 14.6 million of the revolving credit line to complete the honeywell asset purchase and license agreement . on november 30 , 2017 , the company entered into the second amendment to the credit agreement which , in addition to the revolving credit facility and the term loan previously borrowed by ani aps under the original credit agreement , provided for a term loan to the company in the principal amount of $ 15.0 million . upon the closing of the second amendment , the company used the proceeds from the $ 15.0 million term loan to repay the entire $ 14.6 million principal balance of the revolving loan outstanding under the revolving credit facility as of october 28 , 2017 , with the remaining proceeds retained by the company to be used for general corporate purposes . the principal amount of the revolving credit facility under the credit agreement , which had been temporarily increased to $ 15.0 million pursuant to the first amendment , was reduced to $ 10.0 million effective upon the closing of the second amendment , and the revolving credit facility termination and maturity date was extended from january 31 , 2022 to november 22 , 2022. as of january 31 , 2018 , no amounts have been drawn under the existing $ 10.0 million revolving credit facility . refer to note 7 revolving credit line and note 8 debt in the audited consolidated financial statements included elsewhere in this report for further details . 24 both term loans bear interest at a rate per annum equal to the libor rate plus a margin that varies within a range of 1.0 % to 1.5 % based on the company 's consolidated leverage ratio . in connection with our entry into the original credit agreement , ani aps entered into a hedging agreement to manage the variable interest rate risk and currency risk associated with its payments in respect to the term loan . under this combined arrangement , payments of principal and interest with respect to approximately $ 8.9 million of the principal of the term loan will be made in danish krone , and interest on such principal amount will be payable at a fixed rate of 0.67 % per annum for the entire term , subject only to potential changes based on the company 's consolidated leverage ratio . in connection with our entry into the second amendment of the credit agreement , effective november 30 , 2017 , the company entered into a hedging agreement to manage the variable interest rate risk associated with its payments in respect to the $ 15.0 million term loan . under this combined arrangement , interest will be payable at a fixed rate of 2.04 % per annum for the entire term , plus an incremental margin of 1.0 % to 1.5 % , based on the company 's consolidated leverage ratio . refer to note 8 debt and note 9 , derivative financial instruments and risk management , in the audited consolidated financial statements included elsewhere in this report for further details regarding our debt and hedging arrangements . the statements of cash flows for the years ended january 31 , 2018 , 2017 and 2016 are included on page 46 of this form 10-k. net cash provided by operating activities was $ 3.8 million in fiscal 2018 compared to net cash provided by operating activities of $ 7.0 million in the previous year . the decrease in net cash from operations for the current year is primarily due to the decrease in net income and the increase in working capital accounts , particularly inventory and accounts receivables .
| product identification and test & measurement segments both generated double-digit growth in service and other revenue as a result of the trojanlabel and honeywell acquisitions . the company achieved gross profit of $ 44.0 million for fiscal 2018 , reflecting an 11.4 % improvement compared to the prior year 's gross profit of $ 39.5 million . the company 's gross profit margin of 38.8 % in the current year reflects a decrease from the prior year 's gross profit margin of 40.1 % . the higher gross profit for the current year compared to the prior year is primarily attributable to increased revenue ; the current year 's decrease in gross margin is due to product mix and higher manufacturing and period costs . operating expenses for the current year were $ 38.6 million , representing a 16.2 % increase from the prior year 's operating expenses of $ 33.2 million . specifically , selling and marketing expenses of $ 22.2 million in fiscal 2018 increased 17.3 % from prior year 's amount of $ 19.0 million . the increase in selling and marketing expenses for the current year primarily relates to increases in wages and amortization related to the trojanlabel and honeywell acquisitions . selling and marketing expenses represent 19.6 % and 19.3 % of net revenue for fiscal 2018 and 2017 , respectively . current year general and administrative ( g & a ) expenses increased by 12.1 % from prior year to $ 8.9 million primarily as a result of an increase in share-based compensation expenses , as well as outside and professional service costs , including non-recurring costs related to expenses incurred pursuant to a transition service agreement we entered into with honeywell . the increase in g & a was offset by income of $ 1.4 million due to the change in the fair value of the company 's contingent earn out liability related to the trojanlabel acquisition . research & development ( r & d ) costs in fiscal 2018 of $ 7.5 million increased 18.0 % from $ 6.3 million in fiscal 2017 , primarily due to
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as the threat environment has continued to evolve , we have dedicated significant resources to meet the ongoing challenges that this highly dynamic environment creates for our customers such as investing significantly to expand the breadth of our data protection platform as these expenditures are primarily in connection with the replacement and upgrade of equipment to lower the cost of deployment as well as to improve the efficiency for our cloud-based architecture . 40 our business is based on a recurring revenue model . our customers pay a subscription fee to license the various components of our saas platform for a contract term that is typically one to three years . at the end of the license term , customers may renew their subscription and in each year since the launch of our first solution in 2003 , we have maintained a renewal rate with our existing customers of 90 % or higher . we derive this retention rate by calculating the total annually recurring subscription revenue from customers currently using our saas platform and dividing it by the total annually recurring subscription revenue from both these current customers as well as all business lost through non-renewal . we market and sell our solutions worldwide both directly through our sales teams and indirectly through a hybrid model where our sales organization actively assists our network of distributors and resellers . we also derive a lesser portion of our total revenue from the license of our solutions to strategic partners who offer our solutions in conjunction with one or more of their own products or services . our solutions are designed to be implemented , configured and operated without the need for any training or professional services . we offer various training and professional services for those customers that seek to develop deeper expertise in the use of our solutions or would like assistance with complex configurations or the importing of data . in some cases , we provide a hardware appliance to those customers that elect to host elements of our solution behind their firewall . increasing adoption of virtualization in the data center has led to a decline in the sales of our hardware appliances and a shift towards our software-based virtual appliances , which are delivered as a download via the internet . our hardware and services offerings carry lower margins and are provided as a courtesy to our customers . we expect the overall proportion of revenue derived from the hardware and services offerings to generally remain below 5 % of our total revenue . historically , the majority of our revenue was derived from our customers in the united states . we believe the markets outside of the united states offer an opportunity for growth and we intend to make additional investments in sales and marketing to expand in these markets . revenue from customers outside of the united states grew 25 % for the year ended december 31 , 2020 as compared to the prior year . in terms of customer concentration , there were two partners who accounted for 13 % and 11 % , respectively , of our total revenue in 2020. in 2019 , there were two partners who accounted for 12 % and 11 % , respectively , of our total revenue . in 2018 , one partner accounted for 12 % of our total revenue . these partners sold to a number of end users , none of which accounted for more than 10 % of our total revenue in 2020 , 2019 and 2018. the partners ' sales were spread across many individual customers , all of which have a direct relationship with us as part of their access to our demand services . we have not been profitable to date and will need to grow revenue at a rate faster than our investments in cost of revenue and operating expenses in order to achieve profitability , as discussed in more detail below . significant developments in march 2020 , the world health organization declared the outbreak of the covid-19 pandemic , which continues to spread throughout the u.s. and the world and has resulted in authorities implementing numerous measures to contain the virus , including travel bans and restrictions , quarantines , shelter-in-place orders , and business limitations and shutdowns . the company 's overall financial results and operations were modestly impacted by the covid-19 outbreak in 2020. the company 's travel expense and marketing expense for in-person events were decreased due to global restrictions on travel issued by most major nations where the company does business . we have shifted our internal annual sales kick off conference , which was held in january 2021 , to a virtual-only conference and in the near term we have changed our customer , employee and industry events to virtual-only formats . in addition , see part ii-item 1a , “ risk factors , ” included herein for an update that we made to our existing risk factors to include information on risks associated with pandemics in general and covid-19 specifically . the extent to which the covid-19 outbreak impacts our financial results and operations going forward will depend on future developments which are highly uncertain and can not be predicted , including new information which may emerge concerning the severity of the outbreak and the actions being taken to contain and treat it . we are taking a variety of measures to ensure the availability and functioning of our critical infrastructure , to promote the safety and security of our employees and to support the communities in which we operate . these measures include requiring remote working arrangements for employees where practicable . we are following public and private sector policies and initiatives to reduce the transmission of covid-19 , such as the imposition of travel restrictions , the promotion of social distancing and the adoption of work-from-home arrangements , and all of these policies and initiatives could impact our operations . story_separator_special_tag the covid-19 pandemic presents extraordinary challenges in predicting future performance , and while we have modeled many scenarios and associated outcomes , there may be events or trends that are more dire than we have modeled given the unique nature of this event . in particular , we are monitoring covid-19 's effects on our business across many dimensions , including its broad effects on customers in highly impacted industries and on key european economies as they each attempt to recover . these dimensions may change as the pandemic and the response to the pandemic evolve . some of our customers impacted by covid-19 seek to manage cash by executing shorter contract durations or by furloughing or laying off employees , especially in highly impacted industries such as travel and hospitality . other customers are choosing to slow or defer projects , especially those in highly impacted industries and with complex projects requiring large archiving imports that rely heavily on third party resources to manage and execute . we will continue to monitor the 41 impact of the covid-19 pandemic and continually assess its potential effects on our business and our outlook , the actual results of which will largely depend on future developments , including the duration and spread of the outbreak as well as the varied impacts to our customer base by region or industry , which can not be accurately predicted and are uncertain . key opportunities and challenges the total costs associated with the teams tasked with closing business with new customers and additional business with our existing customers have represented more than 90 % of our total sales and marketing costs since 2008. although we expect customers to be profitable over the duration of the customer relationship , the upfront costs typically exceed related revenue during the earlier periods of a contract . as a result , while our practice of invoicing our customers for the entire amount of the contract at the start of the term provides us with a relatively immediate contribution to cash flow , the revenue is recognized ratably over the term of the contract , and hence contributions toward operating income are limited in the period where the sales and marketing costs are incurred . accordingly , an increase in the mix of new customers as a percentage of total customers would likely negatively impact our near-term operating results . on the other hand , we expect that an increase in the mix of existing customers as a percentage of total customers would positively impact our operating results over time . as we accumulate customers that continue to renew their contracts , we anticipate that our mix of existing customers will increase , contributing to a decrease in our sales and marketing costs as a percentage of total revenue and a commensurate improvement in our operating income . as part of maintaining our saas platform , we provide ongoing updates and enhancements to the platform services both in terms of the software as well as the underlying hardware and data center infrastructure . these updates and enhancements are provided to our customers at no additional charge as part of the subscription fees paid for the use of our platform . while more traditional products eventually become obsolete and require replacement , we are constantly updating and maintaining our cloud-based services and as such they operate with a continuous product life cycle . much of this work is designed to both maintain and enhance the customers ' experience over time while also lowering our costs to deliver the service . our saas platform is a shared infrastructure that is used by all of our customers . accordingly , the costs of the platform are spread in a relatively uniform manner across the entire customer base and no specific infrastructure elements are directly attached to any particular customer . as such , in the event that a customer chooses to not renew its subscription , the underlying resources are reallocated either to new customers or to accommodate the expanding needs of our existing customers and , as a result , we do not believe that the loss of any particular customer has a meaningful impact on our gross profit as long as we continue to grow our customer base . historically our customers have primarily used our cybersecurity and compliance solutions with email messaging content . increasingly , customers are also adopting many of our emerging solutions as part of a people-centric approach to cybersecurity , which focuses on identifying and mitigating risks posed by individual users and the attacks that target them . our people-centric portfolio includes casb , isolation , insider threat management , and proofpoint security awareness training , many of which provide cyber resiliency across other vectors such as cloud , web and endpoint as well as security awareness training and phishing simulation . with the majority of our business , we invoice our customers for the entire contract amount at the start of the term and these amounts are recorded as deferred revenue on our balance sheet , with the dollar weighted average duration of these contracts for any given period over the past three years typically ranging from 14 to 20 months . as a result , while our practice of invoicing customers for the entire amount of the contract at the start of the term provides us with a relatively immediate contribution to cash flow , the revenue is recognized ratably over the term of the contract , and hence contributions toward operating income are realized over an extended period . as such , our efforts to improve our profitability require us to invest far less in operating expenses than the cash flow generated by our business might otherwise allow . as we strive to invest in an effort to continue to increase the size and scale of our business , we expect that the level of investment afforded by our growth in revenue should be sufficient to fund the investments needed to drive revenue growth and broaden our product line .
| hardware and services revenue for 2020 increased $ 5.8 million , or 44 % , as compared to 2019 , primarily due to an increase in hardware revenue of $ 1.8 million and an increase in professional service revenue of $ 4.0 million primarily due to the timing of completion of service . hardware and services revenue for 2019 increased $ 0.6 million or 5 % , as compared to 2018 , primarily due to higher professional service revenue . cost of revenue replace_table_token_13_th 48 cost of subscription revenue increased $ 33 . 6 million , or 1 6 % , in 20 20 as compared to 201 9 , and $ 26.7 million , or 15 % , in 2019 as compared to 2018 . the increases were primarily due to increases in operations-related expense of $ 2 3 . 9 million and $ 1 3 .9 million , respectively , due to increased headcount , network expense due to an increase in usage , depreciation expense as a result of higher capital expenditures to support our growth , and larger amortization of intangible assets expense of developed technology from recent acquisitions . additionally , support-related expenses increased $ 10 . 5 million and $ 1 0.9 million , respectively , primarily due to higher headcount and consulting costs . cost of hardware and services revenue for 2020 and 2019 increased $ 5.6 million and $ 7.7 million , or 19 % and 36 % , respectively , as compared to the year before , primarily due to increase in professional service costs of $ 4.5 million and $ 7.6 million , respectively , as our headcount increased . additionally , t he cost of hardware units sold increased $ 0.8 million in 2020. operating expenses replace_table_token_14_th research and development expenses increased $ 53.3 million and $ 45.1 million , or 23 % and 24 % , for 2020 and 2019 , respectively . the increases were primarily due to increases in personnel-related costs of $ 47.6 million and $ 40.3 million for 2020 and 2019 , respectively , from higher headcount , including those from the integration of the acquisitions in 2020 and 2019. additionally , corporate expense allocated to research and development increased $ 3.2 million and $ 4.7 million for 2020 and
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the primary endpoint of the study was best overall response rate ( borr ) by modified recist . in the 29 response-evaluable patients , borr was 31 % ( 9/29 ) , with 14 % ( 4/29 ) of patients achieving a complete response . regression of at least one non-injected , non-electroporated lesion was observed in 50 % ( 13/26 ) of patients . patients are currently being enrolled into an extension arm of the phase ii trial to evaluate a new six-week treatment cycle . on november 25 , 2014 , we announced entering into a clinical collaboration with the university of california , san francisco to initiate an investigator sponsored clinical trial to evaluate the safety , tolerability , and efficacy of the combination of keytruda® ( pembrolizumab ) , merck & co. 's anti-pd-1 therapy , and immunopulse il-12 in metastatic melanoma . this is a multicenter study in which the university of california , san francisco will be the first site of enrollment . the safety and efficacy of intratumoral electroporation with plasmid il-12 is also being tested in other cancer indications . on december 9 , 2014 , we announced plans to conduct a phase ii trial in head and neck squamous cell carcinoma ( hnscc ) using our proprietary immunopulse platform . this is a multicenter study in which the university of california , san francisco will also be the first site of enrollment . the study will enroll patients with treatment-refractory metastatic and unresectable hnscc , regardless of human papillomavirus status . additionally , on january 12 , 2015 , we announced plans to initiate a pilot study to assess immunopulse il-12 in patients with triple negative breast cancer ( tnbc ) . this pilot study , which will be conducted at stanford university , is designed to assess whether immunopulse il-12 increases tnbc tumor immunogenicity by driving a pro-inflammatory cascade of events that leads to increases in cytotoxic tumor-infiltrating lymphocytes . we were incorporated under the laws of the state of nevada on february 8 , 2008 under the name netventory solutions inc. to pursue the business of inventory management solutions . on march 1 , 2011 , we effected a 32-for-one forward stock split of our common stock and completed a merger with our subsidiary , oncosec medical incorporated , a nevada corporation which was incorporated solely to effect the change of our name to oncosec medical incorporated . on march 24 , 2011 , we completed the acquisition of certain technology and related assets from inovio pharmaceuticals , inc. pursuant to an asset purchase agreement . the acquired technology and related assets relate to the use of drug-medical device combination products for the treatment of various cancers . since this acquisition , we have focused our efforts in the biotechnology industry and abandoned our efforts in the online inventory services industry . on may 18 , 2015 , we effected a reverse stock split , pursuant to which each 20 shares of issues and outstanding common stock were combined into and became one share of common stock . the accompanying financial statements and related disclosures give retroactive effect to the reverse stock split for all periods presented . on may 29 , 2015 , our common stock began trading on the nasdaq stock market llc 's nasdaq capital market tier , under the symbol oncs . 29 recent equity financings june 2015 public offering on june 8 , 2015 , we closed a registered direct public offering of an aggregate of 2,469,091 shares of our common stock at a purchase price of $ 5.50 per share , for gross proceeds to us of approximately $ 13.6 million ( the june 2015 public offering ) . after deducting for fees and expenses , the aggregate net proceeds from the sale of the common stock in the june 2015 public offering were approximately $ 12.5 million . in connection with the june 2015 public offering , we paid placement agent fees consisting of ( i ) a cash fee equal to 6 % of the gross proceeds of the offering , as well as a non-accountable expense allowance equal to 1 % of the gross proceeds , and ( ii ) warrants to purchase up to an aggregate of 5 % of the aggregate number of shares of common stock sold in the offering , or 123,455 shares of our common stock ( the june 2015 placement agent warrants ) . the june 2015 placement agent warrants will be exercisable at an exercise price of $ 6.88 per share as of december 8 , 2015 and will expire on may 12 , 2019. these warrants were classified as equity with a fair market value of $ 571,868 recorded in our balance sheet . we intend to use the net proceeds from the june 2015 public offering for general corporate purposes , including clinical trial expenses and research and development expenses . june 2014 public offering on june 6 , 2014 , we closed a registered public offering of an aggregate of 1,126,761 shares of our common stock and warrants to purchase an aggregate of 394,367 shares of common stock for gross proceeds to us of approximately $ 16.0 million ( the june 2014 public offering ) . the warrants issued to purchasers have an exercise price of $ 18.00 per share , are exercisable immediately upon issuance , and have a term of exercise equal to five years from the date of issuance of the warrants . after deducting for fees and expenses , the aggregate net proceeds from the sale of the common stock and the warrants in the june 2014 public offering were approximately $ 14.9 million . story_separator_special_tag in connection with the june 2014 public offering , we paid placement agent fees consisting of ( i ) a cash fee equal to 6 % of the gross proceeds of the offering , as well as a non-accountable expense allowance equal to 1 % of the gross proceeds and ( ii ) warrants to purchase up to an aggregate of 6 % of the aggregate number of shares of common stock sold in the offering , or 67,606 shares of our common stock ( the june 2014 placement agent warrants ) . the june 2014 placement agent warrants have substantially the same terms as the warrants issued to the purchasers in the june 2014 public offering , except that such warrants expire on may 12 , 2019. the placement agent warrants were classified as equity with a fair market value of $ 631,707 recorded in our consolidated balance sheet . september 2013 public offering on september 18 , 2013 , we closed a registered public offering and issued an aggregate of 2,389,600 shares of our common stock and warrants to purchase an aggregate of 1,194,800 shares of common stock for gross proceeds of approximately $ 11.95 million ( the september 2013 public offering ) . the warrants issued to purchasers have an exercise price of $ 7.00 per share , are exercisable immediately upon issuance and have a term of exercise equal to four years from the date of issuance of the warrants . after deducting for fees and expenses , the aggregate net proceeds to us from the sale of the common stock and the warrants in the september 2013 public offering were approximately $ 11.1 million . in connection with the offering , we paid placement agent fees consisting of ( i ) a cash fee equal to 6 % of the gross proceeds of the offering , as well as a non-accountable expense allowance equal to 1 % of the gross proceeds and ( ii ) warrants to purchase up to an aggregate of 5 % of the aggregate number of shares of common stock sold in the offering , or 119,480 shares of our common stock ( the september 2013 placement agent warrants ) . the september 2013 placement agent warrants have substantially the same terms as the warrants issued to the purchasers in the offering , except that such warrants have an exercise price of $ 6.25 and expire on september 13 , 2018. the placement agent warrants were classified as equity with a fair market value of $ 410,535 recorded in our consolidated balance sheet . critical accounting policies accounting for long-lived assets / intangible assets we assess the impairment of long-lived assets , consisting of property and equipment , and finite-lived intangible assets , whenever events or circumstances indicate that the carry value may not be recoverable . examples of such circumstances include : ( 1 ) loss of legal ownership or title to an asset ; ( 2 ) significant changes in our strategic business objectives and utilization of the assets ; and ( 3 ) the impact of significant negative industry or economic trends . 30 recoverability of assets to be held and used in operations is measured by a comparison of the carrying amount of an asset to the future net cash flows expected to be generated by the assets . the factors used to evaluate the future net cash flows , while reasonable , require a high degree of judgment and the results could vary if the actual results are materially different than the forecasts . in addition , we base useful lives and amortization or depreciation expense on our subjective estimate of the period that the assets will generate revenue or otherwise be used by us . if such assets are considered impaired , the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets . assets to be disposed of are reported at the lower of the carrying amount or fair value less selling costs . we also periodically review the lives assigned to our intangible assets to ensure that our initial estimates do not exceed any revised estimated periods from which we expect to realize cash flows from the technologies . if a change were to occur in any of the above-mentioned factors or estimates , the likelihood of a material change in our reported results would increase . stock-based compensation we grant equity-based awards under our share-based compensation plan and outside of our stock-based compensation plan . we estimate the fair value of stock-based payment awards using the black-scholes option valuation model . this fair value is then amortized over the requisite service periods of the awards . the black-scholes option valuation model requires the input of subjective assumptions , including price volatility of the underlying stock , risk-free interest rate , dividend yield , and expected life of the option . stock-based compensation expense is based on awards ultimately expected to vest , and therefore is reduced by expected forfeitures . changes in assumptions used under the black-scholes option valuation model could materially affect our net loss and net loss per share . we have issued equity for services or as consideration within contractual agreements . stock-based compensation expense related to such equity issuances are based on the closing price of our stock on the date the liability is incurred , with the stock-based compensation adjusted on the date of issuance , based on our stock price on the issuance date . recent accounting pronouncements information regarding recent accounting pronouncements is contained in note 2 to the financial statements , included elsewhere in this report .
| the approximately $ 7.3 million increase in research and development expenses for the fiscal year ended july 31 , 2015 as compared to the fiscal year ended july 31 , 2014 ( fiscal 2014 ) was primarily the result of ( i ) increased salary related expenses ( inclusive of stock-based compensation ) of approximately $ 2.9 million due to hiring additional r & d personnel as we further expand our internal research capabilities in molecular discovery , ( ii ) increased outside services expenses related to sponsored research , clinical development consulting and engineering consulting to assist in the research of novel electroporation technologies , combination studies and to facilitate the planning and development of our next generation electroporation devices of approximately $ 2.1 million , ( iii ) increased expenses of approximately $ 1.2 million for the acquisition of reagents and lab supplies and lab space rentals to support the expansion of our r & d operations , ( iv ) increased clinical trial expenses of approximately $ 0.6 million primarily due to the progression of our melanoma extension study and ( v ) increased travel and registration fees of approximately $ 0.6 million related to presenting our data at clinical and engineering conferences , offset by a reduction in intangibles amortization of approximately $ 0.2 million due to our patents being fully amortized . we expect research and development to continue to account for a significant portion of our total expenses in the future as we continue to expand our operations and focus on designing and developing our therapies . we expect to use our current funds , including the proceeds from our june 2015 public offering , for the advancement of our clinical and r & d milestones . we anticipate our spending in discovery research , next-generation electroporation technologies and combination studies will continue to increase as we futher pursue novel immuno-therapies and future product candidates . general and administrative our general and administrative expenses include expenses related to our executive , accounting and finance , compliance , information technology , legal , facilities , human resource , administrative and corporate communications activities . these expenses consist primarily of salaries , benefits , stock-based compensation costs , independent auditor costs , legal fees , consultants , travel , insurance , and public company expenses , such as stock transfer agent fees and listing fees in connection with obtaining our listing on the nasdaq capital market . the approximately $ 2.0 million increase in general and administrative expenses for fiscal 2015 , as compared to fiscal 2014 , was primarily the result of an increase in ( i ) salary-related expenses of approximately $ 1.8 million due to hiring additional personnel to support the growth in
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physical trading also has price risk on any net open positions at the end of each trading day , as well as volatility resulting from ( i ) intra-day fluctuations of natural gas prices , and ( ii ) daily price movements between the time natural gas is purchased or sold for future delivery and the time the related purchase or sale is economically hedged . the determination of our net open position at the end of any trading day requires us to make assumptions as to future circumstances , including the use of natural gas by our customers in relation to anticipated market positions . because the price risk associated with any net open position at the end of such day may increase if the assumptions are not realized , we review these assumptions daily . net open positions may increase volatility in our financial condition or results of operations if market prices move in a significantly favorable or unfavorable manner , because the changes in fair value of trading contracts are immediately recognized as profits or losses for financial accounting purposes . this volatility may occur , with a resulting increase or decrease in earnings or losses , even though the expected profit margin is essentially unchanged from the date the transactions were consummated . pesco is exposed to the credit risk of its counterparties . pesco extends credit to counterparties and continually monitors and manages collections aggressively . there is risk that pesco may not be able to collect amounts owed to it . if the counterparty to such a transaction fails to perform , and any underlying collateral is inadequate , we could experience financial losses , which would negatively impact our results of operations . pesco is dependent upon the availability of credit to successfully operate its business . pesco depends upon credit to buy natural gas for resale or to trade . if financial market conditions or the financial condition of our company declines , then the cost of credit could increase or become unavailable , which might adversely affect our results of operations , cash flows and financial condition . story_separator_special_tag style= '' page-break-after : always '' / > our customer base . failure to retain and grow our customer base in our propane operations would have an adverse effect on our results of operations , cash flows and financial condition . fluctuations in weather may cause a significant variance in our earnings . our natural gas distribution , propane operations and natural gas transmission operations , are sensitive to fluctuations in weather conditions , which directly influence the volume of natural gas and propane we transport , sell and deliver to our customers . a significant portion of our natural gas distribution , propane operations and natural gas transmission revenue is derived from the sales and deliveries to residential , commercial and industrial heating customers during the five-month peak heating season ( november through march ) . other than our maryland division and sandpiper energy which have revenue normalization mechanisms , if the weather is warmer than normal , we sell and deliver less natural gas and propane to customers , and earn less revenue , which could adversely affect our results of operations , cash flows and financial condition . likewise , if the weather is colder than normal , we sell and deliver more natural gas and propane to customers , and earn more revenue , which could positively affect our results of operations , cash flows and financial condition . variations in weather from year to year can cause our results of operations , cash flows and financial condition to vary accordingly . our electric distribution operation is also affected by variations in weather conditions generally and unusually severe weather conditions . however , electricity consumption is generally less seasonal than natural gas and propane because it is used for both heating and cooling in our service areas . natural disasters , severe weather ( such as a major hurricane ) and acts of terrorism could adversely impact earnings . inherent in energy transmission and distribution activities are a variety of hazards and operational risks , such as leaks , ruptures , fires , explosions , sabotage and mechanical problems . natural disasters and severe weather may damage our assets , cause operational interruptions and result in the loss of human life , all of which could negatively affect our earnings , financial condition and results of operations . acts of terrorism and the impact of retaliatory military and other action by the united states and its allies may lead to increased political , economic and financial market instability and volatility in the price of natural gas , electricity and propane that could negatively affect our operations . companies in the energy industry may face a heightened risk of exposure to acts of terrorism , which could affect our earnings , financial condition and results of operations . the insurance industry may also be affected by natural disasters , severe weather and acts of terrorism ; as a result , the availability of insurance covering risks against which we and our competitors typically insure may be limited . in addition , the insurance we are able to obtain may have higher deductibles , higher premiums and more restrictive policy terms , which could adversely affect our results of operations , financial condition and cash flows . operating events affecting public safety and the reliability of our natural gas and electric distribution and transmission systems could adversely affect our operations and increase our costs . story_separator_special_tag our natural gas and electric operations are exposed to operational events and risks , such as major leaks , outages , mechanical failures and breakdown , operations below the expected level of performance or efficiency , and accidents that could affect public safety and the reliability of our distribution and transmission systems , significantly increase costs and cause loss of customer confidence . if we are unable to recover all or some of these costs from insurance and or customers through the regulatory process , our results of operations , financial condition and cash flows could be adversely affected . a security breach disrupting our operating systems and facilities or exposing confidential information may adversely affect our reputation , disrupt our operations and increase our costs . security breaches of our information technology infrastructure , including cyber-attacks and cyber-terrorism , could lead to system disruptions or cause facility shutdowns . if such an attack or security breach were to occur , our business , our earnings , results of operation and financial condition could be adversely affected . in addition , the protection of customer , employee and company data is crucial to our operational security . a breach or breakdown of our systems that results in the unauthorized release of individually identifiable customer or other sensitive data could have an adverse effect on our reputation , results of operations and financial condition and could also materially increase our costs of maintaining our system and protecting it against future breakdowns or breaches . we take reasonable precautions to safeguard our information systems from cyber-attacks and security breaches ; however , there is no guarantee that the procedures implemented to protect against unauthorized access to our information systems are adequate to safeguard against all attacks and breaches . chesapeake utilities corporation 2018 form 10-k page 13 failure to attract and retain an appropriately qualified employee workforce could adversely affect operations . our ability to implement our business strategy and serve our customers depends upon our continuing ability to attract , develop and retain talented professionals and a technically skilled workforce , and transfer the knowledge and expertise of our workforce to new employees as our existing employees retire . failure to hire and adequately train replacement employees , including the transfer of significant internal historical knowledge and expertise to new employees , or the future availability and cost of contract labor could adversely affect our ability to manage and operate our business . if we were unable to hire , train and retain appropriately qualified personnel , our results of operations could be adversely affected . a strike , work stoppage or a labor dispute could adversely affect our operations . we are party to collective bargaining agreements with labor unions at some of our florida operations . a strike , work stoppage or a labor dispute with a union or employees represented by a union could cause interruption to our operations and our results could be adversely affected . our businesses are capital-intensive , and the increased costs and or delays of capital projects may adversely affect our future earnings . our businesses are capital-intensive and require significant investments in ongoing infrastructure projects . our ability to complete our infrastructure projects on a timely basis and manage the overall cost of those projects may be affected by the availability of the necessary materials and qualified vendors . our future earnings could be adversely affected if we are unable to manage such capital projects effectively , or if full recovery of such capital costs is not permitted in future regulatory proceedings . our regulated energy business may be at risk if franchise agreements are not renewed , or new franchise agreements are not obtained , which could adversely affect our future results or operating cash flows and financial condition . our regulated natural gas and electric distribution operations hold franchises in each of the incorporated municipalities that require franchise agreements in order to provide natural gas and electricity . ongoing financial results would be adversely impacted in the event that franchise agreements were not renewed . if we are unable to obtain franchise agreements for new service areas , growth in our future earnings could be negatively impacted . slowdowns in customer growth may adversely affect earnings and cash flows . our ability to increase gross margins in our natural gas , propane and electric distribution businesses is dependent upon growth in the residential construction market , adding new commercial and industrial customers and conversion of customers to natural gas , electricity or propane from other energy sources . slowdowns in growth may adversely affect our gross margin , earnings and cash flows . energy conservation could lower energy consumption , which would adversely affect our earnings . federal and state legislative and regulatory initiatives to promote energy efficiency and conservation could lower energy consumption by our customers . in addition , higher costs of natural gas , propane and electricity may cause customers to conserve fuel . to the extent a psc or ferc does not allow the recovery through customer rates of the costs or lower consumption from energy efficiency or conservation , and our propane margins can not be increased due to market conditions , our results of operations , cash flows and financial condition may be adversely affected . commodity price increases may adversely affect the operating costs and competitive positions of our natural gas , electric and propane operations , which may adversely affect our results of operations , cash flows and financial condition . natural gas/electricity . higher natural gas prices can significantly increase the cost of gas billed to our natural gas customers . increases in the cost of natural gas and other fuels used to generate electricity can significantly increase the cost of electricity billed to our electric customers . damage to the production or transportation facilities of our suppliers , which decreases their supply of natural gas and electricity , could result
| our pension plans are closed to new employees , and the future benefits are frozen . the costs of providing benefits and related funding requirements of these plans are subject to changes in the market value of the assets that fund the plans and the discount rates used to estimate the pension benefit obligations . the funded status of the plans and the related costs reflected in our financial statements are affected by various factors that are subject to an inherent degree of uncertainty , particularly in the current economic environment . future losses of asset values and further declines in discount rates may necessitate accelerated funding of the plans to meet minimum federal government requirements and may result in higher pension expense in future years . adverse changes in the benefit obligations of our pension plans may require us to record higher pension expense and fund obligations earlier than originally planned , which would have an adverse impact on our cash flows from operations , decrease borrowing capacity and increase interest expense . o perational r isks we are dependent upon construction of new facilities to support future growth in earnings in our natural gas and electric distribution and natural gas transmission operations . construction of new facilities required to support future growth is subject to various regulatory and developmental risks , including but not limited to : ( i ) our ability to obtain timely certificate authorizations , necessary approvals and permits from regulatory agencies and on terms that are acceptable to us ; ( ii ) potential changes in federal , state and local statutes and regulations , including environmental requirements , that prevent a project from proceeding or increase the anticipated cost of the project ; ( iii ) our inability to acquire rights-of-way or land rights on a timely basis on terms that are acceptable to us ; ( iv ) lack of anticipated future growth in available natural gas and electricity supply ; ( v ) insufficient customer throughput commitments ; and ( vi ) lack of
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our partners and collaborators include medimmune , llc , the wistar institute , university of pennsylvania , geneone life science inc. , regeneron pharmaceuticals , inc. , genentech , inc. , plumbline life sciences , inc. , the parker institute for cancer immunotherapy , drexel university , national microbiology laboratory of the public health agency of canada , national institute of allergy and infectious diseases ( “ niaid ” ) , united states military hiv research program ( “ usmhrp ” ) , u.s. army medical research institute of infectious diseases ( “ usamriid ” ) , national institutes of health ( `` nih '' ) , hiv vaccines trial network ( “ hvtn ” ) and defense advanced research projects agency ( “ darpa ” ) . all of our product candidates are in the research and development phase . we have not generated any revenues from the sale of any products , and we do not expect to generate any such revenues for at least the next several years . we earn revenue from license fees and milestone revenue , collaborative research and development agreements , grants and government contracts . our product candidates will require significant additional research and development efforts , including extensive preclinical and clinical testing . all product candidates that we advance to clinical testing will require regulatory approval prior to commercial use , and will require significant costs for commercialization . we may not be successful in our research and development efforts , and we may never generate sufficient product revenue to be profitable . recent developments on december 29 , 2017 , we entered into an amended and restated license and collaboration agreement , or the apollobio agreement , with apollobio corporation , or apollobio . under the terms of the apollobio agreement , we have granted to apollobio the exclusive right to develop and commercialize vgx-3100 , our dna immunotherapy product designed to treat pre-cancers caused by hpv , within the territories of china , hong kong , macao and taiwan . the territory may be expanded to include korea in the event that no patent covering vgx-3100 issues in china within the three years following the effective date of the apollobio agreement , as defined below . under the apollobio agreement , apollobio will pay us an upfront payment of $ 23.0 million , and such payment is to be made within three business days following the date of approval of the apollobio agreement by apollobio 's board of directors and shareholders , or the effective date , which we expect to occur in the first quarter of 2018. in the event that such upfront payment is not made on or before april 7 , 2018 , we have the right to terminate the agreement in its entirety . in addition to the upfront payment , we are entitled to receive up to an aggregate of $ 20.0 million upon the achievement of specified milestones related to the regulatory approval of vgx-3100 in the united states , china and korea . in the event that vgx-3100 is approved for marketing , we will be entitled to receive royalty payments based on a tiered percentage of annual net sales , with such percentage being in the low- to mid-teens , subject to reduction in the event of generic competition in a particular territory . apollobio 's obligation to pay royalties will continue for 10 years after the first commercial sale in a particular territory or , if later , until the expiration of the last-to-expire patent covering the licensed products in the specified territory . as of december 31 , 2017 , we had an accumulated deficit of $ 523.4 million . we expect to continue to incur substantial operating losses in the future due to our commitment to our research and development programs , the funding of preclinical studies , clinical trials and regulatory activities and the costs of general and administrative activities . critical accounting policies the sec defines critical accounting policies as those that are , in management 's view , important to the portrayal of our financial condition and results of operations and require management 's judgment . our discussion and analysis of our financial condition and results of operations are based on our audited consolidated financial statements , which have been prepared in accordance with u.s. gaap . the preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , revenue and expenses . we base our estimates on experience and on various assumptions that we believe are reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . actual results may differ from those estimates . our critical accounting policies include : revenue recognition we recognize revenues when all four of the following criteria are met : ( 1 ) persuasive evidence of an arrangement exists ; ( 2 ) delivery of the products and or services has occurred ; ( 3 ) the selling price is fixed or determinable ; and ( 4 ) collectability is reasonably assured . for additional information on the new accounting standard for revenues from contracts with customers please read note 2 , summary of significant accounting policies : recent accounting pronouncements , to our consolidated financial statements included in this report . 52 grant revenue we receive non-refundable grants under available government programs . government grants towards current expenditures are recorded as revenue when there is reasonable assurance that we have complied with all conditions necessary to receive the grants , collectability is reasonably assured and the related expenditures are incurred . license fee and milestone revenue we have adopted a strategy of co-developing or licensing our gene delivery technology for specific genes or specific medical indications . accordingly , we have entered into collaborative research and development agreements and have received third-party funding for pre-clinical research and clinical trials . story_separator_special_tag agreements that contain multiple elements are analyzed to determine whether the deliverables within the agreement can be separated or whether they must be accounted for as a single unit of accounting in accordance with the fasb 's accounting standards update , or asu , no . 2009-13 , revenue recognition ( topic 605 ) : multiple-deliverable revenue arrangements . analyzing the arrangement to identify deliverables requires the use of judgment , and each deliverable may be an obligation to deliver services , a right or license to use an asset , or another performance obligation . the delivered item ( s ) were considered a separate unit of accounting if all of the following criteria were met : ( 1 ) the delivered item ( s ) has value to the customer on a standalone basis ; ( 2 ) there is objective and reliable evidence of the fair value of the undelivered item ( s ) ; and ( 3 ) if the arrangement includes a general right of return relative to the delivered item , delivery or performance of the undelivered item ( s ) is considered probable and substantially in our control . if these criteria were not met , the deliverable was combined with other deliverables in the arrangement and accounted for as a combined unit of accounting . arrangement consideration is allocated at the inception of the agreement to all identified units of accounting based on their relative selling price . the relative selling price for each deliverable is determined using vendor specific objective evidence ( “ vsoe ” ) of selling price or third-party evidence of selling price if vsoe does not exist . if neither vsoe nor third-party evidence of selling price exists , we use our best estimate of the selling price for the deliverable . the amount of allocable arrangement consideration is limited to amounts that are fixed or determinable . the consideration received is allocated among the separate units of accounting , and the applicable revenue recognition criteria are applied to each of the separate units . changes in the allocation of the sales price between delivered and undelivered elements can impact revenue recognition but do not change the total revenue recognized under any agreement . upfront license fee payments are recognized upon delivery of the license if facts and circumstances dictate that the license has standalone value from the undelivered items , the relative selling price allocation of the license is equal to or exceeds the upfront license fee , persuasive evidence of an arrangement exists , the price to the collaborator is fixed or determinable , and collectability is reasonably assured . upfront license fee payments are deferred if facts and circumstances dictate that the license does not have standalone value . the determination of the length of the period over which to defer revenue is subject to judgment and estimation and can have an impact on the amount of revenue recognized in a given period . we apply asu no . 2010-17 , revenue recognition ( topic 605 ) : milestone method of revenue recognition , or the milestone method . under the milestone method , we recognize consideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone is substantive in its entirety . a milestone is considered substantive when it meets all of the following criteria : 1. the consideration is commensurate with either the entity 's performance to achieve the milestone or theenhancement of the value of the delivered item ( s ) as a result of a specific outcome resulting from the entity 's performance to achieve the milestone , 2. the consideration relates solely to past performance , and 3. the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement . a milestone is defined as an event ( i ) that can only be achieved based in whole or in part on either the entity 's performance or on the occurrence of a specific outcome resulting from the entity 's performance , ( ii ) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and ( iii ) that would result in additional payments being due to us . valuation of intangible assets and goodwill intangible assets are amortized over their estimated useful lives ranging from 2 to 18 years . acquired intangible assets are continuously being developed for the future economic viability contemplated at the time of acquisition . we are concurrently conducting preclinical studies and clinical trials using the acquired intangibles and have entered into licensing agreements for the use of these acquired intangibles . historically , we have recorded patents at cost and amortized these costs using the straight-line method over the expected useful lives of the patents or 17 years , whichever is less . patent cost consists of the consideration paid for patents and related legal costs . effective as of the acquisition of vgx in 2009 , all new patent costs are expensed as incurred , with patent costs 53 capitalized as of that date continuing to be amortized over the expected life of the patent . license costs are recorded based on the fair value of consideration paid and are amortized using the straight-line method over the shorter of the expected useful life of the underlying patents or the term of the related license agreement to the extent the license has an alternative future use . as of december 31 , 2017 and 2016 , our intangible assets resulting from the acquisition of vgx , inovio as and bioject , and additional intangibles including previously capitalized patent costs and license costs , net of accumulated amortization , totaled $ 6.0 million and $ 7.6 million , respectively . the determination of the value of intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements .
| we expect that beginning in 2018 , due to the nature of the grant agreements , contributions received will be recorded as a contra-expense as opposed to revenue on the consolidated statement of operations . for additional information on the new accounting standard for revenues from contracts with customers please read note 2 , summary of significant accounting policies : recent accounting pronouncements , to our consolidated financial statements included in this report . research and development expenses the $ 9.9 million increase in research and development expenses for the year ended december 31 , 2017 as compared to 2016 was primarily due to an increase of $ 9.1 million in employee headcount to support clinical trials and partnerships and an increase of $ 1.0 million in non-cash stock-based compensation . these increases were offset by a decrease of $ 3.9 million in expenses related to our darpa ebola grant , among other variances . general and administrative expenses the $ 4.4 million increase in general and administrative expenses for the year ended december 31 , 2017 as compared to 2016 was primarily due to increases in employee headcount , non-cash stock based compensation , rent expense and depreciation expense of $ 1.9 million , $ 1.7 million , $ 769,000 and $ 661,000 respectively . these increases were partially offset by a decrease in employee recruitment and training expenses of $ 623,000 , among other variances . 55 stock-based compensation employee stock-based compensation cost is measured at the grant date , based on the fair value of the award , and is recognized as expense over the employee 's requisite service period . total employee stock-based compensation cost for the years ended december 31 , 2017 and 2016 was $ 12.9 million and $ 10.2 million , of which $ 5.8 million and $ 4.8 million was included in research and development expenses and $ 7.1 million and $ 5.4 million was included in general and administrative expenses , respectively . a portion of the year over year increase resulted from a
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outlook for 2015 we currently expect our net income attributable to nl stockholders in 2015 to be somewhat lower than 2014 primarily due to lower anticipated insurance recoveries and lower income from operations attributable to compx , offset in part by lower environmental and related costs . critical accounting policies and estimates the accompanying “ management 's discussion and analysis of financial condition and results of operations ” is based upon our consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states of america ( gaap ) . the preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reported period . on an ongoing basis , we evaluate our estimates , including those related to the recoverability of long-lived assets , pension and other postretirement benefit obligations and the underlying actuarial assumptions related thereto , the realization of deferred income tax assets and accruals for litigation , income tax and other contingencies . we base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances , the results of which form the basis for making judgments about the reported amounts of assets , liabilities , revenues and expenses . actual results may differ significantly from previously-estimated amounts under different assumptions or conditions . the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements : · investments - we own investments in valhi , inc. that we account for as marketable securities carried at fair value or that we account for under the equity method . for these investments , we evaluate the fair value at each balance sheet date . we use quoted market prices , level 1 inputs as defined in - 32 - accounting standards codification ( asc ) 820-10-35 , fair value measurements and disclosures , to determine fair value for certain of our marketable debt securities and publicly traded investees . we record an impairment charge when we believe an investment has experienced an other-than-temporary decline in fair value below its cost basis ( for marketable securities ) or below its carrying value ( for equity method investees ) . further adverse changes in market conditions or poor operating results of underlying investments could result in losses or our inability to recover the carrying value of the investments that may not be reflected in an investment 's current carrying value , thereby possibly requiring us to recognize an impairment charge in the future . at december 31 , 2014 , the carrying value ( which equals fair value ) of all of our marketable securities equaled or exceeded the cost basis of such investments , see note 6 to our consolidated financial statements . at december 31 , 2014 , the $ 13.02 per share quoted market price of our investment in kronos ( our only equity method investee ) exceeded its per share net carrying value by over 193 % . · long-lived assets - we assess property and equipment for impairment only when circumstances ( as specified in asc 360-10-35 , property , plant , and equipment ) indicate an impairment may exist . our determination is based upon , among other things , our estimates of the amount of future net cash flows to be generated by the long-lived asset ( level 3 inputs ) and our estimates of the current fair value of the asset . significant judgment is required in estimating such cash flows . adverse changes in such estimates of future net cash flows or estimates of fair value could result in an inability to recover the carrying value of the long-lived asset , thereby possibly requiring an impairment charge to be recognized in the future . we do not assess our property and equipment for impairment unless certain impairment indicators specified in asc topic 360-10-35 are present . we did not evaluate any long-lived assets for impairment during 2014 because no such impairment indicators were present . · goodwill - our net goodwill totaled $ 27.2 million at december 31 , 2014. we perform a goodwill impairment test annually in the third quarter of each year . goodwill is also evaluated for impairment at other times whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value . all of our net goodwill at december 31 , 2014 is related to compx . since 2013 , we have used the qualitative assessment of asc 350-20-35 for our annual impairment test and determined it was not necessary to perform the two-step quantitative goodwill impairment test . see note 8 to our consolidated financial statements . considerable management judgment is necessary to evaluate the qualitative impact of events and circumstances on the fair value of a reporting unit . events and circumstances considered in our impairment evaluations , such as historical profits and stability of the markets served , are consistent with factors utilized with our internal projections and operating plan . however , future events and circumstances could result in materially different findings which could result in the recognition of a material goodwill impairment . · benefit plans - we maintain various defined benefit pension plans and postretirement benefits other than pensions ( opeb ) . the amounts recognized as defined benefit pension and opeb expenses and the reported amounts of pension asset and accrued pension and opeb costs are actuarially determined based on several assumptions , including discount rates , expected rates of returns on plan assets , expected health care trend rates and expected mortality . variances from these actuarially assumed rates will result in increases or decreases , as applicable , in the recognized pension and opeb obligations , pension and opeb expenses and funding requirements . story_separator_special_tag these assumptions are more fully described below under the heading “ assumptions on defined benefit pension plans and opeb plans. ” · income taxes - we recognize deferred taxes for future tax effects of temporary differences between financial and income tax reporting . while we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance , it is possible that in the future we may change our estimate of the amount of the deferred income tax assets that would more-likely-than-not be realized in the future resulting in an adjustment to the deferred income tax asset valuation allowance that would either increase or decrease , as applicable , reported net income in the period the change in estimate was made . we record a reserve for uncertain tax where we believe it is more-likely-than-not our position will not prevail with the applicable tax authorities . it is possible that that in the future we may change our assessment regarding the probability that our tax positions will prevail that would require an - 33 - adjustment to the amount of our reserve for uncertain tax positions that could either increase or decrease , as applicable , reported net income in the period the change in assessment was made . · contingencies - we record accruals for environmental , legal and other contingencies and commitments when estimated future expenditures associated with such contingencies become probable , and the amounts can be reasonably estimated . however , new information may become available , or circumstances ( such as applicable laws and regulations ) may change , thereby resulting in an increase or decrease in the amount required to be accrued for such matters ( and therefore a decrease or increase in reported net income in the period of such change ) . income from operations of compx and kronos is impacted by certain significant judgments and estimates , as summarized below : · chemicals ( kronos ) - allowance for doubtful accounts , impairment of equity method investments , long-lived assets , defined benefit pension and opeb plans , loss accruals and income taxes , and · component products ( compx ) - impairment of goodwill and long-lived assets , loss accruals and income taxes . in addition , general corporate and other items are impacted by the significant judgments and estimates for impairment of marketable securities and equity method investments , defined benefit pension and opeb plans , deferred income tax asset valuation allowances and loss accruals . income ( loss ) from operations attributable to continuing operations the following table shows the components of our income ( loss ) from operations attributable to continuing operations . replace_table_token_6_th the following table shows the components of our income ( loss ) before income taxes attributable to continuing operations exclusive of our income ( loss ) from operations . replace_table_token_7_th - 34 - compx international inc. replace_table_token_8_th net sales - net sales increased $ 11.8 million in 2014 primarily due to strong demand within compx 's security products business , including a new initiative for an existing government customer , increased market penetration in electronic locks and strong demand in transportation markets . sales from compx 's marine components business also contributed to the increase , reflecting greater penetration into non high-performance marine markets . relative changes in selling prices did not have a material impact on net sales comparisons . net sales increased approximately $ 8.8 million in 2013 principally due to higher demand for high security pin tumbler locks within the security products business , and to a lesser extent from an increase in marine component sales outside of the high performance boat market through gains in market share . relative changes in selling prices did not have a material impact on net sales comparisons . cost of sales and gross margin - cost of sales and gross margin both increased from 2013 to 2014 primarily due to increased sales volumes . as a percentage of sales , cost of sales decreased 1 % primarily due to improved coverage of fixed manufacturing costs over increased production volumes to meet higher demand for compx 's products , partially offset by the impact of lower variable margins due to relative changes in customer and product mix within compx 's security products business . cost of sales and gross margin both increased from 2012 to 2013 primarily due to increased sales volumes . as a percentage of sales , cost of sales decreased 1 % resulting in an increase in gross margin of 1 % primarily due to improved cost efficiencies from higher sales , partially offset by higher self-insured medical costs in 2013 as discussed below . operating costs and expenses - operating costs and expenses consist primarily of sales and administrative related personnel costs , sales commissions and advertising expenses directly related to product sales and administrative costs relating to compx 's business and corporate management activities , as well as gains and losses on plant , property and equipment . operating costs and expenses increased slightly in 2014 compared to 2013 primarily as a result of increased administrative personnel costs and increased depreciation for compx 's security products business , partially offset by reduced corporate administrative personnel costs . operating costs and expenses increased in 2013 compared to 2012 , and increased in 2012 as compared to 2011 , as a result of increased administrative support costs relating to the higher sales . write-down and loss on disposal of assets held for sale - we recorded a write-downs on assets held for sale of $ 1.2 million ( including a $ .8 million loss on disposal of assets held for sale ) in 2012 , relating to a certain - 35 - facility held for sale that was no longer in use . the write-down is included in corporate operating expense . see note 9 to the consolidated financial statements .
| income from operations margin percentages increased in 2013 compared to 2012 by 1 % primarily due to improved cost efficiencies from higher sales , partially offset by higher self-insured medical costs of $ .6 million in 2013 , $ .5 million of which impacted cost of sales and $ .1 million of which impacted selling and administration expenses . marine components - marine components net sales increased 17 % in 2014 as compared to 2013. the increase was primarily the result of gains in market share for products sold to the ski/wakeboard boat market and other non high-performance marine markets . as a percentage of net sales , gross margin and the loss from operations percentage improved primarily due to variable margins related to product mix and increased leverage of fixed costs as a result of higher volumes . marine components net sales increased 11 % in 2013 as compared to 2012. the increase was primarily the result of a $ .8 million increase in sales to the ski/wakeboard boat market and other non-high performance marine markets . as a percentage of net sales , loss from operations margin percentage improved in 2013 compared to 2012 primarily due to increased leverage of fixed costs as a result of the higher sales . outlook - the robust demand for our products experienced in 2014 was supported by high demand from certain large oem customers and unusually high demand from a number of customers for significant government security applications . consistent with trends in the north american economy , demand from small business customers was soft for much of the year , but improved during the fourth quarter . in addition , we continue to experience the benefits of diversification in our product offerings and ongoing innovation to serve new markets , most recently with our line of electronic locks for multiple high security applications . we anticipate continued strong demand for our products in 2015 , though we do not expect security product demand for government security applications to approach 2014 volumes . as in prior periods , we will
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for impaired loans we calculate the estimated fair value of the loans that are selected for review based on observable market prices , discounted cash flows or the value of the underlying collateral and record an allowance if needed . we then select pools of homogeneous smaller balance loans having similar risk characteristics as well as unimpaired larger commercial loans for evaluation collectively under the provisions of fasb asc topic 450 , “ contingencies. ” these smaller balance loans generally include residential mortgages , consumer loans , installment loans and some commercial loans . fasb asc topic 450 loans are segmented into groups with similar characteristics and an allowance for credit losses is allocated to each segment based on recent loss history and other relevant information . we then review the results to determine the appropriate balance of the allowance for credit losses . this review includes consideration of additional factors , such as the mix of loans in the portfolio , the balance of the allowance relative to total loans and nonperforming assets , trends in the overall risk profile in the portfolio , trends in delinquencies and nonaccrual loans , and local and national economic information and industry data , including trends in the industries we believe are higher risk . there are many factors affecting the allowance for credit losses ; some are quantitative , while others require qualitative judgment . these factors require the use of estimates related to the amount and timing of expected future cash flows , appraised values on impaired loans , estimated losses for each loan category based on historical loss experience by category , loss emergence periods for each loan category and consideration of current economic trends and conditions , all of which may be susceptible to significant judgment and change . to the extent that actual outcomes differ from estimates , additional provisions for credit losses could be required that could adversely affect our earnings or financial position in future periods . the loan portfolio represents the largest asset category on our consolidated statements of financial condition . fair values of financial instruments fasb asc topic 820 , “ fair value measurements and disclosures , ” establishes a framework for measuring fair value . in accordance with fasb asc topic 820 , first commonwealth groups financial assets and financial liabilities measured at fair value into three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value . level 1 valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities . level 2 valuations are for instruments that trade in less active dealer or broker markets and incorporates values obtained for identical or comparable instruments . level 3 valuations are derived from other valuation methodologies , including option pricing models , discounted cash flow models and similar techniques , and not based on market exchange , dealer or broker traded transactions . level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to each instrument . level 2 investment securities are valued by a recognized third party pricing service using observable inputs . management validates the market values provided by the third party service by having another recognized pricing service price 100 % of securities on an annual basis and a random sample of securities each quarter , monthly monitoring of variances from prior period pricing and on a monthly basis evaluating pricing changes compared to expectations based on changes in the financial markets . level 3 investments include pooled trust preferred collateralized debt obligations . the fair values of these investments are determined by a specialized third party valuation service . management validates the fair value of the pooled trust preferred collateralized debt obligations by monitoring the performance of the underlying collateral , discussing the discount rate , cash flow assumptions and general market trends with the specialized third party and by confirming changes in the underlying collateral to the trustee and underwriter reports . management 's monitoring of the underlying collateral includes deferrals of interest payments , payment defaults , cures of previously deferred interest payments , any regulatory filings or actions and general news related to the underlying collateral . management also evaluates fair value changes compared to expectations based on changes in the interest rates used in determining the discount rate and general financial markets . methodologies and estimates used by management when determining the fair value for pooled trust preferred collateralized debt obligations and testing those securities for other-than-temporary impairment are discussed in detail in management 's 26 discussion and analysis of financial condition and results of operations and in note 9 “ impairment of investment securities ” and note 18 “ fair values of assets and liabilities ” of notes to the consolidated financial statements . income taxes we estimate income tax expense based on amounts expected to be owed to the tax jurisdictions where we conduct business . on a quarterly basis , management assesses the reasonableness of its effective tax rate based upon its current estimate of the amount and components of net income , tax credits and the applicable statutory tax rates expected for the full year . deferred income tax assets and liabilities are determined using the asset and liability method and are reported in the consolidated statements of financial condition . under this method , deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases . if current available information raises doubt as to the realization of the deferred tax assets , a valuation allowance is established . deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled . story_separator_special_tag management assesses all available positive and negative evidence on a quarterly basis to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets . the amount of future taxable income used in management 's valuation is based upon management approved forecasts , evaluation of historical earnings levels , proven ability to raise capital to support growth or during times of economic stress and consideration of prudent and feasible potential tax strategies . if future events differ from our current forecasts , a valuation allowance may be required , which could have a material impact on our financial condition and results of operations . accrued taxes represent the net estimated amount due to taxing jurisdictions and are reported in other liabilities in the consolidated statements of financial condition . management evaluates and assesses the relative risks and appropriate tax treatment of transactions and filing positions after considering statutes , regulations , judicial precedent and other information and maintains tax accruals consistent with its evaluation of these relative risks and merits . changes to the estimate of accrued taxes occur periodically due to changes in tax rates , interpretations of tax laws , the status of examinations being conducted by taxing authorities and changes to statutory , judicial and regulatory guidance . these changes , when they occur , can affect deferred taxes and accrued taxes , as well as the current period 's income tax expense and can be significant to our operating results . results of operations—2015 compared to 2014 net income net income for 2015 was $ 50.1 million , or $ 0.56 per diluted share , as compared to net income of $ 44.5 million , or $ 0.48 per diluted share , in 2014 . the growth in net income is a result of an increase in net interest income of $ 4.8 million , combined with a decrease in noninterest expense of $ 7.3 million and growth in noninterest income of $ 0.5 million . our return on average equity was 7.0 % and return on average assets was 0.78 % for 2015 , compared to 6.2 % and 0.71 % , respectively , for 2014 . average diluted shares for the year 2015 were 4 % less than the comparable period in 2014 primarily due to a $ 25.0 million common stock buyback program authorized during 2015 . net interest income net interest income , which is our primary source of revenue , is the difference between interest income from earning assets ( loans and securities ) and interest expense paid on liabilities ( deposits , short-term borrowings and long-term debt ) . the amount of net interest income is affected by both changes in the level of interest rates and the amount and composition of interest-earning assets and interest-bearing liabilities . the net interest margin is expressed as the percentage of net interest income , on a fully taxable equivalent basis , to average interest-earning assets . to compare the tax exempt asset yields to taxable yields , amounts are adjusted to the pretaxable equivalent amounts based on the marginal corporate federal income tax rate of 35 % . the taxable equivalent adjustment to net interest income for 2015 was $ 3.5 million compared to $ 3.3 million in 2014 . net interest income comprises a majority of our operating revenue ( net interest income before provision expense plus noninterest income ) at 75 % for the years ended december 31 , 2015 and 2014 . net interest income , on a fully taxable equivalent basis , was $ 191.9 million for the year-ended december 31 , 2015 , a $ 4.9 million , or 3 % , increase compared to $ 187.0 million for the same period in 2014 . the net interest margin , on a fully taxable equivalent basis , increased 1 basis points to 3.28 % in 2015 from 3.27 % in 2014 . the net interest margin is affected by both changes in the level of interest rates and the amount and composition of interest-earning assets and interest-bearing liabilities . 27 the interest rate environment and resulting decline in rates earned on interest-earning assets challenged the net interest margin during the year ended december 31 , 2015 . yields and spreads on new loan volumes continued to experience pricing pressures in 2015 , specifically for fixed rate commercial loans , home equity loans and indirect auto loans . also contributing to lower yields on earning assets is the runoff of existing older assets , which were earning higher interest rates than new volumes . growth in earning assets has helped to offset the spread compression as average earning assets for the year ended december 31 , 2015 increased $ 125.4 million , or 2 % , compared to the comparable period in 2014 . the acquisition of first community , as of october 1 , 2015 , accounted for $ 15.2 million of the increase in average earning assets for 2015. interest-sensitive assets totaling $ 3.1 billion will either reprice or mature over the next twelve months . the taxable equivalent yield on interest-earning assets was 3.55 % for the year ended december 31 , 2015 , a decrease of 4 basis points from the 3.59 % yield for the same period in 2014 . this decline can be attributed to lower replacement yields on loan portfolio runoff and maturities as a result of narrowing pricing spreads . partially offsetting the decrease in loan yield is an 18 basis point increase in the investment portfolio yield . this increase can be attributed to the runoff or sale of lower yielding u.s. agency securities which were replaced with higher yielding investment securities . investment portfolio purchases during the year ended december 31 , 2015 have been primarily in mortgage-related assets with approximate durations of 48-60 months and municipal securities with a duration of five years . the mortgage-related investments have monthly principal payments that will provide for reinvestment opportunities should interest rates rise .
| during the year-ended december 31 , 2014 , the net interest margin was challenged by the continuing low interest rate environment and decreasing rates earned on interest-earning assets . despite a disciplined approach to pricing , runoff of existing assets earning higher interest rates continued to provide for lower yields on earning assets . growth in earning assets helped offset the impact of runoff as average interest-earning assets increased $ 166.5 million , or 3 % , compared to the comparable period in 2013 . the taxable equivalent yield on interest-earning assets was 3.59 % for the year-ended december 31 , 2014 , a decrease of 20 basis points from the 3.79 % yield for the same period in 2013 . this decline was attributed to the repricing of our variable rate assets in a low rate environment as well as lower interest rates available on new investments and loans . reductions in the cost of interest-bearing liabilities partially offset the impact of lower yields on interest-earning assets . the cost of interest-bearing liabilities was 0.41 % for the year-ended december 31 , 2014 , compared to 0.48 % for the same period in 2013 . comparing the year-ended december 31 , 2014 with the same period in 2013 , changes in interest rates negatively impacted net interest income by $ 9.4 million . the lower yield on interest-earning assets adversely impacted net interest income by $ 11.3 million , while the decline in the cost of interest-bearing liabilities positively impacted net interest income by $ 1.9 million . we were able to partially mitigate the impact of lower interest rates and the effect on net interest income through improving the mix of deposits and borrowed funds , disciplined pricing strategies , loan growth and increasing our investment volumes within established interest rate risk management guidelines . < font
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noi should also not be considered an alternative to net cash flow from operating activities , as determined by gaap , as a measure of liquidity , nor is noi indicative of cash available to fund cash needs . reconciliations of noi for the years ended december 31 , 2016 , 2015 and 2014 to net income for each year are as follows ( dollars in thousands ) : replace_table_token_15_th _ ( 1 ) includes amounts associated with assets sold or held for sale , not classified as discontinued operations . ( 2 ) represents noi from real estate assets sold or held for sale as of december 31 , 2016 that are not classified as discontinued operations . 38 the noi increases for both 2016 and 2015 , as compared to the prior year , consist of changes in the following categories ( dollars in thousands ) : replace_table_token_16_th _ ( 1 ) noi for the year ended december 31 , 2016 includes $ 20,306 in business interruption insurance proceeds related to the edgewater casualty loss . the increase in our established communities ' noi in 2016 and 2015 is due to increased rental rates , partially offset by decreased economic occupancy and increased operating expenses . rental and other income increased in both 2016 and 2015 compared to the prior years due to additional rental income generated from newly developed , acquired and existing operating communities and an increase in rental rates at our established communities . the increase for 2016 is also due to business interruption insurance proceeds received due to the final settlement of the edgewater casualty loss . consolidated communities—the weighted average number of occupied apartment homes for consolidated communities increased to 67,849 apartment homes for 2016 , as compared to 64,211 homes for 2015 and 61,686 homes for 2014 . the weighted average monthly revenue per occupied apartment home increased to $ 2,476 for 2016 as compared to $ 2,388 in 2015 and $ 2,254 in 2014 . established communities—rental revenue increased $ 64,206,000 , or 4.3 % , to $ 1,541,034,000 for 2016 from $ 1,476,828,000 in the prior year . the increase is due to an increase in average rental rates of 4.4 % to $ 2,450 per apartment home , partially offset by a decrease in economic occupancy of 0.1 % to 95.5 % . rental revenue increased $ 66,136,000 , or 5.0 % , for 2015 , as compared to the prior year . economic occupancy takes into account the fact that apartment homes of different sizes and locations within a community have different economic impacts on a community 's gross revenue . economic occupancy is defined as gross potential revenue less vacancy loss , as a percentage of gross potential revenue . gross potential revenue is determined by valuing occupied homes at leased rates and vacant homes at market rents . we experienced increases in rental revenue for all of our established communities ' regions in 2016 as compared to the prior year , as discussed in more detail below . the metro new york/new jersey region accounted for approximately 24.5 % of the established community rental revenue for 2016 and experienced a rental revenue increase of 2.9 % for 2016 over the prior year . average rental rates increased 2.8 % to $ 2,972 per apartment home , and economic occupancy increased 0.1 % to 95.7 % for 2016 as compared to 2015 . while new york city is absorbing a larger pipeline of new apartment deliveries , suburban markets surrounding the city are more insulated from this new competition , and we expect to see continued growth over the prior year in the metro new york/new jersey region in 2017. the northern california region accounted for approximately 20.7 % of the established community rental revenue for 2016 and experienced a rental revenue increase of 6.7 % for 2016 over the prior year . average rental rates increased 6.9 % to $ 2,795 per apartment home , and were partially offset by a 0.2 % decrease in economic occupancy to 95.2 % for 2016 as compared to 2015 . we expect slower job growth and elevated levels of new apartment deliveries will temper growth in 2017 relative to prior years . the southern california region accounted for approximately 18.9 % of the established community rental revenue for 2016 and experienced a rental revenue increase of 6.3 % for 2016 over the prior year . average rental rates increased 6.5 % to $ 2,111 per apartment home , and were partially offset by a 0.2 % decrease in economic occupancy to 95.6 % for 2016 as compared to 2015 . southern california has seen steady job growth and limited new apartment supply , which we expect will continue to support favorable operating results in 2017 . 39 the new england region accounted for approximately 15.5 % of the established community rental revenue for 2016 and experienced a rental revenue increase of 3.4 % for 2016 over the prior year . average rental rates increased 3.6 % to $ 2,314 per apartment home , and were partially offset by a 0.2 % decrease in economic occupancy to 95.6 % for 2016 as compared to 2015 . stable job growth in the boston metro area is expected to support apartment demand in 2017. the fairfield market continues to experience moderate economic growth due to the area 's greater exposure to the financial services sector , which has experienced slower job growth during this recovery than other industries . the mid-atlantic region accounted for approximately 15.2 % of the established community rental revenue for 2016 and experienced a rental revenue increase of 1.7 % for 2016 over the prior year . average rental rates increased 2.0 % to $ 2,134 per apartment home , and were partially offset by a 0.3 % decrease in economic occupancy to 95.3 % for 2016 as compared to 2015 . although new apartment supply will remain elevated , accelerating job growth is expected to support modest growth in 2017. the pacific northwest region accounted for approximately 5.2 story_separator_special_tag % of the established community rental revenue for 2016 and experienced a rental revenue increase of 6.3 % for 2016 over the prior year . average rental rates increased 6.2 % to $ 2,168 per apartment home , and economic occupancy increased 0.1 % to 94.9 % for 2016 as compared to 2015 . we believe healthy job growth will continue to support favorable operating results in 2017. management , development and other fees decreased $ 4,348,000 or 43.7 % , and $ 1,103,000 , or 10.0 % , in 2016 and 2015 , respectively , as compared to the prior years . the decrease in 2016 was primarily due to lower property and asset management fees earned as a result of dispositions from fund ii and the u.s. fund , as well as asset management and disposition fees earned in the prior year not present in 2016 from the residual jv . the decrease in 2015 was primarily due to lower property and asset management fees earned as a result of dispositions from fund i and fund ii , partially offset by an increase in disposition fees in 2015 related to the sale of communities owned within the residual jv . direct property operating expenses , excluding property taxes increased $ 29,260,000 , or 7.8 % , and $ 31,471,000 , or 9.1 % , in 2016 and 2015 , respectively , as compared to the prior years . the increases in 2016 and 2015 were primarily due to the addition of newly developed and acquired apartment communities . the increase for 2016 was partially offset by a decrease in snow removal and other costs related to the severe winter storms in our northeast markets that occurred during the first quarter of 2015 , which contributed to the increase in the prior year . for established communities , direct property operating expenses , excluding property taxes , increased $ 7,256,000 , or 2.5 % , and $ 8,207,000 , or 3.1 % , in 2016 and 2015 , respectively , as compared to the prior years . the increase in 2016 was primarily due to increased bad debt expense , compensation and community repairs and maintenance costs , partially offset by decreased utility costs and a decrease in snow removal and other costs related to the severe winter storms in our northeast markets that occurred during the first quarter of 2015. the increase in 2015 was primarily due to increased repairs and maintenance costs , payroll and benefit costs , and insurance costs , as well as snow removal and other costs related to the severe winter storms in our northeast markets during the first quarter of 2015. property taxes increased $ 11,338,000 , or 5.9 % , and $ 14,865,000 , or 8.3 % , in 2016 and 2015 , respectively , as compared to the prior years . the increases in 2016 and 2015 were primarily due to the addition of newly developed and acquired apartment communities , increased assessments across our portfolio and successful appeals and reductions of supplemental taxes in the respective prior years in excess of those recognized in the then current year . for established communities , property taxes increased $ 6,616,000 , or 4.4 % , and $ 3,829,000 , or 2.8 % , in 2016 and 2015 , respectively , as compared to the prior years . the increase in 2016 was primarily due to increased assessments as well as appeals and supplemental tax reversals in the prior year in excess of those recognized in the current year . the increase in 2015 was primarily due to successful appeals and reductions of supplemental taxes in 2014 in excess of those in 2015 , related primarily to our west coast markets . for communities in california , property tax changes are determined by the change in the california consumer price index , with increases limited by law ( proposition 13 ) . massachusetts also has laws in place to limit property tax increases . we evaluate property tax increases internally and also engage third-party consultants to assist in our evaluations . we appeal property tax increases when appropriate . corporate-level property management and other indirect operating expenses decreased $ 22,000 in 2016 , and increased $ 6,719,000 , or 11.1 % , in 2015 , as compared to the prior years . the increase in 2015 was primarily due to an increase in compensation related costs including certain employee separation costs . 40 expensed acquisition , development and other pursuit costs , net of recoveries primarily reflect the costs incurred related to our asset investment activity , abandoned pursuit costs , which include costs incurred for development pursuits not yet considered probable for development , as well as the abandonment of development rights , acquisition pursuits and disposition pursuits , offset by any recoveries associated with acquisitions for periods prior to our ownership . these costs can be volatile , particularly in periods of increased acquisition activity , periods of economic downturn or when there is limited access to capital , and the costs may vary significantly from period to period . these costs increased $ 3,100,000 , or 45.4 % , and $ 10,539,000 in 2016 and 2015 , respectively , as compared to the prior years . the increase in 2016 was primarily due to costs related to five operating communities acquired in 2016 , as well as the non-cash write-off of asset management fee intangibles associated with the disposition of communities in the u.s. fund . the increase in 2015 was primarily due to receipts in 2014 related to communities acquired as part of the archstone acquisition for periods prior to our ownership , which are primarily comprised of property tax and mortgage insurance refunds , as well as increased costs associated with the acquisition of real estate and abandonment of pursuits , as compared to the prior year .
| we also started the construction of nine communities containing an aggregate of 2,732 apartment homes , which are expected to be completed for an estimated total capitalized cost of $ 1,588,600,000 , including our share of the total capitalized cost for one community being developed within a joint venture in which we own a 55.0 % interest . in addition , during 2016 we completed the redevelopment of 10 communities containing an aggregate of 2,739 apartment homes for a total investment of $ 115,900,000 , excluding costs incurred prior to the redevelopment . 35 during the year ended december 31 , 2016 , we sold seven wholly-owned operating communities , containing an aggregate of 2,051 apartment homes , for an aggregate sales price of $ 522,850,000 , resulting in an aggregate gain in accordance with gaap of $ 370,301,000 . we also sold other real estate , primarily composed of one land parcel which was sold to a joint venture in which we own a 55.0 % interest , and ancillary real estate , for an aggregate sales price $ 41,178,000 , resulting in an aggregate gain in accordance with gaap of $ 10,224,000 . during the year ended december 31 , 2016 , we acquired five communities containing an aggregate of 1,265 apartment homes and 40,000 square feet of retail space for an aggregate purchase price of $ 532,350,000 . one community , avalon clarendon , was a mixed-use development originally acquired through a joint venture . we established separate legal ownership of the residential and retail , office and public parking components of the venture with our venture partner , and as a result consolidated avalon clarendon , reporting the operating results of the community as part of our consolidated operations beginning in october 2016. in conjunction with the acquisition of avalon hoboken , we assumed a fixed rate secured mortgage note with a principal balance of $ 67,904,000 and a contractual interest rate of 4.18 % maturing in december 2020. in conjunction with the acquisition of avalon columbia pike , we assumed a fixed rate secured mortgage note with a
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noninterest income increased $ 0.9 million and noninterest expense increased $ 7.1 million for the year ended december 31 , 2019 compared to the same period in the prior year . the increase in noninterest expense for the year ended december 31 , 2019 compared to the same period in the prior year was primarily a result of increased employee headcount , opening additional banking locations and opening our digital innovation center in cleveland , ohio . 43 year ended december 31 , 2018 compared to year ended december 31 , 2017 net income for the year ended december 31 , 2018 was $ 2.1 million , an increase of $ 0.3 million , or 16.1 % , from net income for the year ended december 31 , 2017 of $ 1.8 million . this increase was due to an increase in interest income primarily related to growth in our loan portfolio and rising interest rates , which improved loan yields . this increase in interest income was partially offset by a $ 3.0 million increase in interest expense due to deposit growth and increased rates paid on our deposit products , as well as a $ 6.7 million increase in noninterest expense related to increased employee headcount , an increase in banking locations and additional salary and benefits expense in preparation to open our digital innovation center . the $ 0.1 million increase in noninterest income was primarily due to increased mortgage banking revenues and increased account fees and service charges , partially offset by a reduction in sba origination fees and other fees and charges . income tax expense decreased $ 1.2 million for the year ended december 31 , 2018 compared to the year ended december 31 , 2017 due to the enactment of the tax act in december 2017 , which reduced the corporate income tax rate . we also recognized a one-time charge in 2017 of approximately $ 0.7 million as a result of the revaluation of our deferred tax asset due to the change in the corporate tax rate . net interest income and net interest margin analysis we analyze our ability to maximize income generated from interest earning assets and control the interest expenses of our liabilities , measured as net interest income , through our net interest margin and net interest spread . net interest income is the difference between the interest and fees earned on interest earning assets , such as loans and securities , and the interest expense paid on interest bearing liabilities , such as deposits and borrowings , which are used to fund those assets . net interest margin is a ratio calculated as annualized net interest income divided by average interest earning assets for the same period . net interest spread is the difference between average interest rates earned on interest earning assets and average interest rates paid on interest-bearing liabilities . changes in market interest rates and the interest rates we earn on interest earning assets or pay on interest-bearing liabilities , as well as in the volume and types of interest earning assets , interest bearing and noninterest-bearing liabilities and shareholders ' equity , are usually the largest drivers of periodic changes in net interest income , net interest margin and net interest spread . fluctuations in market interest rates are driven by many factors , including governmental monetary policies , inflation , deflation , macroeconomic developments , changes in unemployment rates , the money supply , political and international conditions and conditions in domestic and foreign financial markets . periodic changes in the volume and types of loans in our loan portfolio are affected by , among other factors , the economic and competitive conditions in the miami-dade msa , as well as developments affecting the real estate , technology , government services , hospitality and tourism and financial services sectors within the miami-dade msa . our ability to respond to changes in these factors by using effective asset-liability management techniques is critical to maintaining the stability of our net interest income and net interest margin as our primary sources of earnings . 44 the following table shows the average outstanding balance of each principal category of our assets , liabilities and shareholders ' equity , together with the average yields on our assets and the average costs of our liabilities for the periods indicated . such yields and costs are calculated by dividing the annualized income or expense by the average daily balances of the corresponding assets or liabilities for the same period . replace_table_token_4_th ( 1 ) includes nonaccrual loans . ( 2 ) net interest spread is the difference between interest rates earned on interest earning assets and interest rates paid on interest-bearing liabilities . ( 3 ) net interest margin is a ratio of net interest income to average interest earning assets for the same period . ( 4 ) interest income on loans includes loan fees of $ 568 , $ 568 , and $ 434 for the years ended december 31 , 2019 , 2018 , and 2017 , respectively . 45 the following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates . for purposes of this table , changes attributable to both rate and volume that can not be segregated have been proportionately allocated to both volume and rate . story_separator_special_tag replace_table_token_5_th year ended december 31 , 2019 compared to year ended december 31 , 2018 net interest income increased by $ 6.1 million to $ 28.0 million for the year ended december 31 , 2019 compared to the december 31 , 2018. our total interest income was impacted by an increase in interest earning assets , primarily due to organic growth in our loan portfolio , and three market rate increases between december 31 , 2018 and december 31 , 2019 due to increases in the federal funds target interest rate by the federal reserve . average total interest earning assets were $ 839.0 million for the year ended december 31 , 2019 compared with $ 609.5 million for the year ended december 31 , 2018. the annualized yield on those interest earning assets increased 12 basis points from 4.55 % for the year ended december 31 , 2018 to 4.67 % for the year ended december 31 , 2019. however , due to the recent reduction in the federal funds target interest rate by the federal reserve in the second half of 2019 , our yield on interest earning assets declined during the last quarter of 2019 , which was partially offset by lower interest expense on our interest-bearing deposits . the increase in the average balance of interest earning assets was driven almost entirely by organic growth in our loan portfolio of $ 183.7 million , representing an increase of 30.5 % , to $ 785.2 million for the year ended december 31 , 2019 compared to $ 601.5 million for the year ended december 31 , 2018. average interest-bearing liabilities increased by $ 178.0 million , or 39.5 % , from $ 450.3 million for the year ended december 31 , 2018 to $ 628.3 million for the year ended december 31 , 2019. the increase was primarily due to a $ 229.5 million increase in the average balance of interest-bearing deposits , or 37.7 % . the increase in the average balance of interest-bearing deposits was primarily due to increases in certificates of deposit and money market accounts for the year ended december 31 , 2019 compared to the year ended december 31 , 2018 , and , to a lesser extent , negotiable order of withdrawal accounts , or now accounts . the annualized average interest rate paid on average interest-bearing liabilities increased to 1.78 % for the year ended december 31 , 2019 compared to 1.30 % for the year ended december 31 , 2018 , while the annualized average interest rate paid on interest-bearing deposits increased 50 basis points to 1.73 % and the annualized average interest rate paid on borrowed funds increased by 20 basis points to 2.31 % . the increases in annualized average interest rates primarily reflected an increase in market interest rates due to increases in the federal funds target interest rate during the first half of 2019 , partially offset by rate cuts during the last half of 2019. for the year ended december 31 , 2019 , our average other noninterest-bearing liabilities increased $ 12.6 million , or 326.1 % , to $ 16.5 million from $ 3.9 million during the year ended december 31 , 2018. average noninterest-bearing deposits also increased $ 37.3 million , or 29.2 % , from $ 127.7 million to $ 165.0 million for the same periods . for the year ended december 31 , 2019 , our annual net interest margin was 3.34 % and net interest spread was 2.90 % . for the year ended december 31 , 2018 , annual net interest margin was 3.60 % and net interest spread was 3.25 % . our net interest margin was adversely affected by 0.26 % during the year ended december 31 , 2019 , compared to the same period in 2018 46 because rates paid on our interest-bearing deposits , our primary funding source , increased faster than loan yields , which were adversely impacted due to falling yields on 10-year treasury notes , as well as increasing competitive pricing pressures in the loan market . as a result of the recent reduction in the federal funds target interest rate as well as continued declines in the 10-year treasury yield , average rates earned on interest earning assets and average rates paid on our interest-bearing deposits both generally declined during the last half of 2019 compared to the first half of 2019. correspondingly new loans were priced at lower yields in comparison to previously held loans which led to numerous loan payoffs at year end 2019. year ended december 31 , 2018 compared to year ended december 31 , 2017 net interest income increased by $ 5.9 million to $ 21.9 million , or 37.1 % , for the year ended december 31 , 2018. our total interest income was positively impacted by an increase in interest earning assets and a slowly rising interest rate environment in 2018. average total interest earning assets were $ 609.5 million in 2018 compared with $ 434.2 million in 2017 , an increase of 40.4 % . the yield on interest earning assets increased by 21 basis points from 4.34 % in 2017 to 4.55 % in 2018. the increase in the average balance of interest earning assets was driven primarily by organic growth in our loan portfolio . all loan categories increased in 2018 , except construction and development , resulting in an increase in the average balance of the loan portfolio of $ 139.8 million , or 36.8 % , to $ 520.1 million for 2018 compared to $ 380.3 million for 2017 categories ( see “ financial condition — loan portfolio ” in this section for further details about the changes in our loan portfolio ) .
| · nonperforming assets totaled $ 2.3 million , which includes three loans being classified as nonperforming and no loans accruing loans over 90 days past due . there were no nonperforming assets or loans accruing over 90 days past due as of december 31 , 2018 . · as of december 31 , 2019 , we were well-capitalized , with a total risk-based capital ratio of 12.3 % , a tier 1 risk-based capital ratio of 11.3 % , a common equity tier 1 capital ratio of 11.3 % , and a leverage ratio of 7.8 % . as of 41 december 31 , 2019 , all of our regulatory capital ratios exceeded the thresholds to be well-capitalized under the applicable bank regulatory requirements . other highlights · in january 2019 , we hired a private banking team from a large south florida-based bank to establish our doral , fl loan production office , which opened in july 2019 . · in may 2019 , we converted our boca raton , fl loan production office into a full-service branch and we opened our fifth branch in miami , fl ( dadeland ) . · in may 2019 , we hired the former president of a south florida-based community bank and a banking team from a large national bank to establish our wellington , fl loan production office , which opened in july 2019 . · in august 2019 , we entered into a merger agreement to acquire marquis bancorp , inc. and its wholly owned subsidiary , marquis bank , for shares of our class a common stock . · in october 2019 , we opened our digital innovation center in cleveland , oh . · in february 2020 , we announced the closing of our initial public offering of 3,565,000 shares of class a common stock , which included an additional 465,000 shares in connection with the exercise in full of the underwriters ' option to purchase additional shares · in march 2020 , we closed our merger with mbi and its wholly owned subsidiary , marquis
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during 2016 , hardware revenue increased by $ 495 , or 15.0 % , over 2015. asureforce® hardware revenue increased $ 582 , or 44.4 % , over 2015 , primarily as a result of mangrove hardware revenues of $ 515 in 2016 , as well as an increase in asureforce time ( aft ) revenue of $ 81 , or 7.0 % . this increase was offset by a decrease in asurespace hardware revenue of $ 87 , or 4.4 % , over 2015 . 13 maintenance and support revenue decreased $ 1.5 million , or 24.6 % , over 2015. maintenance and support revenue was $ 4.6 million in 2016 as compared to $ 6.1 million in 2015. asureforce® maintenance and support revenue decreased $ 606 , or 30.7 % , over 2015 primarily due to a decrease in asureforce time revenue of $ 595 , or 30.5 % , as compared to 2015. asurespace , maintenance and support revenue decreased $ 881 , or 21.6 % , over 2015 primarily due to decreases in meeting room manager and resource scheduler maintenance and support revenue of $ 300 , or 15.2 % , and $ 509 , or 38.7 % , respectively . these decreases are primarily caused by movements of clients from on premise to on demand , cloud-based solutions . on premise software license revenues increased $ 1.4 million , or 159.1 % , as compared to 2015. asureforce® on premise software license revenues increased $ 879 , or 134.1 % from 2015 due to increases in asureforce time of $ 488 , or 74.5 % , and geopunch ( fotopunch ) on premise software license revenue of $ 300 as compared to zero in 2015. asurespace on premise software license revenues increased $ 483 , or 240.6 % from 2015 primarily due to an increase in resource scheduler on premise software license revenue of $ 476 , or 596.1 % , over 2015. professional services revenue increased $ 1.3 million , or 42.0 % , over 2015. asureforce® professional services revenue increased $ 410 , or 59.9 % , over 2015 , primarily due to mangrove revenues of $ 516 in 2016. asurespace professional services revenue increased $ 878 , or 36.9 % , over 2015 , primarily due to an increase in resource scheduler professional services revenue of $ 850 , or 72.7 % . although our total customer base is widely spread across industries , our sales are concentrated in certain industry sectors , including corporate , education , healthcare , government , legal and non-profit . we continue to target small and medium sized businesses and divisions of larger enterprises in these same industries as prospective customers . geographically , we sell our products worldwide , but sales are largely concentrated in the united states , canada and europe . additionally , we have a distribution partner in australia . as the overall workforce management solutions market continues to experience significant growth related to saas products , we will continue to focus on sales of meeting room manager , on demand , peoplecube and adi saas products . in addition to continuing to develop our workforce and agile workplace management solutions and release new software updates and enhancements , we continue to actively explore other opportunities to acquire additional products or technologies to complement our current software and services . through acquisitions in 2011 of adi and legiant , we expanded our cloud computing time and attendance software and management services business . the 2012 acquisition of peoplecube gave us a product line that includes software to assist customers in driving integrated facility management of offices , conference rooms , video conferencing , events and training , alternative workspaces and lobby use . the 2014 acquisitions of fotopunch and roomtag support our vision to deliver innovative cloud-based agile workplace technologies . our march 2016 acquisitions from mangrove enable us to enter into the human resource management , payroll processing and benefits administration services businesses , which we are integrating into our existing asureforce® product line . our acquisitions in 2017 increased our human resources consulting expertise and added outsourced human resources department offerings to our clients . gross margin consolidated gross margin was $ 27.4 million in 2016 and $ 19.6 million in 2015 , an increase of $ 7.9 million , or 40.2 % . gross margin as a percentage of revenues was 77.2 % for 2016 and 72.7 % for 2015. we attribute the increase in gross margin to a shift in the mix of our revenue between our higher margin and lower margin product lines . consolidated cost of sales increased $ 777 , or 10.6 % , from 2015. our cost of sales relates primarily to direct product costs , compensation and related consulting expenses , hardware expenses , facilities and related expenses and the amortization of our purchased software development costs . these expenses represented approximately 93 % of the total cost of sales for 2016 and 95 % for 2015. these expenses increased by approximately $ 603,000 , or 8.7 % , over 2015. this increase is comprised of increases in salary and benefits expense of $ 800,000 , or 25.5 % , offset by a decrease in facilities related expenses of $ 152,000 , or 51.9 % , over 2015. we include intangible amortization related to developed and acquired technology within cost of sales . selling , general and administrative expenses selling , general and administrative ( “ sg & a ” ) expenses were $ 21.0 million in 2016 and $ 15.0 million in 2015 , an increase of $ 6.0 million , or 40.0 % . sg & a expenses as a percentage of revenues were 59.2 % and 55.6 % for 2016 and 2015 , respectively . story_separator_special_tag general and administrative expenses increased $ 5.9 million , or 76.6 % , and sales and marketing expenses decreased $ 836 , or 11.5 % , over 2015. general and administrative expenses increased due to integration expenses related to the acquisition of mangrove in the first quarter of 2016. sales and marketing expenses decreased as a result of higher expenses in 2015. in 2015 , we reorganized our sales team to increase our focus on larger deals in the enterprise and global markets , resulting in higher headcount and increased selling expenses . we may incur significant additional legal expenses and or professional services-related expenses in the future if we pursue further acquisitions of products or businesses , even if we ultimately do not consummate any acquisition . 14 research and development expenses research and development ( “ r & d ” ) expenses were $ 2.9 million in 2016 and $ 3.1 million in 2015 , a decrease of $ 156,000 or 5.1 % . r & d expenses as a percentage of revenues were 8.2 % and 11.3 % for 2016 and 2015 , respectively . the $ 156,000 decrease is primarily due to a decline in professional and consulting fees as well as facilities , overhead and depreciation expenses as compared to 2015. we continued to invest heavily in 2016 to develop the solutions and technologies required to support our themes of mobility , user experience and integration . these core tenets of 2016 ultimately serve our vision of helping customers build companies of the future . by expanding our investment into core technologies such as saas , mobile and platform integration , we have improved our competency and depth of product features . additionally , working with strategic third parties has provided us the opportunity to co-innovate with our global customers , further establishing asure as the core people success platform driving the workplace of the future . in line with the themes noted above , our saas solutions were updated with a new mobile-first web experience , including contemporary branding and coloring in line with our corporate initiatives , and utilizing the latest responsive ui software libraries to easily adapt to the variety of devices utilized in today 's mobile workforce . this does not take away from our investment in our existing native mobile applications , but rather expands it by providing more accessibility options , allowing mobile-specific solutions to be deployed in those scenarios that require technologies only available on the phone . our asurespace solution saw continued focus on collaboration and web services , including a new option to integrate with the webex productivity suite . combined with our enhanced cisco tms integration , this new option helps corporate it by simplifying the desktop deployment requirements on organizations that have invested in microsoft exchange and cisco infrastructures , while improving the end user experience by having only “ one place to click ” for all of their meeting needs . this feature , plus numerous other features , enhances the position of our single-source platform in the market . our asurehcm suite , acquired as part of the mangrove purchase in march 2016 , has fully met the posted objectives of 2016 , including the aforementioned user experience update . key objectives outside of ux included enhancement of aca and cobra/benefits modules , as well as integration with asure 's existing time and labor management ( tlm ) . asure has also invested in the infrastructure of the platform , with performance and scalability initiatives that will ultimately lead to a migration to amazon aws targeted for q1 of 2017. our time and labor management solution , asureforce time , continued to expand features in both its industry leading facial recognition and core labor and compliance areas , including payroll based journal ( pbj ) reporting . full integration with our asurehcm platform allows customers utilizing both products to experience single sign-on ( sso ) and a unified user experience , all while enjoying the convenience and elimination of duplicate entry that comes with having a single payroll and tlm solution . we anticipate continuing to invest in research and development in 2017 , stimulated by our 2016 success and market opportunities to cross sell and scale the business . this investment will expand the integration and analytics across our unified platform . amortization of intangible assets amortization expenses in 2016 were $ 2.3 million , an increase of $ 387,000 , or 20.7 % , as compared to $ 1.9 million in 2015. amortization expenses as a percentage of revenues were 6.3 % and 6.9 % for 2016 and 2015 , respectively . this decrease is due to some of our intangible assets becoming fully amortized . other income and loss other loss was $ 2.0 million for the year ended 2016 as compared to $ 1.2 million in the year ended 2015. other loss in 2016 and 2015 was primarily comprised of interest expense . income taxes at december 31 , 2016 , we had federal net operating loss carryforwards of approximately $ 115.7 million , federal r & d credit carryforwards of approximately $ 5.1 million and alternative minimum tax credit carryforwards of approximately $ 161,000. the net operating loss and federal r & d credit carryforwards will expire in varying amounts from 2018 through 2036 , if not utilized . minimum tax credit carryforwards carry forward indefinitely . 15 income tax expense decreased from $ 219,000 in 2015 to $ 189,000 in 2016 , a $ 30,000 , or 13.7 % , decrease . these figures represent an effective tax rate of 24.1 % and 14.2 % in 2016 and 2015 , respectively . income tax expense is primarily due to deferred taxes on the amortization of goodwill for tax purposes and the results of foreign operations .
| 11 in march 2014 , we entered into a credit agreement and guaranty and security agreement with wells fargo bank , national association . we amended the credit agreement again in march 2016 coincident with the acquisition of mangrove employer services , inc. of tampa , florida ( “ mangrove ” ) . under this amendment , we expanded our overall credit facility by $ 12.5 million to $ 29.2 million . this includes a $ 26.2 million term facility which is due march 21 , 2019 and a $ 3.0 million revolving credit facility . the latest amendment also changes the applicable margin rates for determining the interest rate payable on the loan . the amendment also amended our leverage ratio requirements under the credit agreement . we have now agreed to a leverage ratio not to exceed 5.00:1 at march 31 , 2016 , stepping down to 2.25:1 at december 31 , 2018. see note 6- notes payable in the accompanying financial statements for more information . in march 2016 , we acquired all of the outstanding shares of common stock of mangrove , a human resource management and payroll processing company . the aggregate consideration for the stock consisted of ( i ) $ 11.3 million in cash , a portion of which was used to pay certain obligations of mangrove and ( ii ) a secured subordinated promissory note ( the “ mangrove note ” ) in the principal amount of $ 6.0 million , subject to adjustment . we funded the cash payment with proceeds from our credit agreement with wells fargo . the mangrove note bears interest at an annual rate of 3.50 % and matures in march , 2018 , with the first installment of principal due in march , 2017 and the second installment of principal due in march , 2018. in march 2016 , we also acquired substantially all the assets of mangrove cobrasource inc. , a benefits administration services business . the aggregate consideration for the assets was
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we continue to focus efforts on the development of sts . we have licensed from oregon health & science university ( “ ohsu ” ) intellectual property rights for the use of sts as a chemoprotectant , and are developing sts as a protectant against the hearing loss often caused by platinum-based anti-cancer agents in children . preclinical and clinical studies conducted by ohsu and others have indicated that sts can effectively reduce the incidence of hearing loss caused by platinum-based anti-cancer agents . we have received orphan drug designation in the united states for the use of sts in the prevention of platinum-induced ototoxicity in pediatric patients . hearing loss among children receiving platinum-based chemotherapy is frequent , permanent and often severely disabling . the incidence of hearing loss in these children depends upon the dose and duration of chemotherapy , and many of these children require lifelong hearing aids . there is currently no established preventive agent for this hearing loss and only expensive , technically difficult and sub-optimal cochlear ( inner ear ) implants have been shown to provide some benefit . in addition , adults undergoing chemotherapy for several common malignancies , including ovarian cancer , testicular cancer , and particularly head and neck cancer and brain cancer , often receive intensive platinum-based therapy and may experience severe , irreversible hearing loss , particularly in the high frequencies . investigators at ohsu have conducted phase i and phase ii studies which have shown sts reduces the hearing loss associated with platinum-based chemotherapy . in one study at ohsu , the need for hearing aids to correct high frequency hearing loss was reduced from about 50 % to less than 5 % . patient enrollment for sts has completed in both cog accl0431 and siopel 6 , which are both phase iii trials of sts . the preliminary results of cog accl0431 were presented in the second quarter of 2014 and the final results were published in lancet oncology in december 2016. the preliminary safety and efficacy results on siopel 6 were presented during the second quarter of 2016 at asco . we have not received and do not expect to have significant revenues from our product candidate until we are either able to sell our product candidate after obtaining applicable regulatory approvals or we establish collaborations that provide us with up-front payments , licensing fees , milestone payments , royalties or other revenue . the company generated a net loss of $ 2.8 million for the year ended december 31 , 2016 and had a non-cash gain on derivative liabilities of $ 0.05 million . we generated a net loss of approximately $ 0.7 million for the year ended december 31 , 2015 ( there was a non-cash gain on the change in derivative liability of $ 1.2 million ) . as of december 31 , 2016 , our accumulated deficit was approximately $ 114.3 million . as a result of our limited financial resources we have postponed or terminated many of our previously planned or ongoing clinical development programs . we continue to pursue various strategic alternatives , including collaborations with other pharmaceutical and biotechnology companies . as a result , there is uncertainty of our ability to continue as a going concern . our projections of our capital requirements are subject to substantial uncertainty . more capital than we anticipated may be required thereafter . to finance our continuing operations , we will need to raise substantial additional funds through either the sale of additional equity , the issuance of debt , the establishment of collaborations that provide us with funding , the out-license or sale of certain aspects of our intellectual property portfolio or from other sources . given current economic conditions , we might not be able to raise the necessary capital or such funding may not be available on financially acceptable terms if at all . if we can not obtain adequate funding in the future , we might be required to further delay , scale back or eliminate certain research and development studies , consider business combinations or even shut down some , or all , of our operations . our operating expenses will depend on many factors , including the progress of our drug development efforts and the implementation of further cost reduction measures . our research and development expenses , which include expenses associated with our clinical trials , drug manufacturing to support clinical programs , salaries for research and development personnel , stock-based compensation , consulting fees , sponsored research costs , toxicology studies , license fees , milestone payments , and other fees and costs related to the development of our product candidate , will depend on the availability of financial resources , the results of our clinical trials and any directives from regulatory agencies , which are difficult to predict . our general and administration expenses include expenses associated with the compensation of employees , stock-based compensation , professional fees , consulting fees , insurance and other administrative matters associated in support of our drug development programs . 20 on may 16 , 2016 , we completed a $ 5.0 million equity financing for general working capital . further development of sts will require additional capital . story_separator_special_tag administrative expenses . replace_table_token_7_th the net cash flow used in operating activities for the year ended december 31 , 2016 was approximately $ 2.1 million as compared to $ 1.9 million in 2015. this increase relates to the commercial development of sts . 22 on september 5 , 2013 , we announced that we intended to primarily focus our remaining financial resources on the development of sts . we continue to pursue various strategic alternatives including collaborations with other pharmaceutical and biotechnology companies . story_separator_special_tag our projections of further capital requirements are subject to substantial uncertainty . our working capital requirements may fluctuate in future periods depending upon numerous factors , including : our ability to obtain additional financial resources ; our ability to enter into collaborations that provide us with up-front payments , milestones or other payments ; results of our research and development activities ; progress or lack of progress in our preclinical studies or clinical trials ; unfavorable toxicology in our clinical programs , our drug substance requirements to support clinical programs ; change in the focus , direction , or costs of our research and development programs ; headcount expense ; the costs involved in preparing , filing , prosecuting , maintaining , defending and enforcing our patent claims ; competitive and technological advances ; the potential need to develop , acquire or license new technologies and products ; our business development activities ; new regulatory requirements implemented by regulatory authorities ; the timing and outcome of any regulatory review process ; and commercialization activities , if any . we had cash and cash equivalents of approximately $ 3.86 million as of december 31 , 2016. financial instruments we invest excess cash and cash equivalents in high credit quality investments held by financial institutions in accordance with our investment policy designed to protect the principal investment . at december 31 , 2016 , we had approximately $ 0.06 million in our cash accounts and $ 3.86 million in our money market accounts . we have not experienced any loss or write down of our money market investments since the inception of the company . our investment policy is to manage investments to achieve , in the order of importance , the financial objectives of preservation of principal , liquidity and return on investment . investments may be made in u.s. or canadian obligations and bank securities , commercial paper of u.s. or canadian industrial companies , utilities , financial institutions and consumer loan companies , and securities of foreign banks provided the obligations are guaranteed or carry ratings appropriate to the policy . securities must have a minimum dun & bradstreet rating of a for bonds or r1 low for commercial paper . the policy also provides for investment limits on concentrations of securities by issuer and maximum-weighted average time to maturity of twelve months . this policy applies to all of our financial resources . the policy risks are primarily the opportunity cost of the conservative nature of the allowable investments . as our main purpose is research and development , we have chosen to avoid investments of a trading or speculative nature . we classify investments with original maturities at the date of purchase greater than three months which mature at or less than twelve months as current . we carry investments at their fair value with unrealized gains and losses included in other comprehensive income ( loss ) ; however we have not held any instruments that were classified as short term investments during the periods presented in this annual report . off-balance sheet arrangements since our inception , we have not had any material off-balance sheet arrangements . contractual obligations and commitments none . critical accounting policies and estimates the preparation of financial statements in conformity with u.s. gaap requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenue and expense during the reporting period . these estimates are based on assumptions and judgments that may be affected by commercial , economic and other factors . actual results could differ from these estimates . an accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made , and if different estimates reasonably could have been used , or changes in the accounting estimates that are reasonably likely to occur periodically , could materially impact the financial statements . the following description of critical accounting policies , judgments and estimates should be read in conjunction with our december 31 , 2016 consolidated financial statements . stock-based compensation the calculation of the fair values of our stock-based compensation plans requires estimates that require management 's judgments . under asc 718 , the fair value of each stock option is estimated on the grant date using the black-scholes option-pricing model . the valuation models require assumptions and estimates to determine expected volatility , expected life , expected dividends and expected risk-free interest rates . the expected volatility was determined using historical volatility of our stock based on the contractual life of the award . the risk-free interest rate assumption was based on the yield on zero-coupon u.s. treasury strips at the award grant date . we also used historical data to estimate forfeiture experience . in valuing options granted in the year ended december 31 , 2016 and fiscal year ended december 31 , 2015 we used the following weighted average assumptions : replace_table_token_8_th 23 common stock and warrants common stock is recorded as the net proceeds received on issuance after deducting all share issuance costs and the relative fair value of investor warrants . warrants are recorded at relative fair value and are deducted from the proceeds of common stock and recorded on the consolidated statements of stockholders ' equity as additional paid-in capital . derivative instruments the company applies asc topic 815-40 , `` derivatives and hedging '' ( asc 815-40 ) .
| quarterly information the following table presents selected consolidated financial data for each of the last eight quarters through december 31 , 2016 , as prepared under u.s. gaap ( dollars in thousands , except per share information ) . replace_table_token_4_th 21 quarter ended december 31 , 2016 versus 2015 replace_table_token_5_th the company reported a net loss from operations of $ 1.1 million ( which excludes an immaterial non-cash gain on derivatives ) for the three months ended december 31 , 2016 , compared to a net loss from operations of $ 0.5 million ( excluding the non-cash gain of $ 0.01 million ) in 2015. research and development expenses totaled $ 0.2 million for the three months ended december 31 , 2016 , as compared to a $ 0.07 million in the same period in 2015 as the company increased drug manufacturing expense . general and administrative expenses increased by $ 0.5 million in the three months ended december 31 , 2016 , as compared to the same period in 2015. the increase relates to non-cash equity based compensation for directors and officers , the extension of expiration dates on various prior option issuances to officers and directors and increased remuneration for officers and directors . replace_table_token_6_th liquidity and capital resources · the $ 3.0 million increase in cash and cash equivalents between december 31 , 2016 and december 31 , 2015 is due to the $ 5.0 million equity financing completed in may 2016 , and the $ 0.1 million cash proceeds from the exercise of 67 warrants offset by clinical trial expenses related to our phase iii study of sts , the increase in regulatory and manufacturing activities for sts and our general and administrative expenses . · the decrease in other current assets between december 31 , 2015 and december 31 , 2016 relates to a reduction in pre-paid director 's and officer 's insurance over the prior year . · current liabilities decreased primarily due to a write-off of old payables which had become statute barred . the company wrote off approximately $ 0.08 million of payables which has
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operating cash flow of $ 4.6 million in 2015 primarily reflected net income of $ 1.5 million adjusted for depreciation and amortization of $ 1.7 million , stock compensation expense of $ 0.7 million , and an increase in net deferred tax liabilities of $ 0.1 million . this was affected by the following changes in assets and liabilities : a decrease in accounts receivable of $ 0.5 million , a decrease in accounts payable of $ 0.1 million , a decrease in accrued expenses of $ 0.5 million , and a decrease in prepaid expenses ( and other current assets ) of $ 0.6 million . while the operating cash flow was $ 0.1 million greater than in 2014 , the net income was down $ 1.7 million . this was offset by a decrease in income tax receivable of $ 1.0 million which reduced the current tax due and an increase in depreciation and amortization of $ 0.7 million due to new equipment and leasehold improvements . operating cash flow of $ 4.5 million in 2014 primarily reflected net income of $ 3.2 million adjusted for depreciation and amortization of $ 1.1 million , stock compensation expense of $ 0.6 million , and an increase in net deferred tax liabilities of $ 1.4 million . this was affected by the following changes in assets and liabilities : a decrease in accounts receivable of $ 0.3 million , an increase in accounts payable of $ 0.3 million , a decrease in accrued expenses of $ 1.2 million , and an increase in prepaid expenses ( and other current assets ) of $ 1.2 million . the decrease in accrued expenses was driven by a $ 1.2 million reduction in the liability for equipment purchases which were paid for in 2014. the change in deferred tax liabilities and other current assets was driven by bonus depreciation on new assets purchased as part of the tax extender bill passed in december 2014 . 13 operating cash flow of $ 6.0 million in 2013 primarily reflected net income of $ 3.8 million adjusted for depreciation and amortization of $ 0.9 million , stock compensation expense of $ 0.5 million , and an increase in net deferred tax liabilities of $ 0.4 million . this was affected by the following changes in assets and liabilities : a decrease in accounts receivable of $ 0.3 million , a decrease in accounts payable of $ 0.2 million , a decrease in accrued expenses of $ 0.1 million , and a decrease in prepaid expenses ( and other current assets ) of $ 0.4 million . investing cash flow principally reflected the purchase of capital expenditures . capital expenditures were $ 1.8 million , $ 7.6 million , and $ 1.5 million in 2015 , 2014 and 2013 , respectively . in 2015 , the expenditures related principally to laboratory equipment , computer equipment , new software , and leasehold improvements for the company 's new facility . capitalized patent costs were $ 46 thousand , $ 244 thousand , and $ 226 thousand in 2015 , 2014 , and 2013 , respectively . during 2015 , 2014 and 2013 , the company did not repurchase any shares of common stock for treasury . the company has authorized 750,000 shares for repurchase since june of 1998 , of which 250,000 shares of common stock were authorized in march of 2008 for repurchase . since 1998 , a total of 550,684 shares have been repurchased . the company also distributed $ 3.2 million of cash dividends to its shareholders in 2015 , 2014 and 2013. at december 31 , 2015 , the company 's principal sources of liquidity included approximately $ 2.7 million of cash and $ 700 thousand of available credit under its equipment financing arrangement . see note 10 – debt and other financing to the financial statements for further detail on the equipment financing arrangement . management currently believes that such funds , together with future operating profits , should be adequate to fund anticipated working capital requirements , including debt obligations , and capital expenditures in the near term . depending upon the company 's results of operations , its future capital needs and available marketing opportunities , the company may use various financing sources to raise additional funds . such sources could include , issuance of common stock or debt financing , lines of credit , or equipment leasing , although there is no assurance that such financings will be available to the company on terms it deems acceptable , if at all . the company has paid dividends over the past seventy-seven quarters . it most recently declared a dividend in february 2016 which will be paid in march 2016 in the amount of $ 813 thousand . the company 's current intention is to continue to declare dividends to the extent funds are available and not required for operating purposes or capital requirements , and only then , upon approval by the board of directors . there can be no assurance that in the future the company will declare dividends . contractual obligations as of december 31 , 2015 were as follows : replace_table_token_5_th purchase commitment operating leases consist of rent obligations for the company 's facilities . the company has no significant contractual obligation for supply agreements as of december 31 , 2015. significant customers the company did not have any individual customers that exceeded 10 % of revenue for the years ended december 31 , 2015 , 2014 and 2013. the company had one customer that accounted for 11 % of the total accounts receivable balance as of december 31 , 2015. there were no customers who exceeded 10 % of the accounts receivable balance as of december 31 , story_separator_special_tag 2014 or 2013. critical accounting policies the company 's significant accounting policies are described in note 2 to the financial statements included in item 8 of this form 10-k. management believes the most critical accounting policies are as follows : revenue recognition the company is in the business of performing drug testing and reporting the results thereof . the company 's drug testing services include training for collection of samples and storage of positive samples for its customers for an agreed-upon fee per unit tested of samples . the revenues are recognized when the predominant deliverable , drug testing , is provided and reported to the customer . the company recognizes revenue in accordance with accounting standards codification “ asc ” 605 , “ revenue recognition . ” in accordance with asc 605 , the company considers testing , training and storage elements as one unit of accounting for revenue recognition purposes , as the training and storage costs are de minimis and do not have stand-alone value to the customer . the company recognizes revenue as the service is performed and reported to the customer , since the predominant deliverable in each arrangement is the testing of the units . the company also provides expert testimony , when and if necessary , to support the results of the tests , which is generally billed separately and recognized as the services are provided . 14 estimates the preparation of financial statements in conformity with accounting principles generally accepted in the united states requires management to make estimates , including bad debts , long-lived asset lives , income tax valuation and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period . actual results could differ from those estimates . capitalized development costs we capitalize costs related to significant software projects developed or obtained for internal use in accordance with u.s. generally accepted accounting standards . costs incurred during the preliminary project work stage or conceptual stage , such as determining the performance requirements , system requirements and data conversion , are expensed as incurred . costs incurred in the application development phase , such as coding , testing for new software and upgrades that result in additional functionality , are capitalized and are amortized using the straight-line method over the useful life of the software for 5 years . costs incurred during the post-implementation/operation stage , including training costs and maintenance costs , are expensed as incurred . we capitalized internally developed software costs of approximately $ 364 thousand , $ 403 thousand and $ 715 thousand during the years ended december 31 , 2015 , 2014 and 2013 , respectively . the software development is for primarily for three projects . determining whether particular costs incurred are more properly attributable to the preliminary or conceptual stage , and thus expensed , or to the application development phase , and thus capitalized and amortized , depends on subjective judgments about the nature of the development work , and our judgments in this regard may differ from those made by other companies . general and administrative costs related to developing or obtaining such software are expensed as incurred . allowance for doubtful accounts the allowance for doubtful accounts is based on management 's assessment of the ability to collect amounts owed to it by its customers . management reviews its accounts receivable aging for doubtful accounts and uses a methodology based on calculating the allowance using a combination of factors including the age of the receivable along with management 's judgment to identify accounts that may not be collectible . the company routinely assesses the financial strength of its customers and , as a consequence , believes that its accounts receivable credit risk exposure is limited . the company maintains an allowance for potential credit losses but historically has not experienced any significant losses related to individual customers or groups of customers in any particular industry or geographic area . bad debt expense has been within management 's expectations . income taxes the company accounts for income taxes using the liability method , which requires the company to recognize a current tax liability or asset for current taxes payable or refundable and a deferred tax liability or asset for the estimated future tax effects of temporary differences between the financial statement and tax reporting bases of assets and liabilities to the extent that they are realizable . deferred tax expense ( benefit ) results from the net change in deferred tax assets and liabilities during the year . a deferred tax valuation allowance is required if it is more likely than not that all or a portion of the recorded deferred tax assets will not be realized . the company had net deferred tax liabilities in the amount of $ 2.5 million at december 31 , 2015 , which primarily related to depreciation and amortization , an increase of $ 0.1 million from 2014. in 2015 , the company had a net tax benefit as a result of r & d tax credits related to information technology projects . this is the first year this benefit was recognized . the benefit from prior years related to these tax credits was $ 479 thousand . without the prior year impact , the current year tax rate would have been 23.3 % . in 2015 , there was $ 108 thousand of tax credits related to information technology projects . the company operates within multiple taxing jurisdictions and could be subject to audit in these jurisdictions . these audits may involve complex issues , which may require an extended period of time to resolve . the company has provided for its estimated taxes payable in the accompanying financial statements . the company did not have any unrecognized tax benefits and did not have any interest or penalties
| average revenue per sample was unchanged from 2014 to 2015. gross profit decreased $ 2.4 million to $ 12.7 million in 2015 compared to $ 15.1 million in 2014. direct costs increased by $ 192 thousand from 2014 to 2015. the capacity expansion costs within cost of sales was approximately $ 1.4 million and included ; $ 0.4 million for hiring and training of additional personnel and $ 1.0 million for building related costs . the gross profit margin decreased from 52 % in 2014 to 47 % in 2015. general and administrative ( “ g & a ” ) expenses were $ 4.6 million in 2015 compared to $ 4.5 million in 2014 , an increase of 2 % . as a percentage of revenue , g & a expenses were 16.9 % and 15.3 % for 2015 and 2014 , respectively . marketing and selling expenses were $ 5.1 million in 2015 compared to $ 4.6 million in 2014 , an increase of 9 % . the increase was driven by spending on information technology projects supporting the sales function . total marketing and selling expenses represented 18.7 % and 15.8 % of revenue for 2015 and 2014 , respectively . 12 research and development ( “ r & d ” ) expenses were $ 1.6 million in 2015 compared to $ 1.3 million in 2014 , an increase of 21 % . r & d expenses increased from additional personnel and supplies used to develop new tests for drugs of abuse as well as process improvements . r & d expenses represented 6.0 % and 4.6 % of revenue for 2015 and 2014 , respectively . other income ( expense ) represented $ 125 thousand of other expenses for 2015 compared to $ 57 thousand of other income for 2014. the other expense primarily consists of interest expense related to long term debt . during the year ended december 31 , 2015 , the company recorded a tax benefit of $ 164 thousand , representing an effective tax rate of ( 12.2 % ) . the tax rate for 2015 was affected by additional r & d tax credits related to
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in situations in which the security 's fair value is below amortized cost but it continues to be probable that all contractual terms of the security will be satisfied , the decline is solely attributable to noncredit factors , and the company asserts that it has positive intent and ability to hold that security to maturity , no otti is recognized . valuation of reo and foreclosed assets real estate properties acquired through foreclosure or by deed-in-lieu of foreclosure are recorded at fair value less estimated costs to sell . fair value is generally determined by management based on a number of factors , including third-party appraisals of fair value in an orderly sale . accordingly , the valuation of reo is subject to significant external and internal judgment . any differences between management 's assessment of fair value , less estimated costs to sell , and the carrying value of the loan at the date a particular property is transferred into reo are charged to the allowance for loan losses . management periodically reviews reo values to determine whether the property continues to be carried at the lower of its recorded book value or fair value , net of estimated costs to sell . any further decreases in the value of reo are considered valuation adjustments and trigger a corresponding charge to non-interest expense in the consolidated statements of operations . expenses from the maintenance and operations of reo are included in other non-interest expense . goodwill valuation goodwill is initially recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired . goodwill is presumed to have an indefinite useful life and is tested , at least annually , for impairment at the reporting unit level . the company has one reporting unit , the bank , for purposes of computing goodwill . all of the company 's goodwill has been allocated to this single reporting unit . the company performs an annual review in the third quarter of each year , or more frequently if indications of potential impairment exist , to determine if the recorded goodwill is impaired . if the fair value exceeds the carrying value , goodwill at the reporting unit level is not considered impaired and no additional analysis is necessary . if the carrying value of the reporting unit is higher than its fair value , there is an indication that impairment may exist and additional analysis must be performed to measure the amount of impairment loss , if any . the amount of impairment is determined by comparing the implied fair value of the reporting unit 's goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination . specifically , the company would allocate the fair value to all of the assets and liabilities of the reporting unit , including unrecognized intangible assets , in a hypothetical analysis that would calculate the implied fair value of goodwill . if the implied fair value of goodwill is less than the recorded goodwill , the company would record an impairment charge for the difference . a significant amount of judgment is involved in determining if an indicator of impairment has occurred . such indicators may include , among others ; a significant decline in our expected future cash flows ; a sustained , significant decline in our stock price and market capitalization ; a significant adverse change in legal factors or in the business climate ; adverse action or assessment by a regulator ; and unanticipated competition . any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on the company 's consolidated financial statements . income taxes the company estimates tax expense based on the amount it expects to owe various tax authorities . accrued taxes represent the net estimated amount due or to be received from taxing authorities . in estimating accrued taxes , management assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory , judicial and regulatory guidance in the context of our tax position . we determine our deferred income taxes using the balance sheet method , under which the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities , and changes in tax rates and laws are recognized in the period in which they occur . deferred income tax expense or benefit is recorded based on changes in deferred tax assets and liabilities between periods . the company records net deferred tax assets to the extent these assets will more likely than not be realized . in making the determination whether a deferred tax asset is more likely than not to be realized , management seeks to evaluate all available positive and negative evidence including the possibility 52 of future reversals of existing taxable temporary differences , projected future taxable income , tax planning strategies and recent financial results . the company reversed its deferred tax asset valuation allowance as of march 31 , 2014 due to management 's determination that it was “ more likely than not ” that the company 's deferred tax assets would be realized . “ more likely than not ” is defined as greater than 50 % probability of occurrence . a determination as to the ultimate realization of the deferred tax assets is dependent upon management 's judgment and evaluation of both positive and negative evidence , forecasts of future taxable income , applicable tax planning strategies , and an assessment of current and future economic and business conditions . the determination resulted from consideration of both the positive and negative evidence available that can be objectively verified . story_separator_special_tag considering the guidance in paragraphs 21-23 of accounting standards codification 740-10-30 , forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years . at march 31 , 2014 , the company was in a cumulative loss position over a three year period which is considered a significant piece of negative evidence that is difficult to overcome . accordingly , in its determination of the deferred tax asset , the company analyzed and evaluated the nature and timing of relevant facts and circumstances with respect to its cumulative loss . management considered the fact that the company was in a cumulative profit position over a two year period , with seven consecutive profitable quarters as part of its evaluation of the company 's three year cumulative loss . management also evaluated the unique and non-recurring the loss evidence as an important consideration in its determination . while this loss occurred , the nature and timing of the components of loss can be assessed as to whether these losses represent a continuing condition . management determined that the steps taken to strengthen its credit risk management process have addressed the conditions that existed when the loans were created and the losses were incurred . the outcome of this evaluation is an important factor in management 's determination that positive evidence overcomes the existence of the cumulative loss in the recent past . positive considerations also evaluated by management include the reduction of the inherent risk in the loan portfolio as indicated by the reduction of classified loans and associated credit costs , significant reductions in reo properties which contributes to lower reo holding costs , the company 's profitable operating performance during the past two years , termination of regulatory agreement and orders , utilization of excess low yielding cash balances to purchase higher yielding investment securities and increase loans receivable balances , as well as the sustained improvement in the economic conditions at the national and local level . as management determined that positive evidence outweighed the negative , financial forecasts and projections were also developed to assess the company 's capacity to realize the deferred tax assets . as a result of this analysis management concluded it was more likely than not that forecasted earnings performance would allow for the realization of the deferred tax assets in a timely manner . for additional information see notes 1 and 12 of the notes to the consolidated financial statements in item 8 of this form 10-k. recently adopted accounting pronouncements and new accounting pronouncements see note 1 of the notes to the consolidated financial statements in item 8 of this form 10-k for a description of recently adopted and new accounting pronouncements , including the respective dates of adoption and expected effects on the company 's financial position and results of operations . operating strategy fiscal year 2014 marked the 91st anniversary since the bank began operations in 1923. the historical emphasis had been on residential real estate lending . since 1998 , however , the company has been diversifying its loan portfolio through the expansion of its commercial and construction loan portfolios . at march 31 , 2014 , commercial and construction loans represented 78.0 % of total loans . commercial lending , including commercial real estate loans , typically has higher credit risk , greater interest margins and shorter terms than residential lending which can increase the loan portfolio 's profitability . the primary business strategy of the company is to provide comprehensive banking and related financial services within its primary market area . the company 's goal is to deliver returns to shareholders by managing problem assets , increasing higher-yielding assets ( in particular commercial real estate and commercial business loans ) , increasing core deposit balances , reducing expenses , hiring experienced employees with a commercial lending focus and exploring expansion opportunities . the company seeks to achieve these results by focusing on the following objectives : 53 focusing on asset quality . the company is focused on monitoring existing performing loans , resolving nonperforming loans and selling foreclosed assets . the company has aggressively sought to reduce its level of nonperforming assets through write-downs , collections , modifications and sales of nonperforming loans and real estate owned . the company has taken proactive steps to resolve its nonperforming loans , including negotiating repayment plans , forbearances , loan modifications and loan extensions with borrowers when appropriate , and accepting short payoffs on delinquent loans , particularly when such payoffs result in a smaller loss than foreclosure . in connection with the downturn in real estate markets , the company applied more conservative and stringent underwriting practices to new loans , including , among other things , increasing the amount of required collateral or equity requirements , reducing loan-to-value ratios and increasing debt service coverage ratios . the company has continued to reduce its exposure to land development and speculative construction loans . the total land development and speculative construction loan portfolios declined to $ 19.9 million at march 31 , 2014 as compared to $ 26.9 million at march 31 , 2013. nonperforming assets decreased $ 15.0 million to $ 21.8 million at march 31 , 2014 compared to $ 36.8 million at march 31 , 2013. however , there can be no assurance that the ongoing economic conditions affecting our borrowers will not result in future increases in nonperforming and classified loans . improving earnings by expanding product offerings . the company intends to prudently increase the percentage of its assets consisting of higher-yielding commercial real estate and commercial loans , which offer higher risk-adjusted returns , shorter maturities and more sensitivity to interest rate fluctuations , while maintaining compliance with its heightened regulatory capital requirements .
| these policies relate to the methodology for the determination of the allowance for loan losses , the valuation of investment securities , the valuation of real estate owned ( “ reo ” ) and foreclosed assets , goodwill valuation and the calculation of income taxes . these policies and the judgments , estimates and assumptions are described in greater detail in subsequent sections of management 's discussions and analysis contained herein and in the notes to the consolidated financial statements contained in item 8 of this form 10-k. in particular , note 1 of the notes to consolidated financial statements , “ summary of significant accounting policies , ” describes generally the company 's accounting policies . management believes that the judgments , estimates and assumptions used in the preparation of the company 's consolidated financial statements are appropriate given the factual circumstances at the time . however , given the sensitivity of the company 's consolidated financial statements to these critical accounting policies , the use of other judgments , estimates and assumptions could result in material differences in the company 's results of operations or financial condition . allowance for loan losses the allowance for loan losses is maintained at a level sufficient to provide for probable loan losses based on evaluating known and inherent risks in the loan portfolio . the allowance is provided based upon the company 's ongoing quarterly assessment of the pertinent factors underlying the quality of the loan portfolio . these factors include changes in the size and composition of the loan portfolio , delinquency levels , actual loan loss experience , current economic conditions and detailed analysis of individual loans for which full collectability may not be assured . the detailed analysis includes techniques to estimate the fair value of loan collateral and the existence of potential alternative sources of repayment . the allowance consists of specific , general and unallocated components . the specific component relates to loans that are considered impaired . for loans that are classified as impaired , an allowance is established when the discounted cash flows or collateral value of
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in this trial , we plan to enroll approximately 400 patients , who will be randomized to receive either monthly administration of zimura 2 mg or sham during the first 12 months of the trial , at which time the primary efficacy analysis of the mean rate of change of ga growth over 12 months , as measured by fundus autofluorescence based on readings at three time points : baseline , month 6 and month 12 , calculated using the square root transformation of the ga area , which is the same primary efficacy endpoint we used for the gather1 trial , will be performed . at month 12 , we plan to re-randomize patients in the zimura 2 mg arm to receive either monthly or every other month administration of zimura 2 mg. the final evaluation will take place at month 24. in june 2020 , we dosed the first patient in this trial . we are continuing to recruit and enroll patients and expect to complete patient enrollment during the third quarter of 2021. meanwhile , we continue to monitor the covid-19 pandemic closely and may need to slow down or stop patient enrollment in certain geographies depending on the local situation . we have 123 added sites to this trial due to the ongoing and variable nature of the covid-19 pandemic and its potential impact on patient recruitment and retention . star ( stgd1 - ongoing ) star , also known as oph2005 , is an international , randomized , double-masked , sham controlled , multi-center clinical trial evaluating the safety and efficacy of zimura for the treatment of stgd1 . star , similar to gather1 , was designed to be a phase 2b screening trial , with the potential to demonstrate statistically significant results depending on the magnitude of the potential benefit observed . if the results are positive and statistically significant , we believe this trial could potentially serve as a clinical trial that can support an application for marketing approval . we initially enrolled 95 patients in the star trial . all of these initially enrolled patients had completed their scheduled visits as of september 2020. in july 2020 , we reopened enrollment in this trial in the united states . we plan to enroll approximately 25 additional patients , with the goal of enrolling a total of approximately 120 patients . similar to gather2 , we continue to monitor the covid-19 pandemic closely and may need to slow down or stop patient enrollment in certain geographies depending on the local situation . newly enrolled patients will be randomized on a 1:1 basis to be treated with either zimura 4 mg or sham for 18 months . we have been and plan to remain masked to the treatment condition of all patients in the trial . in addition , we have not reviewed and do not plan to review or analyze efficacy data for any patients in the trial , until the 18-month data has been collected and analyzed for all patients enrolled in the trial . zimura manufacturing in early 2017 , we completed the small scale manufacture of multiple batches of zimura drug substance that we are using to support clinical drug supply for the gather2 trial and the expanded star trial . we have initiated activities in preparation for the scale-up and validation of the manufacturing process for zimura drug substance with a new manufacturer , with the goal of assessing whether this manufacturer can produce zimura drug substance at an adequate scale for future potential commercial use . if this manufacturer is successful , we intend for this manufacturer to be our primary supplier of zimura drug substance . we also recently engaged our historical contract manufacturer for zimura drug substance , agilent technologies , inc. , or agilent , for scale-up and validation activities . depending on the success of the scale-up activities by the new manufacturer , we may use either this new manufacturer , agilent or both for future supply of zimura drug substance . in addition , regardless of which manufacturer we use , we will need to demonstrate that the drug substance produced through the scaled-up process is analytically comparable to the drug substance we are currently using . we are continuing analytical method development and qualification with our contract manufacturers and laboratories . in 2020 , we engaged a contract manufacturer to provide us with additional supply of finished zimura drug product to support our needs for the gather2 trial and the expanded star trial . we expect that this contract manufacturer will be able to supply sufficient finished zimura drug product for these two clinical trials . in addition , we are planning to make a change to the existing vial used for zimura drug product , which we believe may allow us to support a more efficient fill/finish operation at a commercial scale . we have been in discussions with our historical fill/finish manufacturer , ajinomoto bio-pharma services , or ajinomoto , regarding its capacity to supply us with finished zimura drug product with the new vial for potential commercial use . we order the peg starting material used to make zimura drug substance from a sole source third-party manufacturer outside the united states . we currently procure the supply on a purchase order basis and are planning to enter into a long-term supply agreement with this manufacturer for the peg starting material . we are assessing this supplier 's capacity to supply the peg at the scale that we expect we will need for commercial manufacturing . ic-500 : htra1 inhibitor we are pursuing the preclinical development of ic-500 for the treatment of ga secondary to amd and potentially other age-related retinal diseases . we have selected ic-500 , the lead compound from our htra1 inhibitor program , which includes a number of small molecule compounds that show high affinity and specificity for htra1 when tested in vitro . story_separator_special_tag in early 2021 , we completed a review of our ic-500 development program , which we had previously designed to support monthly dosing in our planned first-in-human clinical trial . we believe that we may be able to establish , at an earlier stage of development , a dosing regimen for ic-500 with less frequent dosing than we had previously planned . as a result , we have revised our development plans and timelines for ic-500 with the goal of including both monthly dosing and a less frequent dosing regimen in our first-in-human clinical trial . currently , we are planning to initiate a number of preclinical pharmacokinetic , tolerability and target engagement studies for ic-500 . we are also conducting additional formulation 124 development activities and planning for cgmp manufacturing activities for ic-500 . based on current timelines and subject to successful preclinical development and cgmp manufacturing , we expect to file an ind for ic-500 during the second half of 2022. gene therapy research and development programs ic-100 : product candidate for rho-adrp we are pursuing the preclinical development of ic-100 , our novel aav gene therapy product candidate for the treatment of rho-adrp . we and the university of pennsylvania , or penn , have conducted a number of preclinical studies of ic-100 and a natural history study of rho-adrp patients . we are working with a gene therapy contract development and manufacturing organization , or cdmo , for preclinical and phase 1/2 clinical supply of ic-100 . we are completing manufacturing activities for a cgmp batch of ic-100 produced by our cdmo and completed toxicology studies of ic-100 . we are planning for a phase 1/2 clinical trial for ic-100 , including site selection and other startup activities . we are planning to meet with the fda to discuss our selected doses for a first-in-human clinical trial before we file an ind for ic-100 . based on current timelines and subject to feedback from the fda , we plan to file an ind for ic-100 and subject to regulatory review , we expect to begin patient enrollment in a phase 1/2 clinical trial in the second half of 2021. ic-200 : product candidate for best1-related irds we are pursuing the preclinical development of ic-200 , our novel aav gene therapy product candidate for the treatment of best1 -related irds . we and penn are conducting preclinical studies of ic-200 and natural history studies of patients with best1 -related irds . we are working with a gene therapy cdmo for preclinical and phase 1/2 clinical supply of ic-200 . we are completing manufacturing activities for a cgmp batch of ic-200 produced by our cdmo . we are conducting other ind-enabling activities , including a toxicology study of ic-200 . we are planning for a phase 1/2 clinical trial for ic-200 , including site selection and other startup activities . based on current timelines and subject to successful completion of preclinical development , we plan to file an ind and subject to regulatory review , begin patient enrollment in a phase 1/2 clinical trial for ic-200 in the second half of 2021. minigene programs aav vectors are generally limited as a delivery vehicle by the size of their genetic cargo , which is restricted to approximately 4,700 base pairs of genetic code . the use of minigenes seeks to deliver a smaller but still functional form of a larger gene packaged into a standard-size aav delivery vector . the goal of minigene therapy is to deliver a gene expressing a protein that , although smaller than the naturally occurring protein , is nonetheless functional for purposes of treating the associated disease . we are funding several sponsored research programs at the university of massachusetts medical school , or umms , seeking to use a minigene approach to develop new gene therapies for several orphan irds . the following is a summary of these minigene programs and their status : minicep290 ( lca10 ) : this program , which we refer to as the minicep290 program , is targeting lca10 , which is associated with mutations in the cep290 gene . in july 2019 , we entered into a license agreement with the university of massachusetts , or umass , for exclusive development and commercialization rights to this program . the sponsored research has yielded a number of minigene constructs that show encouraging results when tested in a mouse model . umms is conducting additional experiments to optimize constructs , which were delayed because of restrictions placed by umms on animal research activities as a result of the covid-19 pandemic . we currently expect to identify a lead construct during the second quarter of 2021. miniabca4 ( stgd1 ) : this program , which we refer to as the miniabca4 program , is targeting stgd1 , which is associated with mutations in the abca4 gene . umms generated and evaluated several abca4 minigene constructs in both in vitro and in vivo experiments , which yielded what we believe to be encouraging results . umms is conducting additional experiments to optimize the constructs . we expect to receive additional results from the miniabca4 program during the first half of 2021. miniush2a ( ush2a -related irds ) : this program , which we refer to as the miniush2a program , is targeting irds associated with mutations in the ush2a gene , including usher 2a and ush2a -associated non-syndromic autosomal recessive retinitis pigmentosa . some of the activities in this program were delayed as a result of the closure of umms 125 animal research laboratories due to the covid-19 pandemic . we expect to receive preliminary results from this program during the first half of 2021. in addition to the license agreement for the minicep290 program , umms has granted us an option to obtain an exclusive license to any patents or patent applications that result from any of these sponsored research programs .
| interest income interest income for the year ended december 31 , 2020 was $ 0.5 million compared to interest income of $ 2.2 million for the year ended december 31 , 2019. the decrease in interest income earned during the year ended december 31 , 2020 was primarily due to the decrease in interest rate yields . income tax benefit we recorded a benefit from income taxes of approximately $ 3.7 million and $ 0.1 million for the year ended december 31 , 2020 and 2019 , respectively , which primarily related to the settlement of local tax audits . comparison of years ended december 31 , 2019 and 2018 replace_table_token_23_th research and development expenses our research and development expenses were $ 39.6 million for the year ended december 31 , 2019 , a decrease of $ 2.1 million compared to $ 41.7 million for the year ended december 31 , 2018. the decrease in research and development expenses for the year ended december 31 , 2019 was primarily due to a $ 6.4 million decrease in costs associated with our htra1 inhibitor program , a $ 3.9 million decrease in costs associated with our zimura program and a $ 1.6 million decrease in professional services and consulting fees . the decreased costs for our htra1 inhibitor program related to the immediate expensing in 2018 of the in-process research and development costs of our htra1 inhibitor program acquired through our acquisition of inception 4 in 2018. the decreased costs for our zimura programs included lower costs related to a decrease in zimura manufacturing 133 activities and lower clinical trial costs as a result of the completion of the oph2007 trial during the fourth quarter of 2018 and the completion of patient recruitment for the oph2003 trial during the fourth quarter of 2018 and the associated reduction in site initiation costs . the decreased costs for our zimura programs were partially offset by increased costs associated with the continued progress of the oph2005 trial . the overall decrease in research and development expenses was partially offset by a $
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as a result , our auto insurance carrier customers reduced marketing spend and cost per sale targets the following year , ultimately impacting our revenue growth in the auto insurance vertical in 2017. despite these industry headwinds , we were able to grow our overall revenue by a small amount in 2017. following this industry downturn , loss ratios decreased in 2017 , and in 2018 , we saw an increase in auto insurance provider marketing spend and spend per referral in our marketplace . shift from indirect to direct distribution channels we have shifted the majority of our revenue from our indirect channel , consisting of aggregators and media networks , to our direct channel , consisting of carriers and agents . this shift has been an important part of our maturity and evolution . the benefits of direct distribution include improved consumer experience , higher pricing per referral , improved pricing stability , greater revenue predictability , richer data feedback , better performance and stronger relationships with providers and consumers . in 2018 , direct distribution accounted for 90 % of total revenue , as compared to 85 % in 2017 . 55 expanding consumer traffic our success depends in part on the growth of our consumer traffic , as measured by quote requests . we have historically increased consumer traffic to our marketplace by expanding existing advertising channels and adding new channels . we plan to continue to increase consumer traffic by leveraging the features and growing data assets of our platform . while we plan to increase consumer traffic over the long term , we also have the ability to decrease advertising , which would likely result in a decrease in quote requests from consumers targeted by such advertising , if we believe the revenue associated with such consumer traffic does not result in incremental profit to our business . increasing the number of insurance providers and their respective spend in our marketplace our success also depends on our ability to retain and grow our insurance provider network . we have expanded both the number of insurance providers and the spend per provider on our platform . while not a factor in our historical increases in revenue per quote request , we believe we have an opportunity to increase the number of referrals per quote request while increasing the bind rate per quote request , which would allow us to increase our revenue at low incremental cost . revenue per quote request we s eek to increase our revenue per quote request by increasing insurance provider bids and by increasing the number of referrals per quote request . insurance provider bids are influenced by the performance of our consumer referrals for insurance providers relative to other consumer acquisition channels , as well as by market conditions , insurance provider budgets and new customer acquisition targets . increases in revenue per quote request allow us to increase advertising and consumer traffic to our marketplace while maintaining or increasing profitability . cost per quote request we seek to efficiently acquire consumers by increasing the effectiveness of our consumer advertising and insurance marketplace . cost per quote request is influenced by the cost of advertising and the conversion rate of marketplace visitors who request an insurance quote . while we expect to minimize cost per quote request over the long term , we may incur increased cost per quote request in order to achieve profitability at relative volumes of quote requests and revenue per quote request . key business metrics we regularly review a number of metrics , including united states generally accepted accounting principles , or gaap , operating results and the key metrics listed below , to evaluate our business , measure our performance , identify trends affecting our business , formulate financial projections , and make operating and strategic decisions . some of these metrics are non-financial metrics or are financial metrics that are not defined by gaap . quote requests quote requests are consumer-submitted website forms that contain the data required to provide an insurance quote . as we attract more consumers to our platform and they complete quote requests , we are able to refer them to our insurance provider customers , selling more referrals while also collecting data , which we use to improve user experience , conversion rates and consumer satisfaction . in 2019 we expect to expand our definition of quote requests to include consumer quote requests we receive through offline channels such as telephone calls , quote requests via our everdrive app , and quote requests submitted directly to third-party partners . quote requests from telephone calls result from consumers dialing into one of our call center partners to request a quote . once we receive a call from a consumer , that 56 consumer is transferred to an insurance provider . these quote requests are different from our online quote requests because these consumers may never visit one of our websites or submit an online request for an insurance quote before being referred to an insurance provider . we do not receive or provide as much information about consumers whose quote requests originate from inbound telephone calls as opposed to online . everdrive users in select states are also now able to request insurance quotes directly through the app by agreeing to share their information with an insurance carrier offering insurance discounts based on driving habits . lastly , beginning in the first quarter of 2019 , we also started acquiring quote requests submitted to third party partners as part of our verified partner network . through our verified partner network , we acquire consumer quote requests that are submitted by consumers directly to select third parties . quote requests acquired by us from third-parties in our verified partner network contain substantially all the same information we obtain in our own online quote requests . at this time , neither calls , everdrive nor our verified partner network contributes meaningfully to our number of quote requests . story_separator_special_tag variable marketing margin we define variable marketing margin , or vmm , as revenue as reported in our statements of operations and comprehensive loss , less online advertising costs related to attracting consumers to our marketplace ( which are a component of total advertising expense , which is a component of sales and marketing expense ) . we utilize vmm to measure the financial return on our online advertising , specifically to measure the degree by which the revenue generated from consumer quote requests exceeds the cost to attract those consumers to our marketplace through online advertising . we also use vmm to measure the efficiency of individual online advertising and consumer acquisition sources and to make trade-off decisions to manage our return on advertising . we do not utilize vmm as a measure of our overall profitability . we present vmm because it is used extensively by our management and board of directors to manage our operating performance , including evaluating our operational performance against budgeted vmm and understanding the efficiency of our online advertising spend . vmm , as a non-gaap financial measure , should not be considered in isolation from , or as an alternative to , measures prepared in accordance with gaap . vmm should be considered together with other operating and financial performance measures presented in accordance with gaap . also , vmm may not necessarily be comparable to similarly titled measures presented by other companies . for further explanation of the uses and limitations of this measure and a reconciliation of our vmm to the most directly comparable gaap measure , revenue less advertising expense , please see non-gaap financial measures . beginning in the first quarter of 2019 , we will define vmm as revenue as reported in our statements of operations and comprehensive loss , less total advertising costs , a component of sales and marketing expense . this change captures the expense of new offline advertising channels , like direct response television advertising , and the cost of advertising in our everdrive app , from which we have begun to generate revenue through insurance offers to our safe-driving users . we expect variable marketing margin to increase in absolute dollars but to remain flat or decrease slightly as a percentage of revenue in 2019. adjusted ebitda we define adjusted ebitda as net loss , adjusted to exclude : stock-based compensation expense , depreciation and amortization expense , interest income and expense and the provision for ( benefit from ) income taxes . adjusted ebitda is a non-gaap financial measure that we present in this annual report on form 10-k to supplement the financial information we present on a gaap basis . we monitor and present adjusted ebitda because it is a key measure used by our management and board of directors to understand and evaluate our operating performance , to establish budgets and to develop operational goals for managing our business . adjusted ebitda should not be considered in isolation from , or as an alternative to , measures prepared in accordance with gaap . adjusted ebitda should be considered together with other operating and financial performance measures presented in accordance with gaap . also , adjusted ebitda may not necessarily be comparable to similarly titled measures presented by other companies . for further explanation of the uses and limitations of this measure and a reconciliation of our adjusted ebitda to the most directly comparable gaap measure , net income ( loss ) , please see non-gaap financial measures . 57 key components of our results of operations revenue we generate our revenue by selling consumer referrals to insurance provider customers , consisting of carriers and agents , as well as to indirect distributors . to simplify the quoting process for the consumer and improve performance for the provider , we are able to provide consumer-submitted quote request data along with each referral . we support three secure consumer referral formats : clicks : an online-to-online referral , with a handoff of the consumer to the provider 's website . data : an online-to-offline referral , with quote request data transmitted to the provider for follow-up . calls : an online-to-offline referral , with the consumer and provider connected by phone . we recognize revenue from consumer referrals at the time of delivery . our revenue is comprised of consumer referral fees from the automotive and home and life insurance verticals as follows : replace_table_token_1_th cost and operating expenses our cost and operating expenses consist of cost of revenue , sales and marketing , research and development , and general and administrative expenses . we allocate certain overhead expenses , such as rent , utilities , office supplies and depreciation and amortization of general office assets to cost of revenue and operating expense categories based on headcount . as a result , an overhead expense allocation is reflected in cost of revenue and each operating expense category . personnel-related costs included in cost of revenue and each operating expense category include wages , fringe benefit costs and stock-based compensation expense . cost of revenue cost of revenue is comprised primarily of the costs of operating our marketplace and delivering consumer referrals to our customers . these costs consist primarily of technology service costs including hosting , software , data services , and third-party call center costs . in addition , cost of revenue includes depreciation and amortization of our platform technology assets and personnel-related costs . sales and marketing sales and marketing expense consists primarily of advertising and marketing expenditures as well as personnel-related costs for employees engaged in sales , marketing , data analytics and consumer acquisition functions . advertising consists of variable costs that are related to attracting consumers to our marketplace and generating consumer quote requests , increasing downloads of our social safe-driving mobile app everdrive and promoting our marketplace to carriers and agents . advertising costs are expensed as incurred . marketing costs consist primarily of content development , public relations , memberships , and event costs .
| cost of revenue replace_table_token_7_th cost of revenue increased by $ 3.9 million from $ 7.7 million for the year ended december 31 , 2017 to $ 11.7 million for the year ended december 31 , 2018. cost of revenue increased in both dollars and as a percentage of revenue due primarily to increased third-party call center costs of $ 2.3 million which were primarily related to increased volume of call referrals , and to increased hosting costs of $ 1.4 million , which were primarily related to expenditures for continued improvements in our marketplace infrastructure . sales and marketing replace_table_token_8_th sales and marketing expenses increased by $ 31.3 million from $ 109.5 million for the year ended december 31 , 2017 to $ 140.7 million for the year ended december 31 , 2018. the increase in sales and marketing expense was primarily due to an increase in advertising expenditures of $ 26.8 million and an increase in personnel-related costs of $ 3.4 million . personnel-related costs for the years ended december 31 , 2018 and 2017 included stock-based compensation expense of $ 2.0 million and $ 0.8 million , respectively . stock-based compensation expense for the year ended december 31 , 2018 included $ 0.4 million related to awards with performance-based vesting conditions for which achievement of the performance condition became probable . research and development replace_table_token_9_th 63 research and development expenses increased by $ 5.0 million from $ 9.2 million for the year ended december 31 , 2017 to $ 14.2 million for the year ended december 31 , 2018. the increase in research and development expense in both dollars and as a percentage of revenue was primarily due to an increase in personnel-related costs of $ 4.2 million as a result of our continued hiring of research and development employees to further develop and enhance our marketplace websites and technology . personnel-related costs for the years ended december 31 , 2018 and 2017 included stock-based compensation expense of $ 2.0 million and $ 0.5 million , respectively . office and occupancy costs also increased by $ 0.3 million as
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for further information and a reconciliation to the most applicable financial measure under u.s. gaap , refer to our discussion under non-gaap financial measures in the `` results of operations `` section . free cash flow . free cash flow is net cash provided by operating activities less purchases of property and equipment and capitalized software . we use free cash flow , and ratios based on it , to conduct and evaluate our business because , although it is similar to cash flow from operations , we believe that it typically represents a more useful measure of cash flows because purchases of fixed assets , software developed for internal-use and website development costs are necessary components of our ongoing operations . free cash flow is not intended to represent the total increase or decrease in groupon 's cash balance for the applicable period . for further information and a reconciliation to the most applicable financial measure under u.s. gaap , refer to our discussion under non-gaap financial measures in the `` results of operations `` section . operating metrics active customers . we define active customers as unique user accounts that have purchased groupons during the trailing twelve months ( `` ttm '' ) . we consider this metric to be an important indicator of our business performance as it helps us to understand how the number of customers actively purchasing groupons is trending . 31 gross billings per average active customer . this metric represents the trailing twelve months gross billings generated per average active customer . this metric is calculated as the total gross billings generated in the trailing twelve months , divided by the average number of active customers in such time period . although we believe total gross billings , not trailing twelve months gross billings per average active customer , is a better indication of the overall growth of our marketplace over time , trailing twelve months gross billings per average active customer provides an opportunity to evaluate whether our growth is primarily driven by growth in total customers or in spend per customer in any given period . replace_table_token_4_th ( 1 ) reflects the total dollar value of customer purchases of goods and services , excluding applicable taxes and net of estimated refunds . ( 2 ) reflects the total number of unique accounts that have purchased groupons during the trailing twelve months . ( 3 ) reflects the total gross billings generated in the trailing twelve months per average active customer in the applicable period . factors affecting our performance deal sourcing and quality . we consider our merchant partner relationships to be a vital part of our business model and have made significant investments in order to expand the variety of tools that we can provide to our merchant partners . we depend on our ability to attract and retain merchants that are prepared to offer products or services on compelling terms , particularly as we attempt to expand our product and service offerings in order to create a more complete online marketplace for local commerce . we generally do not have long-term arrangements to guarantee availability of deals that offer attractive quality , value and variety to consumers or favorable payment terms to us . if new merchants do not find our marketing and promotional services effective , or if our existing merchants do not believe that utilizing our services provides them with a long-term increase in customers , revenue or profit , they may stop making offers through our marketplace . international operations . our international operations are critical to our revenue growth and our ability to achieve and maintain profitability . for the years ended december 31 , 2012 and 2011 , 50.1 % and 60.6 % , respectively , of our revenue was generated from our international segment . operating a global business requires management attention and resources and requires us to localize our services to conform to a wide variety of local cultures , business practices , laws and policies . the different commercial and internet infrastructure in other countries may make it more difficult for us to replicate our current and future business model . the increase in direct revenue transactions in north america contributed to the decrease in international revenue as a percentage of our total revenue during 2012 , as direct revenue is presented on a gross basis in our consolidated statements of operations . marketing costs . we must continue to acquire and retain customers who purchase groupons in order to increase revenue and achieve profitability . if consumers do not perceive our groupon offerings to be attractive , or if we fail to introduce new or more relevant deals , we may not be able to acquire or retain customers . in our limited operating history , we have not incurred significant marketing or other expense on initiatives designed to re-activate customers or increase the level of purchases by our existing customers . as we incur such expenditures , our business and profitability could be adversely affected . investment in growth . we have been a high-growth company and have aggressively invested , and intend to continue to invest , to support this growth . for example , we are developing a suite of merchant products , such as payment processing and point of sale , which require substantial investment and these products do not currently generate a material amount of revenue . we anticipate that we will make substantial investments in the foreseeable future as we continue to increase the number and variety of deals we offer each day , broaden our customer base , expand our marketing channels , expand our operations , hire additional employees and develop our technology . competitive pressure . our growth and geographical expansion have drawn a significant amount of attention to our business model . as a result , a substantial number of companies that attempt to replicate our business model have emerged around the world . we expect new competitors to emerge . story_separator_special_tag in addition to such competitors , we expect to increasingly compete against other large internet and technology‑based businesses that have launched initiatives which are directly competitive to our core business as well as our other categories and our suite of merchant products , such as payment processing and point of sale . we also 32 expect to compete against other internet sites that are focused on specific communities or interests and offer coupons or discount arrangements related to such communities or interests . components of results of operations third party and other revenue third party revenue arises from transactions in which we are acting as a third party marketing agent and consists of the net amount we retain from the sale of groupons after paying an agreed upon percentage of the purchase price to the featured merchant , excluding any applicable taxes and net of estimated refunds for which the merchant 's share is recoverable . other revenue primarily consists of advertising revenue . direct revenue direct revenue arises from transactions , primarily in our goods category , in which we are the merchant of record and consists of the gross amount we receive from the sale of groupons , excluding any applicable taxes and net of estimated refunds . cost of revenue cost of revenue is comprised of direct and indirect costs incurred to generate revenue . for direct revenue transactions , cost of revenue includes the purchase price of consumer products , warehousing , shipping costs and inventory markdowns . for third party revenue transactions , cost of revenue includes estimated refunds that are not recoverable from the merchant . other costs incurred to generate revenue , which include credit card processing fees , editorial costs , certain technology costs , web hosting , and other processing fees , are allocated to cost of third party revenue , direct revenue and other revenue in proportion to relative gross billings during the period . technology costs included in cost of revenue consist of a portion of the payroll and stock‑based compensation expense related to the company 's technology support personnel who are responsible for operating and maintaining the infrastructure of the company 's existing website . technology costs also include a portion of amortization expense from internal-use software related to website development . remaining technology costs included within cost of revenue include email distribution costs . editorial costs consist of a portion of the payroll and stock‑based compensation expense related to the company 's editorial personnel , as these staff members are primarily dedicated to drafting and promoting deals . marketing marketing expense consists primarily of targeted online marketing costs , such as sponsored search , advertising on social networking sites , email marketing campaigns , affiliate programs and , to a lesser extent , offline marketing costs such as television , radio and print advertising . marketing payroll costs , including related stock‑based compensation expense , are also classified as marketing expense . we record these costs within `` marketing '' on the consolidated statements of operations when incurred . discounts provided to subscribers , which are a component of our subscriber activation marketing activities , are classified as reductions to revenue in our consolidated statements of operations . marketing is the primary method by which we acquire customers , and as such , is a critical part of our growth strategy . selling , general and administrative selling expenses reported within `` selling , general and administrative '' on the consolidated statements of operations consist of payroll and sales commissions for inside and outside sales representatives , as well as costs associated with supporting the sales function such as technology , telecommunications and travel . general and administrative expenses consist of payroll and related expenses for employees involved in general corporate functions , including accounting , finance , tax , legal and human resources , among others . additional costs included in general and administrative include subscriber service and operations , depreciation and amortization expense , rent , professional fees , litigation costs , travel and entertainment , stock-based compensation expense , charitable contributions , recruiting , office supplies , maintenance and other general corporate costs . acquisition‑related acquisition-related expense ( benefit ) , net , represents the change in the fair value of contingent consideration arrangements related to business combinations , see note 13 `` fair value measurements. `` 33 interest and other income interest and other income , net , generally consists of interest income on our cash and cash equivalents and foreign currency gains and losses resulting from foreign currency transactions , which are denominated in currencies other than our functional currencies . during the year ended december 31 , 2012 , interest and other income also included a $ 50.6 million impairment of a cost method investment and a gain of $ 56.0 million resulting from the e-commerce transaction , which is described in note 6 , `` investments. `` story_separator_special_tag style= '' line-height:120 % ; padding-bottom:16px ; text-align : justify ; text-indent:48px ; font-size:10pt ; '' > direct revenue direct revenue was $ 454.7 million for the year ended december 31 , 2012 , as compared to $ 20.8 million for the year ended december 31 , 2011 due to the launch of goods in the second half of 2011. we are often the merchant of record for transactions in the goods category , such that the resulting revenue is reported on a gross basis within direct revenue . direct revenue deals have continued to grow , both overall and as a percentage of our revenue , through the continued growth of our goods category and we expect that trend to continue . in addition , we expect that any growth in direct revenue will result in a smaller percentage increase in income from operations than growth in third party revenue because direct revenue includes the entire amount of gross billings , before deducting the cost of the related inventory , while third party revenue is net of the merchant 's share of the transaction price .
| 35 gross billings by segment for each of the years was as follows : replace_table_token_8_th 2012 compared to 2011 north america north america segment gross billings increased by $ 811.2 million to $ 2,373.2 million for the year ended december 31 , 2012 , as compared to $ 1,561.9 million for the year ended december 31 , 2011 . the increase in gross billings was largely attributable to an increase in active customers and growth in our direct revenue . international international segment gross billings increased by $ 583.5 million to $ 3,007.0 million for the year ended december 31 , 2012 , as compared to $ 2,423.6 million for the year ended december 31 , 2011 . the increase in gross billings was largely attributable to an increase in active customers . 2011 compared to 2010 north america north america segment gross billings increased by $ 1,086.9 million to $ 1,561.9 million for the year ended december 31 , 2011 , as compared to $ 475.0 million for the year ended december 31 , 2010 . the increase in gross billings reflected growth in our daily deals business , which was largely attributable to expanding the scale of our business through entering into new domestic markets and increasing active customers . international international segment gross billings increased by $ 2,153.2 million to $ 2,423.6 million for the year ended december 31 , 2011 , as compared to $ 270.3 million for the year ended december 31 , 2010 . the main driver of the increase was that for the year ended december 31 , 2010 , we only had a partial year of operations in the segment due to the timing of our international acquisitions . revenue we generate revenue from third party revenue deals , direct revenue deals and other transactions . revenue for each of the years was as follows : replace_table_token_9_th 36 2012 compared to 2011 revenue increased by $ 724.0 million to $ 2,334.5
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our active pharmaceutical ingredient , or api , for our nuplazid ( pimavanserin ) program has been manufactured in switzerland for over 10 years and we anticipate continuing to manufacture our api in switzerland as we transition to a commercial organization . acadia pharmaceuticals gmbh will manage the worldwide supply chain of pimavanserin api . we believe the establishment of acadia pharmaceuticals gmbh , as well as the licensing of worldwide intellectual property rights for pimavanserin , will allow us to build a platform for long-term operational and financial efficiencies . we have incurred substantial operating losses since our inception due in large part to expenditures for our research and development activities . as of december 31 , 2015 , we had an accumulated deficit of $ 662.6 million . we expect to continue to incur operating losses for at least the next few years as we advance our programs and incur significant development and commercialization costs . revenues we have not generated any revenues from product sales to date . our revenues to date have been generated substantially from payments under our current and past collaboration agreements . our collaboration agreement with allergan focused on muscarinic product candidates for the treatment of glaucoma terminated in 2015 and we will not be receiving any further payments under that agreement . our continuing collaboration agreement with allergan involves the development of product candidates in the area of chronic pain . under this continuing agreement , we are eligible to receive payments upon achievement of development and regulatory milestones , as well as royalties on future product sales , if any . we no longer receive research funding from this agreement and additional payments are dependent upon the advancement of an applicable product candidate . our continuing collaboration agreement with allergan in chronic pain is subject to termination upon notice by allergan . license fees license fees consist of our milestone payments due to the ipsen group under our 2006 license agreement , pursuant to which we licensed certain intellectual property rights that complement our patent portfolio for our serotonin platform , including nuplazid . in connection with the fda 's acceptance of the filing of the nda for nuplazid in the fourth quarter of 2015 , we paid a $ 2.5 million milestone to the ipsen group , and a potential future milestone payment of $ 8.0 million would be payable upon obtaining regulatory approval from the fda of our nda for nuplazid . if nuplazid is approved , then we would also make royalty payments to the ipsen group of up to two percent on future net product sales , if any . 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 , nuplazid ( 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 , 54 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 summarizes our research and development expenses by project for the years ended december 31 , 2015 , 2014 , and 2013 ( in thousands ) : replace_table_token_4_th although our nda for nuplazid has been accepted for filing by the fda , at this time , due to the risks 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 , including work necessary to support the review of the nda . 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 those within alzheimer 's disease 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 supporting 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 the commercial potential of each opportunity 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 supporting the fda 's review of our 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 those within schizophrenia and other alzheimer 's disease indications . story_separator_special_tag 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 launch of nuplazid and we are currently expanding our commercial organization and preparing to build a specialty sales force in the united states that will focus on promoting nuplazid , if approved by the fda . we expect our general and 55 administrative expenses to increase in future periods to support activities associated with our planned launch of nuplazid and our further development of pimavanserin in indications other than parkinson 's disease psychosis . 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 . research and development accruals we estimate certain costs and expenses and accrue for these liabilities 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 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 future to fund our operations . our future capital requirements will depend on , and could increase significantly as a result of , many factors , including : the progress in , and the costs of , our ongoing and planned development activities for pimavanserin , planned commercialization activities for nuplazid , and other research and development programs ; the costs of preparing applications for regulatory approvals for nuplazid and other product candidates , as well as the costs required to support review of such applications ; the costs of establishing , or contracting for , sales and marketing capabilities for nuplazid or other product candidates ; our ability to obtain regulatory approval for , and generate product sales from , nuplazid or other product candidates ; the costs of acquiring additional product candidates or research and development programs ; the scope , prioritization and number of research and development programs ; the ability of our collaborators and us to reach the milestones and other events or developments triggering payments under our collaboration or license agreements , or our collaborators ' ability to make payments under these agreements ; our ability to enter into new , and to maintain existing , collaboration and license agreements ; the extent to which we are obligated to reimburse collaborators or collaborators are obligated to reimburse us for costs under collaboration agreements ; the costs involved in filing , prosecuting , enforcing and defending patent claims and other intellectual property rights ; the costs of securing manufacturing arrangements for clinical or commercial production of nuplazid or other product candidates ; and the costs associated with litigation , including the costs incurred in defending against claims made in the consolidated putative class action that was commenced following our announcement of the update to the timing of our planned nda submission to the fda for nuplazid and the subsequent decline of the price of our common stock in march 2015 . 58 unless and until we can generate significant cash from our operations , we expect to satisfy our future cash needs through our existing cash , cash equivalents and investment securities , strategic collaborations , public or private sales of our securities , debt financings , grant funding , or by licensing all or a portion of our product candidates or technology .
| this increase was primarily due to an increase of $ 15.8 million in personnel and related costs and stock compensation expense associated with our expanded research and development organization , partially offset by pimavanserin manufacturing development costs incurred in 2014 not incurred in 2015. we expect our research and development expenses to increase in future periods as we continue to pursue the development of pimavanserin , including supporting the fda 's review of our 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 those within alzheimer 's disease and schizophrenia , as well as the development of our other product candidates . general and administrative expenses general and administrative expenses increased to $ 88.3 million in 2015 , including $ 28.0 million in stock-based compensation , from $ 32.7 million in 2014 , including $ 10.8 million in stock-based compensation . this increase was due to increases in personnel and related costs of $ 35.3 million and increases in external services costs of $ 20.3 million . contributing to the increase in personnel costs was $ 9.6 million in expense incurred in connection with the transition agreement we entered into with our former chief executive officer upon his retirement in the first quarter of 2015. included in this compensation expense of $ 9.6 million was $ 9.0 million in stock-based compensation expense representing the fair value of the outstanding options expected to vest over the term of the transition agreement as valued on his retirement date . excluding the expense incurred in connection with the transition agreement with our former chief executive officer , the increases in personnel costs and external services costs were largely related to our commercial preparations for the planned launch of nuplazid . 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 , 2014 and 2013 revenues revenues decreased to $
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to augment our existing manufacturing capabilities , we have constructed building 55 , a 50,000 square foot large-scale manufacturing facility on our lansing campus . in july 2010 , we entered into an agreement with the biomedical advanced research and development authority , or barda , to finalize development of and obtain regulatory approval for large-scale manufacturing of biothrax in building 55. this agreement provides for funding from barda of up to approximately $ 107 million over a five-year contract term , including a two-year base period of performance valued at approximately $ 55 million . prior to the award , we incurred costs of approximately $ 83 million for the building and associated capital equipment , as well as for validation and qualification activities required for regulatory approval and initiation of commercial manufacture of biothrax . in november 2009 , we purchased a building in baltimore , maryland for product development and manufacturing purposes , and have begun renovation and improvement of this facility . our specific plans for this facility will be contingent on the progress of our existing development programs and the outcome of our efforts to acquire new product candidates . as we proceed with this project , we expect the costs to be substantial and will likely seek external sources of funds to finance the project . we also own two buildings in frederick , maryland that we currently expect to sell . accordingly , we have classified these buildings as assets held for sale in our consolidated balance sheets . we recorded the assets held for sale at fair market value , based on factors that include recent purchase offers , less estimated selling costs , and recorded impairment charges of approximately $ 1.2 million and $ 7.3 million for the years ended december 31 , 2010 and 2009 , respectively . we continue to actively seek to sell these buildings . critical accounting policies and estimates our discussion and analysis of our financial condition and results of operations are based on our financial statements , which have been prepared in accordance with accounting principles generally accepted in the u.s. 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 ongoing basis , we evaluate our estimates and judgments , including those related to accrued expenses , income taxes , stock-based compensation , investments , in-process research and development , goodwill and contingent value rights . we based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . we believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements . revenue recognition we recognize revenues from product sales if four basic criteria have been met : § there is persuasive evidence of an arrangement ; § delivery has occurred or title has passed to our customer based on contract terms ; § the fee is fixed and determinable and no further obligation exists ; and § collectibility is reasonably assured . we have generated biothrax sales revenues under u.s. government contracts with hhs and the dod . under our current contract with hhs , we invoice hhs and recognize the related revenues upon acceptance by the government at the delivery site , at which time title to the product passes to hhs . from time to time , we are awarded reimbursement contracts for services and development grant contracts with government entities and philanthropic organizations . under these contracts , we typically are reimbursed for our costs as we perform specific development activities , and we may also be entitled to additional fees . revenue on our reimbursable contracts is recognized as costs are incurred , generally based on the allowable costs incurred during the period , plus any recognizable earned fee . the amounts that we receive under these contracts vary greatly from quarter to quarter , depending on the scope and nature of the work performed . we record the reimbursement of our costs and any associated fees as contracts and grants revenue and the associated costs as research and development expense . we also generate revenues from our collaborations with pfizer and abbott . certain internal and external research and development costs and patent costs are reimbursed in connection with our collaboration agreements . reimbursed costs under the pfizer collaboration are recognized as revenue in the period in which the costs are incurred . our collaboration with abbott provides for equal cost sharing of development and clinical costs . each quarter we and abbott report to the other party the total costs incurred for development costs . the total spending by each party is then compared to the spending by the other party . in the event that our spending for a given quarter exceeds the spending of abbott , we record a net receivable in our financial statements for the difference between our spending and 50 % of the total spending for the period , and recognize revenue equal to this amount . if abbott 's spending for the quarterly period exceeds our spending , we record a net payable in our financial statements equal to the difference between our spending and 50 % of the total spending , and record additional research and development expenses in this amount . as a result , our revenues and research and development expenses may fluctuate depending on which party in the collaboration is incurring the majority of the development costs in any particular quarterly period . story_separator_special_tag contracts and grants revenues are subject to the estimation processes to the extent that the reimbursable costs underlying these revenues are incurred but not billed and agreed to on a timely basis , and are subject to change in future periods when actual costs are known . to date we have not made material adjustments to these estimates . we recognize revenues from the achievement of research and development milestones , if deemed substantive , when the milestones are achieved . if not deemed substantive , we recognize revenue on a straight line basis over the remaining expected term of continued involvement in the research and development process . inventories inventories are stated at the lower of cost or market , with cost being determined using a standard cost method , which approximates average cost . average cost consists primarily of material , labor and manufacturing overhead expenses and includes the services and products of third party suppliers . we analyze our inventory levels quarterly and write down inventory that has become obsolete , inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected customer demand . we also write off costs related to expired inventory . we capitalize the costs associated with the manufacture of biothrax as inventory from the initiation of the manufacturing process through the completion of manufacturing , labeling and packaging . income taxes under the asset and liability method of income tax accounting , deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax basis of assets and liabilities and are measured using the tax rates and laws that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled . a net deferred tax asset or liability is reported on the balance sheet . our deferred tax assets include the unamortized portion of in-process research and development expenses , the anticipated future benefit of the net operating losses and other timing differences between the financial reporting and tax basis of assets and liabilities . we have historically incurred net operating losses for income tax purposes in some states , primarily maryland , and in some foreign jurisdictions , primarily the united kingdom . in connection with our october 2010 acquisition of trubion pharmaceuticals , inc. , or trubion , we acquired significant federal net operating losses and research and development tax credits along with other tax attributes . the amount of the deferred tax assets on our balance sheet reflects our expectations regarding our ability to use our net operating losses and research and development tax credit carryforwards , including those acquired in our acquisition of trubion , to offset future taxable income . the applicable tax rules in particular jurisdictions limit our ability to use net operating losses and research and development tax credit carryforwards as a result of ownership changes . in particular , we believe that these rules will significantly limit our ability to use net operating losses generated by microscience limited , or microscience , and antex biologics , inc. , or antex , prior to our acquisition of microscience in june 2005 and our acquisition of substantially all of the assets of antex in may 2003. we do not expect that these limitation rules will significantly limit the net operating losses and research and development tax credit carryforwards acquired in the trubion acquisition . we review our deferred tax assets on a quarterly basis to assess our ability to realize the benefit from these deferred tax assets . if we determine that it is more likely than not that the amount of our expected future taxable income will not be sufficient to allow us to fully utilize our deferred tax assets , we increase our valuation allowance against deferred tax assets by recording a provision for income taxes on our income statement , which reduces net income or increases net loss for that period and reduces our deferred tax assets on our balance sheet . if we determine that the amount of our expected future taxable income will allow us to utilize net operating losses in excess of our net deferred tax assets , we reduce our valuation allowance by recording a benefit from income taxes on our income statement , which increases net income or reduces net loss for that period and increases our deferred tax assets on our balance sheet . uncertainty in income taxes is accounted for using a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return . we recognize in our financial statements the impact of a tax position if that position is more likely than not of being sustained on audit , based on the technical merits of the position . contingent value rights in accordance with the terms of our acquisition of trubion , in october 2010 , we have committed to make potential future contingent value right , or cvr , payments of up to $ 38.7 million to former shareholders and stock option holders of trubion . payments under these agreements generally become due and payable only upon achievement of certain developmental , regulatory or commercial milestones . because the achievement of these milestones has not occurred as of december 31 , 2010 , the obligation for these contingencies has been recorded in our financial statements at fair value . the fair value model used for the cvr obligations is based on a discounted cash flow model that has been risk adjusted based on the probability of achievement of the milestones . we re-evaluate the fair value of the cvr obligations on a quarterly basis .
| contracts and grants revenues for 2009 consisted of $ 17.4 million in development contract revenue from niaid and barda and $ 211,000 from sanofi pasteur under a collaboration agreement that was terminated in december 2008. cost of product sales cost of product sales increased by $ 852,000 , or 2 % , to $ 47.1 million for 2010 from $ 46.3 million for 2009. this increase was primarily attributable to the 15 % increase in the number of biothrax doses sold , substantially offset by a decrease in cost per dose sold associated with increased production yield in the period during which the doses sold were produced . research and development expenses research and development expenses increased by $ 14.7 million , or 20 % , to $ 89.3 million for 2010 from $ 74.6 million for 2009. this increase primarily reflects higher contract service and personnel costs , and includes increased expenses of $ 7.7 million on product candidates that are categorized in the biodefense segment , increased expenses of $ 6.9 million on product candidates and technology platform development activities categorized in the biosciences segment , and increased expenses of $ 39,000 in other research and development , which are in support of central research and development activities . the increase in spending on biodefense product candidates , detailed in the table below , was primarily attributable to the timing of development efforts on various programs as we completed various studies and prepared for subsequent studies and trials . the increase in spending for our nuthrax program was due to the conduct of stability and clinical studies along with potency assay development . the increase in spending for our large-scale manufacturing for biothrax program was primarily due to characterization assay and process development that increased subsequent to the associated development contract award in july 2010. the decrease in spending for biothrax related programs was related to timing of clinical and non-clinical studies to support applications for marketing approval of these programs . the decrease in spending for our previthrax product candidate was primarily due to reduced spending while awaiting a development contract award from barda , which we received in september 2010. the increase in spending for our double mutant recombinant protective antigen anthrax vaccine product
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in agreements that specify milestones , we evaluate whether the milestones are considered probable of being achieved and estimate the amount to be included in the transaction price using the most likely amount method . if it is probable that a significant revenue reversal would not occur , the value of the associated milestone is recognized at a point in time . non-refundable milestone payments related to arrangements under which we have continuing performance obligations would be deferred and recognized over the period of performance . milestone payments that are not within our control , such as submission for approval to regulators by a partner or approvals from regulators , are not considered probable of being achieved until those submissions are submitted by the customer or approvals are received . research and development expenses research and development expenses consist of costs incurred for our product and formulation development activities , including regulatory support . we expense research and development costs as incurred . advanced payments for good and services that will be used in future research and development activities are initially recorded as prepaid expenses and expensed as the activity is performed or when the goods have been received . in 2018 and 2017 , these costs included salaries and related costs for personnel in research and development and regulatory functions . in the fourth quarter of 2018 , we shifted the focus of these personnel to revenue-generating activities and , as such , these costs are included as a cost of sales beginning in the fourth quarter of 2018. selling , general and administrative expenses selling , general and administrative expenses consists of salaries and related costs for corporate administrative , public company costs , business development personnel as well as legal , patent-related expenses and consulting fees . public company costs include compliance , auditing services , tax services , insurance and investor relations . as a significant portion of these corporate public company costs related to a more complex organization with multiple segments , these costs going forward are expected to be in the range of mid to upper single digits , excluding non-cash expenses and new initiatives as they relate to our operations as a stand-alone public company . we expect our business development expenses to increase in 2020 as we continue to expand our sales team in various geographies , in anticipation of business growth from new formulation and development capabilities . amortization of intangible assets we recognize amortization expense related to the intangible asset for our contract manufacturing relationships on a straight-line basis over an estimated useful life of six years . change in fair value of warrants we have classified as liabilities certain warrants outstanding that contain a contingent net cash settlement feature , upon a change in control . the fair value of these warrants are remeasured through settlement or expiration with changes in fair value recognized as a period charge within the consolidated statements of operations and comprehensive loss . all remaining liability classified warrants were exercised in november 2019. a fair value determination at the time of the exercise occurred and is included in the change in warrant valuation for the year ended december 31 , 2019. interest expense , net interest expense , net for the twelve months ended december 31 , 2019 and 2018 was a result of interest expense incurred on our athyrium senior secured term loan and the amortization of the related financing costs . interest expense for the twelve months ended december 31 , 2017 was a result of interest expense incurred on our orbimed and athyrium senior secured term loans and the amortization of the related financing costs . in addition , due to the november 2017 refinancing of our debt , in 2017 we incurred one- 32 time charges for fees related to early extinguishment of the orbimed debt and the non-cash write-off of orbimed deferred financing costs . net operating losses and tax carryforwards as of december 31 , 2019 , we had approximately $ 121.6 million of federal net operating loss carryforwards . we also had federal and state research and development tax credit carryforwards of $ 4.4 million available to offset future taxable income . u.s. tax laws limit the time during which these carryforwards may be utilized against future taxes . with the exception of the 2019 and 2018 federal net operating losses , which have an indefinite carry forward period , these federal and state net operating loss and federal and state tax credit carryforwards will begin to expire at various dates beginning in 2028 , if not utilized . we believe that it is more likely than not that the deferred income tax assets associated with our u.s. operations will not be realized , and as such , there is a full valuation allowance against our u.s. deferred tax assets . story_separator_special_tag roman ; font-size:10pt ; text-transform : none ; font-variant : normal ; '' > interest expense , net . interest expense , net was $ 8.1 million and $ 11.7 million during the twelve months ended december 31 , 2018 and 2017 , respectively . the decrease in interest expense , net , was due to the refinancing of our prior credit agreement with orbimed in 2017 , which resulted in a one-time charge totaling approximately $ 6.8 million for fees related to early extinguishment of debt and the non-cash write-off of related deferred financing costs . this was partially offset by the higher principal balance on our 34 athyrium seni or secured term loan and amortization of the related financing costs in 2018 contribut ing to an increase in interest expense , net . income tax expense . income tax expense from continuing operations was $ 17.4 million and $ 7.3 million for the twelve months ended december 31 , 2018 and 2017 , respectively . income tax expense from continuing operations for the twelve months ended december 31 , 2018 was attributable to the valuation allowance recorded during such period . story_separator_special_tag income tax expense from continuing operations for the twelve months ended december 31 , 2017 primarily relates to the impact of the change in the u.s. tax rate due to the tax cuts and jobs act of 2017 , which resulted in a non-cash adjustment of $ 7.9 million for the remeasurement of the net deferred tax items using the recently enacted 21 % statutory tax rate . liquidity and capital resources as of december 31 , 2019 , we had $ 19.1 million in cash and cash equivalents . since inception through december 31 , 2019 , we have financed our product development , operations and capital expenditures primarily from sales of equity and debt securities , including sales of our common stock with net proceeds of $ 133.5 million , and term loans made under our previous and existing credit facilities , including our credit facility with athyrium with an outstanding balance of $ 125 million and contributions of excess cash flow . during the twelve months ended december 31 , 2019 , our capital expenditures were $ 8.3 million , which increased primarily related to expansion of the capabilities to support anticipated new business activities . we may require additional financing and may raise such additional funds through debt refinancing , bank or other loans , through strategic research and development , licensing , including out-licensing activities , sale of assets and or marketing arrangements or through public or private sales of equity or debt securities from time to time . financing may not be available on acceptable terms , or at all , and our failure to raise capital when needed could materially adversely impact our growth plans and our financial condition or results of operations . additional debt or equity financing , if available , may be dilutive to the holders of our common stock and may involve significant cash payment obligations and covenants that restrict our ability to operate our business or access to capital . on november 17 , 2017 , we entered into our credit agreement with athyrium , pursuant to which we drew upon an initial $ 60.0 million term loan . we used the proceeds from the initial term loan to ( i ) repay in full all outstanding indebtedness under our credit facility with orbimed of approximately $ 31.7 million , which included the remaining debt principal balance of $ 27.3 million and early termination charges of $ 4.4 million and ( ii ) pay transaction fees associated with the credit facility with athyrium of approximately $ 4.2 million . in december 2018 we amended the credit agreement with athyrium and drew upon a $ 10.0 million term b-1 loan . in february 2019 , we entered into a second amendment to the credit agreement with athyrium pursuant to which the credit facility was ( i ) expanded from $ 100.0 million to $ 125.0 million and ( ii ) the two additional $ 15.0 million tranches were restructured into a $ 55.0 million term b-2 loan , which was funded on the date of execution of the second amendment , net of the original issue discount of $ 11.4 million . beginning on march 31 , 2021 , we must repay the outstanding principal amount in quarterly installments of $ 3.0 million with the outstanding principal balance due on march 31 , 2023. as of december 31 , 2019 , we had $ 125.0 million outstanding principal under our credit agreement with athyrium . sources and uses of cash cash provided by operations from continuing operations was $ 16.2 million , $ 11.0 million and $ 19.1 million for the twelve months ended december 31 , 2019 , 2018 and 2017 , respectively , which represents our operating income from continuing operations plus stock-based compensation , depreciation , non-cash interest expense , loss on early extinguishment of debt , changes in fair value of warrants and amortization of intangibles , as well as changes in operating assets and liabilities . cash used in investing activities from continuing operations was $ 8.3 million , $ 3.7 million and $ 9.0 million for the twelve months ended december 31 , 2019 , 2018 and 2017 , respectively , and reflected cash used for the purchase of short-term investments offset by maturities/redemption of investments and for the purchase of property and equipment . there was $ 26.0 million of cash provided by financing activities from continuing operations in the twelve months ended december 31 , 2019 from net proceeds from issuance of long-term debt from athyrium of $ 43.6 million , and net proceeds of $ 6.0 million from the exercise of options , which was partially offset by the contribution of $ 19.0 million to baudax bio in connection with the separation , deferred financing costs of $ 2.9 million from the athyrium transaction and $ 1.7 million of payments of withholdings on shares withheld for income taxes . cash provided by financing activities was $ 27.7 million for the twelve months ended december 31 , 2018 from continuing operations , from proceeds from issuance of long-term debt from athyrium of $ 10.0 million , net proceeds of $ 17.0 million from the sale of shares of common stock through our common stock purchase agreement with aspire capital and proceeds of $ 1.8 million from the exercise of options , which was partially offset by deferred financing costs of $ 1.0 million . cash provided by financing activities from continuing operations for the twelve months ended december 31 , 2017 was $ 23.9 35 million from proceeds from issuance of long-term debt from athyrium of $ 60 million , offset by repayment of long term debt for the payoff of the orbimed debt of $ 27.3 million , fees related to early extinguishment of debt paid to orbimed of $ 4 . 4 million and deferred financing costs from the athyrium transaction of $ 4.2 million .
| amortization expense was $ 2.6 million for each of the twelve months ended december 31 , 2019 and 2018 , respectively , which was exclusively related to the amortization of our royalties and contract manufacturing relationships intangible asset over its estimated useful life . 33 interest expense , net . interest expense , net was $ 19.0 million and $ 8.1 million during the twelve months ended december 31 , 2019 and 2018 , respectively . the in crease in interest expense , net , was due to a higher principal balance on our athyrium senior secured term loan and amortization of the related financing costs . income tax expense . as a result of recording a full valuation allowance , there was no income tax benefit for the twelve months ended december 31 , 2019. for the twelve months ended december 31 , 2018 , the income tax expense was $ 17.4 million , which reflects the recording of a full valuation allowance in the fourth quarter of 2018. as discussed in note 17 to the consolidated financial statements included in this form 10-k , we believe that it is more likely than not that the deferred income tax assets associated with our u.s. operations will not be realized , and as such , there is a full valuation allowance against our u.s. deferred tax assets . comparison of the years ended december 31 , 2018 and 2017 : replace_table_token_2_th revenue and cost of sales . our revenues were $ 77.3 million and $ 71.8 million and cost of sales were $ 43.2 million a $ 38.2 million for the twelve months ended december 31 , 2018 and 2017 , respectively . the $ 5.5 million increase in 2018 revenue versus 2017 was primarily due to higher profit sharing royalties as a result of stronger sales volumes and pricing of one of our products as well as increased manufacturing revenue . these increases were partially offset by decreased royalty revenue due to a change in
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this widespread reduction in spending had a negative impact on our financial results and new orders from the second half of 2014 through 2016. although the probability of any cyclical change in energy prices and the extent and duration of such a change are difficult to predict , there are signs that the market may be recovering from the recent downturn . the announcement by the organization of petroleum exporting countries ( `` opec '' ) and other unaffiliated countries that their production levels would be capped or reduced has led to a modest increase in oil prices . as a result , a number of exploration and production companies have announced increases in their capital budgets for 2017 based on a more optimistic assessment of the direction of oil prices in the near to medium term . should this additional spending materialize and continue , our customers , led by those active in north american land basins , should see increased activity and require additional consumable and capital equipment from the company and other equipment manufacturers . activity in high cost areas , however , especially offshore and in some international areas , is expected to lag any recovery . influenced by the expectation of higher energy prices , our inbound orders increased in the fourth quarter . the pace and strength of a recovery in energy markets and in our results , however , remain uncertain as we enter 2017. the table below shows average crude oil and natural gas prices for west texas intermediate crude oil ( wti ) , united kingdom brent crude oil ( brent ) , and henry hub natural gas : replace_table_token_7_th average wti and brent oil prices were 11 % and 17 % lower , respectively , in 2016 than 2015. the wti oil price was $ 53.75 and $ 37.13 per barrel on december 31 , 2016 and 2015 , respectively . average natural gas prices were 4 % lower in 2016 than 2015. primarily as a result of increasing supply and insufficient demand growth , crude oil prices began a significant decline in the second half of 2014 and have declined 50 % from peak prices in june 2014 to the end of december 2016. the precipitous decline in oil and natural gas prices resulted in a significant decrease in exploration and production activity and spending by our customers , causing us to experience a significant adverse impact on our results of operation during that period . 35 the table below shows the average number of active drilling rigs , based on the weekly baker hughes incorporated rig count , operating by geographic area and drilling for different purposes . replace_table_token_8_th as a result of lower oil and natural gas prices , the average u.s. rig count decreased 48 % from 2015 , while the international rig count and the canadian rig count decreased 18 % and 32 % , respectively , from 2015. the u.s. rig count declined 79 % from the peak of 1,931 rigs in the third quarter of 2014 to the trough of 404 rigs in the second quarter of 2016. since then the number of working rigs has increased steadily to 658 rigs at the end of december 2016. a substantial portion of our revenue is impacted by the level of rig activity and the number of wells completed . while the u.s. land rig count has started to recover , it remains low compared to historical norms . the table below shows the amount of total inbound orders by segment for the years ended december 31 , 2016 , 2015 and 2014 : replace_table_token_9_th 36 acquisitions subsequent to december 31 , 2016 , we acquired substantially all of the assets of cooper valves , llc ( “ cooper ” ) as well as 100 % of the general partnership interests of innovative valve components for total aggregate consideration of $ 14.5 million . the acquired cooper brands include the accuseal® metal seated ball valves engineered to meet class vi shut off standards for use in severe service applications , as well as a full line of cast and forged gate , globe , and check valves . innovative valve components , in partnership with cooper valves , commercialized critical service valves and components for the power generation , mining and oil and natural gas industries . cooper is included in the production and infrastructure segment . on april 28 , 2016 , we completed the acquisition of the wholesale completion packers business of team oil tools , inc. the acquisition includes a wide variety of completion and service tools , including retrievable and permanent packers , bridge plugs and accessories which are sold to oilfield service providers , packer repair companies and distributors on a global basis , and is included in the completions segment . on february 2 , 2015 , we completed the acquisition of j-mac tool , inc. ( “ j-mac ” ) for aggregate consideration of approximately $ 61.9 million . j-mac , located in fort worth , texas , manufactures hydraulic fracturing pumps , power ends , fluid ends and other pump accessories . the acquired business also provides repair and refurbishment services at its main location in fort worth and at other service center locations . j-mac is included in the completions segment . on may 1 , 2014 , we completed the acquisition of quality wireline & cable , inc. ( `` quality '' ) for consideration of $ 38.3 million . quality is a calgary , alberta based manufacturer of high-performance cased-hole electro-mechanical wireline cables and specialty cables for the oil and natural gas industry . quality is included in the drilling & subsea segment . none of these transactions included potential future payments contingent on financial performance . there are factors related to the businesses we have acquired that may result in lower net profit margins on a going-forward basis , primarily the federal income tax status of the legal entity and the level of depreciation and amortization charges arising out of the accounting for the purchase . story_separator_special_tag for additional information regarding our 2016 , 2015 , and 2014 acquisitions , please read note 3 of the notes to the consolidated financial statements in part ii , item 8 `` financial statements and supplementary data '' of this annual report on form 10-k. evaluation of operations we manage our operations through the three business segments described above . we have focused on implementing financial reporting and controls at all of our operations to accelerate the availability of critical information necessary to support informed decision making . we use a number of financial and non-financial measures to routinely analyze and evaluate , on a segment and corporate level , the performance of our business . as an example of a non-financial measure , we measure our safety by tracking the total recordable incident rate and we consider this as an indication of the quality of our products . financial measures include the following : revenue growth . we compare actual revenue achieved each month to the most recent estimate for that month and to the annual plan for the month established at the beginning of the year . we monitor our revenue to analyze trends in the relative performance of each of our product lines as compared to standard revenue drivers or market metrics applicable to that product . we are particularly interested in identifying positive or negative trends and investigating to understand the root causes . in addition , we review these metrics on a quarterly basis . we also evaluate changes in the mix of products sold and the resultant impact on reported gross margins . gross margin percentage . we define gross margin percentage as our gross margin , or net sales minus cost of sales , divided by our net sales . our management continually evaluates our consolidated gross margin percentage and our gross margin percentage by segment to determine how each segment is performing . this metric aids management in capital resource allocation and pricing decisions . selling , general and administrative expenses as a percentage of total revenue . selling , general and administrative expenses include payroll related costs for sales , marketing , administrative , accounting , information technology , certain engineering and human resources functions ; audit , legal and other professional fees ; insurance ; franchise taxes not based on income ; travel and entertainment ; advertising and promotions ; depreciation and amortization expense ; bad debt expense ; and other office and administrative related costs . our management continually evaluates the level of our selling , general and administrative expenses in relation to our revenue and makes appropriate changes in light of activity levels to preserve and improve our profitability while meeting the on-going support and regulatory requirements of the business . 37 operating income and operating margin percentage . we define operating income as revenue less cost of goods sold less selling , general and administrative expenses . we define our operating margin percentage as operating income divided by revenue . these metrics assist management in evaluating the performance of each segment as a whole , especially to determine whether the amount of administrative burden is appropriate to support current business activity levels . earnings per share . we calculate fully-diluted earnings per share as prescribed under gaap , that is net income divided by common shares outstanding , giving effect for the assumed exercise of all outstanding options and warrants with a strike price less than the average fair value of the shares over the period covered for the calculation . there is no dilutive effect for 2016 and 2015 since we are in a net loss position . we believe this measure is important as it reflects the sum total of operating results and all attendant capital decisions , showing in one number the amount earned for the stockholders of our company . free cash flow . we define free cash flow as net cash provided by operating activities , less capital expenditures for property and equipment net of proceeds from sale of property and equipment and other . we believe that this measure is important because it encompasses both profitability and capital management in evaluating results . free cash flow represents the business ' contribution in the generation of funds available to pay debt outstanding , invest in other areas , or return funds to our stockholders . free cash flow is a non-gaap financial measure and should not be considered as an alternative to cash provided by operating activities as a cash flow measurement . factors affecting the comparability of our future results of operations to our historical results of operations our future results of operations may not be comparable to our historical results of operations for the periods presented , primarily for the following reasons : since our initial public offering in 2012 , we have grown our business both organically and through strategic acquisitions . we have expanded and diversified our product portfolio and business lines with the acquisition of one business in each of 2016 , 2015 , and 2014. the historical financial data for periods prior to the acquisitions does not include the results of any of the acquired companies for the periods presented and , as such , does not provide an accurate indication of our future results . as we integrate acquired companies and further implement internal controls , processes and infrastructure to operate in compliance with the regulatory requirements applicable to companies with publicly traded shares , it is likely that we will incur incremental selling , general and administrative expenses relative to historical periods . our future results will depend on our ability to efficiently manage our combined operations and execute our business strategy . 38 story_separator_special_tag style= '' line-height:120 % ; padding-top:10px ; text-align : justify ; font-size:10pt ; '' > other income and expense other income and expense includes interest expense , and foreign exchange gains and losses .
| production & infrastructure segment - revenue decreased $ 86.7 million , or 27.1 % , to $ 233.8 million during the year ended december 31 , 2016 compared to the year ended december 31 , 2015 . the decrease in revenue was primarily attributable to a decrease in exploration and production budgets , which led to pricing pressure and lower sales of our surface production equipment , and , to a lesser extent , lower sales of our valves to the upstream sector . the demand for our midstream and downstream valves has continued to be more resilient than some of our other product lines . segment operating income ( loss ) and segment operating margin percentage segment operating income ( loss ) for the year ended december 31 , 2016 decreased $ 138.0 million , to a loss of $ 125.4 million compared to the year ended december 31 , 2015 . the operating margin percentage decreased to ( 21.3 ) % for the year ended december 31 , 2016 from 1.2 % for the year ended december 31 , 2015. the 2016 results include total charges of $ 38.3 million related to several facility consolidations and closures , inventory write-downs across all product lines attributable to expected continuing lower activity levels , and severance paid to employees under our policy for reductions in force . in 2015 , similar charges totaled $ 63.7 million . the segment operating margin percentage is calculated by dividing segment operating income ( loss ) by revenue . for the year ended december 31 , 2016 , the adjusted segment operating margin percentage , excluding charges , decreased to ( 14.8 ) % from the 7.1 % adjusted operating margin percentage for the year ended december 31 , 2015 . we believe that adjusted operating margins excluding the costs described above are useful for assessing operating performance , especially when comparing periods . the change in adjusted operating margin percentage for each segment , excluding charges , is explained as follows : drilling & subsea segment — the operating margin percentage decreased to ( 23.5 ) %
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announced m & a transaction volumes are recovering in both the u.s. and europe , particularly in france and the u.k. , but we still expect there to be elevated uncertainty in the near term due to the ongoing health crisis . however , fiscal and monetary stimulus in developed countries and the rollout of vaccines globally are creating some optimism and increased ceo confidence . the global scale and breadth of our financial advisory business allows us to advise on a wide range of strategic and restructuring transactions across a variety of industries . in addition , we continue to invest in our financial advisory business by selectively hiring talented senior professionals and continuing to focus on our m & a , restructuring and other advisory services . asset management —in the short to intermediate term , we normally would expect most investor demand to come through financial institutions , and from defined benefit and defined contribution plans in developed economies because of their sheer scope and size . however , continued uncertainties in capital markets arising from the covid-19 pandemic may negatively impact our business in a manner that we can not predict . over the longer term , and depending upon local and global market conditions , we would expect an increasing share of our aum to come from the developing economies around the globe , as their retirement systems evolve and individual wealth is increasingly deployed in the financial markets . given our diversified investment platform and our ability to provide investment solutions for a global mix of clients , we believe we are positioned to benefit from opportunities across the asset management industry despite the current challenges that markets have created for that industry . we are continually developing new investment strategies that extend our existing platforms and assessing potential product acquisitions or other inorganic growth opportunities . among other efforts , we have been particularly focused on continuing to incorporate environmental , social and corporate governance ( “ esg ” ) considerations , as appropriate , into our investment research and launching strategies that use esg and sustainability factors to drive long-term investment returns . in addition to these new esg and sustainable strategies , recent examples of growth initiatives include the following : various quantitative equity strategies , new convertible bond strategies , thematically oriented strategies and a new long/short credit strategy . 41 we operate in a very competitive and rapidly changing environment . new risks and uncertainties emerge continuously , and it is not possible for our management to predict all risks and uncertainties , nor can we assess the impact of all potentially applicable factors on our business or the extent to which any factor , or combination of factors , may cause actual results to differ materially from those contained in any forward-looking statements . see item 1a , “ risk factors ” in this form 10-k. furthermore , net income and revenue in any period may not be indicative of full-year results or the results of any other period and may vary significantly from year to year and quarter to quarter . overall , we continue to focus on the development of our business , including the generation of stable revenue growth , earnings growth and shareholder returns , the evaluation of potential growth opportunities , the investment in new technology to support the development of existing and new business opportunities , the prudent management of our costs and expenses , the efficient use of our assets and the return of capital to our shareholders . certain market data with respect to our financial advisory and asset management businesses is included below . financial advisory as reflected in the following table , which sets forth global m & a industry statistics , the value and number of all completed transactions , including the subset of completed transactions involving values greater than $ 500 million , decreased in 2020 as compared to 2019. with respect to announced m & a transactions , the value and number of all transactions , including the subset of announced transactions involving values greater than $ 500 million , decreased in 2020 as compared to 2019. replace_table_token_4_th source : dealogic as of january 8 , 2021. global restructuring activity during 2020 , as measured by the number of corporate defaults , increased as compared to 2019. the number of defaulting issuers increased to 209 in 2020 , according to moody 's investors service , inc. , as compared to 105 in 2019. net revenue trends in financial advisory are generally correlated to the level of completed industry-wide m & a transactions and restructuring transactions occurring subsequent to corporate debt defaults , respectively . however , deviations from this relationship can occur in any given year for a number of reasons . for instance , our results can diverge from industry-wide activity where there are material variances from the level of industry-wide m & a activity in a particular market where lazard has significant market share , or regarding the relative number of 42 our advisory engagements with respect to larger-sized transactions , and where we are involved in non-public or sovereign advisory assignments . asset management equity market indices for major markets at december 31 , 2020 generally increased as compared to such indices at december 31 , 2019. equity market indices for major markets at december 31 , 2019 generally increased as compared to such indices at december 31 , 2018. the percentage change in major equity market indices ( i ) at december 31 , 2020 , as compared to such indices at december 31 , 2019 , and ( ii ) at december 31 , 2019 , as compared to such indices at december 31 , 2018 , is shown in the table below . replace_table_token_5_th the fees that we receive for providing investment management and advisory services are primarily driven by the level of aum and the nature of the aum product mix . story_separator_special_tag accordingly , market movements , foreign currency exchange rate volatility and changes in our aum product mix will impact the level of revenues we receive from our asset management business when comparing periodic results . a substantial portion of our aum is invested in equities . movements in aum during the period generally reflect the changes in equity market indices . financial statement overview net revenue the majority of lazard 's financial advisory net revenue historically has been earned from the successful completion of m & a transactions , capital advisory services , capital raising , restructuring , shareholder advisory , sovereign advisory and other strategic advisory matters . the main drivers of financial advisory net revenue are overall m & a activity , the level of corporate debt defaults and the environment for capital raising activities , particularly in the industries and geographic markets in which lazard focuses . in some client engagements , often those involving financially distressed companies , revenue is earned in the form of retainers and similar fees that are contractually agreed upon with each client for each assignment and are not necessarily linked to the completion of a transaction . in addition , lazard also earns fees from providing strategic advice to clients , with such fees not being dependent on a specific transaction , and may also earn fees in connection with public and private securities offerings . significant fluctuations in financial advisory net revenue can occur over the course of any given year , because a significant portion of such net revenue is earned upon the successful completion of a transaction , restructuring or capital raising activity , the timing of which is uncertain and is not subject to lazard 's control . lazard 's asset management segment principally includes lam , lfg and edgewater . asset management net revenue is derived from fees for investment management and advisory services provided to clients . as noted above , the main driver of asset management net revenue is the level and product mix of aum , which is generally influenced by the performance of the global equity markets and , to a lesser extent , fixed income markets as well as lazard 's investment performance , which impacts its ability to successfully attract and retain assets . as a result , fluctuations ( including timing thereof ) in financial markets and client asset inflows and outflows have a direct effect on asset management net revenue and operating income . asset management fees are generally based on the level of aum measured daily , monthly or quarterly , and an increase or reduction in aum , due to market price fluctuations , currency fluctuations , changes in product mix , or net client asset flows will result in a corresponding increase or decrease in management fees . the majority of our investment advisory contracts are generally terminable at any time or on notice of 30 days or less . institutional and individual clients , and firms with which we have strategic alliances , can terminate their relationship with us , reduce the aggregate amount of aum or shift their funds to other 43 types of accounts with different rate structures for a number of reasons , including investment performance , changes in prevailing interest rates and financial market performance . in addition , as lazard 's aum includes significant amounts of assets that are denominate d in currencies other than u.s. dollars , changes in the value of the u.s. dollar relative to foreign currencies will impact the value of lazard 's aum and the overall amount of management fees generated by the aum . fees vary with the type of assets managed and the vehicle in which they are managed , with higher fees earned on equity assets and alternative investment funds , such as hedge funds and private equity funds , and lower fees earned on fixed income and cash management products . the company earns performance-based incentive fees on various investment products , including traditional products and alternative investment funds , such as hedge funds and private equity funds . for hedge funds , incentive fees are calculated based on a specified percentage of a fund 's net appreciation , in some cases in excess of established benchmarks or thresholds . the company records incentive fees on traditional products and hedge funds at the end of the relevant performance measurement period , when potential uncertainties regarding the ultimate realizable amounts have been determined . the incentive fee measurement period is generally an annual period ( unless an account terminates or redemption occurs during the year ) . the incentive fees received at the end of the measurement period are not subject to reversal or payback . incentive fees on hedge funds are often subject to loss carryforward provisions in which losses incurred by the hedge funds in any year are applied against certain gains realized by the hedge funds in future periods before any incentive fees can be earned . for private equity funds , incentive fees may be earned in the form of a “ carried interest ” if profits arising from realized investments exceed a specified threshold . typically , such carried interest is ultimately calculated on a whole-fund basis and , therefore , clawback of carried interest during the life of the fund can occur . as a result , incentive fees earned on our private equity funds are not recognized until potential uncertainties regarding the ultimate realizable amounts have been determined , including any potential for clawback . corporate segment net revenue consists primarily of investment gains and losses on the company 's “ seed investments ” related to our asset management business and principal investments in private equity funds , net of hedging activities , as well as gains and losses on investments held in connection with lazard fund interests ( “ lfi ” ) and interest income and interest expense .
| average aum for the year ended december 31 , 2020 decreased $ 9 billion , or 4 % , as compared to 2019. as of december 31 , 2020 approximately 87 % of our aum was managed on behalf of institutional clients , including corporations , labor unions , public pension funds , insurance companies and banks , and through sub-advisory relationships , mutual fund sponsors , broker-dealers and registered advisors as compared to approximately 86 % as of december 31 , 2019. as of december 31 , 2020 , approximately 13 % of our aum was managed on behalf of individual client relationships , which are principally with family offices and individuals , as compared to approximately 14 % as of december 31 , 2019. as of december 31 , 2020 , aum with foreign currency exposure represented approximately 69 % of our total aum , as compared to 67 % at december 31 , 2019. aum with foreign currency exposure generally declines in value with the strengthening of the u.s. dollar and increases in value as the u.s. dollar weakens , with all other factors held constant . 53 the following is a summary of changes in aum by asset class for the years ended december 31 , 20 20 , 2019 and 2018 : replace_table_token_16_th inflows in the equity asset class were primarily attributable to the global , multi-regional and local platforms , and inflows in the fixed income asset class were primarily attributable to the global , multi-regional and emerging markets platforms . outflows in the equity asset class were primarily attributable to the emerging markets , multi-regional and local equity platforms , and outflows in the fixed income asset class were primarily attributable to the emerging markets , global and multi-regional platforms . replace_table_token_17_th replace_table_token_18_th as of february 12 , 2021 , aum was $ 267.0 billion , an $ 8.4 billion increase since december 31 , 2020. the increase in aum was due to market appreciation of $ 9.4 billion , offset by foreign exchange depreciation of $ 0.9 billion and net outflows of $ 0.1 billion . 54 average aum for t he years ended december 31 , 2020 , 2019 and 2018 for each significant asset class is set forth below . average aum generally represents the average of the monthly ending aum balances for the period . replace_table_token_19_th the following table summarizes the reported operating results attributable to the asset management segment : replace_table_token_20_th our top ten clients accounted for 27 % , 28 % and 26 % of our total aum at december 31 , 2020 , 2019 and 2018 , respectively , and no individual client constituted more than 10 % of
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royal purple on july 3 , 2012 , we completed the acquisition of royal purple , inc. , a texas corporation which was converted into a delaware limited liability company at closing , for aggregate consideration of approximately $ 331.2 million , net of cash acquired ( “ royal purple acquisition ” ) . royal purple is a leading independent formulator and marketer of premium industrial and consumer lubricants to a diverse customer base across several large markets including oil and gas , chemicals and refining , power generation , manufacturing and transportation , food and drug manufacturing and automotive aftermarket . the royal purple acquisition was financed with net proceeds of $ 262.5 million from our june 2012 private placement of 9 5/8 % senior notes due august 1 , 2020 and cash on hand . we believe the royal purple acquisition increases our position in the specialty lubricants market , expands our geographic reach , increases our asset diversity and enhances our specialty products segment . trusouth oil on january 6 , 2012 , we completed the acquisition of all of the outstanding membership interests . trusouth oil , llc , renamed calumet packaging , llc in 2013 , a specialty petroleum packaging and distribution company located in shreveport , louisiana for aggregate consideration of approximately $ 26.9 million , net of cash acquired ( “ calumet packaging acquisition ” ) . the calumet packaging acquisition was financed with borrowings under our revolving credit facility ( “ calumet packaging 54 acquisition ” ) . we believe the trusouth acquisition provides greater diversity to our specialty products segment . please read part iii , item 13 “ certain relationships and related transactions and director independence — trusouth acquisition ” for further discussion of our acquisition of trusouth . hercules synthetic lubricants business on january 3 , 2012 , we completed the acquisition of the aviation and refrigerant lubricants business ( a polyolester based synthetic lubricants business ) and a manufacturing facility located in louisiana , missouri from hercules incorporated , a subsidiary of ashland , inc. , for aggregate consideration of approximately $ 19.6 million ( “ missouri acquisition ” ) . we believe the missouri acquisition provides greater diversity to our specialty products segment . the missouri acquisition was financed with borrowings under our revolving credit facility and cash on hand . key performance measures our sales and net income are principally affected by the price of crude oil , demand for specialty and fuel products , prevailing crack spreads for fuel products , the price of natural gas used as fuel in our operations and our results from derivative instrument activities . our primary raw materials are crude oil and other specialty feedstocks and our primary outputs are specialty petroleum products and fuel products . the prices of crude oil , specialty products and fuel products are subject to fluctuations in response to changes in supply , demand , market uncertainties and a variety of additional factors beyond our control . we monitor these risks and enter into derivative instruments designed to mitigate the impact of commodity price fluctuations on our business . the primary purpose of our commodity risk management activities is to economically hedge our cash flow exposure to commodity price risk so that we can meet our cash distribution , debt service and capital expenditure requirements despite fluctuations in crude oil and fuel products prices . we enter into derivative contracts for future periods in quantities that do not exceed our projected purchases of crude oil and natural gas and sales of fuel products . as of december 31 , 2013 , we have hedged refining margins , or crack spreads , on approximately 20.2 million barrels of fuel products through december 2016 at an average refining margin of $ 23.49 per barrel with average refining margins ranging from a low of $ 19.17 per barrel in the first quarter of 2014 to a high of $ 27.27 per barrel in 2016. please refer to note 8 under item 8 “ financial statements and supplementary data — notes to consolidated financial statements ” and item 7a “ quantitative and qualitative disclosures about market risk — commodity price risk ” for detailed information regarding our derivative instruments and our commodity price risk . our management uses several financial and operational measurements to analyze our performance . these measurements include the following : sales volumes ; production yields ; specialty products and fuel products segment gross profit ; and specialty products and fuel products segment adjusted ebitda . sales volumes . we view the volumes of specialty products and fuel products sold as an important measure of our ability to effectively utilize our operating assets . our ability to meet the demands of our customers is driven by the volumes of crude oil and feedstocks that we run at our facilities . higher volumes improve profitability both through the spreading of fixed costs over greater volumes and the additional gross profit achieved on the incremental volumes . production yields . in order to maximize our gross profit and minimize lower margin by-products , we seek the optimal product mix for each barrel of crude oil we refine , or feedstocks we , or third parties , process , which we refer to as production yield . specialty products and fuel products segment gross profit . specialty products and fuel products gross profit are important measures of our ability to maximize the profitability of our specialty products and fuel products segments . we define specialty products and fuel products gross profit as sales less the cost of crude oil and other feedstocks and other production-related expenses , the most significant portion of which includes labor , plant fuel , utilities , contract services , maintenance , depreciation and processing materials . story_separator_special_tag we use specialty products and fuel products gross profit as indicators of our ability to manage our business during periods of crude oil and natural gas price fluctuations , as the prices of our specialty products and fuel products generally do not change immediately with changes in the price of crude oil and natural gas . the increase in selling prices typically lags behind the rising costs of crude oil feedstocks for specialty products . other than plant fuel , production-related expenses generally remain stable across broad ranges of throughput volumes , but can fluctuate depending on maintenance activities performed during a specific period . 55 our fuel products segment gross profit may differ from standard u.s. gulf coast , group 3 , padd 4 billings , montana or 3/2/1 and 2/1/1 market crack spreads due to many factors , including derivative activities to hedge both our fuel products segment revenues and the cost of crude oil reflected in gross profit , our fuel products mix as shown in our production table being different than the ratios used to calculate such market crack spreads , operating costs including fixed costs and actual crude oil costs differing from market indices and our local market pricing differentials for fuel products in the shreveport , louisiana , san antonio , texas , superior , wisconsin and great falls , montana vicinities as compared to u.s. gulf coast , group 3 and padd 4 billings , montana postings . specialty products and fuel products segment adjusted ebitda . we believe that specialty products and fuel products segment adjusted ebitda measures are useful as they exclude transactions not related to our core cash operating activities and provide metrics to analyze our ability to pay distributions to our unitholders as adjusted ebitda is a component in the calculation of distributable cash flow and allows us to meaningfully analyze the trends and performance of our core cash operations as well as make decisions regarding the allocation of resources to segments . in addition to the foregoing measures , we also monitor our selling and general and administrative expenditures . 56 results of operations the following table sets forth information about our combined operations . facility production volume differs from sales volume due to changes in inventories and the sale of purchased fuel product blendstocks such as ethanol and biodiesel in our fuel products segment . the tables include the results of operations at our superior refinery commencing october 1 , 2011 , missouri facility commencing january 3 , 2012 , calumet packaging facility commencing january 6 , 2012 , royal purple facility commencing july 3 , 2012 , montana refinery commencing october 1 , 2012 , san antonio refinery commencing january 2 , 2013 and bel-ray facility commencing december 10 , 2013. replace_table_token_15_th ( 1 ) total sales volume includes sales from the production at our facilities and certain third-party facilities pursuant to supply and or processing agreements , sales of inventories and the resale of crude oil to third party customers . total sales volume includes the sale of purchased fuel product blendstocks , such as ethanol and biodiesel , as components of finished fuel products in our fuel products segment sales . the increase in total sales volume in 2013 compared to 2012 is due primarily to incremental sales of fuel products , asphalt and packaged and synthetic specialty products resulting from the royal purple , montana and san antonio acquisitions , partially offset by decreased sales of lubricating oils , asphalt and fuel products from the shreveport and superior refineries . the increase in total sales volume in 2012 compared to 2011 is due primarily to incremental sales of fuel products , asphalt and packaged and synthetic specialty products subsequent to the superior , missouri , calumet packaging , royal purple and montana acquisitions . ( 2 ) total feedstock runs represent the barrels per day of crude oil and other feedstocks processed at our facilities and at certain third-party facilities pursuant to supply and or processing agreements . the increase in total feedstock runs in 2013 compared to 2012 is due primarily to incremental feedstock runs resulting from the royal purple , montana and san antonio acquisitions , partially offset by reduced run rates at our shreveport refinery due to unscheduled downtime associated with various operational reliability issues and planned turnaround activity at the shreveport and superior refineries during 2013. the increase in total feedstock runs in 2012 compared to 2011 is due primarily to incremental feedstock runs from the superior , missouri , calumet packaging , royal purple and montana acquisitions . ( 3 ) total facility production represents the barrels per day of specialty products and fuel products yielded from processing crude oil and other feedstocks at our facilities and at certain third-party facilities pursuant to supply and or processing agreements . the difference between total facility production and total feedstock runs is primarily a result of the time lag between the input of feedstocks and production of finished products and volume loss . 57 the increases in total facility production in 2013 over 2012 and 2012 over 2011 are due primarily to the operational items discussed above in footnote 2 of this table . ( 4 ) represents production of packaged and synthetic specialty products at our royal purple , bel-ray , calumet packaging and missouri facilities . the following table reflects our consolidated results of operations and includes the non-gaap financial measures ebitda , adjusted ebitda and distributable cash flow . for a reconciliation of ebitda , adjusted ebitda and distributable cash flow to net income and net cash provided by operating activities , our most directly comparable financial performance and liquidity measures calculated in accordance with gaap , please read “ — non-gaap financial measures. ” replace_table_token_16_th 58 year ended december 31 , 2013 compared to year ended december 31 , 2012 sales . sales increased $ 764.1 million , or 16.4 % , to $ 5,421.4 million in 2013 from $ 4,657.3 million in 2012 .
| in addition , we had $ 121.1 million of cash on hand as of december 31 , 2013. we believe we will continue to have sufficient cash flow from operations and borrowing capacity to meet our financial commitments , minimum quarterly distributions to unitholders , debt service obligations , contingencies and anticipated capital expenditures . recent debt offering in november 2013 , we issued $ 350.0 million in 7 5/8 % of senior notes due 2022 , generating net proceeds of $ 337.4 million . from the net proceeds , we repurchased approximately $ 100.0 million of outstanding 9 3/8 % senior notes due 2019. we also used a portion of the net proceeds from the offering to fund the bel-ray acquisition and intend to continue to use the remaining net proceeds for general partnership purposes , including funding previously announced organic growth projects . recent equity offerings during 2013 , we completed two public offerings of our common units . in january 2013 , we completed an equity offering of approximately 5.8 million units , including the overallotment option , at $ 31.81 per unit , generating net proceeds of $ 175.2 million . net proceeds were used to repay borrowings under our revolving credit facility and for general partnership purposes . 52 in april 2013 , we completed an equity offering of approximately 6.0 million units , including the overallotment option , at $ 37.50 per unit , generating net proceeds of $ 217.3 million . net proceeds were used for general partnership purposes . cash distribution for 2013 , we paid $ 201.6 million in cash distributions to our unitholders , an increase of 52 % from the $ 132.4 million paid in 2012. on january 24 , 2014 , we declared a quarterly cash distribution of $ 0.685 per unit ( $ 2.74 on an annualized basis ) on all outstanding units , or $ 52.6 million ( including the general partner 's incentive distribution rights ) , for the fourth quarter 2013. the distribution was paid on february 14 , 2014 to unitholders of record as of the close of business on february 4 , 2014 . renewable fuels standard as set forth under rfsii , the epa provides annual requirements
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our current developmental and operational efforts are primarily focused on expanding the functionality of the platform for existing private bank and wealth managers in the united kingdom as well as building the necessary functionality in order to service financial institutions and investment advisors in the united states . in 2011 , we converted a small , select group of advisors onto the global wealth platform . we expect to continue the rollout in 2012 and 2013. we are also investing in automation aimed at enhancing our operational efficiency and scale . a significant portion of the costs for these efforts will not be capitalized and ; therefore , our operational costs related to the platform are expected to remain at current levels or increase , primarily impacting the operating margins of the private banks and investment advisors segments . we expect continued pressure on our operating margin for the private banks segment in 2012 by the extended lead time required to fully realize recurring revenues from new global wealth services clients serviced on the global wealth platform . about half of our new clients will transfer assets onto the platform over time rather than a complete conversion of an existing book of business as of a specific date . as stated earlier , we will continue our efforts to improve the operational efficiency and scale of the global wealth services solution as we gain new clients ; however , we do not expect profitability gains for the private banks segment in 2012. the majority of our revenues are based on the value of our assets under management and administration which are affected by changes in the capital markets . the sharp market volatility experienced during 2011 substantially offset our overall revenue growth gained from new business and increased business from our existing clients . if the instability of the capital market environment continues throughout 2012 , our revenues and profits could be negatively impacted . also , the current economic environment has slowed decision making in some of our target markets . we are actively engaged with new prospects in our target markets , but expect the current economic environment may make it difficult to generate substantial new client activity . if these economic conditions persist , we would expect extended sales cycles to continue throughout 2012 , which could further impede revenue growth . page 20 of 88 ending asset balances this table presents ending asset balances of our clients , or of our clients ' customers , for which we provide management or administrative services through our subsidiaries and partnerships in which we have a significant interest . these assets are not included in our balance sheets because we do not own them . replace_table_token_7_th page 21 of 88 average asset balances this table presents average asset balances of our clients , or of our clients ' customers , for which we provide management or administrative services through our subsidiaries and partnerships in which we have a significant interest . these assets are not included in our balance sheets because we do not own them . replace_table_token_8_th page 22 of 88 in the preceding tables , assets under management are total assets of our clients or their customers invested in our equity and fixed-income investment programs , collective trust fund programs , and liquidity funds for which we provide asset management services . assets under management and administration also include total assets of our clients or their customers for which we provide administrative services , including client proprietary fund balances for which we provide administration and or distribution services . business segments revenues , expenses , and operating profit ( loss ) for our business segments for the year ended 2011 compared to the year ended 2010 , and for the year ended 2010 compared to the year ended 2009 are : replace_table_token_9_th for additional information pertaining to our business segments , see note 13 to the consolidated financial statements . page 23 of 88 private banks replace_table_token_10_th revenues increased slightly in 2011 compared to the prior year . revenues during 2011 were primarily affected by : increased investment management fees from existing international clients due to higher average assets under management from improved capital markets in late 2010 into the first half of 2011 , positive cash flows and favorable exchange rates ; and increased net investment processing fees from new global wealth services clients implemented onto the global wealth platform ; partially offset by lower recurring investment processing fees due to price reductions provided to existing clients that recontracted for longer periods , lower transaction volumes and client losses occurring in 2010 ; and lower one-time project-related investment processing fees . revenues decreased $ 14.6 million , or four percent , in 2010 compared to the prior year . revenues during 2010 were primarily affected by : decreased trade execution fees due to lower trading volumes in the capital markets ; decreased investment processing fees for our global wealth services solution ; including non-recurring deconversion and contract buyout fees , due to the loss of two large u.s. bank clients involved in mergers and acquisitions ; lower investment processing fees from both lost clients and fee concessions for contract renewals with u.s. regional and community banks for our global wealth services solution ; and lower fees from our liquidity products due to voluntary fee waivers ; partially offset by increased investment processing fees for our global wealth services solution , including non-recurring project fees , because of new united kingdom wealth advisory firms implemented onto the global wealth platform ; and increased investment management fees from existing international clients due to higher average assets under management from improved capitalmarkets . story_separator_special_tag operating margins were three percent in 2011 and ten percent in 2010. operating income decreased $ 27.3 million , or 76 percent , in 2011 compared to the prior year . operating income in 2011 was primarily affected by : increased non-capitalized development costs , mainly consulting fees , and amortization expense relating to the global wealth platform ; increased operational costs , mainly personnel and data processing and computer-related expenses , for servicing new and existing global wealth services clients implemented onto the global wealth platform ; and increased direct expenses associated with increased investment management fees from existing international clients ; partially offset by decreased stock-based compensation costs due to the acceleration in 2010 , net of the reversal of stock-based compensation costs in the third quarter 2010 ; decreased one-time termination costs associated with a workforce reduction in first quarter 2010 ; and an increase in revenues . page 24 of 88 operating margins were 10 percent in 2010 and 14 percent in 2009. operating income decreased $ 15.9 million , or 31 percent , in 2010 compared to the prior year . operating income in 2010 was primarily affected by : the decrease in revenues ; increased non-capitalized development costs as well as operating costs relating to the global wealth platform ; increased direct expenses associated with increased investment management fees from existing international clients ; an increase in stock-based compensation costs primarily due to the acceleration in recognition of stock-based compensation , net of the reversal of stock-based compensation costs , due to a change in management 's estimate of the attainment of certain performance vesting targets ; and increased sales compensation expenses due to sales of new business ; partially offset by decreased direct expenses associated with the decreased trade execution fees ; additional amortization expense of $ 10.1 million in 2009 related to the shortening in useful life of certain components related to the global wealth platform ; and decreased one-time termination costs associated with the workforce reduction in first quarter 2009 , net of one-time termination costs in first quarter 2010. investment advisors revenues increased $ 6.4 million , or three percent , in 2011 compared to the prior year . revenues during 2011 were primarily affected by : increased investment management fees from existing clients due to higher average assets under management caused by improved capital markets during the latter half of 2010 and through the first half of 2011 and an increase in net cash flows in 2011 from new advisors . revenues increased $ 17.3 million , or ten percent , in 2010 compared to the prior year . revenues during 2010 were primarily affected by : increased investment management fees from existing clients due to higher average assets under management caused by improved capital markets ; and an increase in the average basis points earned on assets due to client-directed shifts from liquidity products to our equity and fixed income programs . operating margins were 42 percent in 2011 and 40 percent in 2010. operating income increased $ 6.4 million , or nine percent , in 2011 compared to the prior year . operating income in 2011 was primarily affected by : an increase in revenues ; decreased stock-based compensation costs due to the acceleration in 2010 , net of the reversal of stock-based compensation costs in the third quarter 2010 ; and a charge of approximately $ 1.0 million related to a processing error in third quarter 2010 ; partially offset by increased non-capitalized development costs and amortization expense relating to the global wealth platform as well as spending associated with building the necessary functionality and infrastructure for servicing financial institutions and investment advisors in the united states ; and increased compensation and other personnel expenses . operating margins were 40 percent in 2010 and 34 percent in 2009. operating income increased $ 16.3 million , or 29 percent , in 2010 compared to the prior year . operating income in 2010 was primarily affected by : an increase in revenues ; additional amortization expense of $ 3.7 million in 2009 related to the shortening in useful life of certain components related to the global wealth platform ; and decreased one-time termination costs associated with the workforce reduction in first quarter 2009 ; partially offset by an increase in stock-based compensation costs primarily due to the acceleration in recognition of stock-based compensation , net of the reversal of stock-based compensation costs , due to a change in management 's estimate of the attainment of certain performance vesting targets ; and a charge of approximately $ 1.0 million related to a processing error in the third quarter 2010. page 25 of 88 institutional investors revenues increased $ 3.5 million , or two percent , in 2011 compared to the prior year . revenues during 2011 were primarily affected by : increased investment management fees from existing clients due to higher average assets under management caused by improved capital markets during the latter half of 2010 and through the first half of 2011 as well as additional asset funding from existing clients ; and asset funding from new sales of our retirement and not-for-profit solutions ; partially offset by client losses . revenues increased $ 28.8 million , or 16 percent , in 2010 compared to the prior year . revenues during 2010 were primarily affected by : increased investment management fees from existing clients due to higher average assets under management caused by improved capital markets as well as additional asset funding from existing clients ; and asset funding from new sales of our retirement and not-for-profit solutions ; partially offset by client losses .
| the majority of our asset-based revenues are based upon average assets , which increased during the year despite the sharp decline experienced during the third quarter . our average assets under management , excluding lsv , increased $ 9.8 billion , or nine percent , to $ 117.0 billion during the year as compared to $ 107.2 billion during 2010. new business coupled with asset funding from existing clients for our hedge fund solutions and increased accounts for our separately managed accounts solutions in our investment managers segment also served to drive revenue growth . revenues in our private banks segment were negatively impacted by lower investment processing fees from price reductions provided to existing clients that recontracted for longer periods , lower transaction volumes and lower one-time project-related fees . furthermore , the full impact of previously-announced client losses in the segment were reflected in 2011 as the associated recurring and one-time revenues from the client losses were recognized in the preceding year . our proportionate share in the earnings of lsv in 2011 was $ 105.8 million as compared to $ 99.5 million in 2010 , an increase of six percent . the net market appreciation in lsv 's average assets under management during the first half of 2011 as well as increased performance fees resulted in an overall increase in their revenues . although ending assets under management declined to $ 53.7 billion , lsv 's average assets under management increased $ 5.2 billion , or ten percent , to $ 58.5 billion during the year as compared to $ 53.3 billion during the prior year . our operating expenses related to servicing new and existing clients of our global wealth services solution implemented on the global wealth platform has increased as we continue to build out the operational infrastructure and add new functionality to the platform . a higher portion of these costs are not capitalized . these increased operational costs primarily impacted the private banks and investment advisors segments . the increased operational costs
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our operating expenses decreased by $ 2.9 million to $ 11.2 million for the year ended december 31 , 2019 as compared to $ 14.1 million for the year ended december 31 , 2018. this decrease is the result of a decrease in goodwill and intangible asset impairment of $ 3.1 million , a decrease in legal and other professional fees of $ 1.0 million and a decrease in amortization of acquired intangibles of $ 0.1 million . the decreases were partially offset by a $ 0.7 million increase in sales and marketing costs , which is primarily increased personnel costs related to our increase in patient diagnostic service revenues , an increase of $ 0.2 million in stock compensation costs and an increase of $ 0.2 million in other general and administrative costs . other income ( expense ) . other expense , net was $ 2.3 million and $ 2.1 million for the year ended december 31 , 2019 and 2018 , respectively , and included interest expense of $ 0.5 million and $ 0.3 million , respectively , income from warrant revaluations of $ 0.4 million and $ 1.9 million , respectively , derivative revaluations expense of $ 0.4 million and income of $ 0.3 million , respectively , a loss on modification of warrants $ 1.1 million and zero , respectively and a loss on litigation of $ 0.3 million and zero respectively . additionally , the company had a loss on issuance of convertible notes of $ 1.9 million and $ 1.3 million , respectively , gains on settlements of liabilities of $ 1.4 million and $ 0.3 million , respectively , and a loss on extinguishment of debt of less than $ 0.1 million and a gain from extinguishment of debt of $ 0.4 million , respectively . during the year ended december 31 2018 , other expense also included a loss on extinguishment of convertible notes of $ 2.9 million and a loss on settlement of equity instruments of $ 0.4 million . liquidity and capital resources the consolidated financial statements have been prepared using accounting principles generally accepted in the united states of america ( “ gaap ” ) applicable for a going concern , which assume that we will realize our assets and discharge our liabilities in the ordinary course of business . we have incurred substantial operating losses and have used cash in our operating activities for the past several years . for the year ended december 31 , 2019 , we had a net loss of $ 13.2 million and negative working capital of $ 2.5 million . our ability to continue as a going concern is dependent upon a combination of achieving our business plan , including generating additional revenue , and raising additional financing to meet our debt obligations and paying liabilities arising from normal business operations when they come due . 32 our working capital positions at december 31 , 2019 and 2018 were as follows : replace_table_token_4_th during the year ended december 31 , 2019 we received gross proceeds of $ 6.6 million from sale of 2,778,077 shares of our common stock , $ 1.6 million from the exercise of 310,200 warrants and $ 2.1 million from the issuance of convertible notes . we also converted $ 7.6 million of convertible notes , including interest , into 2,511,173 shares of our common stock . notwithstanding the aforementioned circumstances , there remains substantial doubt about our ability to continue as a going concern for the next twelve months from the date the consolidated financial statements were issued . there can be no assurance that we will be able to successfully achieve our initiatives summarized above in order to continue as a going concern . the accompanying financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments that might result should we be unable to continue as a going concern as a result of the outcome of this uncertainty . analysis of cash flows - years ended december 31 , 2019 and 2018 net change in cash . cash increased by $ 0.5 million during the year ended december 31 , 2019 , compared to a decrease of less than $ 0.1 million during the year ended december 31 , 2018. cash flows used in operating activities . the cash flows used in operating activities of $ 9.1 million during the year ended december 31 , 2019 included a net loss of $ 13.2 million , an increase in accounts receivable of $ 0.8 million , a decrease in accounts payable of $ 1.9 million and a decrease in operating lease liabilities of $ 0.2 million . these were partially offset by a decrease in other assets of $ 0.4 million and non-cash adjustments of $ 6.6 million . the non-cash adjustments to net loss include , among other things , depreciation and amortization , changes in provision for losses on doubtful accounts , warrant and derivative revaluations , stock based compensation , gains on settlements of liabilities , impairment of intangible assets and losses on the issuance of convertible notes . the cash flows used in operating activities in the year ended december 31 , 2018 included net loss of $ 15.7 million , an increase in accounts receivable of $ 0.5 million and an increase in inventories of less than $ 0.1 million . these were partially offset a decrease in other assets of $ 0.1 million , an increase in accounts payable , accrued expenses and other liabilities of $ 0.6 million and by non-cash adjustments of $ 8.8 million . the non-cash adjustments to net loss include , among other things , depreciation and amortization , impairment of goodwill , changes in provision for losses on doubtful accounts , warrant and derivative revaluations , stock based compensation , and gains or losses on settlements of liabilities or debt and extinguishments of debt and convertible notes . cash flows used in investing activities . story_separator_special_tag cash flows used in investing activities were $ 0.1 million for the year ended december 31 , 2019 and 2018 , respectively , resulting from purchases of property and equipment . cash flows provided by financing activities . cash flows provided by financing activities totaled $ 9.7 million for the year ended december 31 , 2019 , which included proceeds of $ 6.6 million from the issuance of common stock , $ 1.6 million from the exercise of warrants and $ 2.1 million from the issuance of convertible notes . these proceeds were partially offset by payments on our long-term debt and convertible notes of $ 0.5 million and payments for our finance lease obligations and deferred financing costs of approximately $ 0.1 million . cash flows provided by financing activities totaled $ 6.8 million for the year ended december 31 , 2018 , which included proceeds of $ 2.0 million from the issuance of common stock , $ 0.3 million from the issuance of long-term debt , $ 3.8 million from the issuance of convertible notes and $ 1.3 million from the exercise of warrants . these proceeds were partially offset by payments on our long-term debt of $ 0.4 million and payments for our capital lease obligations and deferred financing costs of $ 0.2 million . 33 off-balance sheet arrangements at each of december 31 , 2019 and december 31 , 2018 , we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition , changes in financial condition , revenues or expenses , results of operations , liquidity , capital expenditures or capital resources . contractual obligations and commitments at december 31 , 2019 , our contractual obligations and other commitments were as follows : replace_table_token_5_th ( 1 ) see note 5 - `` long-term debt '' and note 6 – “ convertible notes ” to our accompanying consolidated financial statements included with this annual report on form 10-k. ( 2 ) see note 8 - `` leases '' to our accompanying consolidated financial statements included with this annual report on form 10-k. ( 3 ) these amounts represent purchase commitments , including all open purchase orders . critical accounting policies and estimates the following discussion and analysis of financial condition and results of operations are based upon the company 's consolidated financial statements , which have been prepared in conformity with accounting principles generally accepted in the united states of america . the company 's significant accounting policies are more fully described in note 2 of the notes to consolidated financial statements included with this annual report on form 10-k . certain accounting estimates are particularly important to the understanding of the company 's financial position and results of operations and require the application of significant judgment by the company 's management and can be materially affected by changes from period to period in economic factors or conditions that are outside the control of management . the company 's management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates . those estimates are based on historical operations , future business plans and projected financial results , the terms of existing contracts , the observance of trends in the industry , information provided by customers and information available from other outside sources , as appropriate . the following discusses the company 's critical accounting policies and estimates : revenue recognition the company derives its revenues from diagnostic testing - histology , flow cytometry , cytology and molecular testing ; clinical research from bio-pharma customers , state and federal grant programs ; and from biomarker testing from bio-pharma customers . service revenues are comprised of patient diagnostic services for cancer as well as contract diagnostic services for pharmacogenomics trials . service revenue is recognized upon completion of the testing process and when the diagnostic result is delivered to the ordering physician and or customer . net patient service revenue is reported at the estimated net realizable amounts from patients , third-party payers and others for services rendered , including retroactive adjustment under reimbursement agreements with third-party payers . revenue under third-party payer agreements is 34 subject to audit and retroactive adjustment . provisions for third-party payer settlements are provided in the period in which the related services are rendered and adjusted in the future periods , as final settlements are determined . revenue from clinical research grant is recognized over time as the service is being performed using a proportional performance method . the company uses an `` efforts based '' method of assessing performance . if the arrangement requires the performance of a specified number of similar acts ( i.e . test ) , then revenue is recognized in equal amounts as each act is completed . other revenues are comprised of the company 's icp technology kits sales to bio-pharma customers and contracted project based technology evaluations . for the year ended december 31 , 2019 , service revenue represented 99 % of our consolidated revenues and other revenues represented 1 % . there was no revenue attributable to clinical grants during 2019. for the year ended december 31 , 2018 , service revenue represented 96 % of our consolidated revenues , the revenue attributable to clinical grants represented 3 % and other revenues represented 1 % . allowance for contractual discounts we are reimbursed by payers for services we provide . payments for services covered by payers average less than billed charges . we monitor revenue and receivables from payers and record an estimated contractual allowance for certain revenue and receivable balances as of the revenue recognition date to properly account for anticipated differences between amounts estimated in our billing system and amounts ultimately reimbursed by payers . accordingly , the total revenue and receivables reported in our financial statements are recorded at the amounts expected to be received from these payers .
| recent developments on march 16 , 2020 , the company announced that it had completed a non-cash transaction with poplar healthcare to establish a strategic partnership that includes the acquisition of the customer base oncometrix , poplar 's 30 hematopathology division . precipio will assume responsibility for oncometrix 's customer base and associated revenues which should provide a substantial improvement to the company 's laboratory economies of scale . as part of the transaction , three sales representatives of oncometrix have transitioned to precipio . the transition of the customer base involved no exchange of cash or equity with poplar healthcare . going concern the consolidated financial statements have been prepared using accounting principles generally accepted in the united states of america ( “ gaap ” ) applicable for a going concern , which assume that the company will realize its assets and discharge its liabilities in the ordinary course of business . the company has incurred substantial operating losses and has used cash in its operating activities for the past several years . as of december 31 , 2019 , the company had a net loss of $ 13.2 million , negative working capital of $ 2.5 million and net cash used in operating activities of $ 9.1 million . the company 's ability to continue as a going concern over the next twelve months from the date the consolidated financial statements were issued is dependent upon a combination of achieving its business plan , including generating additional revenue , and raising additional financing to meet its debt obligations and paying liabilities arising from normal business operations when they come due . to meet its current and future obligations the company has entered into a purchase agreement with lincoln park ( the “ lp purchase agreement ” or “ equity line ” ) , pursuant to which lincoln park has agreed to purchase from the company up to an aggregate of $ 10.0 million of common stock of the company ( subject to certain limitations ) from time to time over the term of the lp purchase agreement . the extent we rely on lincoln park as a source of funding will depend on a number of factors
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at december 31 , 2016 , we operated 573 behavioral healthcare facilities with approximately 17,100 beds in 39 states , the u.k. and puerto rico . during the year ended december 31 , 2016 , we acquired 328 facilities and added approximately 967 new beds ( exclusive of acquisitions ) , including 827 to existing facilities and 140 added through the opening of two de novo facilities . during the year ended december 31 , 2016 , we divested 21 existing u.k. facilities and one de novo facility . for the year ending december 31 , 2017 , we expect to add approximately 800 total beds exclusive of acquisitions . we are the leading publicly traded pure-play provider of behavioral healthcare services , with operations in the united states and the united kingdom . management believes that the company is positioned as a leading platform in a highly fragmented industry under the direction of an experienced management team that has significant industry expertise . management expects to take advantage of several strategies that are more accessible as a result of our increased size and geographic scale , including continuing a national marketing strategy to attract new patients and referral sources , increasing our volume of out-of-state referrals , providing a broader range of services to new and existing patients and clients and selectively pursuing opportunities to expand our facility and bed count in the u.s. and u.k. acquisitions 2016 u.s. acquisitions on june 1 , 2016 , we completed the acquisition of pocono mountain , an inpatient psychiatric facility with 108 beds located in henryville , pennsylvania , for cash consideration of approximately $ 25.4 million . in addition , we may be required to make a cash payment of up to $ 5.0 million under an earn-out agreement , contingent upon achievement by pocono mountain of certain operating performance targets for the one-year period ending may 31 , 2017. on may 1 , 2016 , we completed the acquisition of trustpoint , an inpatient psychiatric facility with 100 beds located in murfreesboro , tennessee , for cash consideration of approximately $ 62.7 million . on april 1 , 2016 , we completed the acquisition of serenity knolls , an inpatient psychiatric facility with 30 beds located in forest knolls , california , for cash consideration of approximately $ 9.7 million . priory on february 16 , 2016 , we completed the acquisition of priory for a total purchase price of approximately $ 2.2 billion , including cash consideration of approximately $ 1.9 billion and the issuance of 4,033,561 shares of our common stock to shareholders of priory . priory was the leading independent provider of behavioral healthcare services in the u.k. operating 324 facilities with approximately 7,100 beds at the acquisition date . the cma in the u.k. reviewed our acquisition of priory . on july 14 , 2016 , the cma announced that our acquisition of priory was referred for a phase 2 investigation unless we offered acceptable undertakings to address the cma 's competition concerns relating to the provision of behavioral healthcare services in certain markets . on july 28 , 2016 , the cma announced that we had offered undertakings to address the cma 's concerns and that , in lieu of a phase 2 investigation , the cma would consider our undertakings . 47 index to financial statements on october 18 , 2016 , we signed a definitive agreement with bc partners for the sale of 21 existing u.k. behavioral health facilities and one de novo behavioral health facility with an aggregate of approximately 1,000 beds . on november 10 , 2016 , the cma accepted our undertakings to sell the u.k. disposal group to bc partners and confirmed that the divestiture satisfied the cma 's concerns about the impact of our acquisition of priory on competition for the provision of behavioral healthcare services in certain markets in the u.k. as a result of the cma 's acceptance of our undertakings , our acquisition of priory was not referred for a phase 2 investigation . on november 30 , 2016 , we completed the sale of the u.k. disposal group to bc partners for £320 million cash . 2015 u.s. acquisitions on december 1 , 2015 , we completed the acquisition of certain facilities from mmo , including two acute inpatient behavioral health facilities with a total of 80 beds located in jennings and covington , louisiana , for cash consideration of approximately $ 20.2 million . on november 1 , 2015 , we completed the acquisitions of ( i ) discovery house for cash consideration of approximately $ 118.3 million and ( ii ) duffy 's for cash consideration of approximately $ 29.6 million . discovery house operates 19 comprehensive treatment centers located in four states . duffy 's is a substance abuse facility with 61 beds located in calistoga , california . on august 31 , 2015 , we completed the acquisition of a controlling interest in southcoast , an inpatient psychiatric facility located in fairhaven , massachusetts . the company owns 75 % of the equity interests in the facility . the value of the 25 % noncontrolling interest is approximately $ 9.2 million . on july 1 , 2015 , we completed the acquisition of the assets of belmont , an inpatient psychiatric facility with 147 beds located in philadelphia , pennsylvania for cash consideration of approximately $ 39.0 million which consists of $ 35.0 million base purchase price and a working capital settlement of $ 4.0 million . on march 1 , 2015 , we acquired the stock of qam for cash consideration of approximately $ 54.8 million . qam operates seven comprehensive treatment centers located in wisconsin . on february 11 , 2015 , we completed the acquisition of crc for total consideration of approximately $ 1.3 billion . as consideration for the acquisition , we issued 5,975,326 shares of our common stock to certain holders of crc common stock and repaid crc 's outstanding indebtedness of $ 904.5 million . story_separator_special_tag crc was a leading provider of treatment services related to substance abuse and other addiction and behavioral disorders operating 35 inpatient facilities with over 2,400 beds and 81 comprehensive treatment centers located in 30 states at the acquisition date . 2015 u.k. acquisitions on november 1 , 2015 , we completed the acquisition of cleveland house , an inpatient psychiatric facility with 32 beds located in england , for cash consideration of approximately $ 10.3 million . on october 1 , 2015 , we completed the acquisition of meadow view , an inpatient psychiatric facility with 28 beds located in england , for cash consideration of approximately $ 6.8 million . on september 1 , 2015 , we completed the acquisitions of ( i ) three facilities from danshell for approximately $ 59.8 million , ( ii ) two facilities from h & scp for approximately $ 26.2 million and ( iii ) manor hall for approximately $ 14.0 million . the inpatient psychiatric facilities acquired from danshell have an aggregate of 73 beds and are located in england . the inpatient psychiatric facilities acquired from h & scp have an aggregate of 50 beds and are located in england . manor hall has 26 beds and is located in england . on july 1 , 2015 , we completed the acquisition of the manor clinic , a substance abuse facility with 15 beds located in england , for cash consideration of approximately $ 5.9 million . on june 1 , 2015 , we completed the acquisitions of ( i ) one facility from choice for cash consideration of approximately $ 25.9 million and ( ii ) 15 facilities from care uk for approximately $ 88.2 million . the inpatient psychiatric facility acquired from choice has 42 beds and is located in england . the inpatient psychiatric facilities acquired from care uk have an aggregate of 299 beds and are located in england . 48 index to financial statements on april 1 , 2015 , we completed the acquisitions of ( i ) two facilities from choice for cash consideration of approximately $ 37.5 million , ( ii ) pastoral for approximately $ 34.2 million and ( iii ) mildmay oaks for cash consideration of approximately $ 14.9 million . the two inpatient psychiatric facilities acquired from choice have an aggregate of 48 beds and are located in england . pastoral operates two inpatient psychiatric facilities with an aggregate of 65 beds located in wales . mildmay oaks is an inpatient psychiatric facility with 67 beds located in england . revenue our revenue is primarily derived from services rendered to patients for inpatient psychiatric and substance abuse care , outpatient psychiatric care and adolescent residential treatment . we receive payments from the following sources for services rendered in our facilities : ( i ) state governments under their respective medicaid and other programs ; ( ii ) commercial insurers ; ( iii ) the federal government under the medicare program administered by cms ; ( iv ) public funded sources in the u.k. ( including the nhs , ccgs and local authorities ) ; and ( v ) individual patients and clients . revenue is recorded in the period in which services are provided at established billing rates less contractual adjustments based on amounts reimbursable by medicare or medicaid under provisions of cost or prospective reimbursement formulas or amounts due from other third-party payors at contractually determined rates . story_separator_special_tag href= '' https : //www.sec.gov/archives/edgar/data/0001520697/000119312517056016/ # toc '' > index to financial statements ( gain ) loss on foreign currency derivatives . we entered into foreign currency forward contracts during the years ended december 31 , 2016 and 2015 in connection with ( i ) acquisitions in the u.k. and ( ii ) transfers of cash between the u.s. and the u.k. under our cash management and foreign currency risk management programs . exchange rate changes between the contract date and the settlement date resulted in a gain on foreign currency derivatives of $ 0.5 million for the year ended december 31 , 2016 , compared to a loss of $ 1.9 million for the year ended december 31 , 2015. transaction-related expenses . transaction-related expenses were $ 48.3 million for the year ended december 31 , 2016 compared to $ 36.6 million for the year ended december 31 , 2015. transaction-related expenses represent costs incurred in the respective periods , primarily related to the 2015 and 2016 acquisitions , as summarized below ( in thousands ) : replace_table_token_6_th provision for income taxes . for the year ended december 31 , 2016 , the provision for income taxes was $ 28.8 million , reflecting an effective tax rate of 87.3 % , compared to $ 53.4 million , reflecting an effective tax rate of 32.4 % , for 2015. the change in the tax rate for the year ended december 31 , 2016 is primarily attributable to the disparity between the accounting treatment and the tax treatment of the u.k. divestiture on november 30 , 2016. year ended december 31 , 2015 compared to the year ended december 31 , 2014 revenue before provision for doubtful accounts . revenue before provision for doubtful accounts increased $ 798.8 million , or 77.5 % , to $ 1.8 billion for the year ended december 31 , 2015 from $ 1.0 billion for the year ended december 31 , 2014. the increase related primarily to revenue generated during the year ended december 31 , 2015 from the facilities acquired in our 2014 and 2015 acquisitions , particularly the acquisition of crc . same-facility revenue before provision for doubtful accounts increased by $ 78.9 million , or 7.8 % , for the year ended december 31 , 2015 compared to the year ended december 31 , 2014 , primarily resulting from same-facility growth in patient days of 8.0 % .
| the same-facility provision for doubtful accounts was $ 35.3 million for the year ended december 31 , 2016 , or 1.9 % of revenue before provision for doubtful accounts , compared to $ 31.5 million for the year ended december 31 , 2015 , or 1.9 % of revenue before provision for doubtful accounts . salaries , wages and benefits . salaries , wages and benefits ( swb ) expense was $ 1.5 billion for the year ended december 31 , 2016 compared to $ 973.7 million for the year ended december 31 , 2015 , an increase of $ 568.1 million . swb expense included $ 28.3 million and $ 20.5 million of equity-based compensation expense for the years ended december 31 , 2016 and 2015 , respectively . excluding equity-based compensation expense , swb expense was $ 1.5 billion , or 53.8 % of revenue , for the year ended december 31 , 2016 , compared to $ 953.3 million , or 53.1 % of revenue , for the year ended december 31 , 2015. the $ 560.3 million increase in swb expense , excluding equity-based compensation expense , was primarily attributable to swb expense incurred by the facilities acquired in our 2015 and 2016 acquisitions , particularly the acquisition of priory . same-facility swb expense was $ 895.0 million for the year ended december 31 , 2016 , or 50.2 % of revenue , compared to $ 830.8 million for the year ended december 31 , 2015 , or 50.0 % of revenue . professional fees . professional fees were $ 185.5 million for the year ended december 31 , 2016 , or 6.6 % of revenue , compared to $ 116.5 million for the year ended december 31 , 2015 , or 6.5 % of revenue . the $ 69.0 million increase was primarily attributable to professional fees incurred by the facilities acquired in our 2015 and 2016 acquisitions , particularly the acquisition of priory . same-facility professional fees were $ 92.8 million for the year ended december 31 , 2016 , or 5.2 % of revenue , compared to $ 95.0 million , for the year ended december 31 , 2015 , or 5.7 % of revenue . supplies . supplies expense was $ 117.4 million for the year
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201 6 acquisitions during 2016 , we acquired the assets of the following businesses for total consideration of $ 33.3 million : § an asphalt plant in new mexico § an aggregates facility in texas § a distribution business in georgia to complement our aggregates logistics an d d istribution activities for a detailed discussion of our acquisitions and divestitures , see note 19 “ acquisitions and divestitures ” in item 8 “ financial statements and supplementary data. ” part i i 31 market developments and outlook the strong fundamentals of our aggregates-focused business and the outstanding improvement in our core profitability have led to strong earnings growth during the last three years of recovery . in 2017 , we expect continued growth across the vast majority of our markets and across each of the end use segments we serve . our expectation for full year adjusted ebitda of $ 1.125 to $ 1.225 billion is driven by a continuing recovery in shipments , with higher levels of publicly funded construction activity just beginning to join the ongoing recovery in private demand , as well as a favorable pricing environment . the following assumptions support our outlook for strong year-over-year growth in adjusted ebitda in 2017 : § aggregates shipments growth of 5 % to 8 % from 2016 , wit h g rowth weighted more toward the second half of the year § freight-adjusted aggregates price increase of 5 % to 7 % , with unit margins continuing to grow faster than pricing § asphalt mix , concrete and calcium segment gross profit growth of approximately 15 % § sag expenses of approximately $ 320 million , 2 % higher than the prior year and excluding business development-related expenses other expectations include : § core capital spending of approximately $ 300 million to support the increased level of shipments and further improve production costs and operating efficiencies § interest expense of approximately $ 140 million § depreciation , depletion , accretion and amortization expense of approximately $ 300 million § effective tax rate of 28 % we remain focused on continuous , compounding improvement in profitability and cash flows . our 2017 outlook reflects earnings growth and unit margin performance consistent with recent trends as well as our longer range goals . the flow-through of freight-adjusted revenues to gross profit in our aggregates segment should remain in line with the long-term goal of greater than 60 % . since the beginning of this recovery , o ur eff orts have resulted in aggregates segment gross profit increasing $ 515 million on a 41 million ton increase in shipments . during this same period , uni t g ross profit in our core aggregates segment has improved 89 % on a trailing twelve month ( ttm ) basis . * excludes more recent acquisitions . ttm 2q'13 represents the cyclical low in aggregates volumes . part i i 32 reconciliation of non-gaap financial measures gross profit margin excluding freight and delivery revenues is not a generally accepted accounting principle ( gaap ) measure . we present this metric as it is consistent with the basis by which we review our operating results . likewise , we believe that this presentation is consistent with our competitors and consistent with the basis by which investors analyze our operating results considering that freight and delivery services represent pass-through activities . reconciliation of this metric to its nearest gaap measure is presented below : gross profit margin in accordance with gaap replace_table_token_9_th gross profit margin excluding freight and delivery revenues replace_table_token_10_th 1 includes freight to remote distribution sites . same-store we have provided certain information on a same-store basis . when discussing our financial results in comparison to prior periods , we may exclude the operating results of recently acquired/divested businesses that do not have comparable results in the periods being discussed . these recently acquired/divested businesses are disclosed in note 19 “ acquisitions and divestitures ” in item 8 “ financial statements and supplementary data. ” this approach allows us to evaluate the performance of our operations on a comparable basis . we believe that measuring performance on a same-store basis is useful to investors because it enables evaluation of how our operations are performing period over period without the effects of acquisition and divestiture activity . our same-store information may not be comparable to similar measures used by other entities . part i i 33 aggregates segment gross profit margin as a percentage of freight-adjusted revenues is not a gaap measure . we present this metric as it is consistent with the basis by which we review our operating results . we believe that this presentation is consistent with our competitors and meaningful to our investors as it exclude s freight , delivery and transportation revenues , which are p ass-through activit ies . it also excludes immaterial other revenues related to services , such as landfill tipping fees , that are derived from our aggregates business . incremental gross profit as a percentage of freight-adjusted revenues represents the year-over-year change in gross profit divided by the year-over-year change in freight-adjusted revenues . reconciliation s of th ese metric s to their nearest gaap measure s are presented below : aggregates segment gross profit margin in accordance with gaap replace_table_token_11_th aggregates segment gross profit as a percentage of freight-adjusted revenues replace_table_token_12_th 1 at the segment level , freight , delivery and transportation revenues include intersegment freight & delivery revenues , which are eliminated at the consolidated level . part i i 34 gaap does not define `` cash gross profit `` and it should not be considered as an alternativ e to earnings measures defined by gaap . story_separator_special_tag we present this metri c f or the convenience of investment professionals who use such metrics in their analyse s a nd for shareholders who need to understand the metrics we use to assess performanc e. we and the investment communit y u s e this metri c t o assess the operating performance of our business . we do not use this metri c as a measure to allocate resources . reconciliatio n of this metri c to its nearest gaap measur e is presented below : cash gross profit c ash gross profit adds back noncash charges for depreciation , depletion , accretion and amortization to gross profit . cash gross profit per ton is computed by dividing cash gross profit by tons shipped . replace_table_token_13_th part i i 35 gaap does not define `` earnings before interest , taxes , depreciation and amortization ” ( ebitda ) and it should not be considered as an alternativ e to earnings measures defined by gaap . we present this metric for the convenience of investment professionals who use such metrics in their analyses and for shareholders who need to understand the metrics we use to assess performance . w e us e this metric to assess the operating performance of our business and for a basis of strategic planning and forecasting . we do not use this metric as a measure to allocate resources . we adjust ebitda for certain items to provide a more consistent comparison of earnings performance from period to period . ebitda and adjusted ebitda replace_table_token_14_th 1 the 2016 amount includes a $ 4.3 million gain ( reflected within other operating income , net ) for plant relocation reimbursement . adjusted ebitda for 2015 and 2014 has been revised to conform with the 2016 presentation which no longer includes an adjustment for amortization of deferred revenue and charges associated with business development . adjusting for amortization of deferred revenue is no longer meaningful as all periods presented include amortization of deferred revenue at amounts that are substantially equivalent . additionally , we no longer exclude charges associated with business development as they are deemed to represent normal recurring operating expenses . 2017 projected ebitda the following reconciliation to the mid-point of the range of 2017 projected ebitd a e xclud es adjustments for the future outcome of legal proceedings , charges associated with divested operations , asset impairment and other unusual gains and losses due to the uncertainty in predicting these items . 2017 projected in millions mid-point net earnings $ 530 income tax expense 205 interest expense , net of interest income 140 loss on discontinued operations , net of tax 0 depreciation , depletion , accretion and amortization 300 projected ebitda $ 1,175 part i i 36 results of operations total revenues include sales of product to customers , net of any discounts and taxes , and freight and delivery revenues billed to customers . related freight and delivery costs are included in cost of revenues . this presentation is consistent with the basis on which we review our consolidated results of operations . we discuss separately our discontinued operations , which consist s of our former chemicals business . the following table highlights significant components of our consolidated operating results including ebitda and adjusted ebitda . consolidated operating result highlights replace_table_token_15_th net earnings for 201 6 wer e $ 419.5 millio n ( $ 3.09 per diluted share ) c ompared to $ 221.2 millio n ( $ 1.64 per diluted share ) i n 201 5 and $ 204.9 million ( $ 1.54 per diluted share ) in 201 4 . e ach year 's results were impacted by discrete items as follows : net earnings for 2016 include : § $ 36.1 million of tax benefits ( utilization of foreign tax credits — $ 6.5 million , partial release of the alabama nol carryforward valuation allowance — $ 4.8 million , and excess tax benefits related to share-based compensation — $ 24.8 millio n § a pretax gain of $ 16.2 million related to the sale of real estate § a pretax gain of $ 11.0 million for business interruption claims ( net of incentives ) § pretax charges of $ 16.9 million associated with divested operations § pretax losses of $ 10.5 million from asset impairmen t part i i 37 net earnings for 2015 include : § a pretax gain of $ 6.3 million related to the sale of real estate and businesses § pretax charges of $ 7.1 million associated with divested operation s § a $ 5.2 million pretax asset impairment loss § a $ 5.0 million pretax charge for restructuring § a pretax loss on debt purchase of $ 67.1 million presented as a component of interest expense ( see note 6 “ debt ” in item 8 “ financial statements and supplementary data ” ) § a $ 6.5 million tax charge related to a foreign tax credit carryforward impairment § a $ 4.7 million tax benefit related to a partial release of the alabama nol carryforw ard valuation allowance net earnings for 2014 include : § a pretax gain of $ 238.5 million related to the sale of real estate and businesses including our cement and concrete businesses in the florida area § pretax charges of $ 15.0 million associated with divested operation s § a pretax loss on debt purchase of $ 72.9 million presented as a component of interest expe nse adjusted concrete and calcium segment financial data the following table compares our concrete and calcium segments financial data excluding the results of the divested operations from both the january 2015 exchange of our california concrete businesses and the march 2014 sale of our florida area concrete and cement businesses .
| 72 per diluted sha re § discrete items in 201 6 include : § $ 36.1 million of tax benefit s ( including $ 24.8 million of excess tax benefits for share-based compensation ) , a pretax gain of $ 16.2 million on the sale of real esta te , a pretax gain of $ 11.0 million for business interruption claim s , p retax charge s of $ 16.9 million for divested operations and p retax loss es of $ 10.5 million from asset impairm ent § discrete items in 2015 include : § a $ 6.5 million tax charge for a foreign tax credit carryforward impairment , a $ 4.7 mi llion tax benefit for a partial release of the alabama nol carryforward valuation allowance , a pretax charge of $ 67.1 million for debt purchase costs , a pretax gain of $ 6.3 million for the sale of real estate and businesses , a pretax charge of $ 7.1 million for divested operation s , a pretax loss of $ 5.2 million for asset impairment and a pretax charge of $ 5.0 million for restructuring § net earnings were $ 419.5 million , a n in crease of $ 198.3 million , or 90 % § adjusted ebitda was $ 966.0 million , a n in crease of $ 131.1 million , or 16 % § increased return of capital to shareholders via higher dividends ( $ 106.3 million versus $ 53.2 million ) and share repurchases ( $ 161.5 million versus $ 21.5 million ) key drivers of value creation * source : moody 's analytics part i i 29 our five core disciplines < p style= '' margin:0pt 0pt 3pt ; line-height:6pt ; border-bottom:1pt none # d9d9d9
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the second lease is for a portion of the ground floor and basement for a term of ten years , seven months and the third lease is for another portion of the ground floor for a term of ten years , four months . the leases have all commenced . at july 31 , 2018 and 2017 , the carrying value of the land , building and improvements at 520 broad street was $ 45.2 million and $ 45.9 million , respectively . the building in piscataway , new jersey is located at 225 old new brunswick road : it is a three-story commercial office building containing approximately 65,000 square feet . the building was completed in 1978. since its completion , the building has been leased as data space and therefore has ample power , diverse paths of fiber , back-up generators and dedicated hvac units . currently , approximately 28 % of the building is leased to two data users . both leases are to tenants who each occupy a portion of the first floor . one lease expires at the end of 2020 and the other lease expires at the end of october 2022. these two tenants have been in the building for over twenty years . while both leases have been renewed , there were not any tenant improvements or leasing commission for either renewal . the space in israel is a condominium portion of an office building located in the har hotzvim section of jerusalem , israel . the condominium , built in 2004 , is approximately 12,400 square feet and the space is occupied by idt and related parties . har hotzvim is a high-tech industrial park located in northwest jerusalem . it is the city 's main zone for science-based and technology companies , among them intel , teva and mobileye . a related party terminated its lease as of june 30 , 2017. as of july 31 , 2018 , idt is leasing approximately 30 % of the condominium . the leases associated with this space , to host offices for idt and its affiliates , expire in april 2025 , and have an aggregate annual base rent of $ 100,000. this space has no leases to unrelated parties . related parties represented approximately 51 % and 64 % of our total revenue for fiscal year 2018 and fiscal year 2017 , respectively . as of august 1 , 2017 , we amended our related party leases to more accurately reflect the space currently being used by idt and other affiliated companies . had they been in place for the entirety of fiscal year 2017 , these amendments would have resulted in a decrease of related party revenues of $ 1.7 million , with related parties then representing 51 % of our adjusted total revenue for fiscal year 2017. the following table represents a schedule of lease expirations , stating the number of tenants whose leases will expire , the total area in square feet covered by the leases , the annual rent represented by the leases and the percentage of gross annual rent represented by the leases : replace_table_token_4_th 47 depreciation and amortization expense of property , plant and equipment was $ 1.7 million , $ 1.7 million , and $ 1.6 million in fiscal 2018 , fiscal 2017 and fiscal 2016 , respectively . depending on market conditions and the success of our efforts to lease additional space , we anticipate making significant capital improvements to our real estate portfolio , including but not limited to , renovating common areas such as lobbies and bathrooms as well as building wide hvac systems . if we are successful in leasing additional space in our buildings , we would likely expend additional funds for improvements to the tenant 's space . we estimate costs of $ 30-50 per square foot on tenant improvements , which will be determined by our agreement with the tenants and dependent on many factors , including condition of the space , rental amount , lease length and other leasing criteria . the total estimated capital expenditures including building upgrades , tenant improvements and leasing commissions will be approximately $ 24 to $ 45 million comprised primarily of tenant improvements . pharmaceutical investments rafael pharmaceuticals ' vision is to be the premier cancer bioenergetics/metabolism firm designing drugs to attack the proteins and enzymes reconfigured , re-regulated , and repurposed in cancer and responsible for the unique metabolic features of tumors . we own our interests/rights in rafael pharmaceuticals through a 90 % -owned non-operating subsidiary , idt-rafael holdings , llc . idt-rafael holdings holds a warrant to purchase a significant stake in rafael pharmaceuticals , as well as other equity and governance rights in rafael pharmaceuticals , and owns 50 % of cs pharma , a non-operating entity which holds convertible debt and other rights to purchase equity interests in rafael pharmaceuticals . those interests/rights include : 1 . $ 10,000,000 of series d convertible notes of rafael pharmaceuticals held by cs pharma . 2. a warrant to purchase up to 56 % of the capital stock of rafael pharmaceuticals – the right to exercise the first $ 10,000,000 worth of the warrant is held by cs pharma ; and the remainder is held directly by idt-rafael holdings . 3. on september 5 , 2018 , cs pharma exercised the first $ 10 million of warrants to purchase 8.0 million shares of series d convertible preferred stock of rafael pharmaceuticals , representing approximately 13.5 % of the outstanding equity of rafael pharmaceuticals . we also have certain governance rights , including appointment of directors . on september 19 , 2017 , idt approved a compensatory arrangement with howard s. jonas related to the right held by idt-rafael holdings to receive additional rafael pharmaceutical shares ( “ bonus shares ” ) upon the achievement of certain milestones . story_separator_special_tag under that arrangement , idt and the company transferred to howard jonas the contractual right to receive “ bonus shares ” for an additional 10 % of the outstanding capital stock of rafael pharmaceuticals that was previously held by idt-rafael holdings , which is contingent upon achieving certain milestones . this right was previously held by idt-rafael holdings , of which howard jonas is a 10 % owner , subject to its right to transfer to recipients that idt-rafael holdings , in its sole discretion , felt merit because of special efforts by such persons in assisting rafael pharmaceuticals and its products . idt-rafael holdings distributed the rights to its members and we transferred the portion we received to howard jonas . if any of the milestones are met , the bonus shares are to be issued without any additional payment . howard jonas has the right to transfer the bonus shares , in his discretion , to others , including those who are instrumental to the future success of rafael pharmaceuticals . on march 2 , 2017 , howard jonas , our chairman of the board , and chairman of the board of rafael pharmaceuticals purchased 10 % of idt-rafael holdings , llc , in which the company 's direct and indirect interest and rights in rafael pharmaceuticals were held , for a purchase price of $ 1 million , which represented 10 % of the company 's cost basis in idt-rafael holdings . we hold our interest in cs pharma through our 90 % -owned non-operating subsidiary , idt-rafael holdings , llc , which holds a 50 % interest in cs pharma . accordingly , we will hold an effective 45 % indirect interest in the assets held by cs pharma , including its cash . separately , howard jonas and deborah jonas jointly own $ 525,000 of series c convertible notes of rafael pharmaceuticals , and the howard s. and deborah jonas foundation owns $ 525,000 of series c notes of rafael pharmaceuticals . 48 david polinsky , our chief financial officer , and certain family members and entities own $ 480,000 of series c convertible notes of rafael pharmaceuticals , 4,045,041 common shares of rafael pharmaceuticals , as well as hold a loan receivable from rafael pharmaceuticals of $ 1,225,650. david polinsky is also owed deferred salary of $ 203,592 , which remains outstanding from his previous period of employment at rafael pharmaceuticals . additionally , officers of rafael holdings hold the following options to purchase shares of rafael pharmaceuticals : replace_table_token_5_th the series d stock has a stated value of $ 1.25 per share ( subject to appropriate adjustment to reflect any stock split , combination , reclassification or reorganization of the series d preferred stock or any dilutive issuances , as described below ) . holders of series d stock are entitled to receive non-cumulative dividends when , as and if declared by the board of rafael pharmaceuticals , prior to any dividends to any other class of capital stock of rafael pharmaceuticals . in the event of any liquidation , dissolution or winding up of the company , or in the event of any deemed liquidation , proceeds from such liquidation , dissolution , winding up shall be distribute first to the holders of series d stock . except with respect to certain major decisions , or as required by law , holders of series d stock vote together with the holders of the other preferred stock and common stock and not as a separate class . the rafael pharmaceuticals series d note earns interest at 3.5 % per annum , with principal and accrued interest due and payable on september 16 , 2018 . the company and rafael pharmaceuticals are in discussions regarding the maturity of the series d note . the series d note is convertible at the holder 's option into shares of rafael pharmaceuticals ' series d preferred stock . the series d note also includes a mandatory conversion into rafael pharmaceuticals common stock upon a qualified initial public offering , and conversion at the holder 's option upon an unqualified financing event . in all cases , the series d note conversion price is based on the applicable financing purchase price . we and cs pharma were issued warrants to purchase shares of capital stock of rafael pharmaceuticals representing up to 56 % of the then issued and outstanding capital stock of rafael pharmaceuticals , on an as-converted and fully diluted basis . the right to exercise warrants as to the first $ 10 million thereof is owned by cs pharma and the remainder is owned by idt-rafael holdings . the warrant expires on december 31 , 2020. currently , if rafael holdings desires to raise additional financing from unaffiliated parties in connection with its exercise of its warrant or other current rights to invest in rafael pharmaceuticals ( but not including the rafael pharmaceuticals rights held by cs pharma ) , it first must give the other cs pharma holders the opportunity to provide such financing on a pro rata basis . the exercise price of the warrant is the lower of 70 % of the price sold in an equity financing , or $ 1.25 per share , subject to certain adjustments . the minimum initial and subsequent exercises of the warrant shall be for such number of shares that will result in at least $ 5 million of gross proceeds to rafael pharmaceuticals , or such lesser amount as represents 5 % of the outstanding capital stock of rafael pharmaceuticals , or such lesser amount as may then remain unexercised . the warrant will expire upon the earlier of december 31 , 2020 or a qualified initial public offering or liquidation event of rafael pharmaceuticals . on september 5 , 2018 , cs pharma exercised the first $ 10 million of warrants to purchase 8.0 million shares of series d convertible preferred stock of rafael pharmaceuticals , representing approximately 13.5 % of the outstanding equity of rafael pharmaceuticals .
| the $ 1.7 million increase in selling , general and administrative expenses in fiscal year 2018 compared to fiscal year 2017 is primarily due to the september 2017 compensatory arrangement under which the contingent right to receive additional equity interests in rafael pharmaceuticals held by idt-rafael holdings was transferred to howard s. jonas , resulting in fiscal year 2018 compensation expense of $ 606,000 , an increase in payroll as well as stock based compensation of $ 343,000 related to newly retained management and employees , an increase in legal and consulting fees of $ 483,000 in connection with the spin-off and $ 174,000 in expenses related to the company being a public company and d & o insurance , as well as an increase of $ 78,000 in real estate taxes . the increase in selling , general and administrative expenses in fiscal year 2017 compared to fiscal year 2016 is primarily due to an increase in real estate and parking taxes of $ 370,000 , an increase in allocated expenses from idt of $ 270,000 and an increase in consulting fees of $ 225,000. depreciation and amortization expense . depreciation and amortization expenses remained consistent in fiscal year 2018 compared to fiscal year 2017 and in fiscal year 2017 compared to fiscal year 2016. pharmaceuticals segment replace_table_token_7_th nm—not meaningful to date , the pharmaceuticals segment has not generated any revenues . the entirety of the expenses in the pharmaceuticals segment relate to the operating and research and development activities of lipomedix , of which we are a 50.6 % owner . combined operations our combined income and expense line items below income ( loss ) from operations were as follows : replace_table_token_8_th 54 interest income , net and net gains resulting from sales of marketable securities . interest income and net gains resulting from sales of marketable securities in fiscal year 2018 increased due to interest earned on the $ 31 million of marketable securities contributed by idt as of the spin-off on march 26 , 2018. net gains ( losses ) resulting from foreign
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for the years ended december 31 , 2013 and 2012 , we derived approximately 70 % and 67 % , respectively , of our revenues from transactions processed and subscription arrangements . the remainder of our revenues was generated by professional services and licenses . the current mix of revenue represents higher transaction and subscription revenues than we have historically experienced . this is a result of new subscription arrangements with our existing customers . historically , our revenues have been directly impacted by the number of transactions processed . the future success of our business depends on the continued growth of consumer and business transactions and , as such , the volume of transactions that we process could fluctuate on a quarterly basis . see `` current trends affecting our results of operations '' for certain matters regarding future results of operations . most of our revenues are recorded in us dollars but as we continue to expand our business with international carriers and increase the extent of recording our international activities in local currencies we will become subject to currency translation risk that could affect our future net sales . our five largest customers , at & t , verizon wireless , comcast , nbn co limited and vodafone , accounted for approximately 77 % of our revenues for the year ended december 31 , 2013 , as compared to our five largest customers , at & t , level 3 communications , time warner cable , verizon wireless and vodafone , which accounted for 76 % of our revenues for the year ended december 31 , 2012. of these customers , at & t and verizon wireless each accounted for more than 10 % of our revenues in 2013 . 36 costs and expenses our costs and expenses consist of cost of services , research and development , selling , general and administrative , depreciation and amortization , change in contingent consideration and interest and other expense . cost of services includes all direct materials , direct labor , cost of facilities and those indirect costs related to revenues such as indirect labor , materials and supplies . our primary cost of services is related to our information technology and systems department , including network costs , data center maintenance , database management and data processing costs , as well as personnel costs associated with service implementation , customer deployment and customer care . also included in cost of services are costs associated with our exception handling centers and the maintenance of those centers . currently , we utilize a combination of employees and third-party providers to process transactions through these centers . research and development costs are expensed as incurred unless they meet u.s. generally accepted accounting principles ( gaap ) criteria for deferral and amortization . software development costs incurred prior to the establishment of technological feasibility do not meet these criteria , and are expensed as incurred . research and development expense consists primarily of costs related to personnel , including salaries and other personnel-related expenses , consulting fees and the cost of facilities , computer and support services used in service technology development . we also expense costs relating to developing modifications and minor enhancements of our existing technology and services . selling , general and administrative expense consists of personnel costs including salaries , sales commissions , sales operations and other personnel-related expenses , travel and related expenses , trade shows , costs of communications equipment and support services , facilities costs , consulting fees , costs of marketing programs , such as internet and print and other overhead costs . net change in contingent consideration obligation consists of the changes to the fair value estimate of the obligation to the former equity holders which resulted from our acquisitions . the estimate is based on the weighted probability of achieving certain financial targets and milestones . the contingent consideration obligation earn-out periods are no longer than 12 months in duration . as such , we recognize the changes in fair value over that period . final determination of the payment is done up to 90 days after the earn-out period . restructuring charges consist of the costs associated with the january 2013 work-force reduction plan to reduce costs and align our resources with our key strategic priorities . the restructuring charges include employee termination costs and facilities consolidation costs related to minimum lease payments of a leased location that will be closed . depreciation relates to our property and equipment and includes our network infrastructure and facilities . amortization primarily relates to trademarks , customer lists and technology acquired . interest expense consists primarily of interest on our lease financing obligations . current trends affecting our results of operations business from our activation platforms and synchronoss personal cloud solutions have been driven by the unprecedented growth in mobile devices globally . certain industry trends , such as next programs from at & t have resulted in faster device upgrade cycles by customers precipitating in increased device order transactions and activations . with mobile devices becoming content rich and acting as a replacement for other traditional devices like pc 's , the need to securely back up content from mobile devices , sync it with other devices and share it with others in their community of family , friends and business associates have become essential needs . the major tier 1 carriers are also publically discussing achieving 500 % penetration ( multiple connected devices per user ) by enabling 37 connectivity to non-traditional devices . such devices include connected cars , health and wellness devices , connected home and health care . the need for these devices to be activated , managed and the contents from them to be stored in a common cloud are also expected to be drivers of our businesses in the long term . story_separator_special_tag bring your own technology ( byot/byod ) is impacting the work environment for small and medium businesses , which find themselves in a position where they need to offer their employees a safe environment to share and collaborate on their work documents and files via mobile devices . leveraging our synchronoss personal cloud solution infrastructure and technology to build synchronoss workspace for this purpose is enabling us to serve a completely new market , which we believe will also contribute to our growth . to support our expected growth driven by the favorable industry trends mentioned above , we continue to look for opportunities to improve our operating efficiencies , such as the utilization of offshore technical and non-technical resources for our exception handling center management as well as routine software maintenance activities . we also leverage modular components from our existing software platforms to build new products . we believe that these opportunities will continue to provide future benefits and position us to support revenue growth . in addition , we anticipate further automation of the transactions generated by our more mature customers and additional transaction types . our cost of services can fluctuate from period to period based upon the level of automation and the on-boarding of new transaction and service types . we are also making investments in new research and development for development of products designed to enable us to grow rapidly in the mobile wireless market . our purchase of capital assets and equipment may also increase based on aggressive deployment , subscriber growth and promotional offers for free storage by our major tier 1 carrier customers . we continue to advance our plans for the expansion of our platforms ' footprint with broadband carriers and international mobile carriers to support connected devices and multiple networks through our focus on transaction management and cloud-based services for back up , synchronization and sharing of content . our initiatives with at & t , verizon wireless , vodafone and other csps continue to grow both with our current businesses as well as new products . we are also exploring additional opportunities through merger and acquisition activities to support our customer , product and geographic diversification strategies . critical accounting policies and estimates the discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements , which have been prepared in accordance with u.s. gaap . the preparation of these consolidated financial statements in accordance with u.s. gaap requires us to utilize accounting policies and make certain estimates and assumptions that affect the reported amounts of assets and liabilities , the disclosure of contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during a fiscal period . the securities and exchange commission ( sec ) considers an accounting policy to be critical if it is important to a company 's financial condition and results of operations , and if it requires significant judgment and estimates on the part of management in its application . we have discussed the selection and development of the critical accounting policies with the audit committee of our board of directors , and the audit committee has reviewed our related disclosures in this form 10-k. although we believe that our judgments and estimates are appropriate , correct and reasonable under the circumstances , actual results may differ from those estimates . if actual results or events differ materially from those contemplated by us in making these estimates , our reported financial condition and results of operations for future periods could be materially affected . see `` risk factors '' for certain matters bearing risks on our future results of operations . 38 we believe the following to be our critical accounting policies because they are important to the portrayal of our consolidated financial condition and results of operations and they require critical management judgments and estimates about matters that are uncertain . if actual results or events differ materially from those contemplated by us in making these estimates , our reported consolidated financial condition and results of operations for future periods could be materially affected . see `` risk factors '' for certain matters bearing risks on our future results of operations . revenue recognition and deferred revenue we provide services principally on a transactional or subscription basis or , at times , on a fixed fee basis and recognize the revenues as the services are performed or delivered as discussed below : transactional and subscription service arrangements : transaction and subscription revenues represented approximately 70 % , 67 % , and 77 % of our revenues for the years ended december 31 , 2013 , 2012 and 2011 , respectively . transaction and subscription revenues consist of revenues derived from the processing of transactions through our service platforms , providing enterprise portal management services on a subscription basis and maintenance agreements on software licenses . transaction service arrangements include services such as processing equipment orders , new account set-up and activation , number port requests , credit checks and inventory management . subscription services include hosting and storage and the related maintenance support for those services . transaction revenues are principally based on a contractual price per transaction and are recognized based on the number of transactions processed during each reporting period . revenues are recorded based on the total number of transactions processed at the applicable price established in the relevant contract . the total amount of revenues recognized is based primarily on the volume of transactions . subscription revenues are recorded on a straight-line basis over the life of the contract for subscription services and maintenance agreements . many of our contracts guarantee minimum volume transactions from the customer . in these instances , if the customer 's total transaction volume for the period is less than the contractual amount , we record revenues at the minimum guaranteed amount . at times , transaction revenues may also include billings to customers that reimburse us based on the number of individuals dedicated to processing transactions .
| personnel and related costs increased $ 9.1 million due primarily to our continued growth in existing and new programs with our current customers and recent acquisitions . outside consulting increased $ 5.5 million due to our increased use of third party exception handling vendors . cost of services as a percentage of revenues decreased to 41.9 % for 2013 , as compared to 42.3 % for 2012. research and development . research and development expense increased approximately $ 12.5 million to $ 64.8 million in 2013 , compared to 2012 , due primarily to an increase of $ 10.0 million in our personnel and related costs as a result of our continued growth as we further expand the capabilities of our offerings , as well as investing in several early-stage customer deployments . outside consulting increased $ 731 thousand and telecommunication and facility costs increased $ 1.6 million as a result of the expansion of our programs . research and development expense as a percentage of revenues decreased to 18.6 % for 2013 , compared to 19.1 % in 2012. selling , general and administrative . selling , general and administrative expenses increased $ 15.4 million to $ 62.1 million in 2013 , compared to 2012 due primarily to an increase of $ 12.7 million in personnel and related costs as a result of our recent acquisitions and our expanded sales and marketing programs . professional services related to accounting and legal costs increased $ 2.4 million as a result of our acquisition and patent activity and telecommunication and facility costs increased $ 2.2 million as a result of our acquisitions . offsetting the increase was a decrease of $ 2.2 million in mergers and acquisition expense due to a decrease in the number of acquisitions in 2013 compared to 2012. selling , general and administrative expense as a percentage of revenues increased to 17.8 % for 2013 , as compared to 17.1 % for 2012. net change
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properties under contract summary information about transactions we have under purchase agreements as of march 6 , 2018 is presented in the table below : replace_table_token_14_th ( 1 ) represents contractual purchase price . ( 2 ) monthly base rent in the month placed under contract multiplied by 12 . ( 3 ) capitalization rates are calculated based on current lease terms and do not give effect to future rent escalations . we entered into the purchase and sale agreements for the orlando and belpre transactions on january 24 , 2018 and march 6 , 2018 , respectively . we are currently in the due diligence periods for these transactions . if we identify problems with the properties or the operators of the properties during our due diligence review , we may not close the transactions on a timely basis or we may terminate the purchase agreements and not close the transactions . increase in capacity of our revolving credit facility on march 6 , 2018 , we amended our revolving credit facility to increase the aggregate size of the facility by $ 90 million to $ 340 million . as of december 31 , 2017 , we had $ 164.9 million of outstanding borrowings under this facility . 39 trends which may influence our business and results of operations we believe the following trends may positively impact our business and results of operations : · growing healthcare expenditures – according to the u.s. department of health and human services , overall healthcare expenditures are expected to grow at an average rate of 5.6 % per year from 2016 through 2025. we believe the long-term growth in healthcare expenditures will correlate with the long-term leases at our properties and help maintain or increase the value of our healthcare real estate portfolio ; · an aging population – according to the 2010 u.s. census , the segment of the population consisting of people 65 years or older comprise the fastest growing segment of the overall u.s. population . we believe this segment of the u.s population will utilize many of the services provide at our healthcare facilities such as orthopedics , cardiac , gastroenterology and rehabilitation ; · a continuing shift towards outpatient care – according to the american hospital association , patients are demanding more outpatient operations . we believe this shift in patient preference from inpatient to out-patient facilities will benefit our tenants as most of our properties consists of medical office buildings , ambulatory surgery centers and specialty hospitals that provide an alternative to inpatient facilities such as acute-care hospitals ; · physician practice group and hospital consolidation – according to becker 's hospital review , the first half of 2017 saw a significant increase in physician practice group consolidation from the fourth quarter of 2016. we believe the trend towards physician group consolidation will serve to strengthen the credit quality of our tenants if our tenants merge or are consolidated with larger health systems ; · a highly fragmented healthcare real estate market . despite the move toward consolidation with respect to healthcare services , we believe the healthcare real estate market continues to be highly fragmented , which will provide us with significant acquisition opportunities ; and · increased supply of attractive acute-care hospital acquisition opportunities – we believe many hospital systems are moving towards investing more in out-patient facilities and divesting acute-care hospitals . although not the primary focus of our investment strategy , we believe that the current supply and demand forces in the hospital market could provide opportunities to purchase high-quality , acute-care hospitals in desirable markets at attractive , risk-adjusted returns . we believe the following trends may negatively impact our business and results of operations : · increasing market volatility . during 2018 , the stock markets experienced extreme volatility . during this period of extreme volatility , the stock of healthcare reits have struggled , with the ftse nareit equity healthcare index dropping approximately 6.32 % during the month of january . if markets continue to experience extreme volatility , or healthcare reit stocks continue to decline , we could have difficulty raising equity capital at attractive prices or at all , which could inhibit our ability to grow our portfolio ; · increases in short-term interest rates . during 2018 , the market interest rates on which our credit facility interest rate is based has increased . if this trend continues and we are unable to hedge our interest rate exposure , our interest rate expense will increase , which would negatively affect our results of operations ; · leverage restrictions . pursuant to our revolving credit facility , our consolidated leverage ratio , defined as the ratio of our total debts to total assets , can not exceed 0.65:1 and our minimum fixed charge coverage ratio , defined as the ratio of adjusted ebitda and fixed charges , must be at least 1.50:1. as of december 31 , 2017 , our total debt was approximately $ 203.4 million and our total interest expense plus preferred dividends was approximately $ 9.1 million , and our consolidated leverage and fixed charge coverage ratios were 0.42 and 2.27 , respectively . due to our leverage limitations , if we are unable to raise equity capital in sufficient amounts or at all in order to pay down our indebtedness , we will be limited in the amount of properties we may acquire ; · increasing prices for our core assets . the heavy pace of acquisitions in our core asset classes in 2017 led to a market-wide decrease in capitalization rates . if this acquisition pace continues into 2018 , we may see further decreases in the capitalization rates of our core asset classes , which will , due to our high cost of capital , make it harder to acquire accretive assets in our core asset class . story_separator_special_tag if we are unable to make accretive acquisitions in our core asset classes , we may not be able to acquire as many properties as we would like or may be forced to purchase more non-core assets or riskier assets in order to meet our business objectives ; and · changes in third party reimbursement methods and policies . as the price of healthcare services continues to increase , we believe third-party payors , such as medicare and commercial insurance companies , will continue to scrutinize and reduce the types of healthcare services eligible for , and the amounts of , reimbursement under their health insurance plans . additionally , many employer-based insurance plans have continued to increase the percentage of insurance premiums for which covered individuals are responsible . if these trends continue , our tenants may experience lower patient volumes as well as higher patient credit risks , which could negatively impact their business as well as their ability to pay rent to us . critical accounting policies the preparation of financial statements in conformity with gaap requires our management to use judgment in the application of accounting policies , including making estimates and assumptions . we base estimates on the best information available to us at the time , our experience and on various other assumptions believed to be reasonable under the circumstances . these estimates affect the reported amounts of assets and liabilities , disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods . if our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different , it is possible that different accounting would have been applied , resulting in a different presentation of our financial statements . from time-to-time , we re-evaluate our estimates and assumptions . in the event estimates or assumptions prove to be different from actual results , adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain . for a more detailed discussion of our significant accounting policies , see note 2 – “ summary of significant accounting policies ” in the footnotes to the accompanying financial statements . below is a discussion of accounting policies that we consider critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain . 40 use of estimates the preparation of the financial statements in conformity with gaap requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes . actual results could differ from those estimates . purchase of real estate transactions in which real estate assets are purchased that are not subject to an existing lease are treated as asset acquisitions and are recorded at their purchase price , including capitalized acquisition costs , which is allocated to land and building based upon their relative fair values at the date of acquisition . transactions in which real estate assets are acquired either subject to an existing lease or as part of a portfolio level transaction with significant leasing activity are treated as a business combination under accounting standards codification ( “ asc ” ) topic 805 , business combinations , and the assets acquired and liabilities assumed , including identified intangible assets and liabilities , are recorded at their fair value . fair value is determined based upon the guidance of asc topic 820 , fair value measurements and disclosures and generally are determined using level 2 inputs , such as rent comparables , sales comparables , and broker indications . although level 3 inputs are utilized , they are minor in comparison to the level 2 data used for the primary assumptions . the determination of fair value involves the use of significant judgment and estimates . we make estimates to determine the fair value of the tangible and intangible assets acquired and liabilities assumed using information obtained from multiple sources , including pre-acquisition due diligence , and we routinely utilize the assistance of a third-party appraiser . initial valuations are subject to change until the information is finalized , no later than 12 months from the acquisition date . we expense transaction costs associated with acquisitions accounted for as business combinations in the period incurred . valuation of tangible assets : the fair value of land is determined using the sales comparison approach whereby recent comparable land sales and listings are gathered and summarized . the available market data is analyzed and compared to the land being valued and adjustments are made for dissimilar characteristics such as market conditions , size , and location . we estimate the fair value of buildings acquired on an as-if-vacant basis and depreciate the building value over its estimated remaining life . we determine the fair value of site improvements ( non-building improvements that include paving and other ) using the cost approach , with a deduction for depreciation , and depreciate the site improvements over their estimated remaining useful lives . tenant improvements represent fixed improvements to tenant spaces , the fair value of which is estimated using prevailing market tenant improvement allowances that would be given to attract a new tenant , estimated based on the assumption that it is a necessary cost of leasing up a vacant building . tenant improvements are amortized over the remaining term of the lease . as of december 31 , 2017 , we recorded site improvements of $ 4.8 million and tenant improvement of $ 8.0 million , resulting from the acquisitions that were accounted for as business combinations . valuation of intangible assets : in determining the fair value of in-place leases ( the avoided cost associated with existing in-place leases ) management considers current market conditions and costs to execute similar leases in arriving at an estimate of the carrying costs during the expected lease-up period from vacant to existing occupancy .
| , we recognize an equivalent increase in revenue ( expense recoveries ) and expense ( operating expenses ) ) . we did not recognize any revenue from expense recoveries during the year ended december 31 , 2016. expenses acquisition fees acquisition fees to unrelated parties for the year ended december 31 , 2017 were $ 2.5 million , compared to $ 1.6 million for the same period in 2016 , an increase of $ 0.9 million . these acquisition fees represent costs incurred on our acquisitions that were accounted for as business combinations . the increase results from the fact that in 2017 we had 12 acquisitions that were accounted for as business combinations versus only three during the same period in 2016. as discussed below in the “ acquisition fees – related party ” section , prior to july 1 , 2016 , the effective date of our amended management agreement ( the “ amended management agreement ” ) , our acquisition fees were payable to our advisor . 43 acquisition fees – related party acquisition fees to a related party for the year ended december 31 , 2017 was zero , compared to $ 0.8 million for the same period in 2016. related party acquisition fees for the year ended december 31 , 2016 consisted of $ 0.4 million , $ 0.3 million and $ 0.1 million that were expensed in connection with the acquisitions of the plano facility , the melbourne facility , and the westland facility , respectively . pursuant to our original management agreement , the acquisition fees payable to our advisor were computed at a rate of 2 % of the purchase price of the facility . general and administrative general and administrative expenses for the year ended december 31 , 2017 were $ 5.5 million , compared with $ 4.2 million for the same period in 2016 , an increase of $ 1.3 million . non-cash ltip expenses included in general and administrative expense included $ 1.8 million in 2017 compared to $ 1.7 million in 2016. the remaining increase in general and administrative expenses
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once the order is placed , we ship a fully charged cryoport express® shipper to the customer who conveniently loads their frozen commodity into inner chamber of the shipper . the customer then closes the shipper and reseals the shipping box displaying the recipient 's address ( “ flap a ” ) for pre-arranged carrier pick up . cryoport arranges for the pick-up of the parcel by a shipping service provider for delivery to the customer 's intended recipient . the recipient simply opens the box and shipper and removes the frozen commodity . the recipient only needs to reseal the box , displaying the nearest cryoport operations center address ( “ flap b ” ) and set out for pre-arranged carrier pick up . the cryoport express ® shipper is returned to us for cleaning , quality assurance testing , recharging and reuse of the cryoport express® shipper . in late 2012 , we shifted our focus from being a developer of cryogenic shippers and software to being a comprehensive frozen logistics solutions provider to the life sciences industry , which was accomplished by broadening our service offerings . now , in addition to our “ turn-key solution , ” we also provide the following value-added solutions that were developed to address our various clients ' needs : · “ customer staged solution , ” under which we supply an inventory of our cryoport express® shippers to our customer , in an uncharged state , enabling our customer ( after training/certification ) to charge them with liquid nitrogen and use our cryoportal to enter orders with shipping and delivery service providers for the transportation of the package . once the order is released , our customer services professionals monitor the shipment and the return of the shipper to us for cleaning , quality assurance testing , and reuse . · “ customer managed solution , ” a limited customer implemented solution , whereby we supply our cryoport express® shippers to clients in a fully charged state , but leaving it to the client to manage the shipping , including the selection of the shipping and delivery service provider and the return of the shipper to us . under this solution , the customer accepts a significant level of the risk for a successful shipment . · “ powered by cryoport sm ” is made available to providers of shipping and delivery services who seek to offer a “ branded ” cryogenic shipping solution as part of their service offerings . by negotiation , this solution can be private labeled as long as “ powered by cryoport sm ” appears prominently on the offering software interface and prominently on the packaging , which is provided by the client after minimum volume requirements are met . · “ integrated solution ” is our most comprehensive and complex outsourcing solution . it usually involves our management of the entire cryogenic logistics process for our client , including the location of our employees at the client 's site to manage the client 's cryogenic logistics , in total . · “ life science point-of-care repository solution ” whereby we supply our cryoport express ® shippers to ship and store cryogenically preserved life science products for up to 6 days ( or longer periods with substitute shippers ) at a point-of-care site , with the cryoport express ® shippers serving as a temporary freezer/repository enabling the efficient distribution of temperature sensitive allogeneic cell-based therapies without the expense , inconvenience , and potential costly failure of an on-sight , cryopreservation apparatus . our customer services professionals monitor each shipment throughout the predetermined process including the shipment 's return to cryoport where the cryoport express ® shipper is cleaned , tested for quality assurance and then returned to inventory for reuse . · “ personalized medicine and cell-based immunotherapy solution ” whereby our cryoport express ® solutions serves as an enabling technology for the safe manufacture of the rapidly expanding autologous cellular-based immunotherapy market by providing a comprehensive logistics solution for the verified chain of custody and condition transport from , ( a ) the collection of the patient 's cells in a hospital setting , to ( b ) a central processing facility where they are manufactured into a personalized medicine , to ( c ) the safe , cryogenically preserved return of these irreplaceable cells to a point-of-care treatment facility . the cryoport express ® shippers can then serve as a temporary freezer/repository to allow the efficient distribution of this personalized medicine to patients when and where they need it most without the expense , inconvenience , and potential costly failure of an on-sight , cryopreservation apparatus . our customer services professionals monitor each shipment throughout the predetermined process including the shipment 's return to cryoport where the cryoport express ® shipper is cleaned , tested for quality assurance and then returned to inventory for reuse . 28 one of our distribution partners is federal express corporation ( “ fedex ” ) . we have an agreement with fedex to provide frozen shipping logistics services through the combination of our purpose-built proprietary technologies and turnkey management processes . fedex markets and sells cryoport 's services for frozen temperature-controlled cold chain transportation as its fedex ® deep frozen shipping solution , on a non-exclusive basis and at its sole expense . during fiscal year 2013 , the company worked closely with fedex to further align its sales efforts and accelerate penetration within fedex 's life sciences customer base through improved processes , sales incentives , joint customer calls and more frequent communication at the sales and executive level . in addition , fedex has developed a fedex branded version of the cryoportal tm software platform , which is “ powered by cryoport , ” for use by fedex and its customers giving them access to the full capabilities of our logistics management platform . story_separator_special_tag in january 2013 , we entered into a master agreement ( “ fedex agreement ” ) with fedex renewing these services and providing fedex with a non-exclusive license and right to use a customized version of our cryoportal tm for the management of shipments made by fedex customers . the fedex agreement became effective on january 1 , 2013 and , unless sooner terminated as provided in the fedex agreement , expires on december 31 , 2015. pursuant to an agreement with dhl express ( usa ) , inc. ( “ dhl ” ) , dhl biotechnology and life science customers have direct access to our cloud-based order entry and tracking portal to order cryoport express ® shippers and receive preferred dhl shipping rates . the agreement covers dhl shipping discounts that may be used to support our customers using our cryoport express ® solutions . in connection with the agreement , we have integrated our proprietary cryoportal tm to dhl 's tracking and billing systems to provide dhl biotechnology and life science customers with a seamless way ( “ powered by cryoport ” ) of shipping their critical biological material worldwide . in december 2012 , we signed an agreement with pfizer inc. relating to zoetis inc. ( formerly the animal health business unit of pfizer inc. ) pursuant to which we were engaged to manage frozen shipments of a key poultry vaccine . under this arrangement , the company is providing on-site logistics personnel and its logistics management platform , the cryoportal tm , to manage shipments from the zoetis manufacturing site in the united states to domestic customers as well as various international distribution centers . as part of our logistics management services , cryoport is constantly analyzing shipping data and processes to further streamline zoetis ' logistics , ensuring products arrive at their destinations in specified conditions , on-time and with the optimum uses of resources . the company manages zoetis ' total fleet of dewar flask shippers used for this purpose , including liquid nitrogen shippers . in july 2013 , the agreement was amended to expand cryoport 's scope to manage all logistics of zoetis ' key frozen poultry vaccine to all zoetis ' international distribution centers as well as all domestic shipments of this vaccine . in october 2013 , the agreement was further amended to further expand cryoport 's services to include the logistics management for a second poultry vaccine . in february 2014 , we entered into a services agreement with liventa bioscience , inc. ( “ liventa ” ) , a commercial stage biotechnology company focused on cell-based , advanced biologics in the orthopedic industry . under this agreement , liventa will be using cryoport express ® solutions for the logistics of its cell-based therapies requiring cryogenic temperatures and also provide cryoport express ® solutions to other biologics suppliers within the orthopedic arena . the agreement combines cryoport 's proprietary , purpose-built cold chain logistics solutions for cell-based and advanced biologic tissue forms with liventa 's distribution capability to orthopedic care providers . the implementation of cryoport 's solution will eliminate the need for expensive onsite cryogenic freezers for storage of cell-based orthopedic therapies . this will enable liventa to better serve physicians at the point-of-care , whether at hospitals , clinics , pharmacies , family practices , surgery centers or orthopedic offices . we offer our solutions to companies in the life sciences industry and specific verticals including manufacturers of stem cells and cell lines , diagnostic laboratories , bio-pharmaceuticals , contract research organizations , in-vitro fertilization , cord blood , vaccines , tissue , animal husbandry , and other producers of commodities requiring reliable frozen solutions for logistics . these companies operate within heavily regulated environments and as such , changing vendors and distribution practices typically require a number of steps ; which may include the audit of our facilities , review of our procedures , qualifying us as a vendor , and performing test shipments . this process can take up to nine months or longer to complete prior to a potential customer adopting one or more of the cryoport express ® solutions . 29 going concern as reported in the report of independent registered public accounting firm to our march 31 , 2014 and 2013 consolidated financial statements , we have incurred recurring losses and negative cash flows from operations since inception . these factors , among others , raise substantial doubt about our ability to continue as a going concern . we expect to continue to incur substantial additional operating losses from costs related to the commercialization of our cryoport express ® solutions and do not expect that revenues from operations will be sufficient to satisfy our funding requirements in the near term . we believe that our cash resources at march 31 , 2014 , and funds currently being raised through a preferred stock offering together with the revenues generated from our services will be sufficient to sustain our planned operations into the second quarter of fiscal year 2015 ; however , we must obtain additional capital to fund operations thereafter and for the achievement of sustained profitable operations . these factors raise substantial doubt about our ability to continue as a going concern . we are currently working on funding alternatives in order to secure sufficient operating capital to allow us to continue to operate as a going concern . future capital requirements will depend upon many factors , including the success of our commercialization efforts and the level of customer adoption of our cryoport express ® solutions as well as our ability to establish additional collaborative arrangements . we can not make any assurances that the sales ramp will lead to achievement of sustained profitable operations or that any additional financing will be completed on a timely basis on acceptable terms or at all .
| % of revenues for the prior year . the increase in gross margin is primarily due to the increase in net revenue combined with a reduction in freight as a percentage of revenues and a decrease of fixed manufacturing costs . cost of revenues for the year ended march 31 , 2014 was 83.6 % of revenues , as compared to 144.3 % of revenues for the prior year . our cost of revenues are primarily comprised of freight charges , payroll and related expenses related to our operations center in california , third-party charges for our european and asian operations centers in holland and singapore , depreciation expenses of our cryoport express® shippers and supplies and consumables used for our solutions . the increase in cost of revenues is primarily due to freight charges from the growth in shipments . 31 selling , general and administrative expenses . selling , general and administrative expenses decreased $ 306,000 , or 5.6 % for the year ended march 31 , 2014 as compared to the prior year . this decrease is primarily related to a severance payment of approximately $ 180,000 paid to the former chief executive officer in april 2012 and a decrease in board of director stock-based compensation . partially offsetting these decreases is an increase in compensation related to replacement of the chief executive officer and an increase in expenses related to sales and marketing activities compared to previous year . research and development expenses . research and development expenses decreased $ 16,000 or 3.8 % for the year ended march 31 , 2014 , as compared to the prior year . our research and development efforts are focused on continually improving the features of the cryoport express ® solutions including the company 's cloud-based logistics management platform , the cryoportal tm , the cryoport express ® shippers and development of additional accessories to facilitate the efficient shipment of life science commodities using our solution . we
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“ risk factors ” in this form 10-k. given these uncertainties , the covid-19 pandemic could disrupt the business of certain of our collaborators and impact our business operations and our ability to execute on our associated business strategies and initiatives , and adversely impact our consolidated results of operations and or our financial condition in the future . we will continue to closely monitor and evaluate the nature and extent of the impact of the covid-19 pandemic to our business , consolidated results of operations , and financial condition . collaborations we pursue a balanced approach between product candidates that we develop ourselves and those that we develop with our collaborators . under our strategic collaborations to date , we have received significant non-dilutive funding and continue to have rights to additional funding upon completion of certain research , achievement of key product development milestones and royalties and other payments upon the commercial sale of products . our current collaborations include the following : incyte . in 2017 , we entered into an exclusive global collaboration and license agreement with incyte corporation ( incyte ) for retifanlimab ( also known as incmga0012 ) , an investigational monoclonal antibody that inhibits programmed cell death protein 1 ( pd-1 ) ( incyte license agreement ) . incyte has obtained exclusive worldwide rights for the development and commercialization of retifanlimab in all indications , while we retain the right to develop our pipeline assets in combination with retifanlimab . incyte paid us an upfront payment of $ 150.0 million under the terms of the agreement . under the terms of the incyte license agreement , incyte leads global development of retifanlimab . assuming successful development and commercialization of retifanlimab by incyte , we could receive total development and regulatory milestones of up to approximately $ 420.0 million and up to $ 330.0 million in commercial milestones . we received $ 55.0 million of the total development milestones through december 31 , 2020 and an additional development milestone of $ 10.0 million was earned in february 2021. if retifanlimab is approved and commercialized , we would be eligible to receive tiered royalties of 15 % to 24 % on any global net sales and we have the option to co-promote retifanlimab with incyte . we retain the right to develop our pipeline assets in combination with retifanlimab , with incyte commercializing retifanlimab and us commercializing our asset ( s ) , if any such potential combinations are approved . we also have an agreement with incyte under which we are to perform development and manufacturing services for incyte 's clinical needs of retifanlimab ( incyte clinical supply agreement ) and another agreement under which we are entitled to manufacture a portion of incyte 's global commercial supply of retifanlimab ( incyte commercial supply agreement ) . zai lab . in 2018 , we entered into a collaboration and license agreement with zai lab limited ( zai lab ) under which zai lab obtained regional development and commercialization rights in mainland china , hong kong , macau and taiwan ( zai lab 's territory ) for ( i ) margetuximab , an immune-optimized anti-her2 monoclonal antibody , ( ii ) tebotelimab ( formerly known as mgd013 ) , a bispecific dart molecule designed to provide coordinate blockade of pd-1 and lag-3 for the potential treatment of a range of solid tumors and hematological malignancies , and ( iii ) an undisclosed multi-specific trident molecule in preclinical development . zai lab will lead clinical development in its territory . under the terms of the agreement , zai lab paid us an upfront payment of $ 25.0 million less foreign withholding tax of $ 2.5 million . assuming successful development and commercialization of margetuximab , tebotelimab and the trident molecule , we could receive up to $ 140.0 million in development and regulatory milestones , of which we have already received $ 4.0 million ( $ 3.6 million net of foreign withholding tax ) . in addition , zai lab would pay us tiered royalties at percentage rates of mid-teens to 20 % for net sales of margetuximab in zai lab 's territory , mid-teens for net sales of tebotelimab in zai lab 's territory and 10 % for net sales of the trident molecule in zai lab 's territory , which may be subject to adjustment in specified circumstances . i-mab biopharma . in july 2019 , we entered into a collaboration and license agreement with i-mab biopharma ( i-mab ) to develop and commercialize enoblituzumab , an immune-optimized , anti-b7-h3 monoclonal antibody that incorporates our proprietary fc optimization technology platform . i-mab obtained regional development and 57 commercialization rights in mainland china , hong kong , macau and taiwan ( i-mab 's territory ) , will lead clinical development of enoblituzumab in its territories , and will participate in global studies conducted by us . under the terms of the agreement , i-mab paid us an upfront payment of $ 15.0 million . assuming successful development and commercialization of enoblituzumab , we could receive up to $ 135.0 million in development and regulatory milestones . in addition , i-mab would pay us tiered royalties ranging from mid teens to 20 % on annual net sales in its territories . janssen . in december 2020 , we entered into a research collaboration and global license agreement to develop a preclinical bispecific molecule with janssen biotech , inc. ( janssen ) . the research collaboration will incorporate our proprietary dart platform to enable simultaneous targeting of two undisclosed targets in a therapeutic area outside oncology . under the terms of the agreement , janssen paid us an upfront payment of $ 20.0 million and will be responsible for funding all expenses . we will also be eligible to receive up to $ 312.0 million in potential milestone payments and tiered royalties of up to 10 % on worldwide product sales . story_separator_special_tag financial operations overview revenue our revenue consists primarily of collaboration revenue , including amounts recognized relating to upfront nonrefundable payments for licenses or options to obtain future licenses , amounts earned by performing development and manufacturing services , research and development funding and milestone payments earned under our collaboration and license agreements with our strategic collaborators . in addition , we have earned revenues through several grants and or contracts with the u.s. government and other research institutions on behalf of the u.s. government , primarily with respect to research and development activities related to infectious disease product candidates . research and development expense research and development expense consists of expenses incurred in performing research and development activities . these expenses include conducting preclinical experiments and studies , clinical trials , manufacturing efforts and regulatory filings for all product candidates , and other indirect expenses in support of our research and development activities . we capture research and development expense on a program-by-program basis for our product candidates and recognize these expenses as they are incurred . the following are items we include in research and development expense : employee-related expenses , such as salaries and benefits ; employee-related overhead expenses , such as facilities and other allocated items ; stock-based compensation expense to employees engaged in research and development activities ; depreciation of laboratory and manufacturing equipment , computers and leasehold improvements ; fees paid to consultants , subcontractors , clinical research organizations ( cros ) and other third party vendors for work performed under our preclinical and clinical trials including , but not limited to , investigator grants , laboratory work and analysis , database management , statistical analysis , and other items ; amounts paid to vendors and suppliers for laboratory supplies ; internal and third party costs related to manufacturing clinical trial materials , including vialing , packaging and testing ; license fees and other third party vendor payments related to in-licensed product candidates and technology ; and costs related to compliance with regulatory requirements . it is difficult to determine with certainty the duration and completion costs of our current or future preclinical programs and clinical trials of our product candidates , or if , when or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain regulatory approval . the duration , costs and timing of clinical trials and development of our product candidates will depend on a variety of factors , including the uncertainties of future clinical trials and preclinical studies , uncertainties in clinical trial enrollment rates and significant and changing government regulation . in addition , the probability of success for each product candidate will depend on numerous factors , 58 including competition , manufacturing capability and commercial viability . we will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each product candidate , as well as an assessment of each product candidate 's commercial potential . general and administrative expenses general and administrative expenses consist of salaries and related benefit costs for employees in our executive , finance , legal and intellectual property , business development , human resources , information technology and other support functions , travel expenses and other legal and professional fees . other income ( expense ) other income ( expense ) consists of realized and unrealized gains and losses on equity securities and interest income earned on our cash , cash equivalents and marketable securities , offset by other expenses . critical accounting policies and significant judgments and estimates our management 's discussion and analysis of financial conditions 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 of america ( gaap ) . the preparation of these consolidated financial statements requires us to make estimates , judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheets and the reported amount of the revenue and expenses recorded during the reporting period . we base our estimates on historical experience and on various other assumptions that we believe to be reasonable . we review and evaluate these estimates on an on-going basis . these assumptions and estimates form the basis for making judgments about the carrying values of assets and liabilities and amounts that have been recorded as revenues and expenses . actual results and experiences may differ from these estimates . the results of any material revisions would be reflected in the consolidated financial statements prospectively from the date of the change in estimate . while a summary of significant accounting policies is described fully in note 2 in our consolidated financial statements , we believe that the following accounting policies are the most critical to assist you in fully understanding and evaluating our financial results and the effect of the estimates and judgments we used in preparing our consolidated financial statements . revenue recognition we expect to launch margenza in march 2021 , but have not generated any revenue from product sales to date . we recognize revenue under accounting standards update ( asu ) no . 2014-09 , revenue from contracts with customer s and all related amendments ( collectively asc 606 ) when our customer obtains control of promised goods or services , in an amount that reflects the consideration which we expect to receive in exchange for those goods or services .
| the agreement effective november 2019. the increase of $ 4.9 million in revenue from government agreements for the year ended december 31 , 2020 compared to the year ended december 31 , 2019 was primarily due to increased clinical trial activity of mgd014 and development of the second dart molecule . research and development expenses the following represents a comparison of our research and development expenses for the years ended december 31 , 2020 and 2019 : replace_table_token_2_th ( a ) 2019 expenses are shown net of reimbursements from collaboration partner . ( b ) includes research and discovery projects , as well as early preclinical and terminated molecules . research and development expenses for the year ended december 31 , 2020 decreased by $ 2.1 million compared to the year ended december 31 , 2019. this decrease was primarily attributable to : decreased clinical trial costs related to our enoblituzumab studies ; decreased costs related to margetuximab postbiologics license application submission ; and decreased spend on certain preclinical programs as well as decreased clinical trial costs related to mgd007 and mgd009 as these programs have been discontinued ; these decreases were partially offset by : increased flotetuzumab development costs due to increased clinical trial enrollment and regulatory costs , and the end of cost sharing with servier ; increased development and manufacturing costs related to the second dart molecule under our contract with the national institute of allergy and infectious diseases ( niaid ) ; and increased development and manufacturing costs related to retifanlimab due to timing of manufacturing activities for incyte . 63 general and administrative expenses the following represents a comparison of our general and administrative expenses for the years ended december 31 , 2020 and 2019 : replace_table_token_3_th general and administrative expenses decreased for the year ended december 31 , 2020 by $ 3.4 million compared to 2019 primarily due to decreased spend on external expenses , including consulting . other income ( expense ) the decrease in
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general and administrative totaled $ 8,561,755 for the year ended december 31 , 2019 , an increase of $ 961,020 or 12.6 % over $ 7,600,735 recognized during the year ended december 31 , 2018. the increase was primarily attributed to increase in headcount and salaries , legal , operations and support functions . sales and marketing totaled $ 7,644,019 for the year ended december 31 , 2019 , an increase of $ 2,855,818 or 59.6 % over $ 4,788,201 recognized during the year ended december 31 , 2018. the increase was primarily attributed to increase in digital advertising , a dramatic increase to the sales team and addition of customer relationship management systems . research and development totaled $ 2,496,165 for the year ended december 31 , 2019 , an increase of $ 1,081,438 or 76.4 % over $ 1,414,727 recognized during the year ended december 31 , 2018. the increase was primarily attributed to the growth in the technology team related to the enhancement and maintenance of our digital marketplace technology platform . ● net loss totaled $ 12,518,377 for the year ended december 31 , 2019 , an increase of $ 1,274,474 or 11.3 % over $ 11,243,903 recognized during the year ended december 31 , 2018. the increase in net loss was driven by the higher operating costs described above , partially offset by the higher net revenues recognized during the year ended december 31 , 2019 . - 21 - during the first quarter of 2020 : ● net rental days increased 16.2 % sequentially to approximately 229,000 rental days for the first fiscal quarter ended march 31 , 2020 from approximately 197,000 rental days for the prior fiscal quarter ended december 31 , 2019 and increased 65.9 % from approximately 138,000 rental days for the prior fiscal year quarter ended march 31 , 2019. management 's plan we have incurred operating losses since inception and historically relied on debt and equity financing for working capital . going forward the company intends to fund its operations through increased revenue from operations and the funds raised through public securities offerings . our annualized rental day run rate increased to over 900,000 in the first quarter of 2020 before the covid-19 situation occurred starting in early march 2020. this situation has had a dramatic negative impact on the ridesharing sector as evidenced by revenue drops at the tncs . as our operations are platform agnostic , we are diversifying our business to include other gig economy service providers , including but not limited to , food and grocery delivery services , as demand for those services has significantly increased . this expands the opportunities for the drivers and owners on our platform and solidifies their connection to our company . as you can see in the chart below , our weekly rental days have decreased approximately 30 % from all-time highs in early march through mid-april as our car supply supports the expansion of the gig economy . we are attempting to moderate the impact to our car owners and drivers , as well as to the company itself . much of our cost structure is variable in nature so that our costs for driver screening , insurance , merchant processing , and more has almost immediately decreased in line with these lower activity levels . based on generally increasing revenues through the normal course of business and a high relative amount of variable costs , our additional cash generated from the funded ppp loan from jpmorgan chase for $ 2,004,175 received april 13 , 2020 , and our current capital as well as the access to additional capital , we believe the company 's has sufficient resources to continue to operate its business for at least the next 12 months . - 22 - components of our results of operations the following describes the various components that make up our results of operations , discussed below : revenue is earned from fees associated with matching drivers to owners of cars that meet the strict requirements imposed by ride-sharing services such as uber and lyft with drivers . a driver will typically rent a car through one transaction via our on-line marketplace . we recognize gaap reportable revenue primarily from a transaction fee and an insurance fee when a car is rented on our platform when the company 1 ) identifies the contract with the customer 2 ) identifies the performance obligations in the contract 3 ) determines the transaction price , 4 ) determines if an allocation of that transaction price is required to the performance obligations in the contract , and 5 ) recognizes revenue when or as the companies satisfies a performance obligation . cost of revenues primarily include direct fees paid for driver insurance , insurance claim payments based on the policy in effect at the time of loss , merchant processing fees , technology and hosting costs , and motor vehicle record fees incurred for paid driver applications . the company has chosen to transition how it categorizes insurance claims for physical damage , liability claims and certain incidental expenses incurred as part of its protections plans to cost of revenues from operating expenses for the full year ended december 31 , 2019 to adopt emerging industry norms and the changes made to our business practices around our insurance policies , and will present this financial information in this manner going forward , subject to additional changes in policies or business practices . this change simply moves the same amount of expense from operating expenses to cost of revenues and is earnings neutral . general and administrative costs include all corporate and administrative functions that support our business . these costs also include payroll for officers and operational staff , stock-based compensation expense , consulting costs , professional fees , and other costs that are not included in cost of revenues . story_separator_special_tag research and development costs are related to activities such as user experience and user interface development , database development and maintenance , and technology related expenses to research , improve , implement , or maintain technology and systems utilized throughout our enterprise . other income/expense includes non-operating income and expenses including interest income and expense . story_separator_special_tag arise . if we are unable to raise capital in the future , we may need to curtail expenditures by scaling back certain sales and marketing expenses . - 24 - cash flows net cash used in operating activities was $ 8,113,762 for the year ended december 31 , 2019. this consisted primarily of a net loss of $ 12,518,377 offset by non-cash stock-based compensation expense of $ 1,988,626 largely driven by the recognition of costs related to stock options , rsus , and shares issued for services . additionally , there was an increase in insurance reserves of $ 984,450 and accounts payable of $ 1,375,704. net cash used in operating activities was for the year ended december 31 , 2018 resulted in cash outflows of $ 6,515,069. this consisted primarily of a net loss of $ 11,243,903 offset by non-cash stock-based compensation expense of $ 2,280,842 and non-cash amortization of debt discount of $ 1,515,191. additionally , there were an increase in accrued liabilities of $ 747,358 and insurance reserve of $ 348,442. net cash used in investing activities was $ 6,207 for the year ended december 31 , 2019 , which primarily consists of deposits . net cash used in investing activities was $ 197,676 for the year ended december 31 , 2018 , which primarily consists of purchases of property and equipment and investment in internally developed software , partially offset by deposits . net cash provided by financing activities was $ 12,012,239 for the year ended december 31 , 2019 , which primarily consists of gross proceeds of sale of common stock in our july 2019 secondary public offering of $ 12,075,000 , exercise of warrants of $ 873,403 , partially offset by offering costs of $ 1,017,623. net cash provided by financing activities was $ 13,263,672 for the year ended december 31 , 2018 , which primarily consists of net proceeds of $ 11,340,000 related to our june 2018 initial public offering , net proceeds from convertible debt of $ 2,778,579 , partially offset by offering costs of $ 569,665 and repayments on notes payable totaling $ 350,000. capital management we aim to manage capital so that we will maintain optimal returns to shareholders and benefits for other stakeholders . we also aim to maintain a capital structure that ensures the lowest cost of capital available to the company . we regularly review the company 's capital structure and seek to take advantage of available opportunities to improve outcomes for the company and its shareholders . for the years ended december 31 , 2019 and 2018 , there were no dividends paid and we have no plans to commence the payment of dividends . we have no current plans to issue further shares on the market but will continue to assess market conditions and the company 's cash flow requirements to ensure the company is appropriately funded . there is no significant external borrowing at the reporting date . neither the company nor any of the subsidiaries are subject to externally imposed capital requirement . going concern the accompanying consolidated financial statements have been prepared on the basis that we will continue as a going concern , which contemplates realization of assets and the satisfaction of liabilities in the normal course of business . at december 31 , 2019 , we had an accumulated deficit of $ 29,015,134 and a working capital of $ 6,577,375. our operating activities consume the majority of our cash resources . we anticipate that we will continue to incur operating losses and negative net cash flows from operations , as we navigate the covid-19 situation . as of the date of this report we had approximately $ 9,000,000 of cash and cash equivalents . based on our additional cash generated from the funded ppp loan from jpmorgan chase for $ 2,004,175 received april 13 , 2020 , cash generated from our revenues , and our current capital as well as the access to additional capital , we believe the company 's has sufficient resources to continue to operate its business for at least the next 12 months . if we are unable to raise sufficient additional funds , we will have to develop and implement a plan to extend payables , reduce expenditures , or scale back our business plan until sufficient additional capital is raised to support further operations . there can be no assurance that such a plan will be successful . - 25 - critical accounting policies , judgments and estimates use of estimates the preparation of consolidated financial statements in conformity with u.s. gaap requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities , and the reported amount of revenues and expenses during the reporting period . actual results could materially differ from these estimates . it is reasonably possible that changes in estimates will occur in the near term . the company 's most significant estimates and judgments involve recognition of revenue , insurance reserves , the measurement of the company 's stock-based compensation , including the estimation of the underlying deemed fair value of common stock in periods prior to the date of the company 's ipo , the estimation of the fair value of market-based awards , the valuation of warrants , allowance for doubtful accounts , estimates for future contingent customer incentive obligations , and the fair value of financial instruments . stock based compensation the company accounts for stock options issued to employees under asc 718 , compensation – stock compensation .
| sales and marketing totaled $ 7,644,019 for the year ended december 31 , 2019 , an increase of $ 2,855,818 or 59.6 % over $ 4,788,201 recognized during the year ended december 31 , 2018. the increase was primarily attributed to increase in digital advertising , a dramatic increase to the sales team and addition of customer relationship management systems . research and development totaled $ 2,496,165 for the year ended december 31 , 2019 , an increase of $ 1,081,438 or 76.4 % over $ 1,414,727 recognized during the year ended december 31 , 2018. the increase was primarily attributed to the growth in the technology team related to the enhancement and maintenance of our digital marketplace technology platform . - 23 - loss from operations . loss from operations for the year ended december 31 , 2019 was $ 12,689,558 as compared to a loss from operations of 9,158,663 for the year ended december 31 , 2018. the increase in loss from operations was driven by the higher operating costs described above , partially offset by the higher net revenues recognized during the year . other ( income ) expense . for the year ended december 31 , 2019 , interest expense totaled $ 2,500 as compared to interest expense of $ 2,040,311 for the year ended december 31 , 2018. the decrease as a result of interest charges for beneficial conversion features on convertible debt and the amortization of debt discounts in 2018 , those charges no longer exist going forward after the ipo . net loss . net loss for the year ended december 31 , 2019 was $ 12,518,377 as compared to a net loss for the year ended december 31 , 2018 of $ 11,243,903. the increase in net loss was driven by the higher operating costs described above , partially offset by the higher net revenues recognized during the year . non-gaap financial measure – gross billings gross billings is an important measure by which we evaluate and manage our business . we define gross billings as the amount billed to drivers , without any adjustments for amounts paid to owners or refunds . gross billings include transactions from both our revenues recorded on a net and a gross basis . it is important to note that gross billings is a
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revenue from our enterprise customers represented 75 % of our total revenue for the past seven consecutive quarters . we expect our future revenue growth to come primarily from our enterprise customer base and to be driven in part by the increasingly web-based economy and developing it strategies such as cloud computing , collaboration , data center connectivity and disaster recovery that requires the reliable connectivity and network capacity that we provide . our national fiber footprint and new and enhanced service capabilities enable us to serve customers with multi-point , multi-city locations . carrier customer revenue revenue from carrier customers increased 2 % in 2010 as compared to the prior year . our carrier revenue base has been relatively stable , representing 22 % of total revenue for the past seven consecutive quarters . the 35 increase in carrier revenue in 2010 was primarily due to an increase in installed sales to carrier customers , including wireless providers ; however , carrier revenue historically has been impacted by pricing declines in connection with carrier customer contract renewals , disconnections resulting from price competition from other carriers , customer cost cutting measures and carrier consolidation , among other factors . we expect demand from our carrier customers to be driven in part by the provision of services for wireless backhaul facilities . we can not assure that future new installed sales will continue to outpace the revenue declines from carrier repricing and disconnections . intercarrier compensation revenue intercarrier compensation revenue , which consists of switched access and reciprocal compensation , represented 3 % of our total revenue for the past 11 consecutive quarters , and may decline in the future as a percentage of total revenue due to growth in revenue from enterprise customers , federal and state mandated rate reductions and possible changes in the regulatory regime for intercarrier compensation . intercarrier compensation revenue also may fluctuate from quarter to quarter based on variations in minutes of use originating and terminating on our network and changes in customer dispute activity . revenue and customer churn revenue churn , defined as the average lost recurring monthly billing from a customer 's partial or complete disconnection of services ( excluding pricing declines upon contract renewals and lost usage revenue ) compared to reported revenue was 1.0 % , 1.3 % and 1.2 % of monthly revenue in 2010 , 2009 and 2008 , respectively . as a component of revenue churn , revenue lost from customers fully disconnecting services was 0.2 % for 2010 and 0.3 % for 2009 and 2008. customer and service disconnections occur as part of the normal course of business and are primarily associated with price competition from other providers , customer network optimization , customers moving facilities to other locations , cost cutting , business contractions , customer financial difficulties and industry consolidation . we also believe that the economic environment contributed to an increase in disconnections beginning in late 2007. while we experienced an improvement in revenue churn in 2010 that we believe was in part due to an improving economy and our customer experience initiatives to increase customer loyalty and reduce churn , we can not predict whether these favorable churn results will continue or the total impact on revenue from future customer disconnections or the timing of such disconnections . customer churn , defined as the average monthly customer turnover compared to the average monthly customer count , was 1.1 % , 1.3 % and 1.4 % for 2010 , 2009 and 2008 , respectively . the majority of this churn came from our smaller customers , which we expect to continue . pricing we experience significant price competition across our service categories that impacts our revenue , which is particularly intense for traditional tdm inter-city point-to-point services , pop to pop and pop to customer premise legacy dedicated services , data center to data center dedicated services , medium and high capacity internet access , long distance service and integrated service bundles . we also believe that technology advancements in the telecommunications industry have resulted in lower unit costs for some electronics and equipment that drives customer demand for higher bandwidth at the same or lower prices . in our industry , service agreements typically range from two to five years , with fixed pricing for the contract term . when contracts are renewed with no changes to the services , pricing may be reduced to current market levels as a renewal incentive . in addition , during the terms of agreements , customers often purchase additional services or increase or decrease the capacity of existing services . during the recent recession , we experienced a reduction in such service additions that resulted in a greater impact to our total revenue from pricing declines to current market levels upon contract renewals . this impact may continue if the economic recovery slows or stalls or may ease if economic conditions generally improve . 36 pricing of special access services we provide special access services to customers over our own fiber facilities in competition with ilecs , and we also purchase special access and other services from ilecs to extend the reach of our network . the ilecs have argued before the fcc that the high capacity telecommunications services that they sell , including special access services we buy from them , should no longer be subject to regulations governing price and quality of service . we have advocated that the fcc should modify its special access pricing flexibility rules to return these services to price-cap regulation to protect against unreasonable price increases . the fcc is reviewing its regulation of special access pricing in a pending proceeding and is collecting data for that purpose , but we do not know when or if the fcc will act on interstate special access pricing regulation in the near term . story_separator_special_tag if the special access services we buy from the ilecs were to be further deregulated , ilecs would have a greater ability to increase the price and reduce the service quality of special access services they sell to us . if the prices we must pay for special access services increase materially , our margins could be adversely affected . we entered into a two year wholesale service agreement through may 31 , 2012 with a large ilec under which that ilec supplies us with tariffed special access and other services for end-user access and transport with certain service level commitments . this agreement replaced a prior agreement for these services that expired in may 2010. this new agreement resulted in higher costs for some special access services than under the expiring agreement . this increased cost has not been material to our consolidated financial statements . in addition , the fcc has granted petitions for forbearance from regulation of certain special access services , including ethernet services offered by the ilecs as special access with the result that prices we would pay for the ethernet and oc-n high capacity data services of the petitioning carriers are no longer price regulated . we continue to pursue commercial arrangements with the ilecs for these services on acceptable terms and conditions . quarterly and other financial trends although our business is not inherently seasonal in nature , historically our revenue and expense in the first quarter of the year has been impacted by some seasonal factors that may cause fluctuations from the prior quarter . first quarter installations and the associated revenue may be impacted by the slowing of our customers ' purchasing activities at the end of the fourth quarter . our expenses also are impacted in the first quarter by the resetting of payroll taxes and other employee-related cost increases . because we generally do not recognize revenue subject to billing disputes until the dispute is resolved , the timing of filing disputes and dispute resolutions may positively or negatively affect our revenue in a particular quarter . the timing of disconnections may also impact our results in a particular quarter , with disconnections early in the quarter generally having a greater impact . the timing of capital and other expenditures may affect our margins or cash flow . the convergence of any of these or other factors such as fluctuations in usage or pricing declines upon contract renewals in a particular quarter may result in our revenue growing more or less than previous trends , may impact our other financial results and may not be indicative of future financial performance . we have undertaken a number of initiatives to increase revenue growth , margins and cash flows , including expansion of our sales and sales support staff and training and retention programs , revenue assurance and cost reduction measures such as network grooming and cost optimization intended to reduce the overall access costs paid to carriers , enhancing back office support systems to improve operating efficiencies and network investment initiatives to reduce the cost of equipment and increase overall capital efficiency . we increased our capital spending in 2010 to fund new service portfolio enhancements , incremental success-based expenditures related to specific sales opportunities , including sales to wireless providers , and corporate and it initiatives that support our service evolution , enable our customer experience and drive increased scale and efficiency . we can not predict the exact timing of revenue recognition of these sales and whether these and other initiatives will be sufficient to maintain our current financial performance or increase revenue growth , margins and cash flows . 37 due to the quality of our customer base , successful collection efforts , internal controls , bad debt recoveries , and our revenue recognition policies , including recognition of contract termination charges upon cash receipt , our bad debt expense remained at less than 1 % of our total revenue for 2010 , comparable to 2009. we can not assure that we will be able to maintain bad debt expense at this low level over the long term , particularly if economic conditions worsen . critical accounting policies and estimates we prepare our financial statements in accordance with accounting principles generally accepted in the united states , which require us to make estimates and assumptions that affect reported amounts and related disclosures . we consider an accounting estimate to be critical if : it requires assumptions to be made that were uncertain at the time the estimate was made ; and changes in the estimate or different estimates that could have been selected could have a material impact on our consolidated results of operations or financial condition . goodwill we perform impairment tests at least annually on all goodwill and indefinite-lived intangible assets as required by relevant accounting standards , which require goodwill to be assigned to a reporting unit and tested using a consistent measurement date . for purposes of testing goodwill for impairment , our goodwill has been assigned to our one consolidated reporting unit and our test is performed in the fourth quarter of each year or more frequently if impairment indicators arise . goodwill is reviewed for impairment utilizing a two-step process . the first step is to identify if a potential impairment exists by comparing the fair value of the reporting unit to its carrying amount . if the fair value of the reporting unit exceeds its carrying amount , goodwill is not considered to have a potential impairment and the second step of the impairment test is not necessary . however , if a potential impairment exists , the fair value of the reporting unit is compared to the fair value of its assets and liabilities , excluding goodwill , to estimate the implied value of the reporting unit 's goodwill . if an impairment charge is deemed necessary , a charge is recognized for any excess of the carrying amount of the reporting unit 's goodwill over the implied fair value .
| revenue from network services decreased $ 11.7 million , or 3 % , to $ 359.2 million for the year ended december 31 , 2010 from $ 370.9 million in 2009. the decrease in network services revenue was primarily from disconnections and repricing of renewing customer contracts partially offset by growth primarily in high capacity and collocation services revenue as well as increased installations of transport services to wireless providers . voice services revenue decreased $ 0.4 million , to $ 332.9 million for the year ended december 31 , 2010 from $ 333.3 million in 2009. the decrease in voice services revenue resulted primarily from service disconnections including a reduction in usage-based services offset by growth in new installed sales and certain taxes and fees remitted to government authorities that we classify on a gross versus net basis in revenue and expense . revenue based on the minutes of service used by customers included in voice services was 4 % of our total revenue for each of the years ended december 31 , 2010 and 2009. intercarrier compensation revenue , including switched access and reciprocal compensation , decreased $ 0.7 million , or 2 % , to $ 33.9 million for the year ended december 31 , 2010 from $ 34.6 million in 2009. the decrease was primarily due to fluctuations in dispute settlements and a decline in minutes of use terminated on our network . operating expenses . our operating expenses consist of costs directly related to the operation and maintenance of our network and the provisioning of our services . these costs , which are net of costs capitalized for labor and overhead on capital projects , include the salaries and related expenses of customer care , provisioning , network maintenance , technical field and network operations and engineering personnel , costs to repair and maintain our network , and costs paid to other carriers for access to their facilities , interconnection , and facilities leased and associated utilities . we carry a significant portion of our traffic on our own fiber infrastructure , which enhances our ability to minimize and control access costs , which are the costs to purchase network services from other carriers . operating expenses increased $ 25.0 million , or 5 % , to $ 529.0 million for the year ended december 31 , 2010 from $ 504.0 million in 2009. the increase
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we seek to maximize the fair value of the distressed mortgage loans that we acquired using means that are appropriate for the particular loan , including both proprietary and nonproprietary loan modification programs , special servicing and other initiatives focused on avoiding foreclosure , when possible . when we are unable to effect a cure for a mortgage loan delinquency , our objective is timely acquisition and or liquidation of the property securing the mortgage loan through the use , in part , of short sales and deed-in-lieu-of-foreclosure programs . we may elect to hold certain real estate acquired in settlement of loans ( “ reo ” ) as income-producing properties for extended periods as a means of maximizing our returns on such properties . we seek to maximize our returns on distressed mortgage assets through individual loan and property resolutions , as well as bulk sales . during the year ended december 31 , 2018 , we reduced our investments in distressed mortgage loans and reo by $ 727.9 million , or 78 % . we received proceeds from liquidations , payoffs , paydowns and sales from our portfolio of distressed mortgage loans and reo totaling $ 721.9 million , including sales totaling $ 563.4 million in fair value of distressed mortgage loans . at december 31 , 2018 , we held $ 203.4 million of distressed mortgage assets ( comprised of distressed mortgage loans and reo ) . we believe that we qualify to be taxed as a reit and as such will not be subject to federal income tax on that portion of our income that is distributed to shareholders as long as we meet applicable reit asset , income and share ownership tests . if we fail to qualify as a reit , and do not qualify for certain statutory relief provisions , our profits will be subject to income taxes and we may be precluded from qualifying as a reit for the four tax years following the year we lose our reit qualification . a portion of our activities , including our correspondent production business , is conducted in our taxable reit subsidiary ( “ trs ” ) , which is subject to corporate federal and state income taxes . accordingly , we have made a provision for income taxes with respect to the operations of our trs . we expect that the effective rate for the provision for income taxes may be volatile in future periods . our goal is to manage the business to take full advantage of the tax benefits afforded to us as a reit . critical accounting policies preparation of financial statements in compliance with accounting principles generally accepted in the united states ( “ gaap ” ) requires us to make estimates and judgments 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 revenues and expenses during the reporting period . certain of these estimates significantly influence the portrayal of our financial condition and results , and they require our manager to make difficult , subjective or complex judgments . our critical accounting policies primarily relate to our fair value estimates . fair value our consolidated balance sheet is substantially comprised of assets that are measured at or based on their fair values . measurement at fair value may be on a recurring or nonrecurring basis depending on the accounting principles applicable to the specific asset or liability and whether our manager has elected to carry them at fair value . we group financial statement items measured at or based on fair value in three levels based on the markets in which the assets are traded and the observability of the inputs used to determine fair value . 49 the fair value level assigned to an asset or liability is identified based on the lowest level of inputs that are significant to determining the respective asset or liability 's fair value . these levels are : at december 31 , 2018 level description carrying value of assets measured ( 1 ) % total assets % shareholders ' equity ( in thousands ) level 1 : prices determined using quoted prices in active markets for identical assets or liabilities . $ 80,165 1 % 5 % level 2 : prices determined using other significant observable inputs . observable inputs are inputs that other market participants would use in pricing an asset or liability and are developed based on market data obtained from sources independent of the manager . 4,543,499 58 % 290 % level 3 : prices determined using significant unobservable inputs . unobservable inputs reflect our manager 's judgments about the factors that market participants use in pricing an asset or liability , and are based on the best information available in the circumstances . 1,788,020 23 % 114 % total assets measured at or based on fair value $ 6,411,684 82 % 409 % total assets $ 7,813,361 total shareholders ' equity $ 1,566,132 ( 1 ) includes assets measured on both a recurring and nonrecurring basis based on the accounting principles applicable to the specific asset and whether we have elected to carry the item at its fair value . for assets carried at lower of amortized cost or fair value , carrying value represents the assets ' amortized cost reduced by any applicable valuation allowance ; for assets carried at fair value , carrying value is represented by such assets ' fair value . at december 31 , 2018 , $ 6.3 billion , or 81 % , of our total assets were carried at fair value on a recurring basis and $ 85.7 million , or 1 % ( consisting of reo ) , were carried based on its fair value on a non-recurring basis when fair value indicates evidence of impairment . story_separator_special_tag of these assets , $ 1.8 billion or 23 % of total assets are measured using “ level 3 ” fair value inputs – significant inputs that are difficult to observe due to illiquidity of the markets in which the assets are traded . changes in inputs to measurement of these financial statement items can have a significant effect on the amounts reported for these items including their reported balances and their effects on our net income . as a result of the difficulty in observing certain significant valuation inputs affecting “ level 3 ” fair value assets and liabilities , our manager is required to make judgments regarding these items ' fair values . different persons in possession of the same facts may reasonably arrive at different conclusions as to the inputs to be applied in estimating the fair value of these fair value assets and liabilities and their fair values . such differences may result in significantly different fair value measurements . likewise , due to the general illiquidity of some of these fair value assets and liabilities , subsequent transactions may be at values significantly different from those reported . because the fair value of “ level 3 ” fair value assets and liabilities is difficult to estimate , our manager 's valuation process is conducted by specialized staff and receives significant executive management oversight . our manager has assigned the responsibility for estimating the fair values of our “ level 3 ” fair value assets and liabilities , except for interest rate lock commitments ( “ irlcs ” ) , to pfsi 's financial analysis and valuation group ( the “ fav group ” ) . with respect to those valuations , pfsi 's fav group reports to pfsi 's valuation committee , which oversees the valuations . during 2018 , pfsi 's valuation committee included the company 's executive chairman , chief executive , chief financial , chief risk and deputy chief financial officers . the fair value of our irlcs is developed by our manager 's capital markets risk management staff and is reviewed by our manager 's capital markets operations group in the exercise of their internal control activities . 50 following is a discussion relating to our manager 's approach to measuring the assets and liabilities that are most affected by “ level 3 ” fair value estimates . mortgage loans we carry mortgage loans at their fair values . we recognize changes in the fair value of mortgage loans in current period income as a component of either net gain on mortgage loans acquired for sale or net gain ( loss ) on investments . our manager estimates fair value of mortgage loans based on whether the mortgage loans are saleable into active markets with observable pricing . our manager categorizes mortgage loans that are saleable into active markets as “ level 2 ” fair value assets . such mortgage loans include substantially all of our mortgage loans acquired for sale and our mortgage loans held in a vie . our manager estimates such loans ' fair values using their quoted market price or market price equivalent . our manager categorizes mortgage loans that are not saleable into active markets as “ level 3 ” fair value assets . such mortgage loans include substantially all of our investments in distressed mortgage loans and certain of the mortgage loans acquired for sale which we subsequently repurchased pursuant to representations and warranties or that our manager identified as non-salable to the agencies . our manager estimates the fair value of our “ level 3 ” fair value mortgage loans using a discounted cash flow valuation model . inputs to the model include current interest rates , loan amount , payment status and property type , and forecasts of future interest rates , home prices , prepayment speeds , defaults and loss severities . a shift in the market for “ level 3 ” fair value mortgage loans or a change in our manager 's assessment of an input to the valuation of such fair value mortgage loans can have a significant effect on the fair value of our mortgage loans at fair value and in our income for the period . our manager believes that the fair value of distressed mortgage loans is most sensitive to changes in underlying property values . following is a summary of the effect on fair value of changes to the property value inputs used by our manager to make its fair value estimates as of december 31 , 2018 : replace_table_token_8_th excess servicing spread we acquire the right to receive the ess cash flows relating to certain msrs over the life of the underlying mortgage loans . we carry our investment in ess at fair value . we record changes in the fair value of ess in net gain ( loss ) on investments . because ess is a claim to a portion of the cash flows from msrs , its valuation process is similar to that of msrs discussed below . our manager uses the same discounted cash flow approach to measuring the ess as it uses to value the related msrs except that certain inputs relating to the cost to service the mortgage loans underlying the msrs and certain ancillary income are not included as these cash flows do not accrue to the holder of the ess . 51 a shift in the market for ess or a change in our manager 's assessment of an input to the valuation of ess can have a significant effect on the fair value of ess and in our income for the period . we believe that the most significant “ level 3 ” fair value inputs to the valuation of ess are the pricing spread ( discount rate ) and prepayment speed .
| 58 our net income increased during the year ended december 31 , 2017 , as compared to the same period in 2016 , primarily due to an increase in pretax income in our credit sensitive strategies segment of $ 84.9 million . during the year ended december 31 , 2017 , our credit sensitive strategies segment recognized net investment income totaling $ 133.4 million , an increase of $ 67.1 million from $ 66.3 million during the year ended december 31 , 2016 , primarily due to gains from our investments in crt agreements which reflects both growth in our investment in crt agreements and a tightening of credit spreads ( credit spreads represent the yield premium demanded by investors for securities similar to crt agreements as compared to a u.s. treasury security ) . in our correspondent production activities , our net investment income decreased by $ 36.5 million during the year ended december 31 , 2017 , as compared to the year ended december 31 , 2016 , from $ 168.5 million to $ 132.0 million . our net gain on mortgage loans acquired for sale decreased due to tightening gain on sale margins , resulting from a smaller mortgage market size . however , we maintained our mortgage loan production volume in a smaller mortgage market through the continued growth of our correspondent seller network . net investment income our net investment income is summarized below : replace_table_token_17_th our net investment income reflects the effects of rising interest rates on our net mortgage loan servicing fees and our net gains on mortgage loans held for sale , as well as the effect of the growth of our investments in mbs and crt agreements . net mortgage loan servicing fees our correspondent production activity is the primary source of our mortgage loan servicing portfolio . when we sell mortgage loans , we generally enter into a contract to service those loans and we recognize the fair value of such contracts as msrs . under these contracts , we are required to perform mortgage loan servicing functions in exchange for fees and the right to other compensation . the servicing functions ,
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in our advanced devices segment , we announced the thingmagic mercury xpress platform , a flexible development platform designed to simplify the process of bringing application specific rfid readers and embedded rfid solutions to market . bringing existing technology to new geographic markets we continue to position ourselves in newer geographic markets that will serve as important sources of future growth . in our engineering and construction segment , we further expanded our network of sitech technology dealers during the year by adding new dealerships in vietnam , peru , the kingdom of saudi arabia , southern africa , finland , the baltic states of estonia , latvia and lithuania , as well as new sitech locations in the united states in louisiana , idaho , eastern oregon , eastern washington , western montana , colorado , nevada , new mexico and el paso county in texas . additional new products were announced during the year that begin to take advantage of signals from new gnss as they are deployed , including the european union 's galileo system and china 's beidou system , including the bd930 gnss module and the centerpoint rtx post-processing product . we also continue to focus on expansion initiatives in africa , china , india , the middle-east , russia , south america and south east asia . during the year , we held the trimble dimensions china 2013 user 's conference in beijing , with more than 2,000 registered attendees from across china and neighboring countries . major projects and accounts announced in these markets included the use of our quantm® alignment planning system for route optimization on the 547-kilometer mongolian northern railways coal freight project from ovoot to erdenet , helping to identify a new route and resulting in significant savings . we also announced that the russian high-speed rail authority will use the trimble quantm system to help find the optimal alignment for two major high-speed rail projects connecting moscow to yekaterinburg and sochi , each approximately 1,600 kilometers long . major new accounts for trimble buildings announced in developing markets included musanada in abu dhabi and dubai-based al ajmi engineering consultants who is standardizing on trimble 's proliance capital program management software across its portfolio of more than 1,200 construction projects throughout the united arab emirates . critical accounting policies and estimates our accounting policies are more fully described in note 2 of the notes to the consolidated financial statements . the preparation of financial statements and related disclosures in conformity with u.s. generally accepted accounting principles requires us to make judgments , assumptions , and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes to the consolidated financial statements . we consider the accounting polices described below to be our critical accounting policies . these critical accounting policies are impacted significantly by judgments , assumptions , and estimates used in the preparation of the consolidated financial statements , and actual results could differ materially from the amounts reported based on these policies . revenue recognition we recognize revenue when it is realized or realizable and earned . we consider revenue realized or realizable and earned when persuasive evidence of an arrangement exists , shipment has occurred , the fee is fixed or determinable , and collectibility is reasonably assured . in instances where final acceptance of the product is specified by the customer or is uncertain , revenue is deferred until all acceptance criteria have been met . contracts and or customer purchase orders are used to determine the existence of an arrangement . shipping documents and customer acceptance , when applicable , are used to verify delivery . we assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment . we assess collectibility based primarily on the creditworthiness of the customer as determined by credit checks and analyses , as well as the customer 's payment history . 32 revenue for orders is generally not recognized until the product is shipped and title has transferred to the buyer . we bear all costs and risks of loss or damage to the goods up to that point . our shipment terms for u.s. orders and international orders fulfilled from our european distribution center typically provide that title passes to the buyer upon delivery of the goods to the carrier named by the buyer at the named place or point . if no precise point is indicated by the buyer , delivery is deemed to occur when the carrier takes the goods into its charge from the place determined by us . other shipment terms may provide that title passes to the buyer upon delivery of the goods to the buyer . shipping and handling costs are included in cost of sales . revenue from sales to distributors and dealers is recognized upon shipment , assuming all other criteria for revenue recognition have been met . distributors and dealers do not have a right of return . revenue from purchased extended warranty and post contract support ( pcs ) agreements is deferred and recognized ratably over the term of the warranty or support period . revenue from our subscription services related to our hardware and applications is recognized ratably over the term of the subscription service period beginning on the date that service is made available to the customer , assuming all revenue recognition criteria have been met . we present revenue net of sales taxes and any similar assessments . our software arrangements generally consist of a perpetual license fee and pcs . we generally have established vendor-specific objective evidence ( vsoe ) of fair value for our pcs contracts based on the renewal rate . the remaining value of the software arrangement is allocated to the license fee using the residual method . license revenue is primarily recognized when the software has been delivered and fair value has been established for all remaining undelivered elements . story_separator_special_tag in cases where vsoe of fair value for pcs is not established , revenue is recognized ratably over the pcs period after all software deliverables have been made and the only the undelivered element is pcs . some of our subscription product offerings include hardware , subscription services and extended warranty . under these hosted arrangements , the customer typically does not have the contractual right to take possession of the software at any time during the hosting period without incurring a significant penalty and it is not feasible for the customer to run the software either on its own hardware or on a third-party 's hardware . our multiple deliverable product offerings include hardware with embedded firmware , extended warranty , software , pcs services and subscription services , which are considered separate units of accounting . for certain of our products , software and non-software components function together to deliver the tangible product 's essential functionality . in evaluating the revenue recognition for our hardware or subscription agreements which contain multiple deliverable arrangements , we determined that in certain instances we were not able to establish vsoe for some or all deliverables in an arrangement as we infrequently sold each element on a standalone basis , did not price products within a narrow range , or had a limited sales history . when vsoe can not be established , we attempt to establish the selling price of each element based on relevant third-party evidence ( tpe ) . tpe is determined based on competitor prices for similar deliverables when sold separately . generally , our go-to-market strategy differs from that of competitors , and offerings may contain a significant level of proprietary technology , customization or differentiation such that the comparable pricing of products with similar functionality can not be obtained . furthermore , we are unable to reliably determine what similar competitor products ' selling prices are on a stand-alone basis . therefore , we typically are not able to establish the selling price of an element based on tpe . when we are unable to establish selling price using vsoe or tpe , we use our best estimate of selling price ( besp ) in our allocation of arrangement consideration . the objective of besp is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis . besp is generally used for offerings that are not typically sold on a stand-alone basis or for new or highly customized offerings . we determine besp for a product or service by considering multiple factors including , but not limited to , pricing practices , market conditions , competitive landscape , internal costs , geographies and gross margin . the determination of besp is made through consultation with and formal approval by our management , taking into consideration our go-to-market strategy . allowance for doubtful accounts our accounts receivable balance , net of allowance for doubtful accounts and sales returns reserve , was $ 337.9 million at the end of fiscal 2013 , as compared with $ 323.5 million at the end of fiscal 2012. the allowance for doubtful accounts was both $ 6.3 million at the end of fiscal 2013 and 2012. we evaluate ongoing collectibility of our trade accounts receivable based on a number of factors such as age of the accounts receivable balances , credit quality , historical experience , and current economic conditions that may affect a customer 's ability to pay . in circumstances where we are aware of a specific customer 's inability to meet its financial obligations to us , a specific allowance for bad debts is estimated and recorded which reduces the recognized receivable to the estimated amount we believe will ultimately be collected . in addition to specific customer identification of potential bad 33 debts , bad debt charges are recorded based on our recent past loss history and an overall assessment of past due trade accounts receivable amounts outstanding . inventory valuation our inventories , net balance was $ 254.3 million at the end of fiscal 2013 as compared with $ 240.5 million at the end of fiscal 2012 . our inventory allowances at the end of fiscal 2013 were $ 40.6 million , as compared with $ 40.3 million at the end of fiscal 2012 . our inventories are stated at the lower of standard cost ( which approximates actual cost on a first-in , first-out basis ) or market . adjustments are also made to reduce the cost of inventory for estimated excess or obsolete balances . factors influencing these adjustments include declines in demand , technological changes , product life cycle and development plans , component cost trends , product pricing , physical deterioration and quality issues . income taxes income taxes are accounted for under the liability method whereby deferred tax asset or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income . a valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not such assets will not be realized . relative to uncertain tax positions , we only recognize the tax benefit if it is more likely than not that the tax position will be sustained on examination by the taxing authorities , based on the technical merits of the position . the tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50 % likelihood of being realized upon ultimate settlement . our practice is to recognize interest and or penalties related to income tax matters in income tax expense . our valuation allowance is primarily attributable to foreign net operating losses and state research and development credit carryforwards .
| revenue growth within engineering and construction was driven primarily by organic growth due to global sales of building construction , and to a lesser extent , heavy civil and survey products in the u.s. and europe . mobile solutions revenue increased primarily due to organic growth in the transportation and logistics market , as well as acquisitions not applicable in the prior periods , including tmw , which was acquired in the fourth quarter of fiscal 2012. advanced devices revenue increased primarily due to stronger sales of rfid product solutions . field solutions revenue decreased slightly due to softness in gis markets due to economic uncertainties in the u.s. , which was partially offset by increased agricultural sales . in fiscal 2012 , total revenue increased by $ 396.0 million , or 24 % , to $ 2.04 billion from $ 1.64 billion in fiscal 2011 . of this increase , product revenue increased $ 221.1 million , or 16 % , service revenue increased $ 103.8 million , or 65 % , and subscription revenue increased $ 71.2 million , or 51 % . the product and service revenue increase in fiscal 2012 as compared to fiscal 2011 was driven by organic growth across all segments and acquisitions not applicable in the prior periods including tekla and peoplenet which were both acquired in the third quarter of fiscal 2011. subscription revenue increased primarily due to organic growth in engineering and construction and mobile solutions as well as the peoplenet acquisition . on a segment basis , the increase in fiscal 2012 was primarily due to stronger results from the engineering and construction , field solutions and mobile solutions segments . engineering and construction revenue increased $ 182.9 million , or 20 % , field solutions increased $ 68.2 million , or 16 % , mobile solutions increased $ 129.6 million , or 59 % , and advanced devices increased $ 15.3 million , or 15 % , as compared to fiscal 2011. revenue
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in determining whether professional services revenue should be accounted for separately from license revenue , we evaluate whether the professional services are considered essential to the functionality of the software using factors such as : the nature of our software products ; whether they are ready for use by the customer upon receipt ; the nature of our professional services ; the availability of professional services from other vendors ; whether the timing of payments for license revenue coincides with performance of services ; and whether milestones or acceptance criteria exist that affect the realizability of the software license fee . if we determine that the professional services revenue should not be accounted for separately from license revenue , the license revenue is recognized together with the professional services revenue using the percentage-of-completion method or completed contract method . the completed contract method is also used for contracts where there is a risk over final acceptance by the customer or for contracts that are short term in nature . license and implementation revenue . we derive the majority of our license and implementation revenue from the sale of perpetual licenses and related implementation services . we evaluate the nature and scope of implementation services for each arrangement , and if we determine that professional services revenue should not be accounted for separately from license revenue , we recognize the license and implementation revenue together as the services are performed using the percentage-of-completion method provided other revenue recognition criteria have been met . we also recognize revenue associated with billable expenses when the expenses are incurred . we have historically recognized revenue from the majority of our software sales on a percentage-of-completion basis , which has provided visibility into a significant portion of our revenue in the near-term quarters , although the actual timing of recognition of revenue on these types of arrangements will vary based on the nature and requirements of our contracts . under percentage-of-completion method of accounting , our revenue recognition generally begins when efforts are expended during the implementation , which helps alleviate pressure to enter into license agreements at the end of any particular quarter as we are typically not able to recognize the corresponding revenue during the period in which the agreement is signed except to the extent we provide implementation services during the period . as a result of our revenue recognition policy , revenue from license arrangements is generally recognized over the implementation period , which typically ranges from four to fifteen months . the percentage-of-completion computation is measured by the percentage of man-days expended on an implementation during the reporting period as a percentage of the total man-days estimated to be necessary to complete the software implementation . we measure performance under the percentage-of-completion method using the total man-day method based on current estimates of man-days to complete the software implementation . we believe that for each such software implementation , man-days expended in proportion to total estimated man-days at completion represents the most reliable and meaningful measure for determining a software implementation 's progress toward completion . in addition , under our fixed-fee software implementation arrangements , should a loss be anticipated on a contract , the full amount of the loss is recorded when the loss is determinable . see `` critical accounting policies and estimates '' for additional information regarding revenue recognition . we also license software under term license agreements that typically include maintenance and support during the contractual license term . our term license agreements typically range from two to five years . revenue and the associated costs are deferred until the delivery of the licensed solution and recognized ratably over the remaining contractual license term . revenue from term license agreements , which are included in license and implementation revenue in the consolidated statements of comprehensive income , represented 3.6 % , 4.8 % , and 5.8 % of total revenue for the years ended december 31 , 2013 , 2012 and 2011 respectively . 28 for arrangements that include hosting and cloud-based services , we allocate the arrangement consideration between the hosting service and other elements and recognize the hosting fee ratably beginning on the date the customer commences use of our services and continuing through the end of the contractual hosting term . revenue from hosting and cloud-based services , which is included in license and implementation revenue in the consolidated statements of comprehensive income , represented 2.4 % , 2.6 % and 2.3 % of total revenue for the years ended december 31 , 2013 , 2012 and 2011 respectively . maintenance and support revenue . we generate maintenance and support revenue from the sale of maintenance and support services on our software solutions . our maintenance and support arrangements are sold with terms generally ranging from one to two years . maintenance and support fees are invoiced to our customers either monthly , quarterly or on an annual basis . maintenance and support revenue includes customer support and the right to unspecified software updates and enhancements on a when and if available basis . approximately 98 % and 97 % of the maintenance and support arrangements by our customers were renewed for the years ended december 31 , 2013 and 2012 , respectively . cost of revenue cost of license and implementation revenue . cost of license and implementation revenue includes those costs related to the implementation of our solutions , principally ( a ) personnel costs , which include our employees and third party contractors , ( b ) noncash share based compensation expense , ( c ) billable and nonbillable travel , lodging and other out-of-pocket expenses , ( d ) hosting and cloud-related expenses , ( e ) amortization of capitalized software for internal use , and ( f ) an allocation of depreciation , facilities and it support costs and other costs incurred in providing implementation services to our customers . license and implementation costs may vary from quarter to quarter depending on a number of factors , including the amount of implementation services required to deploy our solutions . story_separator_special_tag cost of maintenance and support revenue . cost of maintenance and support consists largely of personnel related expenses and an allocation of depreciation , facilities and it support costs and other costs incurred in providing support and services to our customers . operating expenses selling , marketing , general and administrative . selling , marketing , general and administrative expenses principally consist of ( a ) personnel costs , which include our employees and third party contractors and sales commissions related to selling , marketing and administrative personnel , ( b ) noncash share based compensation expense ( c ) sales and marketing programs such as lead generation programs , company awareness programs , conferences , hosting and participation in industry trade shows , and other sales and marketing programs , ( d ) travel and other out-of-pocket expenses , ( e ) accounting , legal and other professional fees and ( f ) an allocation of depreciation , facilities and it support costs and other costs . research and development . research and development expenses principally consist of ( a ) personnel costs , which include our employees and third party contractors , comprised of software developers , scientists and product managers working on enhancements of existing solutions , the development of new solutions , scientific research , quality assurance and testing , ( b ) noncash share based compensation expense , and ( c ) an allocation of depreciation , facilities and it support costs and other costs . income taxes we are subject to income taxes in the united states and abroad , and we use estimates in determining our provision for income taxes . we estimate separately our deferred tax assets , related valuation allowances , current tax liabilities and deferred tax liabilities . at december 31 , 2013 , our deferred tax assets consisted primarily of temporary differences related to noncash share based compensation and acquired net operating losses . we assess the likelihood that deferred tax assets will be realized and we recognize a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized . this assessment requires judgment as to the likelihood and amounts of future taxable income . although we believe that our tax estimates are reasonable , the ultimate tax determination involves significant judgment that is subject to audit by tax authorities in the ordinary course of business . we record our deferred tax assets and liabilities at an amount based upon a u.s. federal income tax rate of 34 % and appropriate statutory tax rates of various state and local jurisdictions in which we operate . if our tax rates change in the future , we may adjust our deferred tax assets and liabilities to an amount reflecting those income tax rates . any change will affect the provision for income taxes during the period that the determination is made . our effective tax rate was ( 5 ) % , 38 % and 26 % for the years ended december 31 , 2013 , 2012 and 2011 , respectively , our federal effective tax rate has historically been lower than the federal rate of 34 % largely due to the application of the r & e tax credit . in january 2013 , congress passed the american taxpayer relief act of 2012 which , among other things , made the r & e 29 ta x credit retroactive to january 1 , 2012 and extended the r & e tax credit until december 31 , 2013. as a result of the retroactive reinstatement of the r & e tax credit , the full benefit of the 2012 r & e tax credit was recorded in the first quarter of 2013. as a part of our accounting for business combinations , intangible assets are recognized at fair values and goodwill is measured as the ex cess of consideration transferred over the net estimated fair values of assets acquired . impairment charges associated with goodwill are generally not tax deductible and will result in an increased effective income tax rate in the period that any impairment is recorded . amortization expenses associated with acquired intangible assets are generally not tax deductible pursuant to our existing tax structure ; however , deferred taxes have been recorded for non-deductible amortization expenses as a part of the accounting for business combinations . deferred revenue and unbilled receivables for our license and implementation service fees , we invoice and are paid based upon contractual payment schedules in each customer arrangement which may include payments linked to contractual milestones . we record as deferred revenue invoices that have been issued before the corresponding license and implementation revenue is recognized . we record as unbilled receivables any recognized license and implementation revenue in excess of the amount invoiced to the customer . we generally invoice for our maintenance and support services on a monthly , quarterly or annual basis through the maintenance and support period . deferred revenue does not reflect the total contract value of our customer arrangements at any point in time as we only record deferred revenue if amounts are invoiced in advance of the corresponding recognition of license and implementation revenue . as a result , there is little correlation between the timing of our revenue recognition , the timing of our invoicing and the amount of deferred revenue . story_separator_special_tag selling , marketing , general and administrative expenses increased $ 15.3 million to $ 63.5 million for the year ended december 31 , 2013 from $ 48.2 million for the year ended december 31 , 2012 , representing a 32 % increase . the increase was principally attributable to an increase of $ 12.2 million in sales , marketing , general and administrative personnel costs as a result of an increase in headcount to support our current and future growth objectives and higher commission expenses resulting from higher revenue levels . included in the increase in personnel costs is an increase of $ 4.6 million of noncash share based compensation .
| total revenue increased $ 27.0 million to $ 144.8 million for the year ended december 31 , 2013 from $ 117.8 million for the year ended december 31 , 2012 , representing a 23 % increase . revenue from the manufacturing , distribution and services ( `` mds '' ) industries increased $ 16.2 million to $ 82.4 million for the year ended december 31 , 2013 from $ 66.2 million for the year ended december 31 , 2012 , representing a 25 % increase . the increase in revenue from mds was attributed principally to a 29 % increase in license and implementation revenue as a result of both increased backlog revenue recognized from prior 30 year contracts and revenue recognized from contracts executed in 2013 and an increase of 15 % in maintenance and support revenue . revenue from travel increased $ 10.8 million to $ 62.4 million for the year ended december 31 , 2013 from $ 51.6 million for the year ended december 31 , 2012 representing a 21 % increase . the increase in revenue from travel was attributed principally to a 25 % increase in license and implementation revenue as a result of both increased backlog revenue recognized from prior year contracts and revenue recognized from contracts executed in 2013 and an increase of 15 % in maintenance and support revenue associated with implementations completed in 2013. cost of revenue and gross profit : replace_table_token_5_th cost of license and implementation . cost of license and implementation revenue increased $ 9.1 million to $ 34.9 million for the year ended december 31 , 2013 from $ 25.8 million for the year ended december 31 , 2012 , representing a 35 % increase . the increase in cost of license and implementation revenue was principally attributable to an increase of $ 7.6 million of personnel costs . personnel costs , which include our employees and third party contractors , increased primarily as a result of an increase in headcount
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potentially significant risks to the execution of our initiatives include domestic and global economic and credit conditions including , in particular , market conditions and spending trends in the financial services industry , fluctuations in oil and commodity prices and their effects on local , regional and global market conditions , and economic and market conditions in russia and china ; continued strengthening of the u.s. dollar resulting in unfavorable foreign currency impacts ; collectability difficulties in subcontracting relationships in emerging industries ; competition that can drive further price erosion and the potential loss of market share ; difficulties associated with the introduction of products in new self-service markets ; market adoption of our products by customers ; and management and servicing of our existing indebtedness . for further information on potential risks and uncertainties see item 1a `` risk factors . '' results from operations the following table shows our results for the years ended december 31 : replace_table_token_6_th the following table shows our revenue and gross margins from products and services , respectively , for the years ended december 31 : replace_table_token_7_th 27 the following tables show our revenue by geographic theater for the years ended december 31 : replace_table_token_8_th replace_table_token_9_th ( 1 ) the tables above each include a presentation of period-over-period revenue growth or decline on a constant currency basis , which is a non-gaap measure that excludes the effects of foreign currency fluctuations . we calculate this information by translating prior period revenue growth at current period monthly average exchange rates . we believe that examining period-over-period revenue growth or decline excluding foreign currency fluctuations is useful for assessing the underlying performance of our business , and our management uses revenue growth on a constant currency basis to evaluate period-over-period operating performance . this non-gaap measure should not be considered a substitute for , or superior to , period-over-period revenue growth under accounting principles generally accepted in the united states of america ( or gaap ) . 2015 compared to 2014 results discussion revenue revenue decreased 3 % in 2015 from 2014 due to declines in our financial services and retail solutions operating segments partially offset by improvement in our hospitality and emerging industries operating segments . foreign currency fluctuations unfavorably impacted the revenue comparison by 6 % . for the year ended december 31 , 2015 our product revenue decreased 6 % and our services revenue decreased 1 % compared to the year ended december 31 , 2014 . the decrease in our product revenue was due to declines in the financial services and the retail solutions operating segments in the emea and apj theaters and declines in the hospitality operating segment in the americas theater , partially offset by growth in the retail solutions operating segment in the americas theater and growth in the emerging industries operating segment in the apj theater . the decrease in our services revenue was attributable to decreases in transaction and annuity services , partially offset by an increase in our software maintenance and cloud services . services revenue decreased in the financial services and retail solutions operating segments in the emea and apj theaters and decreased in the emerging industries operating segment in the emea theater , partially offset by an increase in all operating segments in the americas theater and an increase in the emerging industries operating segment in the apj theater . gross margin gross margin as a percentage of revenue was 23.1 % in 2015 compared to 26.3 % in 2014 . product gross margin in 2015 decreased to 23.6 % compared to 25.6 % in 2014 . product gross margin in 2015 was negatively impacted by a $ 10 million increase in pension expense , offset by $ 4 million of lower charges for the write-down of inventory related to the restructuring plan . excluding these items , product gross margin decreased due to a less favorable mix of revenue . services gross margin decreased to 22.7 % in 2015 compared to 26.8 % in 2014 . services gross margin in 2015 was negatively impacted by a $ 226 million increase in pension expense offset by a reduction of $ 40 million for the write-down of inventory related to the restructuring plan . excluding these items , services gross margin increased due to a favorable mix of revenue , including an increase in cloud revenue . 28 2014 compared to 2013 story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > 14.2 % in 2013 . in 2014 , selling , general , and administrative expenses included $ 48 million of pension expense , $ 27 million of acquisition-related costs , $ 56 million of acquisition-related amortization of intangibles , and $ 3 million of ofac and fcpa related legal costs . in 2013 , selling , general , and administrative expenses included $ 22 million of pension benefit , $ 46 million of acquisition-related costs , $ 29 million of amortization of acquisition-related intangible assets and $ 3 million of ofac and fcpa related legal costs . excluding these items , selling , general and administrative expenses remained consistent as a percentage of revenue at 13.3 % . research and development expenses research and development expenses decreased $ 33 million to $ 230 million in 2015 from $ 263 million in 2014 . as a percentage of revenue , these costs were 3.6 % in 2015 and 4.0 % in 2014 . research and development expenses included pension expense of $ 18 million in 2015 as compared to pension expense of $ 19 million in 2014 . after considering this item , research and development expenses decreased to 3.3 % in 2015 from 3.7 % in 2014 as a percentage of revenue due to the focus on cost reduction actions , including limits on discretionary spending , as we continue to focus on higher value offerings . research and development expenses increased $ 60 million to $ 263 million in 2014 from $ 203 million in 2013 . story_separator_special_tag as a percentage of revenue , these costs were 4.0 % in 2014 and 3.3 % in 2013 . research and development expenses included pension expense of $ 19 million in 2014 as compared to pension benefit of $ 10 million in 2013 . after considering this item , research and development expenses increased to 3.7 % in 2014 from 3.5 % in 2013 as a percentage of revenue and were in line with management expectations as we continue to invest in broadening our self-service solutions . restructuring-related charges in 2015 , the company recorded restructuring-related charges of $ 62 million related to the restructuring program announced in july 2014. the charges consisted of severance and other employee related costs of $ 20 million , other exit costs of $ 13 million and asset-related charges of $ 29 million . in 2014 , the company recorded restructuring-related charges of $ 104 million related to the restructuring program announced in july 2014. the charges consist of severance and other employee related costs of $ 86 million , other exit costs of $ 5 million and asset-related charges of $ 13 million . interest expense interest expense was $ 173 million in 2015 compared to $ 181 million in 2014 and $ 103 million in 2013 . interest expense in 2015 and 2014 was primarily related to the company 's senior unsecured notes and borrowings under the company 's senior secured credit facility . the increase in 2014 compared to 2013 is primarily related to a full year of interest expense related to the company 's 5.875 % and 6.375 % senior unsecured notes in 2014 compared to a partial year of interest expense in 2013 . 30 other expense other ( expense ) , net was $ 57 million in 2015 compared to $ 35 million in 2014 and $ 9 million in 2013 . interest income was $ 5 million in 2015 , and $ 6 million in 2014 and 2013 . in 2015 , other ( expense ) , net included $ 21 million related to losses from foreign currency fluctuations and foreign exchange contracts , $ 9 million in bank-related fees , and $ 34 million related to the loss on the pending sale of the ips business . in 2014 , other ( expense ) , net included $ 32 million related to losses from foreign currency fluctuations and foreign exchange contracts , $ 7 million in bank-related fees , and $ 3 million related to the impairment of an investment partially offset by a $ 4 million gain on the sale of available for sale securities . in 2013 , other ( expense ) , net included $ 13 million related to losses from foreign currency contracts not designated as hedging instruments as well as from foreign currency fluctuations and $ 7 million in bank-related fees partially offset by income from the sale of certain patents and a $ 3 million gain on the sale of an investment . income taxes the effective tax rate was ( 58 ) % in 2015 , ( 35 ) % in 2014 , and 18 % in 2013 . during 2015 , there was no tax benefit recorded on the $ 427 million charge related to the settlement of the uk london pension plan due to a valuation allowance against deferred tax assets in the united kingdom . refer to note 10 , “ employee benefit plans , ” for additional discussion on the settlement of the uk london pension plan . additionally , we favorably settled examinations with canada for tax years 2002 through 2006 that resulted in a tax benefit of $ 10 million in 2015 . during 2014 , we favorably settled examinations with the internal revenue service ( irs ) for the 2009 and 2010 tax years that resulted in a tax benefit of $ 13 million . in addition , the 2014 tax rate was favorably impacted by a $ 9 million reduction in the u.s. valuation allowance and a favorable mix of earnings by country , primarily driven by actuarial pension losses due to a change in the u.s. mortality table . during 2013 , we recorded a one-time benefit of approximately $ 16 million in connection with the american taxpayer relief act of 2012 that was signed into law in january 2013 and the related retroactive tax relief for certain law provisions that expired in 2012. the 2013 tax rate was also favorably impacted by the release of a $ 10 million valuation allowance due to the implementation of a tax planning strategy to access certain deferred tax assets , a $ 15 million reduction in a valuation allowance related to a subsidiary in japan , and a favorable mix of earnings by country , primarily related to lower pension benefit . during 2014 , the internal revenue services ( irs ) finalized an examination of our 2009 and 2010 income tax returns and commenced an examination of our 2011 , 2012 and 2013 income tax returns , which is ongoing . while we are subject to numerous federal , state and foreign tax audits , we believe that appropriate reserves exist for issues that might arise from these audits . should these audits be settled , the resulting tax effect could impact the tax provision and cash flows in future periods . during 2016 , the company expects to resolve certain tax matters related to u.s. and foreign jurisdictions . these resolutions could have a material impact on the effective tax rate in 2016 . income ( loss ) from discontinued operations in 2015 , loss from discontinued operations was $ 24 million , net of tax , primarily related to updates in estimates and accruals for litigation expenses related to the fox river reserve in addition to accruals for litigation expenses related to the kalamazoo river environmental matter .
| product gross margin in 2014 was negatively impacted by a $ 5 million increase in pension expense , $ 3 million in higher acquisition-related amortization of intangibles and a $ 9 million charge for the write-down of inventory related to the restructuring plan . excluding these items , product gross margin as a percentage of revenue remained relatively consistent . services gross margin decreased to 26.8 % in 2014 compared to 30.5 % in 2013 . services gross margin in 2014 was negatively impacted by a $ 126 million increase in pension expense , $ 24 million in higher acquisition-related amortization of intangibles and a $ 47 million charge for the write-down of inventory related to the restructuring plan . excluding these items , services gross margin increased due to a favorable mix of revenue , including an increase in cloud revenue . effects of pension , postemployment , and postretirement benefit plans ncr 's income from continuing operations for the years ended december 31 was impacted by certain employee benefit plans as shown below : replace_table_token_10_th in 2015 , pension expense was $ 464 million compared to pension expense of $ 152 million in 2014 and a pension benefit of $ 78 million in 2013 . in 2015 , pension expense included a settlement loss of $ 427 million related to the completion of the transfer of ncr 's uk london pension plan to an insurer in addition to actuarial losses of $ 29 million primarily attributable to lower than expected return on u.s. pension assets , partially offset by an increase in the discount rate . in 2015 , approximately 31 % of the pension expense was included in selling , general and administrative and research and development expenses , with the remaining 69 % included in cost of products and services . in 2014 , pension expense included actuarial losses of $ 150 million primarily attributable to the change in the u.s. mortality table . in 2013 , the pension benefit included actuarial gains of $ 104 million driven
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expenses our expenses primarily consist of : cost of products sold ( excluding depreciation and amortization ) , which includes raw materials , labor , rent , freight , utilities and operating supplies . cost of products sold is primarily driven by the preceding conversion costs , production volume and the mix of the products that we manufacture . depreciation and amortization , which includes depreciation of property , plant and equipment and amortization of identifiable intangible assets . depreciation expense is primarily driven by capital expenditures , offset by the reduction of assets that become fully depreciated and disposals of equipment . amortization expense is primarily driven by the valuation of intangible assets resulting from acquisitions . restructuring and impairment charge ( adjustment ) , which includes costs related to closing previously acquired facilities . restructuring charges are typically driven by our initiatives to reduce our overall operating costs through consolidation of facilities and headcount reductions and include severance , rent on vacated facilities and equipment removal costs . impairment charges result whenever the carrying amount of an asset may not be recoverable . selling and administrative expense , which includes corporate and sales salaries and incentive compensation , professional fees , insurance , stock-based compensation , rent , bad debt expense and other corporate administrative costs . the primary drivers for selling and administrative expense are wage increases , inflation , regulatory compliance costs , professional fees , changes to stock-based compensation based on stock valuation and changes in incentive compensation expense . interest expense , net , which includes interest payments on our indebtedness . changes in the amount of our indebtedness and fluctuations in interest rates drive changes in these costs . other expense ( income ) , net , includes foreign currency transaction gains and losses , gains and losses on sales of fixed assets , kelso financial advisory fees and other non-operating costs . raw materials for the metal segment include tinplate , blackplate and cold rolled steel , various fittings , coatings , inks and compounds . steel producers have historically raised prices annually around january 1st of each year . in recent years , there has been consolidation in the steel industry and , as a result , our steel raw material purchases have been concentrated with the largest suppliers . we have historically been able to secure steel to meet our customers ' requirements even during periods of high demand . 31 index to financial statements raw materials for the plastics segment include resins , fittings and inks . resin prices fluctuate periodically throughout the year and have increased approximately 22 % over the last three years . we have generally been able to recover these raw material price increases through pass-through mechanisms in our sales agreements . we have historically been able to secure resin to meet our customers ' requirements even during periods of tight supply . to reduce our overall cost of raw materials , we have periodically supplemented our steel and resin raw material supply with purchases on the spot market and additional purchases in advance of price increases . productivity improvements in 2007 , we acquired vulcan in canada , closed the acquired facilities , consolidated the business into our icl facilities and eliminated approximately 100 employees . in reaction to changes in demand , customer mix and product mix and increased competitive price pressure , we are adjusting production schedules and manning , and we are evaluating capacity reduction options , which will include a plant rationalization . acquisitions and restructuring nampac acquisition on july 7 , 2004 , we acquired all of the issued and outstanding shares of stock of nampac , a manufacturer of rigid plastic containers for industrial packaging markets . we paid approximately $ 202.8 million in cash , net of cash acquired , for the acquisition , which was funded by a $ 30.0 million equity contribution from the kelso affiliates and certain members of our senior management and from a portion of the proceeds from a $ 225.0 million term loan facility , which was subsequently refinanced in connection with the icl acquisition . the results of operations related to this acquisition are included in our consolidated financial statements from the date of acquisition . the nampac acquisition enabled us to expand our presence in the general line rigid plastic container market and to further diversify our plastic container product offering . after the nampac acquisition , in october 2004 , we approved a plan to close the three sst industries plastics manufacturing facilities and to eliminate certain positions that became redundant as a result of the nampac acquisition . we ceased operations in and closed all three facilitiesone at the end of fiscal 2004 and the remaining two in the third quarter of fiscal 2005. we consolidated the business from these closed facilities into our other plastics manufacturing facilities , which has resulted in lower overall manufacturing costs and improved manufacturing capacity . in closing the facilities , we relocated or terminated the workforce and disposed of , stored or transferred certain equipment to other manufacturing facilities . icl acquisition on july 17 , 2006 , we acquired substantially all of the assets and assumed certain of the liabilities of industrial containers , ltd. , a toronto-based manufacturer of rigid plastic containers and steel pails for industrial packaging markets . the net assets were acquired by icl industrial containers ulc ( icl ) , a wholly-owned subsidiary of bway created to effectuate the acquisition . we paid approximately $ 68.3 million in cash for the acquisition , which was funded by $ 50.0 million in term loan borrowings by icl and from a portion of the proceeds of additional term loan borrowings by bway . for a further discussion of the term loans , see note 7 , long-term debt , of notes to consolidated financial statements , in item 8. the results of operations of icl are included in the consolidated financial statements from the date of acquisition . story_separator_special_tag included in the purchase price is approximately $ 1.7 million in transaction costs associated with the acquisition . the icl acquisition enabled us to expand in the canadian market . 32 index to financial statements vulcan acquisition on january 30 , 2007 , we acquired substantially all of the assets and assumed certain liabilities of vulcan containers , ltd. for a purchase price of approximately $ 6.0 million , which was paid using cash on hand . vulcan was headquartered in toronto and produced steel pails for distribution primarily in canada . the vulcan acquisition further expanded our presence in canada and provided an opportunity to leverage the manufacturing capacity of icl . the acquired business is included in our metal packaging segment , and the results of operations are included in the consolidated financial statements from the date of acquisition . in february 2007 , we committed to a plan to consolidate the vulcan business with and into our icl operations . as a result , we closed the vulcan manufacturing facilities and terminated approximately 100 employees . in connection with the purchase price allocation , pursuant to emerging issues task force issue 95-3 , recognition of liabilities in connection with a purchase business combination , we recorded a reorganization liability of approximately $ 3.4 million , which consisted of severance payments and facility closure costs . in this item 7 , we refer to the icl acquisition and the vulcan acquisition as the canadian acquisitions. accounting for inventory during the fourth quarter of 2007 , we changed the method of accounting for substantially all of our inventories from the lifo method to the fifo method . as of october 1 , 2006 , the percentage of inventories accounted for under the lifo method for the carrying amounts of u.s. inventories and consolidated inventories was 98 % and 92 % , respectively . we believe the fifo method of inventory valuation is preferable to the lifo method as it better reflects the current acquisition cost of those inventories on our consolidated balance sheets , enhances the matching of cost of products sold with net sales and conforms the inventory costing methods for all of our inventories to a single method . in accordance with statement of financial accounting standards no . 154 , accounting changes and error corrections , all prior periods presented have been retrospectively adjusted to apply the new method . for a summary of the effect of the retrospective adjustments resulting from the change in accounting principle for inventory costs for the fiscal years ended september 30 , 2007 , october 1 , 2006 and october 2 , 2005 , see note 3 , change in method of accounting for inventory , of notes to consolidated financial statements , included in item 8. story_separator_special_tag acquisition , as well as higher scheduled amortization of intangibles . the decrease in corporate d & a , which consists entirely of depreciation , for 2007 over 2006 is due to a higher percentage of fully depreciated assets relative to new corporate capital expenditures . 35 index to financial statements selling and administrative expense replace_table_token_13_th the decrease in segment selling and administrative expense ( s & a ) for 2007 over 2006 is primarily due to lower bonus expense and spending in each of the segments offset by additional expenses associated with the canadian acquisitions . the increase in corporate undistributed expenses for 2007 over 2006 is primarily due to the initial public offering management bonus and stock-based compensation associated with the accelerated vesting of certain stock options and the modified vesting of certain other stock options , each in connection with the initial public offering in 2007. the increase for 2007 over 2006 is partially offset by $ 8.8 million in stock-based compensation expense in 2006 related to the cash settlement of certain stock options that did not occur in 2007. interest , taxes and other items interest expense , net . interest expense , net , increased $ 3.3 million for 2007 over 2006 primarily due to an increase in debt related to the icl acquisition in the fourth quarter of 2006 and to slightly higher interest rates . provision for income taxes . the provision for income taxes decreased approximately $ 8.3 million to $ 0.9 million for 2007 from $ 9.2 million for 2006. the provision recorded on the loss before income taxes is primarily the result of certain expenses related to the initial public offering that are not deductible for income tax purposes . restructuring charge ( adjustment ) . the restructuring charge in 2006 primarily related to on-going holding costs and severance related to closures in 2005 , including a charge of approximately $ 0.8 million related to a revision in our sublease assumption for one of the closed facilities . the adjustment in 2007 relates to differences between previously recorded estimates and lower actual costs . the adjustment was partially offset by actual holding costs incurred for vacated facilities . other expense , net . other expense , net , decreased for 2007 over 2006 primarily due to certain expenses incurred in 2006 related to the refinancing of the credit facility that could not be capitalized as deferred financing costs in accordance with applicable accounting guidance . cumulative effect of change in accounting principle , net of tax benefit . upon adoption of financial accounting standards board ( fasb ) interpretation no . 47 , accounting for conditional asset retirement obligationsan interpretation of fasb statement no . 143 ( fin 47 ) , in the fourth quarter of 2006 , we recorded an increase in property , plant and equipment of $ 0.6 million and recognized an asset retirement obligation of $ 1.2 million . this resulted in the recognition of a non-cash cumulative effect of a change in accounting principle of $ 0.4 million , net of a $ 0.2 deferred tax benefit , in 2006 .
| although we realized modest volume gains in 2007 for our aerosol products , overall metal packaging volumes were down slightly in 2007. these declines are a result of a weak housing market affecting demand for paint and other housing related products , customer mix and product mix . in addition , pricing became more competitive in 2007 , especially in aerosol containers , and we reduced selling prices in certain instances to maintain volume . customer mix negatively impacted sales as volumes increased with our larger customers that typically have lower selling prices and margins but decreased with our smaller customers that typically have higher selling prices and margins . the increase in plastic packaging segment net sales for 2007 over 2006 is primarily attributable to the icl acquisition and other volume increases , which were offset by lower selling prices as a result of a decrease in the pass through of material costs . 34 index to financial statements cost of products sold replace_table_token_11_th nmnot meaningful the increase in cost of products sold , excluding depreciation and amortization ( cps ) for the metal packaging segment for 2007 over 2006 is primarily due to the canadian acquisitions . general line material costs were greater in 2007 in association with higher aerosol volumes and higher material prices , and the costs were partially offset by reduced spending . higher material costs were primarily attributable to annual metal increases effective in january 2007 , and the absence of foreign supplied steel and spot market metal purchases in the last four months of 2007 that typically have lower cost than contracted metal purchases . metal packaging segment cps as a percentage of segment net sales increased to 85.8 % in 2007 from 83.0 % in 2006 due to the higher metal costs noted above as well as to changes in customer mix , as discussed above under the net sales . the increase in cps for the plastic packaging segment for 2007 over 2006 is primarily due to the icl acquisition , partially offset by lower raw material costs and reduced
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transportation revenue includes charges to sellers for towing vehicles under certain contracts and towing charges assessed to buyers for delivering vehicles . purchased vehicle revenue includes the gross sales price of the vehicle , which we have purchased or are otherwise considered to own , and is primarily generated in the u.k. we have certain contracts with insurance companies in which we act as a principal , purchasing vehicles and reselling them for our own account . we also purchase vehicles in the open market , primarily from individuals and resell them for our own account . our revenue is impacted by several factors , including salvage frequency and the average vehicle auction selling price , as over 50 % of our service revenue is associated in some manner to the ultimate selling price of the vehicle . vehicle auction selling prices are driven primarily by : ( i ) changes in commodity prices , particularly the per ton price for crushed car bodies , as this has an impact on the ultimate selling price of vehicles sold for scrap and vehicles sold for dismantling ; ( ii ) used car pricing , which we believe has an impact on salvage frequency ; and ( iii ) the mix of cars sold , as insurance company cars on average command a lower average selling price than non-insurance cars . we can not determine the impact of the movement of these influences as we can not determine which vehicles are sold to the end user or for scrap , dismantling , retailing or export . we also can not predict the future movements of these influences . accordingly , we can not quantify the specific impact that commodity pricing , used car pricing , and product sales mix has on the selling price of vehicles and ultimately on service revenue . salvage frequency is the percentage of cars involved in accidents which insurance companies salvage rather than repair and is driven by the relationship between repairs costs , used car values , and auction returns . over the last several years , we believe there has been an increase in overall growth in the salvage market driven by an increase in salvage frequency . the increase in salvage frequency may have been driven by the decline in used car values relative to repair costs . conversely , increases in used car prices , such as occurred during the most recent recession may decrease salvage frequency and adversely affect our growth rate . used car values are determined by many factors , including the used car supply , which is tied directly to new car sales , and the average age of cars on the road . new car sales grew on a year over year basis increasing the supply of used cars . additionally , the average age of cars on the road continued to increase , growing from 9.6 years in 2002 to 11.5 years in 2014. these factors , among others , have led to a general decline in used car values while repair costs are generally trending upward . the factors that influence repair costs , used car pricing , and auction returns are many and varied and we can not predict their movements . accordingly , we can not predict future trends in salvage frequency . operating costs and expenses : yard operations expenses consist primarily of operating personnel ( which includes yard management , clerical and yard employees ) , rent , contract vehicle towing , insurance , fuel , equipment maintenance and repair , and costs of vehicles sold under the purchase contracts . general and administrative expenses consist primarily of executive management , accounting , data processing , sales personnel , human resources , professional fees , research and development , and marketing expenses . other income and expense : other income primarily includes income from the rental of certain real property , foreign exchange rate gains and losses , and gains and losses from the disposal of assets , which will fluctuate based on the nature of these activities each period . other expense consists primarily of interest expense on long-term debt . see notes to consolidated financial statements , note 8 — long-term debt . liquidity and cash flows : our primary source of working capital is cash operating results . the primary source of our liquidity is our cash and cash equivalents . the primary factors affecting cash operating results are : ( i ) seasonality ; ( ii ) market wins and losses ; ( iii ) supplier mix ; ( iv ) accident frequency ; ( v ) salvage frequency ; ( vi ) increased volume from our existing suppliers ; ( vii ) commodity pricing ; ( viii ) used car pricing ; ( ix ) foreign currency exchange rates ; ( x ) product mix ; and ( xi ) contract mix to the extent appropriate . these factors are further discussed in the results of operations and risk factors sections of this annual report on form 10-k. potential internal sources of additional working capital are the sale of assets or the issuance of equity through option exercises and shares issued under our employee stock purchase plan . a potential external source of additional working capital is the issuance of debt and equity ; however , we can not predict if these sources will be available in the future and , if available , if they can be issued under terms commercially acceptable to us . acquisitions and new operations as part of our overall expansion strategy of offering integrated services to vehicle sellers , we anticipate acquiring and developing facilities in new regions , as well as the regions currently served by our facilities . we believe that these acquisitions and openings will strengthen our coverage , as we have facilities located in north america , the u.k. , brazil , the u.a.e. , oman , bahrain , germany , and spain with the intention of providing national coverage for our sellers . story_separator_special_tag all of these acquisitions have been accounted for using the purchase method of accounting . 30 the following table sets forth facilities that we have acquired or opened from august 1 , 2012 through july 31 , 2015 : locations acquisition or greenfield date geographic service area webster , new hampshire greenfield september 2012 united states gainesville , georgia acquisition may 2013 united states davison , michigan acquisition may 2013 united states ionia , michigan acquisition may 2013 united states kincheloe , michigan acquisition may 2013 united states salvage parent , inc. * acquisition may 2013 united states seaford , delaware greenfield july 2014 united states montreal , quebec acquisition november 2013 canada moncton , new brunswick greenfield july 2015 canada dubai , u.a.e . acquisition august 2012 united arab emirates embu , brazil acquisition november 2012 brazil pirapora , brazil acquisition november 2012 brazil osasco , brazil acquisition november 2012 brazil castelo branco , brazil acquisition november 2012 brazil vila jaguara , brazil acquisition november 2012 brazil itaquaquecetuba , brazil greenfield january 2014 brazil ettlingen , germany acquisition november 2012 germany cordoba , spain acquisition june 2013 spain manama , bahrain greenfield may 2015 bahrain muscat , oman greenfield june 2015 oman * salvage parent , inc. conducted business primarily as quad city salvage auction , crashedtoys , and desert view auto auctions . the period-to-period comparability of our consolidated operating results and financial position is affected by business acquisitions , new openings , weather and product introductions during such periods . in particular , we have certain contracts inherited through our u.k. acquisitions that require us to act as a principal , purchasing vehicles from the insurance companies and reselling them for our own account . it is our intention , where possible , to migrate these contracts to the agency model in future periods . changes in the amount of revenue derived in a period from principal transactions relative to total revenue will impact revenue growth and margin percentages . in addition to growth through business acquisitions , we seek to increase revenues and profitability by , among other things , ( i ) acquiring and developing additional vehicle storage facilities in key markets ; ( ii ) pursuing national and regional vehicle seller agreements ; ( iii ) increasing our service offerings to sellers and members ; and ( iv ) expanding the application of vb3 into new markets . in addition , we implement our pricing structure and auction procedures , and attempt to introduce cost efficiencies at each of our acquired facilities by implementing our operational procedures , integrating our management information systems , and redeploying personnel , when necessary . 31 story_separator_special_tag operating expenses , total other expenses and income taxes for fiscal 2015 , 2014 and 2013 : replace_table_token_7_th yard operations expense . the increase in yard operations expense for fiscal 2015 of $ 5.9 million , or 1.1 % as compared to fiscal 2014 primarily came from ( i ) growth in volume in north america , the u.k. , and in our other international markets ; ( ii ) partially offset by a decrease in the cost to process each car in north america , primarily driven by operational efficiencies and the integration of the salvage parent , inc. , acquisition ; and ( iii ) the beneficial impact of $ 3.5 million in the u.k. due to the change in the british pound to u.s. dollar exchange rate . included in our yard operations expenses for fiscal 2014 were severance and lease termination costs of $ 4.0 million , primarily associated with the integration of the salvage parent , inc. acquisition . included in yard operations cost was depreciation and amortization expenses , which were $ 34.9 million , $ 36.2 million , and $ 40.8 million for fiscal 2015 , 2014 , and 2013 , respectively . the decrease in yard operation depreciation and amortization expense in fiscal 2015 as compared to fiscal 2014 resulted primarily from certain assets becoming fully amortized in north america . the decrease in yard operation depreciation and amortization expense in fiscal 2014 as compared to fiscal 2013 was due primarily to our data center assets being fully depreciated . the increase in yard operations expense for fiscal 2014 of $ 62.2 million , or 13.6 % as compared to fiscal 2013 primarily came from ( i ) growth in north america , driven by the acquisition of salvage parent , inc. , which closed in the fourth quarter of fiscal 2013 , increased volume from what we believe to be an increase in the overall size of the salvage market due to increased salvage frequency , and increases in volume from non-insurance suppliers ; ( ii ) growth in the u.k. , driven by increased volumes from our new and existing suppliers ; and ( iii ) growth in our international activity outside of the u.k. as these operations are in their developmental stages , without the benefit of scale . included in our yard operations expense in fiscal 2013 was $ 25.7 million of abnormal costs associated with hurricane sandy . excluding those costs , the average handling cost per car increased , driven primarily by growth in normal subhaul , labor , equipment and titling costs , as well as charges associated with severance and lease termination costs of $ 2.9 million , primarily associated with the integration of the salvage parent , inc. acquisition . cost of vehicle sales . the decrease in cost of vehicle sales for fiscal 2015 of $ 38.1 million , or 21.8 % as compared to fiscal 2014 came from ( i ) a decline in the u.k. of $ 26.9 million , which included the benefical impact of the change in the british pound to u.s. dollar exchange rate of $ 4.0 million ; ( ii ) a decline in north america of $ 6.9 million ; and ( iii ) a decline in our other international markets of $ 4.3 million .
| the increase in service revenues for fiscal 2014 of $ 108.7 million , or 12.8 % as compared to fiscal 2013 came from ( i ) growth in north america of $ 76.7 million ; ( ii ) growth in the u.k. of $ 23.7 million , driven by increased volume from our vehicle suppliers ; and ( iii ) our international expansion during the prior fiscal year into germany , spain , the u.a.e. , and brazil , which represented $ 8.3 million . excluding the increase in revenues in fiscal 2013 associated with hurricane sandy of $ 31.2 million , north america service revenue grew by $ 107.9 million , or 14.7 % . the growth in north america was driven primarily by increased volume as revenue per car remained relatively flat . the increase in volume came from the acquisition of salvage parent , inc. , which closed in the fourth quarter of fiscal 2013 , and increases from existing suppliers as we believe there may have been an increase in the overall growth in the salvage market driven by increased salvage frequency . 32 vehicle sales . the decrease in vehicle sales for fiscal 2015 of $ 44.4 million , or 21.6 % as compared to fiscal 2014 came from ( i ) a decline in the u.k. of $ 31.8 million ; ( ii ) a decline in north america of $ 8.1 million ; and ( iii ) a decline in our other international markets of $ 4.5 million . the decline in the u.k. was primarily the result of decreased volume from insurance sellers and lower average auction selling prices , driven by decreased insurance volume and increased open market purchase activity from the general public , and included a $ 5.1 million detrimental impact due to the change in the british pound to u.s. dollar exchange rate . the decline in north america was primarily the result of decreased open market purchase activity from the general public and lower average auction selling prices , which we believe is due to lower commodity prices . the decline in our other international markets was driven primarily by reduced volume . the increase in vehicle sales for fiscal 2014 of $ 8.4 million , or 4.2 % as compared to fiscal 2013 primarily came from ( i ) our international expansion during the prior fiscal year into
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in march 2009 , based upon an assessment of fair value based upon bids received in the auction process , the company recognized an impairment charge totaling $ 17.5 million ( $ 10.7 million , net of taxes ) , on the assets held for sale . the impairment charge was included in discontinued operations . during the fourth quarter of 2010 and the third quarter of 2011 , based upon continuing developments in the process of selling these assets , the company determined that the fair value of converged services had declined from earlier estimates . accordingly , the company recorded impairment losses of $ 1.9 million and $ 0.6 million , respectively , ( $ 1.1 million and $ 0.4 million , respectively , net of taxes ) to further reduce the carrying value of these assets to their revised estimated fair value less cost to sell . during 2011 , the company sold service contracts and assets for a substantial number of the properties in a series of transactions , generating cash proceeds of approximately $ 3.0 million and an additional $ 2.3 million of proceeds placed in escrow . during 2012 , the company sold additional service contracts and assets for an additional $ 1.9 million in cash proceeds , as well as collecting all but $ 0.1 million of proceeds previously placed in escrow . as of december 31 , 2012 , negotiations to complete the sale of the remaining properties continue . at this time , the expected proceeds are sufficient to cover the remaining $ 0.2 million of carrying value , and the company has determined that there has been no additional impairment to the carrying value of the assets . changes in pension plans in 2006 , the company froze benefit accruals for all participants in the company 's defined benefit pension plan . during the second quarter of 2010 , the company completed the settlement of the plan following the receipt of a favorable tax determination letter in february , 2010. in order to complete the settlement , the company contributed $ 1.0 million to fully fund the pension obligations , and recognized $ 3.6 million of pension expense from other comprehensive income . during the second quarter of 2010 , the company also curtailed future participation in the company 's supplemental executive retirement plan ( “ serp ” ) . current participants may remain in the serp and will continue to earn returns ( either gains or losses ) on invested balances , but the company will make no further contributions to the serp and no new participants will be eligible to join the serp . as a result of the curtailment , the company recognized a curtailment loss of $ 0.7 million , consisting of actuarial losses previously recorded in other comprehensive income . acquisition of virgin mobile customers and initiation of prepaid wireless sales on july 8 , 2010 , the company acquired the right to receive a share of revenues from approximately 50,000 virgin mobile customers in our service area , and effective july 11 , 2010 , the company began selling virgin mobile and boost prepaid products and services under an amendment to the sprint agreements . the company recognized amortization on the $ 6.9 million capitalized purchase price of the acquired contract for the 50,000 acquired virgin mobile subscribers . the amortization of the acquired subscriber base will approximate the life of the customers acquired , gradually decreasing over the expected four year life of this asset . the company incurs significant costs of acquisition ( including handset subsidies , commissions , and other sales and marketing costs ) in the month of a new customer activation . new customers are expected to generate net income over their service life . due to expensing all costs of acquisition in the month of acquisition , the sale of prepaid products and services had a net negative impact on operating results until the base of customers was sufficient such that the aggregate monthly revenue less recurring expenses exceeded the up-front costs for new activations . the company believes it had reached this point in 2011 . 36 acquisition of jetbroadband on july 30 , 2010 , the company completed the acquisition of the cable operations of jetbroadband for $ 148 million in cash . the acquired cable operations offered video , high speed internet and voice services representing approximately 66,000 revenue generating units in southern virginia and southern west virginia . the acquired networks passed approximately 115,000 homes . various fees and other expenses associated with the acquisition increased the company 's operating expenses by approximately $ 3.1 million in 2010. network vision in february 2012 , the company announced that it had amended its management agreement with sprint nextel corporation in connection with the company 's commitment to build a 4g lte network in the company 's service area . replacement of base stations began in may 2012 , proceeded slowly through august , and accelerated in the fall . as of december 31 , 2012 , 200 of the company 's 516 base stations had been upgraded to 4g lte . all base stations are expected to be replaced before the end of 2013 , with most work expected to be completed by the end of the third quarter of 2013. based upon the initial timetable and updated as the timetable was revised , the company determined that changes to the depreciation schedules for base stations and certain other assets were required , resulting in $ 8.4 million of additional depreciation in 2012. the 4g lte base stations require either fiber or microwave backhaul . as a result , the company is replacing the copper-based t1 circuits it currently has with fiber and microwave technology . story_separator_special_tag in addition to incurring the costs to install the new backhaul facilities , the company incurs duplicate network costs during the replacement period for each base station , and higher monthly costs of the higher capacity circuits ( though much less expensive per megabit of capacity ) following the upgrade , impacting 2012 , 2013 and future years . however , the additional capacity of the new backhaul facilities will delay the need to further upgrade its capacity to accommodate additional network traffic . revision of prepaid cost pass-throughs in july 2010 , the company executed an amendment to its management agreement with sprint nextel to allow the company to participate in sprint nextel 's prepaid wireless offerings . due to the nature of the prepaid business , the revenue and cost per unit ( per average subscriber or per gross addition or upgrade , as defined ) passed through to the company were based on sprint nextel 's national averages for its prepaid programs , as determined by sprint . in december 2012 , sprint nextel determined it had incorrectly calculated certain cost pass-throughs from inception of the company 's participation , and reimbursed the company for $ 11.8 million to correct its errors from july 2010 through september 2012. the company recognized this receipt as a reduction of expenses in the quarter and year ended december 31 , 2012. cable segment goodwill impairment during 2012 , the company determined that the fair value of the company 's cable segment had declined during the year , and that the goodwill associated with this segment had become impaired . as a result the company recorded an $ 11.0 million write-down of cable segment goodwill . factors contributing to this determination included weak economic conditions , underperformance relative to market operating margins and penetration levels , and continued capital spending to upgrade the last remaining markets , improve the customer experience , and combat subscriber loss . critical accounting policies the company relies on the use of estimates and makes assumptions that affect its financial condition and operating results . these estimates and assumptions are based on historical results and trends as well as the company 's forecasts as to how these might change in the future . the most critical accounting policies that materially affect the company 's results of operations include the following : 37 revenue recognition the company recognizes revenue when persuasive evidence of an arrangement exists , services have been rendered or products have been delivered , the price to the buyer is fixed and determinable and collectability is reasonably assured . revenues are recognized by the company based on the various types of transactions generating the revenue . for services , revenue is recognized as the services are performed . for equipment sales , revenue is recognized when the sales transaction is complete . for transactions with customers in our wireless segment that involve multiple elements , such as the sale of service combined with the sale of a handset , the consideration received at the time of sale is measured and allocated to the separate units based upon their relative fair values . generally , this method results in all cash received at the time of the initial sale being allocated to and recognized as equipment revenue . under the sprint nextel management agreement , postpaid wireless service revenues are reported net of an 8 % management fee and , since its imposition effective january 1 , 2007 , the net service fee retained by sprint nextel . the net service fee was initially set at 8.8 % , and was increased to 12 % , the maximum then allowed under the management agreement , effective june 1 , 2010. in accordance with the february , 2012 , amendment , the maximum fee will increase to 14 % effective july 1 , 2013. prepaid wireless service revenues are reported net of a 6 % management fee . allowance for doubtful accounts estimates are used in determining the allowance for doubtful accounts and are based on historical collection and write-off experience , current trends , credit policies , and the analysis of the accounts receivable by aging category . in determining these estimates , the company compares historical write-offs in relation to the estimated period in which the subscriber was originally billed . the company also looks at the historical average length of time that elapses between the original billing date and the date of write-off and the financial position of its larger customers in determining the adequacy of the allowance for doubtful accounts . from this information , the company assigns specific amounts to the aging categories . the company provides an allowance for all receivables over 60 days old and partial allowances for all other receivables . the company does not carry an allowance for receivables related to sprint nextel pcs customers . in accordance with the terms of the affiliate contract with sprint nextel , the company receives payment from sprint nextel for the monthly net billings to pcs customers in weekly installments over the following four or five weeks . income taxes income taxes are accounted for under the asset and liability method . deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases . deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled . the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date . the company evaluates the recoverability of deferred tax assets generated on a state-by-state basis from net operating losses apportioned to that state . management uses a more likely than not threshold to make the determination if a valuation allowance is warranted for tax assets in each state .
| gain on sale of directory the company sold its telephone directory for $ 4 million in cash during the third quarter of 2010 . 48 other income ( expense ) the change in other income ( expense ) resulted primarily from incremental interest costs associated with the additional debt utilized to finance the acquisition of cable systems during 2010. investment results and other non-operating items generated less income in 2011 than 2010. income tax expense the company 's effective tax rate on income from continuing operations increased from 41.6 % in 2010 to 44.1 % in 2011 principally due to changes in the mix of taxable income resulting in more income apportioned to states with relatively higher tax rates , and more losses apportioned to states with relatively lower tax rates , resulting in an increase in the effective state tax rate . net income from continuing operations net income from continuing operations decreased $ 5.2 million in 2011 from 2010 , primarily as a result of the additional losses in the cable segment , the incremental interest expenses associated with the debt utilized to acquire the cable systems , and the increase in the effective tax rate . wireless replace_table_token_14_th operating revenues wireless service revenue increased $ 25.8 million , or 23.2 % , for 2011 over 2010. prepaid wireless service revenue , net of fees , generated $ 16.6 million of the year over year increase . prepaid customers increased to more than 107 thousand at december 31 , 2011 , from 67 thousand customers at december 31 , 2010. postpaid wireless service revenue increased $ 9.3 million , net of fees and adjustments , or 8.1 % . average postpaid subscribers for 2011 increased 5.7 % compared to 2010. the $ 10 monthly fee for smartphone data usage added to customer bills during 2011 added $ 6.7 million to postpaid net service revenues during 2011. the increase in the postpaid net service fee from 8.8 % of billed revenue to 12.0 % , effective june 1 , 2010 , resulted
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interest expense represents amounts we incurred on our former indebtedness at the then-applicable interest rates . income tax expense . we incur federal income tax expense on our 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 , 3-4 family dwelling package , condominium , renters , equipment breakdown and service line endorsements , and personal umbrella policies . commercial liability . we offer business owners policies which consist primarily of small business retail risks without a residential exposure . we also write artisan 's liability policies and special multi-peril property and liability policies . commercial automobile . we had previously provided physical damage and liability coverage for light vehicles owned by small contractors and artisans . due to the poor performance of this line , effective october 1 , 2014 , we decided to no longer accept new commercial auto policies . in february 2015 , we decided to longer offer renewals to our existing commercial auto policies beginning with those effective may 1 , 2015 . 26 livery physical damage and other . we write for-hire vehicle physical damage only policies for livery and car service vehicles and taxicabs as well as canine legal liability policies . these policies insure only the physical damage portion of insurance for such vehicles , with no liability coverage included . 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 loss adjustment expenses ( “ 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 . critical accounting policies and estimates our consolidated financial statements include the accounts of kingstone companies , inc. and all majority-owned and controlled subsidiaries . the preparation of financial statements in conformity with accounting principles generally accepted in the united states requires our management to make estimates and assumptions in certain circumstances that affect amounts reported in our consolidated financial statements and related notes . in preparing these financial statements , our management has utilized information available including our past history , industry standards and the current economic environment , among other factors , in forming its estimates and judgments of certain amounts included in the consolidated financial statements , giving due consideration to materiality . it is possible that the ultimate outcome as anticipated by our management in formulating its estimates inherent in these financial statements might not materialize . however , 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 companies in similar businesses . 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 ( accounting policies and basis of presentation ) of the notes to consolidated financial statements following item 15 of this annual report . 27 consolidated results of operations the following table summarizes the changes in the results of our operations ( in thousands ) for the periods indicated : replace_table_token_9_th ( 1 ) for the year ended december 31 , 2014 , includes the effects of severe winter weather ( which we define as a catastrophe ) , which occurred in january and february 2014. for the year ended december 31 , 2013 , includes the effects of superstorm sandy ( which we define as a catastrophe ) , which occurred on october 29 , 2012. we define a “ catastrophe ” as an event or series of related events that involve multiple first party policyholders , or an event or series of events that produce a number of claims in excess of a preset , per-event threshold of average claims in a specific area , occurring within a certain amount of time constituting the event or series of events . catastrophes are caused by various natural events including high winds , excessive rain , winter storms , severe winter weather , tornadoes , hailstorms , wildfires , tropical storms , and hurricanes . story_separator_special_tag 28 replace_table_token_10_th direct written premiums direct written premiums during the year ended december 31 , 2014 ( “ 2014 ” ) were $ 76,255,000 compared to $ 60,449,000 during the year ended december 31 , 2013 ( “ 2013 ” ) . the increase of $ 15,806,000 , or 26.1 % , was primarily due to an increase in policies in-force during 2014 as compared to 2013. we wrote more new policies as a result of continued demand for our products in the markets that we serve . policies in-force increased by 22.0 % as of december 31 , 2014 compared to december 31 , 2013. in addition to the increase in policies in-force , the average premium per policy increased . our growth rate in direct premiums written was dampened somewhat due to the suspension , effective october 1 , 2014 , of the writing of new policies in our commercial auto line of business due to a history of poor underwriting results . our direct written premiums in our other lines of business grew by 31.3 % in 2014 compared to 2013. the increase in direct written premiums in 2014 over 2013 was also affected by new york state regulations enacted to protect victims of superstorm sandy , which prohibited us from cancelling policies or non-renewing existing policies beginning in the fourth quarter of 2012 and extending through various dates during the quarter ended march 31 , 2013 ( the “ moratorium period ” ) . after the expiration of the moratorium period in 2013 , the additional cancellations and non-renewal of existing policies reduced our direct written premiums in 2013. net written premiums and net premiums earned the following table describes the quota share reinsurance rates in effect during 2014 and 2013. for purposes of the discussion herein , the change in quota share rates on july 1 of each year will be referred to as “ the cut-off ” . 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 . 29 replace_table_token_11_th net written premiums increased $ 18,455,000 , or 74.3 % , to $ 43,294,000 in 2014 from $ 24,839,000 in 2013. 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 ) . our personal lines business is subject to a quota share treaty and our commercial lines business was subject to a quota share treaty through june 30 , 2014. a reduction to the quota share percentage or elimination of a quota share treaty will reduce our ceded written premiums , which will result in a corresponding increase to our net written premiums . effective july 1 , 2014 , we terminated our commercial lines quota share treaty . the previous commercial lines quota share treaty effective july 1 , 2013 had a quota share percentage of 25 % . also , effective july 1 , 2014 , we decreased the quota share percentage in our personal lines quota share treaty from 75 % to 55 % . the cut-off of these treaties on july 1 , 2014 results in the return of unearned premiums from our reinsurers that were previously ceded under the expiring quota share treaties . in 2014 and 2013 , our ceded catastrophe premiums include an additional $ 70,000 and $ 496,000 , respectively , of reinstatement premiums for catastrophe coverage as a result of superstorm sandy . most of the premiums written under our personal lines are also subject to our catastrophe treaty . an increase in our personal lines business gives rise to more property exposure , which increases our exposure to catastrophe risk ; therefore , our premiums for catastrophe insurance will increase . this results in an increase in premiums ceded under our catastrophe treaty , which reduces net written premiums . an increase in written premiums will also increase the premiums ceded under our excess of loss treaties , which will also reduce our net written premiums . in 2014 , our catastrophe and excess of loss reinsurance premiums increased by $ 1,605,000 and $ 499,000 , respectively , over the premiums in 2013. net premiums earned increased $ 10,403,000 , or 46.8 % , to $ 32,628,000 in 2014 from $ 22,225,000 in 2013. the increase was primarily due to us retaining more earned premiums as result of the reduction of the quota share percentage in our personal lines quota share treaty and the elimination of the commercial lines treaty on july 1 , 2014. the decreases in our quota share percentages from the july 1 , 2014 cut-offs gave us a return of premiums previously ceded , which increased our net premiums earned during the period . in addition , as premiums written earn ratably over a twelve month period , net premiums earned in 2014 will increase from the higher net written premiums for the twelve months ended december 31 , 2014 compared to the twelve months ended december 31 , 2013. the increase in net premiums earned was also due to a reduction of $ 426,000 in reinstatement premiums paid in 2014 compared to what was paid in 2013 for catastrophe coverage as a result of superstorm sandy . 30 ceding commission revenue the following table describes the quota share provisional ceding commission rates in effect during 2014 and 2013. this table should be referred to in conjunction with the discussion for ceding commission revenue that follows . replace_table_token_12_th the following table summarizes the changes in the components of ceding commission revenue ( in thousands ) for the periods indicated : replace_table_token_13_th ceding commission revenue was $ 13,911,000 in 2014 compared to $ 11,673,000 in 2013. the increase of $ 2,238,000 , or 19.2 % , was due to an increase in both provisional ceding commissions earned and contingent ceding commissions earned .
| the fair value hierarchy in gaap prioritizes fair value measurements into three levels based on the nature of the inputs . quoted prices in active markets for identical assets have the highest priority ( “ level 1 ” ) , followed by observable inputs other than quoted prices including prices for similar but not identical assets or liabilities ( “ level 2 ” ) , and unobservable inputs , including the reporting entity 's estimates of the assumption that market participants would use , having the lowest priority ( “ level 3 ” ) . as of december 31 , 2014 and 2013 , 63 % and 78 % , respectively , of the investment portfolio recorded at fair value was priced based upon quoted market prices . as more fully described in note 3 to our consolidated financial statements , “ investments—impairment review , ” we completed a detailed review of all our securities in a continuous loss position as of december 31 , 2014 and 2013 , and concluded that the unrealized losses in these asset classes are temporary in nature and the result of a decrease in value due to technical spread widening and broader market sentiment , rather than fundamental collateral deterioration . the table below summarizes the gross unrealized losses of our fixed-maturity securities available-for-sale and equity securities by length of time the security has continuously been in an unrealized loss position as of december 31 , 2014 and 2013 : replace_table_token_24_th 42 replace_table_token_25_th 43 there were 35 securities at december 31 , 2014 that accounted for the gross unrealized loss , none of which were deemed by us to be other than temporarily impaired . there were 52 securities at december 31 , 2013 that accounted for the gross unrealized loss , none of which were deemed by us to be other than temporarily impaired . significant factors influencing our determination that unrealized losses were temporary included the magnitude of the unrealized losses in relation to each security 's cost , the nature of the investment and management 's intent not to sell these securities and it being not
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in connection with the trinity acquisition , we issued 2,000 shares of our series a convertible preferred stock , with a stated value of $ 1,000 per share , to the sole member of trinity . the series a convertible preferred stock is convertible at a price of $ 0.50 per share and is convertible into an aggregate of 4,000,000 shares of the company 's common stock . on february 27 , 2020 , we acquired one hundred percent of the membership interests of each of 5j oilfield services llc ( “ 5j oilfield ” ) and 5j trucking llc ( “ 5j trucking ” ) , each a texas limited liability company . the aggregate purchase price of 5j was $ 27.3 million , consisting of a combination of cash , notes , series b convertible preferred stock and the assumption and refinance of debt . recent accounting pronouncements the financial accounting standards board , or fasb , has issued accounting standards update no . 2014-09 , revenue from contracts with customers ( topic 606 ) , or asu 606. asu 606 provides guidance outlining a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers in an amount that supersedes most current revenue recognition guidance . this guidance requires us to recognize revenue when we transfer 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 . we adopted asu 606 at the beginning of our first quarter of fiscal 2018. the new guidance requires enhanced disclosures , including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition . we implemented the new standard using the modified retrospective approach effective january 1 , 2018. the adoption of this guidance did not have a material impact on our consolidated financial statements within any accounting period presented . in february 2016 , the fasb issued asu no . 2016-02 , leases ( topic 842 ) ( asu 2016-02 ) . under asu no . 2016-2 , an entity will be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements . asu no . 2016-02 offers specific accounting guidance for a lessee , a lessor and sale and leaseback transactions . lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount , timing and uncertainty of cash flows arising from leases . for public companies , asu no . 2016-02 is effective for annual reporting periods beginning after december 15 , 2018 , including interim reporting periods within that reporting period , and requires a modified retrospective adoption , with early adoption permitted . the company does not expect the adoption of this standard to have a material impact on the company 's consolidated financial statements . on june 20 , 2018 , the fasb issued asu no . 2018-07 , compensation—stock compensation ( topic 718 ) - improvements to nonemployee share-based payment accounting , which aligns the accounting for share-based payment awards issued to employees and nonemployees . under asu no . 2018-07 , the existing employee guidance will apply to nonemployee share-based transactions ( as long as the transaction is not effectively a form of financing ) , with the exception of specific guidance related to the attribution of compensation cost . the cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services . in addition , the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards . the company elected to early adopt this standard in the second quarter of 2018. the adoption had no impact on the company 's historic financial statements . effective january 1 , 2018 , the company adopted the provisions of asu 2017-01 – “ business combinations ( topic 805 ) : clarifying the definition of a business ” ( “ asu 2017-01 ” ) . asu 2017-01 provides revised guidance to determine when an acquisition meets the definition of a business or alternatively should be accounted for as an asset acquisition . asu 2017-01 requires that , when substantially all of the fair value of an acquisition is concentrated in a single identifiable asset or a group of similar identifiable assets , the asset or group of similar identifiable assets does not meet the definition of a business and therefore is required to be accounted for as an asset acquisition . transaction costs will continue to be capitalized for asset acquisitions and expensed as incurred for business combinations . asu 2017-01 will result in most , if not all , of the company 's post january 1 , 2018 acquisitions being accounted for as asset acquisitions because substantially all of the fair value of the gross assets the company acquires are concentrated in a single asset or group of similar identifiable assets . for asset acquisitions that are “ owner occupied ” ( meaning that the seller either is the tenant or controls the tenant ) the purchase price , including capitalized acquisition costs , will be allocated to land and building based on their relative fair values with no value allocated to intangible assets or liabilities . for asset acquisitions where there is a lease in place but not “ owner occupied ” the company will allocate the purchase price to tangible assets and any intangible assets acquired or liabilities assumed based on their relative fair values . story_separator_special_tag 24 story_separator_special_tag 116,564 , offset partially by cash received from the sale of assets of $ 14,000 in the year ended december 31 , 2018. we had net cash provided in financing activities of $ 858,242 in the year ended december 31 , 2019 as compared to $ 702,979 of net cash provided by financing activities for year ended december 31 , 2018. our net cash provided by financing activities for the year ended december 31 , 2019 , resulted primarily from proceeds from notes payable of $ 1,180,000 , proceeds from sale of common stock of $ 359,000 , proceeds from a secured line of credit of $ 207,929 and proceeds from notes payable related party of $ 97,016. this net cash provided by financing activities was partially offset by payments on notes payable of $ 760,159 , payments on notes payable related party of $ 188,036 and payments on mg cleaners acquisition note related party of $ 21,000. our net cash and cash equivalents increased for the year ended december 31 , 2019 by $ 28,746 as compared to a net decrease of $ 83,962 in the year ended december 31 , 2018. our cash flows from operations are primarily funded through our accounts receivable line of credit facility , notes and loans , stock sales , issuing our stock for services and various leases . currently , we believe we will need to continue to utilize lines of credit , borrowings and stock sales to sufficiently sustain our current level of operations for the next 12 months . at present , we believe the industry is or will enter a down-cycle given current commodity prices and the global covid 19 pandemic that is prevalent in the markets we operate . we likely will require additional capital to maintain or expand operations . additionally , we believe any material acquisition of another operating company would require additional outside capital consisting of debt or equity . failure to secure additional funds could significantly hamper our ongoing operations particularly if a down cycle in our industry continues further . as the business cycle improves , and the pandemic dissipates in the markets we serve , we plan to improve our cash flows provided in operating activities by focusing on increasing sales by increasing utilization of the assets we have acquired and offering higher value services that receive higher gross margins . however , there can be no assurances given of industry improvement , pandemic relief or improved cash flows of our business . historically , we have funded our capital expenditures internally through cash flow , leasing and financing arrangements . we intend to continue to fund future capital expenditures through cash flow , as well as through capital available to us pursuant to our line of credit , capital from the sale of our equity securities and through commercial leasing and financing programs . on may 31 , 2017 , mg entered into a $ 1 million revolving accounts receivable financing facility with crestmark bank . the financing facility provides for mg to have access to the lesser of ( i ) $ 1 million or ( ii ) 85 % of the net amount of eligible receivables ( as defined in the financing agreement ) . the financing facility is paid for by the assignment of mg 's accounts receivable to crestmark bank and is secured by mg 's assets . the financing facility has an interest rate of 7.25 % in excess of the prime rate reported by the wall street journal per annum , with a floor minimum rate of 11.5 % . interest and maintenance fees will be calculated on the higher of the average monthly loan balance from the prior month or a minimum average loan balance of $ 200,000. the financing facility is for an initial term of two-years and will renew on a year to year basis , unless terminated in accordance with the financing agreement . pursuant to the terms of the financing facility , crestmark has been granted a security interest in all of our assets and the assets of mg and we have agreed to guaranty all amounts due under the facility upon an event of default , however , the guaranty does not restrict the company 's ability to incur debt in connection with its operations . on august 13 , 2018 , mg entered into amendment # 2 of the crestmark bank financing facility which increased the advance rate of which crestmark would lend on eligible accounts receivables to 90 % from 85 % . on january 9 , 2019 , we entered into amendment # 3 of the crestmark bank financing facility whereby we increased the size of the line of credit to $ 1.5 million from $ 1 million and added our frac water subsidiary as an additional borrower with its accounts receivable . we are guarantors of the financing facility and our subsidiaries as borrowers have cross-collateralized their accounts receivable with this facility . pursuant to the terms of the financing facility , mg is not allowed to incur additional indebtedness , to create liens or other encumbrances , or to sell or otherwise dispose of mg 's assets , without the prior written consent of crestmark . the crestmark facility does not restrict the company 's ability to finance its operations through the sale of its equity securities . in june 2019 , the crestmark facility was replaced by a credit facility with a new lender . on june 19 , 2019 , each of mg cleaners llc ( “ mg ” ) , trinity services llc ( “ trinity ” ) and jake oilfield solutions llc ( “ jake ” ) , each of which is a wholly-owned subsidiary of the company , entered into separate revolving accounts receivable financing facilities ( collectively the “ ar facility ” ) with catalyst finance l.p. ( “ catalyst ” ) . the ar facility was funded on june 27 , 2019. the new ar facility with catalyst was used to pay off the crestmark facility in full .
| selling , general and administrative expenses for the year ended december 31 , 2019 increased to $ 3,210,475 , or approximately 49.6 % of revenues , an increase of $ 775,656 from $ 2,434,819 or 55 % of revenues for the year ended december 31 , 2018. this increase in selling , general and administrative expenses in 2019 over the prior year was due to increased lease operating expense , not present in the 2018 period , higher wages and $ 121,000 of bad debt expense . several one-time expenses also occurred in 2019 in connection with the legal and professional fees associated with the trinity services acquisition in june 2019 and professional fees working on other potential acquisition targets , a reserve of $ 60,000 was accrued in 2019 in connection with a wage claim settlement not present in 2018 period that was settled in january 2020. non cash stock option and stock award expense was $ 246,100. stock based compensation expense was $ 246,099 in 2019 compared to $ 81,657 for the same period in 2018. the increase was attributable to an increase in payment for services with our common stock . the impairment expense in 2019 was $ 577,766 compared to $ 0 in 2018. the increase in 2019 was related to the impairment of goodwill to zero and partial impairment of crown tools . the bad debt expense in 2019 was $ 121,081 , as compared to a bad debt expense of $ 22,907 in 2018 resulting from uncollectable accounts receivables from certain customers . the acquisition costs in 2019 were $ 70,945 compared to $ 58,905 in 2018. the increase in 2019 resulted from the company 's acquisition of trinity services in june 2019. the loss on settlement of liabilities in 2019 of $ 82,843 resulted from the settlement of two notes payable during the year ended december 31 , 2019 , compared to a gain on settlement of accrued liability in 2018 of $ 9,151 resulted from the settlement of a liability from a vendor during the year ended december 31 , 2018. interest expense , net , increased to $ 485,690 during the year ended december 31 , 2019 from $ 310,030 during the year ended december 31 , 2018. the net loss for the year ended december 31 , 2019 was $ 3,984,356 as compared to a net loss of
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on july 12 , 2016 , the company sold the vessel harrier for $ 3.2 million , after brokerage commissions , associated selling expenses , and recorded a loss of $ 115,000. a portion of the proceeds was used towards repayment of the term loan under the first lien facility . on september 6 , 2016 , the company sold the vessel kittiwake for $ 4.0 million , after brokerage commission , associated selling expenses , and recorded a net gain of approximately $ 316,000 in the third quarter of 2016. a portion of the proceeds was used towards repayment of the term loan under the first lien facility . on september 30 , 2016 , eagle shipco signed a memorandum of agreement to acquire a 2016 nacks built ultramax 61,000 dwt . vessel for $ 18.85 million . the company took the delivery of the vessel , the stamford eagle , in the fourth quarter of 2016. on november 14 , 2016 , the company , through its subsidiary eagle bulk shipco llc , signed a memorandum of agreement to acquire a 2017 built 64,000 dwt sdari-64 ultramax dry bulk vessel constructed at chengxi shipyard co. , ltd for $ 17.9 million . the company took delivery of the vessel , the singapore eagle , on january 11 , 2017. on january 6 , 2017 , the company sold the vessel redwing for $ 5.8 million , after brokerage commissions and associated selling expenses , and recorded a net gain of approximately $ 0.1 million . the vessel was classified as an asset held for sale as of december 31 , 2016. a portion of the proceeds was used towards repayment of the term loan under the first lien facility . on april 6 , 2017 , the company sold the vessel sparrow for $ 4.8 million after brokerage commissions and associated selling expenses , and recorded a net gain of approximately $ 1.8 million . a portion of the proceeds was used towards repayment of the term loan under the first lien facility . on july 27 , 2017 , the company sold the vessel woodstar for $ 7.8 million after brokerage commissions and associated selling expenses and recorded a gain for $ 0.2 million . a portion of the proceeds was used towards repayment of the term loan under the first lien facility . on november 28 , 2017 , the company sold the vessel wren for $ 7.6 million after brokerage commissions and associated selling expenses and recorded a gain of $ 0.03. a portion of the proceeds was used towards repayment of the term loan under the first lien facility . on august 30 , 2017 , the company signed a memorandum of agreement to sell the vessel avocet for $ 9.6 million after brokerage commissions and associated selling expenses . the vessel is expected to be delivered to the buyers in the second quarter of 2018. the company expects to recognize a gain of $ 0.3 million . as of december 31 , 2017 , the company reported the carrying amount of the vessel as vessel held for sale in its consolidated balance sheet . on december 19 . 2017 , the company , through ultraco , signed a memorandum of agreement to acquire a 2015 built 64,000 dwt crown-83 ultramax dry bulk vessel constructed at chengxi shipyard co. , ltd for $ 21.2 million . the company took delivery of the vessel , the new london eagle , on january 9 , 2018. as of december 31 , 2017 , the company paid a deposit of $ 2.2 million for the purchase of the vessel . 59 the following are certain significant events with respect to our vessels that occurred during 2015 : in april 2015 , the company decided to sell the kite , a 1997-built handymax , and reached an agreement to sell the vessel for $ 4.3 million after brokerage commissions payable to a third party . on may 7 , 2015 , the company sold the vessel and realized a net loss of approximately $ 5.7 million in the second quarter of 2015. on may 20 , 2015 , the company delivered a 90 day termination notice to navig8 pool to terminate the pool arrangements for all of its vessels in the navig8 pool . the notice of termination was given pursuant to the terms of the company 's pool agreement . on august 24 , 2015 , the company provided three months ' notice to v. ships limited to terminate the technical management contract . the company completed the transfer of all vessels to in-house technical management during the first quarter of 2016. business strategy and outlook : we believe our strong balance sheet allows us the flexibility to opportunistically make investments in the dry bulk segment that will drive shareholder growth . in order to accomplish this , we intend to : maintain a highly efficient and the high quality fleet in the dry bulk segment . maintain a revenue strategy that takes advantage of a rising rate environment and at the same time mitigate risk in a declining rate environment . maintain a cost structure that allow us to be competitive in all economic cycles without sacrificing safety and maintenance . continue to grow our relationships with our charterers and vendors continue to invest in our on-shore operations and development of processes . our financial performance is based on the following key elements of our business strategy : ( 1 ) concentration in one vessel category : supramax/ultramax dry bulk vessels , which we believe offer certain size , operational and geographical advantages relative to other classes of dry bulk vessels , such as handymax , panamax and capesize vessels , ( 2 ) an active owner-operator model where we seek to operate our own fleet and develop contractual relationships directly with cargo interests . these relationships and the related cargo contracts have the dual benefit of providing greater operational efficiencies and act as a balance to the company 's naturally long position to the market . story_separator_special_tag notwithstanding the focus on voyage chartering , we consistently monitor the dry bulk shipping market and , based on market conditions , will consider taking advantage of long-term time charters at higher rates when appropriate . ( 3 ) maintain high quality vessels and improve standards of operation through improved standards and procedures , crew training and repair and maintenance procedures . we have employed all of our vessels on time and voyage charters . the following table represents certain information about our revenue earning charters on our operating fleet as of december 31 , 2017 : replace_table_token_7_th 60 replace_table_token_8_th 61 replace_table_token_9_th ( 1 ) the vessel is contracted to perform a time charter after the drydock at a rate of $ 11,400 . ( 2 ) the vessel is contracted to continue the existing time charter at an increased charter rate of $ 11,000 after january 14 , 2018 . ( 3 ) the vessel is contracted to continue the existing time charter at an increased charter rate of $ 11,000 after january 23 , 2018 . ( 4 ) the vessel is contracted to continue the existing time charter at an increased charter rate of $ 12,000 after january 16 , 2018 . 62 ( 5 ) the vessel is contracted to continue the existing time charter at an increased charter rate of $ 10,000 after march 10 , 2018 . ( 6 ) the vessel is contracted to continue the existing time charter at an increased charter rate of $ 10,500 after march 10 , 2018 . ( 7 ) the vessel is contracted to continue the existing time charter at an increased charter rate of $ 10,500 after february 18 , 2018 . ( 8 ) the vessel is contracted to continue the existing time charter at an increased charter rate of $ 9,500 after february 28 , 2018. market overview the international shipping industry is highly competitive and fragmented with no single owner accounting for more than 5 % of the on-the-water fleet . as of december 31 , 2017 , there are approximately 11,116 dry bulk carriers ( over 10,000 dwt ) totaling 817 million dwt . we compete with other ( primarily private ) owners of dry bulk vessels in the handysize , supramax , and panamax asset classes . competition in the dry bulk trade is robust . demand is a function of world economic conditions and the consequent requirement for commodities , production and consumption patterns , as well as events , which interrupt production , trade routes , and consumption . we compete for charters based on price , vessel location , size , age , and condition , as well as on our reputation as an owner and operator . customers , or charterers , tend to prefer modern vessels ( over older ships ) due to their greater operational reliability , lower fuel consumption , and improved built-designs complying with more recent regulation standards . consequently , owners of large modern fleets tend to have a competitive advantage over owners operating older ships . our strategy is to focus on the supramax/ultramax asset class , which is part of the broader handymax segment , defined as dry bulk vessels between 40,000 to 65,000 dwt . supramax/ultramax vessels range in size from approximately 50,000 to 65,000 dwt . these vessels have the cargo loading and unloading flexibility offered by their on-board cranes , while the cargo carrying capacity approaches that of panamax , which ranges in size between 72,000 and 83,000 dwt and which require onshore facilities to load and offload their cargoes . we believe that the cargo handling flexibility and cargo carrying capacity of the supramax/ultramax class makes it the preferred type of ship attractive to potential charterers . all 47 of our owned vessels , as of december 31 , 2017 , range in size between 50,000 and 64,000 dwt . the supply of dry bulk vessels depends primarily on the level of the orderbook , the fleet age profile , and the operating efficiency of the existing fleet . as of december 2017 , 8 % of the world handymax fleet was 20 years or older , while the newbuilding orderbook stood at 6.5 % of the ( handymax ) on-the-water fleet . the 47 vessels in our operating fleet have an average age of approximately 8.2 years as of december 31 , 2017. the typical trading life of a handymax vessel is approximately 25 years . the handymax market in 2017 , drybulk global market continued to recover from a historic market low from early 2016. trade demand grew by 4 % in 2017 , as compared to an increase of 1.2 % in 2016. the improvement in demand was primarily driven by an increase in trades relating to iron ore , coal and grain as well as the minor bulks . on the supply side , net fleet growth ( newbuilding deliveries less scrapping ) amounted to 2.9 % for 2017 , as compared to 2.3 % for the year prior . although 2017 newbuilding deliveries decreased by 108 vessels , or 20 % from the prior year , scrapping decreased by a greater amount causing net fleet growth to increase slightly year-on-year . scrapping totaled 214 vessels in 2017 , as compared to 408 in 2016 , representing a drop of 48 % . the baltic supramax index ( “ bsi ” ) , a dry bulk index based on 52,000 dwt vessels , averaged $ 9,185 for 2017. the improvement in rates during the year was driven by increased demolition ( of older vessels ) , lower supply growth , and higher iron ore and coal flows into china . looking ahead , newbuilding deliveries for 2018 ( and beyond ) are expected to continue their downward trend , with the orderbook currently standing at approximately 10 % of the existing fleet .
| the shipping industry uses operating days to measure the aggregate number of days in a period during which vessels actually generate revenues . fleet utilization : we calculate fleet utilization by dividing the number of our operating days during a period by the number of our available days during the period . the shipping industry uses fleet utilization to measure a company 's efficiency in finding suitable employment for its vessels and minimizing the amount of days that its vessels are off-hire for reasons other than scheduled repairs or repairs under guarantee , vessel upgrades , special surveys or vessel positioning . our fleet continues to perform at very high utilization rates . time charter and voyage revenue shipping revenues are highly sensitive to patterns of supply and demand for vessels of the size and design configurations owned and operated by a company and the trades in which those vessels operate . in the dry bulk sector of the shipping industry , rates for the transportation of dry bulk cargoes such as ores , grains , steel , fertilizers , and similar commodities , are determined by market forces such as the supply and demand for such commodities , the distance that cargoes must be transported , and the number of vessels expected to be available at the time such cargoes need to be transported . the demand for shipments is significantly affected by the state of the global economy and in discrete geographical areas . the number of vessels is affected by newbuilding deliveries and by the removal of existing vessels from service , principally because of scrapping . the mix of charters between spot or voyage charters and mid-term time charters also affects revenues . because the mix between voyage charters and time charters significantly affects shipping revenues and voyage expenses , vessel revenues are benchmarked based on net charter hire income . net charter hire income comprises revenue from vessels operating on time charters , and voyage revenue less voyage expenses from vessels operating on voyage charters in the
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payroll taxes and employee benefits consist of the employer 's portion of social security and medicare taxes , federal and state unemployment taxes and staffing services employee reimbursements for materials , supplies and other expenses , which are paid by our customer . workers ' compensation costs consist primarily of the costs associated with our workers ' compensation program , including claims reserves , claims administration fees , legal fees , medical cost containment ( “ mcc ” ) expense , state administrative agency fees , third-party broker commissions , risk manager payroll , premiums for excess insurance and the fronted insurance program , and costs associated with operating our two wholly owned insurance companies , aice and ecole . selling , general and administrative expenses represent both branch office and corporate-level operating expenses . branch operating expenses consist primarily of branch office staff payroll and personnel related costs , advertising , rent , office supplies , professional and legal fees and branch incentive compensation . corporate-level operating expenses consist primarily of executive and office staff payroll and personnel related costs , professional and legal fees , travel , occupancy costs , information systems costs , and executive and corporate staff incentive compensation . - 21 - depreciation and amortization represent depreciation of property and equipment , leasehold improvements and capitalized software costs . property , equipment and software are depreciated using the straight-line method over their estimated useful live s , which range from 3 to 39 years . leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life . critical accounting policies and estimates we have identified the following accounting estimate as critical to our business and the understanding of our results of operations . for a detailed discussion of the application of this and other accounting policies , see “ note 1. summary of operations and significant accounting policies ” to the consolidated financial statements incorporated into item 8 of part ii of this report . the preparation of this annual report on form 10-k requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements , and the reported amounts of revenue and expenses during the reporting period . management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates . workers ' compensation reserves we recognize our liability for the ultimate payment of incurred claims and claims adjustment expenses by establishing a reserve which represents our estimates of future amounts necessary to pay claims and related expenses with respect to workplace injuries that have occurred . when a claim involving a probable loss is reported , our independent third-party administrator for workers ' compensation claims ( “ tpa ” ) establishes a case reserve for the estimated amount of ultimate loss . the estimate reflects a judgment based on established case reserving practices and the experience and knowledge of the tpa regarding the nature and expected amount of the claim , as well as the estimated expenses of settling the claim , including legal and other fees and expenses of claims administration . the adequacy of such case reserves in part depends on the professional judgment of the tpa to properly and comprehensively evaluate the economic consequences of each claim . our reserves include an additional component for potential future increases in the cost to finally resolve open injury claims and claims incurred in prior periods but not reported ( together , `` ibnr '' ) based on actuarial estimates provided by the company 's independent actuary . ibnr reserves , unlike specific case reserves , do not apply to a specific claim but rather apply to the entire population of claims arising from a specific time period . ibnr primarily covers costs relating to : future claim payments in excess of case reserves on recorded open claims ; additional claim payments on closed claims ; and claims that have occurred but have not yet been reported to us . the process of estimating unpaid claims and claims adjustment expense involves a high degree of judgment and is affected by both internal and external events , including changes in claims handling practices , modifications in reserve estimation procedures , changes in individuals involved in the reserve estimation process , inflation , trends in the litigation and settlement of pending claims , and legislative changes . our estimates are based on informed judgment , derived from individual experiences and expertise applied to multiple sets of data and analyses . we consider significant facts and circumstances known both at the time that loss reserves are initially established and as new facts and circumstances become known . due to the inherent uncertainty underlying loss reserve estimates , the expenses incurred through final resolution of our liability for our workers ' compensation claims will likely vary from the related loss reserves at the reporting date . therefore , as specific claims are paid out in the future , actual paid losses may be materially different from our current loss reserves . - 22 - a basic premise in most actuarial analyses is that historical data and past patter ns demonstrated in the incurred and paid historical data form a reasonable basis upon which to project future outcomes , absent a material change . significant structural changes to the available data can materially impact the reserve estimation process . story_separator_special_tag to the extent a material change affecting the ultimate claim liability becomes known , such change is quantified to the extent possible through an analysis of internal company data and , if available and when appropriate , external data . actuaries exercise a con siderable degree of judgment in the evaluation of these factors and the need for such actuarial judgment is more pronounced when faced with material uncertainties . we believe that the amounts recorded for our estimated liabilities for workers ' compensation claims , which are based on informed judgement , analysis of data , actuarial estimates , and analysis of other trends associated with the company 's historical universe of claims data , are reasonable . nevertheless , adjustments to such estimates will be required in future periods if the development of claim costs varies materially from our estimates and such future adjustments may be material to our results of operations . recent accounting pronouncements for a discussion of recent accounting pronouncements and their potential effect on the company 's results of operations and financial condition , see “ note 1. summary of operations and significant accounting policies ” to the consolidated financial statements incorporated into item 8 of part ii of this report . forward-looking information statements in this item or in items 1 , 1a , 3 and 9a of this report include forward-looking statements which are not historical in nature and are forward-looking statements within the meaning of the private securities litigation reform act of 1995. these forward-looking statements include , among others , discussion of economic conditions in our market areas and their effect on revenue levels , the effect of changes in our mix of services on gross margin , the adequacy of our workers ' compensation reserves , the effect of changes in estimates of our future claims liabilities on our workers ' compensation reserves , including the effect of changes in our reserving practices and claims management process on our actuarial estimates , the effects of recent federal tax legislation , our ability to generate sufficient taxable income in the future to utilize our deferred tax assets , the effect of our formation and operation of two wholly owned licensed insurance subsidiaries , the risks of operation and cost of our fronted insurance program with chubb , the financial viability of our excess insurance carriers , the effectiveness of our management information systems , our relationship with our primary bank lender and the availability of financing and working capital to meet our funding requirements , litigation costs and the effect of the potential resolution of any enforcement action that may be brought by the sec division of enforcement , the effect of changes in the interest rate environment on the value of our investment securities and long-term debt , the adequacy of our allowance for doubtful accounts , and the potential for and effect of acquisitions . - 23 - all of our forward-looking statements involve known and unknown risks , uncertainties and othe r factors that may cause the actual results , performance or achievements of the company or industry to be materially different from any future results , performance or achievements expressed or implied by such forward-looking statements . such factors with r espect to the company include our ability to retain current clients and attract new clients , difficulties associated with integrating clients into our operations , economic trends in our service areas , the potential for material deviations from expected fut ure workers ' compensation claims experience , the workers ' compensation regulatory environment in our primary markets , security breaches or failures in the company 's information technology systems , collectability of accounts receivable , the carrying values of deferred income tax assets and goodwill ( which may be affected by our future operating results ) , the impact of the patient protection and affordable care act and escalating medical costs on our business , the effect of conditions in the global capital ma rkets on our investment portfolio , and the availability of capital , borrowing capacity on our revolving credit facility , or letters of credit necessary to meet state-mandated surety deposit requirements for maintaining our status as a qualified self-insure d employer for workers ' compensation coverage or our fronted insurance program . additional risk factors affecting our business are discussed in item 1a of part i of this report . we disclaim any obligation to update any such factors or to publicly announce any revisions to any of the forward-looking statements contained herein to reflect future events or developments . story_separator_special_tag financial restatements , outside investigations , and legal proceedings related to securities law issues . other expense , net for 2016 totaled $ 3.4 million compared to $ 1.3 million for 2015. the change was primarily attributable to a $ 3.3 million litigation settlement recognized in the third quarter of 2016 , partially offset by a decrease in interest expense and an increase in investment income . our effective income tax rate for 2016 was 26.5 % compared to 27.5 % for 2015. our income tax rate typically differs from the federal statutory tax rate of 35 % primarily due to federal and state tax credits . - 27 - fluctuations in quarterly operating results we have historically experienced significant fluctuations in our quarterly operating results , including losses in the first quarter of each year , and expect such fluctuations to continue in the future . our operating results may fluctuate due to a number of factors such as seasonality , wage limits on statutory payroll taxes , claims experience for workers ' compensation , demand for our services , and competition .
| management believes these ratios are useful in understanding the efficiency and profitability of our service offerings . replace_table_token_8_th the presentation of revenues on a net basis and the relative contributions of staffing and professional employer services revenues can create volatility in our gross margin percentage . the general impact of fluctuations in our revenue mix is described below . a relative increase in professional employer services revenue will result in a higher gross margin percentage . improvement in gross margin percentage occurs because incremental client services revenue dollars are reported as revenue net of all related direct payroll and safety incentive costs . a relative increase in staffing revenues will typically result in a lower gross margin percentage . staffing revenues are presented at gross with the related direct costs reported in cost of revenues . while staffing relationships typically have higher margins than professional employer service relationships , an increase in staffing revenues and related costs increases the impact of the net professional employer services revenue on gross margin percentage . - 25 - yea rs ended december 31 , 2017 and 2016 net income for 2017 was $ 25.2 million compared to net income of $ 18.8 million for 2016. diluted income per share for 2017 was $ 3.33 compared to diluted income per share of $ 2.55 for 2016. revenues for 2017 totaled $ 920.4 million , an increase of $ 79.8 million or 9.5 % over 2016 , which reflects an increase in the company 's professional employer service fee revenue of $ 84.1 million or 12.5 % and a decrease in staffing services revenue of $ 4.3 million or 2.6 % . there was one less business day in 2017 compared to 2016. our growth in professional employer service revenues was attributable to both new and existing customers . due to continued strength in our referral channels , business from new customers during 2017 exceeded business lost from former customers . professional employer service revenue from continuing customers grew 7.2 % on a year-over-year basis ,
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we are organized as a holding company and conduct our business primarily through our various wholly-owned subsidiaries . we are externally managed and advised by our manager pursuant to the terms of a management agreement . our manager is controlled by barry sternlicht , our chairman and chief executive officer . our manager is an affiliate of starwood capital group , a privately-held private equity firm founded and controlled by mr. sternlicht . business objectives and outlook our objective is to provide attractive risk-adjusted returns to our investors over the long-term , primarily through dividends and secondarily through capital appreciation . we intend to achieve this objective by originating and acquiring target assets to create a diversified investment portfolio that is financed in a manner that is designed to deliver attractive returns across a variety of market conditions and economic cycles . we are focused on our three core competencies : transaction access , asset analysis and selection , and identification of attractive relative values within the real estate debt and equity markets . in the initial 18 months following our ipo in august 2009 , we capitalized on the dislocation in the credit markets and depressed levels of available capital by acquiring real estate debt assets from distressed sellers at historically high risk-adjusted returns , and to a lesser extent by originating new loans in a marketplace with lower levels of competition . as the real estate and capital markets have recovered , we have evolved from a company focused on opportunistic acquisitions to that of a full-service commercial real estate finance platform that is primarily focused on the origination of real estate debt investments across the capital structure , in both the u.s. and europe . with the starwood brand , market presence , and lending/asset management platform that we have developed , along with the capabilities , business lines , and additional infrastructure acquired through our acquisition of lnr , we intend to focus primarily on the following opportunities : 1 ) expand our investment activities in subordinate cmbs and revenues from special servicing through lnr ; 58 2 ) expand our presence in the medium-sized commercial real estate lending market ( loans in the $ 10 million to $ 40 million range ) by leveraging lnr 's sourcing and credit underwriting capabilities . this will significantly expand our overall footprint in the commercial real estate debt markets ; 3 ) continue to expand our market presence as a leading provider of acquisition , refinance , development and expansion capital to large real estate projects ( greater than $ 75 million ) in infill locations , and other attractive market niches where our size and scale give us an advantage to provide a `` one-stop '' lending solution for real estate developers , owners and operators ; 4 ) continue to expand our capabilities in syndication and securitization , which serve as a source of attractively priced , matched-term financing . there can be no assurance that we will continue to find appropriate investment opportunities . recent developments three months ended march 31 , 2013 originated an $ 86 million first mortgage construction financing for the development of a proposed 31-story tower containing 30 luxury condominium residences and a ground floor retail space . the first mortgage has an interest rate of one-month libor plus a spread of 8.75 % with a libor floor of 1.5 % . issued $ 600 million of 4.55 % convertible senior notes due 2018. the notes were sold to the underwriters at a discount of 2.05 % , resulting in net proceeds to us of $ 587.7 million . originated a $ 43.1 million first mortgage and mezzanine loan for the financing of a class b+ office building located in san francisco , california . the first mortgage was sold on may 1 , 2013. the first mortgage has an interest rate of one-month libor plus a spread of 2.0 % with a libor floor of 0.2 % . the mezzanine loan has an interest rate of one-month libor plus a spread of 8.6 % with a libor floor of 0.2 % . acquired a portfolio of 833 non-performing residential loans at an aggregate cost of $ 104.1 million . at the time of the acquisition , the unpaid principal balance on the loans was $ 213.1 million . entered into an agreement to sell , and on april 2 , 2013 , we closed on the sale of , a cmbs position with aggregate gross proceeds of $ 206.4 million ( $ 66.5 million after repaying the related financing ) , which generated a gain of approximately $ 11.0 million . invested $ 106.7 million in 873 residential real estate owned properties throughout the first quarter of 2013. three months ended june 30 , 2013 acquired lnr as described in the overview section above . originated a $ 350 million first mortgage and mezzanine loan for the south towerrelated companies and oxford properties groups ' hudson yards project , located on the west side of manhattan , ny . originated a $ 158.5 million first mortgage and mezzanine loan on the brill building180,925 square feet 11-story class b office/retail building located at 1619 broadway , new york , ny . originated a $ 31 million first mortgage and mezzanine loan for the acquisition of the 336-key ritz carlton in san francisco , ca . 59 originated a $ 44.8 million partial recourse loan for the acquisition of a matured senior loan collateralized by a 95,005 square feet development site originally planned as the chicago spire , located in chicago , il . named special servicer on three new issue cmbs deals . purchased $ 84.1 million of cmbs , including $ 76.9 million in new issue b-pieces . originated new conduit loans of $ 390.7 million . received proceeds of $ 476.5 million from sales of conduit loans . invested $ 130 million and $ 15 million in the acquisition and renovation of residential properties , respectively . story_separator_special_tag purchased $ 28.8 million ( $ 65.2 million of current face ) pool of non-performing loans in april 2013. three months ended september 30 , 2013 originated a $ 275 million first mortgage loan with $ 225 million initially funded and $ 50 million of future funding commitments , on the four seasons resort hualalai in hawaii . the loan bears interest at 4.45 % . issued $ 460 million of 4.00 % convertible senior notes due 2019. the notes were sold to the underwriters at a discount of 2.125 % , resulting in net proceeds to us of $ 450.2 million . refinanced a previously outstanding loan . the recapitalization includes a $ 140 million first mortgage loan with an initial funding of $ 115 million and future funding commitments of $ 25 million . the loan bears interest at 4.45 % and is collateralized by an office/retail building in san francisco , ca . the loan is split between a $ 95 million a-note , with an initial funding of $ 78 million and future funding commitments of $ 17 million , and a $ 45 million b-note , with an initial funding of $ 37 million and future funding commitments of $ 8 million . on july 22 , 2013 , we sold the a-note to another lender for proceeds that approximated our carrying amount , thereby effectively creating leverage on the b-note that we intend to hold for investment . refinanced an existing loan collateralized by a portfolio of hotel properties located throughout the united states . we co-originated the $ 285 million new loan with a strategic partner , with each of us holding a 50 % pari-passu interest . as a result , our portion of the loan was $ 142.5 million . as the outstanding balance on our previous loan was approximately $ 161 million , the refinancing resulted in a net cash inflow to us . the new loan is comprised of a $ 200 million a-note that bears interest at libor plus 3.75 % , and an $ 85 million b-note that bears interest at libor plus 7.522 % . on august 6 , 2013 , the a-note was sold into a securitization trust , thereby effectively creating leverage on the b-note that we intend to hold for investment . the gross proceeds from the sale of our 50 % interest approximated our carrying amount , and our share of the offering costs were approximately $ 2.2 million . sold the a-note on an office/retail building located in manhattan , ny , to another lender for proceeds of $ 83.3 million , which approximated our carrying amount . through the sale we effectively created leverage on the b-note that we intend to hold for investment . originated a $ 67 million first mortgage and a $ 78.6 million mezzanine loan , of which $ 115.0 million was funded at close , secured by a media campus located in burbank studios . the first mortgage and mezzanine loans bear interest at libor plus 3.25 % and 10.08 % , respectively . 60 co-originated a eur-denominated first mortgage loan with starfin lux s.a.r.l . ( `` starfin '' ) , an affiliate of our manager . the loan had an initial funding of $ 102.3 million ( $ 53.8 million for us and $ 48.5 million for starfin ) , and future funding commitments totaling $ 24.6 million . the loan bears interest at three-month euribor plus 7.0 % and is secured by a portfolio of retail properties in finland . originated a $ 102.6 million first mortgage loan and a $ 34.2 million mezzanine loan collateralized by eight , two-story office/research and development buildings located on a campus in san jose , ca . the first mortgage and mezzanine loans bear interest at libor plus 2.25 % and 9.45 % , respectively . the combined initial funding on the loans was $ 112.0 million with $ 24.8 million in future funding commitments . sold a cmbs position for proceeds of $ 206.9 million , resulting in a gain of $ 6.4 million . these securities had been pledged under a repurchase agreement , and although we incurred a $ 5.1 million prepayment penalty on the early extinguishment of this debt , the security provided a double digit return based upon the price at which we sold relative to our initial acquisition price , and the structure of the financing . originated a $ 112.0 million first mortgage loan secured by 844,820 square feet of land , which currently consists of 15 parking lots totaling 2,509 spaces , located in boston 's seaport district . the sponsors have gained full entitlement and approval for a 22-building master planned development , known as seaport square , that includes retail , office , multifamily , hotel and parking components . the loan is divided into a $ 67.0 million a-note and a $ 45.0 million b-note , which bear interest at libor plus 3.25 % and 8.83 % , respectively . named special servicer on two new issue cmbs deals . purchased $ 33.4 million of cmbs , including $ 20.6 million in new issue b-pieces . originated new conduit loans of $ 457.5 million . received proceeds of $ 375.2 million from sales of conduit loans . purchased a pool of 143 residential non-performing loans for $ 20.2 million , which represents a 49.4 % discount to the aggregate unpaid principal balance . the underlying single-family homes are located in florida . invested $ 183.9 million and $ 9.7 million in the acquisition and renovation of single family homes , respectively . three months ended december 31 , 2013 co-originated , with starwood european real estate finance , a £288 million first mortgage loan collateralized by the heron tower in london . in conjunction with the loan closing , we obtained a libor-based £210 million collateralized term financing facility , and retained a £60 million junior investment .
| 62 costs and expenses for the year ended december 31 , 2013 , total costs and expenses increased $ 298.3 million to $ 422.8 million compared to $ 124.6 million for the year ended december 31 , 2012. the year over year increase was primarily due to $ 171.3 million of costs and expenses attributable to lnr , $ 18.0 million of business combination costs related to the lnr acquisition , and increases in our lending and sfr segments of $ 58.9 million for interest expense , $ 26.4 million for depreciation and other operating costs of the sfr segment , $ 16.6 million for management fees and $ 6.7 million for general and administrative expenses . costs and expenses of lnr primarily reflect general and administrative expenses of $ 133.2 million , allocated management fees of $ 13.9 million , direct and allocated interest expense of $ 12.3 million and depreciation and amortization of $ 9.7 million . the increase in interest expense reflects our issuance of $ 1.1 billion total principal amount of 4.6 % and 4.0 % convertible senior notes in february and july of 2013 and a new term loan facility that we used to replace lnr 's previous senior credit facility in april 2013. the new term loan facility had an initial principal balance of $ 300 million , which was increased to $ 673 million in december 2013. other income for the year ended december 31 , 2013 , total other income increased $ 170.0 million to $ 191.5 million from $ 21.5 million for the year ended december 31 , 2012. the year over year increase was primarily due to $ 151.7 million of other income attributable to lnr ( after vie consolidations of $ 93.6 million ) and an $ 11.3 million increase in gains on loans and investments in our other segments . other income of lnr primarily consisted of $ 116.4 million of income of consolidated vies and a $ 45.9 million increase
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the fourth quarter of 2013 included pre-tax other costs of $ 16 million , the third quarter of 2013 included pre-tax other costs of $ 10 million and a pre-tax gain of $ 102 million resulting from the settlement of a legal claim , and the fourth quarter of 2012 included pre-tax other costs of $ 51 million , and a net $ 69 million tax benefit related to certain u.s. foreign tax credits in the quarter . excluding the pre-tax gain , tax benefit and other costs from all periods , fourth quarter 2013 earnings were $ 1.56 per fully diluted share , compared to $ 1.34 per fully diluted share in the third quarter of 2013 and $ 1.49 per fully diluted share in the fourth quarter of 2012. operating profit excluding other costs and the litigation gains was $ 973 million or 15.8 % of sales in the fourth quarter of 2013 , compared to $ 853 million or 14.7 % of sales in the third quarter of 2013 , and $ 954 million or 16.8 % of sales in the fourth quarter of 2012. oil & gas equipment and services market worldwide , developed economies turned down in late 2008 as looming housing-related asset write-downs at major financial institutions paralyzed credit markets and sparked a serious global banking crisis . major central banks responded vigorously through 2009 , but a credit-driven worldwide economic recession developed nonetheless . developed economies struggled to recover throughout 2010 and 2011 , facing additional economic weakness related to potential sovereign debt defaults in europe . as a result , commodity prices , including oil and gas prices , have been volatile . after rising steadily for six years to peak at around $ 140 per barrel ( west texas intermediate crude prices ) earlier in 2008 , oil prices collapsed back to average $ 43 per barrel during the first quarter of 2009 , but slowly recovered into the $ 100 per barrel range by mid-2011 where they held relatively steady since ( although the fourth quarter of 2012 dipped to average $ 88 per barrel ) . after trading in the range of $ 6 to $ 9 an mmbtu from 2004 to 2008 , north american gas prices declined to average $ 3.17 per mmbtu in the third quarter of 2009. gas prices recovered modestly , trading up above $ 5 six months later , but then slowly settled into the $ 3 to $ 4 per mmbtu through 2011 before turning down sharply in early 2012 to the $ 2 range . in the fourth quarter 2012 , gas prices recovered to average $ 3.40 per mmbtu ; and , for the full year 2013 , gas prices averaged $ 3.72 per mmbtu . the gas price collapse appears to be a direct result of rising gas supply out of unconventional shale reservoir development across north america , including gas associated with liquids production from shales . the steadily rising oil and gas prices seen between 2003 and 2008 led to high levels of exploration and development drilling in many oil and gas basins around the globe by 2008 , but activity slowed sharply in 2009 with lower oil and gas prices and tightening credit availability . strengthening oil prices since then have led to steadily rising oil-drilling activity over the past two years . the count of rigs actively drilling in the u.s. as measured by baker hughes ( a good measure of the level of oilfield activity and spending ) peaked at 2,031 rigs in september 2008 , but decreased to a low of 876 in june , 2009. u.s. rig count increased steadily to 2,026 by late 2011 , but began to decline with lower gas prices to average 1,809 rigs for the fourth quarter of 2012. the average u.s. rig count declined to 1,758 rigs in the first quarter of 2013 , and remained relatively flat throughout the year . many oil and gas operators reliant on external financing to fund their drilling programs significantly curtailed their drilling activity in 2009 , but drilling recovered across north america as gas prices improved . recently low gas prices have caused operators to trim drilling , driving the average u.s. gas rig count down 58 % from the fourth quarter of 2011 , to an average of 371 in the fourth quarter of 2013. however , with high oil prices , many have redirected drilling efforts towards unconventional shale plays targeting oil , rather than gas . for the fourth quarter of 2013 , oil-directed drilling rose to almost 78 % of the total domestic drilling effort , and remains near its highest levels in the u.s. since the early 1980 's . 39 most international activity is driven by oil exploration and production by national oil companies , which has historically been less susceptible to short-term commodity price swings ; but , the international rig count exhibited modest declines nonetheless , falling from its september 2008 peak of 1,108 to 947 in august 2009. recently international drilling rebounded due to high oil prices , climbing back to average 1,321 rigs in the fourth quarter of 2013. during 2009 the company saw its petroleum services & supplies and its distribution & transmission margins affected most acutely by a drilling downturn , through both volume and price declines . resumption of drilling activity since enabled both of these segments to gain volume , stabilize and lift pricing , and improve margins since the fourth quarter of 2009. the company 's rig technology segment was less impacted by the 2009 downturn owing to its high level of contracted backlog , which it executed well . it posted higher revenues in 2009 than 2008 as a result . its revenues declined in 2010 as its backlog declined , but increased 12 % in 2011 as orders for new offshore rigs began to increase . story_separator_special_tag the economic decline beginning in late 2008 followed an extended period of high drilling activity which fueled strong demand for oilfield services between 2003 and 2008. incremental drilling activity through the upswing shifted toward harsh environments , employing increasingly sophisticated technology to find and produce reserves . higher utilization of drilling rigs tested the capability of the world 's fleet of rigs , much of which is old and of limited capability . technology has advanced significantly since most of the existing rig fleet was built . the industry invested little during the late 1980 's and 1990 's on new drilling equipment , but drilling technology progressed steadily nonetheless , as the company and its competitors continued to invest in new and better ways of drilling . as a consequence , the safety , reliability , and efficiency of new , modern rigs surpass the performance of most of the older rigs at work today . drilling rigs are now being pushed to drill deeper wells , more complex wells , highly deviated wells and horizontal wells , tasks which require larger rigs with more capabilities . the drilling process effectively consumes the mechanical components of a rig , which wear out and need periodic repair or replacement . this process was accelerated by very high rig utilization and wellbore complexity . drilling consumes rigs ; more complex and challenging drilling consumes rigs faster . the industry responded by launching many new rig construction projects since 2005 , to 1 . ) retool the existing fleet of jackup rigs ( according to riglogix , nearly 62 % of the existing 513 jackup rigs are greater than 25 years old ) ; 2 . ) replace older mechanical and dc electric land rigs with improved ac power , electronic controls , automatic pipe handling and rapid rigup and rigdown technology ; and 3 . ) build out additional deepwater floating drilling rigs , including semisubmersibles and drillships , to employ recent advancements in deepwater drilling to exploit unexplored deepwater basins . we believe that the newer rigs offer considerably higher efficiency , safety , and capability , and that many will effectively replace a portion of the existing fleet . as a result of these trends the company 's rig technology segment grew its backlog of capital equipment orders from $ 0.9 billion at june 30 , 2005 , to $ 11.8 billion at september 30 , 2008. however , as a result of the credit crisis and slowing drilling activity , orders declined below amounts flowing out of backlog as revenue , causing the backlog to decline to $ 4.9 billion by june 30 , 2010. the backlog increased steadily since , as drillers began ordering more than the company shipped out of backlog , and finished the fourth quarter of 2013 at a record $ 16.2 billion . approximately $ 8.5 billion of these orders are scheduled to flow out as revenue during 2014 , with the balance flowing out in 2015 and beyond . of this backlog , 93 % of the total is for equipment destined for offshore operations , with 7 % destined for land . equipment destined for international markets totaled 94 % of the backlog . segment performance the rig technology segment generated $ 11.7 billion in revenues and $ 2.5 billion in operating profit or 21.5 % of sales during 2013. compared to the prior year , revenues improved 16 % while operating profit dollars increased 8 % year-over-year . for the fourth quarter of 2013 , the segment generated $ 3.3 billion in revenues and $ 692 million in operating profit or 20.9 % of sales . compared to the prior quarter , revenues increased $ 365 million or 12 % , and operating profit decreased $ 14 million . compared to the fourth quarter of 2012 , segment revenues grew $ 414 million or 14 % , and operating profit increased $ 56 million . year-over-year operating leverage or flow-through was 14 % . margins have moved down steadily since mid-2010 due to an adverse mix shift in the segment , the addition of lower-margin acquisitions , and incremental expenses to support several strategic growth initiatives . the mix shift arises from offshore projects contracted at high prices in 2007 and 2008 , which were subsequently manufactured in low cost environments in 2009 and 2010 , resulting in high margins for the group which peaked in the third quarter of 2010. as these projects have been completed and replaced with lower priced projects , margins have gradually declined . revenue out of backlog increased 20 % sequentially and increased 14 % year-over-year . non-backlog revenue , which is predominantly aftermarket spares and services , increased 7 % sequentially and increased 15 % from the fourth quarter of 2012. orders for four deepwater floating rig equipment packages , and twenty five drilling equipment packages for jackup rigs , contributed to total order additions to backlog of $ 3.6 billion during the fourth quarter . interest in offshore rig construction has remained strong as announced dayrates for deepwater offshore rigs remain strong , rig building costs have stabilized at attractive levels , and financing appears to be available for most established drillers . the segment also benefitted from the shipment of several land rigs in the fourth quarter ; and , despite the continued decline in demand for pressure pumping equipment in north america , the segment 's well intervention and stimulation product sales increased 11 % sequentially , as unexpected demand in the quarter was filled with existing inventory .
| operating profit from rig technology was $ 2,522 million for the year ended december 31 , 2013 , an increase of $ 187 million ( 8.0 % ) compared to 2012. operating profit percentage decreased to 21.5 % , from 23.1 % in 2012. the decrease in operating profit percentage continues to be primarily due to a shift in product mix as lower priced offshore projects replace projects contracted at higher prices in 2007 and 2008. fpso revenue continues to increase with operating margins that are dilutive while land rig and pressure pumping equipment revenue , with margins that are generally accretive , continues to decline . in addition , our shipyard customers are compressing delivery schedules which have been leading to increased freight and personnel costs . expenses associated with acquisition integration efforts , numerous strategic growth initiatives and capacity expansions worldwide have also contributed to the decrease in operating profit percentage . included in operating profit are certain other costs which include items such as transaction costs and the amortization of backlog and inventory that was stepped up during purchase accounting . other costs included in operating profit for rig technology were $ 27 million for the year ended december 31 , 2013 and $ 45 million for the year ended december 31 , 2012 . 42 the rig technology segment monitors its capital equipment backlog to plan its business . new orders are added to backlog only when the company receives a firm written order for major drilling rig components or a signed contract related to a construction project . the capital equipment backlog was $ 16.2 billion at december 31 , 2013 , an increase of $ 4.4 billion ( 37.0 % ) from backlog of $ 11.9 billion at december 31 , 2012. at december 31 , 2013 , approximately 93 % of the capital equipment backlog was for offshore products and 7 % was for land ; and approximately 94 % of the capital equipment backlog was for international markets and 6 % was for domestic markets . petroleum services & supplies revenue from petroleum services & supplies for the year ended december 31 , 2013 was $ 7,184 million , an increase of $ 217 million ( 3.1 % ) compared to the year ended december 31 , 2012. the increase is primarily due to the acquisition of robbins & myers during the first quarter of 2013
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our overall end markets were mixed in 2016 leading to organic growth in the year of one percent and a continuation of pressure on operating margins from business and product mix , as lower margin non-residential and residential markets grew , while higher margin industrial and oil markets continued to decline , although at rates that moderated as compared to 2015. the utility market was approximately flat in 2016 driven by project delays . considering these overall market conditions , we continued our focus on productivity and the restructuring and related program that began in 2014. the savings from our productivity and restructuring and related actions have helped to reduce the impact of unfavorable sales mix on operating margins as well as headwinds from pricing in certain markets and foreign exchange . our productivity measures are aimed to offset inflationary cost increases , while our restructuring and related actions are focused on reducing structural costs of the business , aligning our cost structure with market demand , and achieving greater back-office efficiencies . hubbell incorporated - form 10-k 19 summary of consolidated results ( in millions , except per share data ) replace_table_token_4_th our consolidated results of operations in 2016 , 2015 and 2014 include what we refer to as `` restructuring and related costs '' . restructuring actions support our cost reduction efforts involving the consolidation of manufacturing and distribution facilities as well as workforce reductions and the sale or exit of business units we determine to be non-strategic . restructuring costs include severance and employee benefits , asset impairments , as well as facility closure , contract termination and certain pension costs that are directly related to restructuring actions . restructuring-related costs are costs associated with our business transformation initiatives , including the consolidation of back-office functions and streamlining our processes , and certain other costs and gains associated with restructuring actions . in the fourth quarter of 2016 restructuring-related costs include a gain on the sale of a property associated with restructuring activities . our consolidated results of operations in 2015 also include costs associated with the reclassification of the company 's common stock to eliminate its two-class structure ( the `` reclassification '' and the `` reclassification costs '' ) . reclassification costs are primarily professional fees associated with the reclassification and are recognized in other expense , net in the consolidated statement of income . only a portion of the reclassification costs were tax deductible . we believe certain non-gaap measures that exclude the impact of these costs may provide investors with useful information regarding our underlying performance from period to period and allow investors to assess the impact of the company 's restructuring and related activities and business transformation initiatives on the results of operations . adjusted gross profit , adjusted selling & administrative ( `` s & a '' ) expense , and adjusted operating income each exclude restructuring and related costs . adjusted net income attributable to hubbell and adjusted earnings per diluted share exclude restructuring and related costs as well as reclassification costs . management uses these adjusted measures when assessing the performance of the business . additional information about the reclassification is included in note 15 — capital stock of the notes to consolidated financial statements as well as the company 's current reports on form 8-k filed on august 24 , 2015 and december 23 , 2015 and the company 's registration statement on form s-4 ( file no . 333-206898 ) , initially filed with the sec on september 11 , 2015 and declared effective on november 23 , 2015 . 20 hubbell incorporated - form 10-k the following table reconciles our adjusted financial measures to the directly comparable gaap financial measure ( in millions , except per share amounts ) : replace_table_token_5_th the following table reconciles our restructuring costs to our restructuring and related costs for 2016 and 2015 ( in millions ) : replace_table_token_6_th of the $ 35.0 million of restructuring and related costs incurred in 2016 , $ 32.1 million is recorded in the electrical segment and $ 2.9 million is recorded in the power segment . of the $ 38.9 million of restructuring and related costs incurred in 2015 , $ 32.8 million is recorded in the electrical segment and $ 6.1 million is recorded in the power segment . restructuring and related costs in cost of goods sold increased in 2016 primarily due to a $ 12.5 million charge in the fourth quarter of 2016 to record an estimated liability associated with the anticipated withdrawal from a multi-employer pension plan associated with the consolidation of two of our lighting facilities . restructuring related costs in s & a expense declined as compared to the prior year as 2016 includes a $ 7.2 million gain on the sale of a property associated with a restructuring action . hubbell incorporated - form 10-k 21 2016 compared to 2015 net sales net sales of $ 3.5 billion in 2016 increased three percent as compared to 2015 . acquisitions added three percentage points to net sales in 2016 and organic volume , including pricing headwinds , added one percentage point , while foreign currency translation reduced net sales by one percentage point . within our electrical segment , organic net sales of products sold into the non-residential and residential construction markets grew , but was mostly offset by lower organic net sales of products into the energy-related and industrial markets , which experienced continued , but moderating , weakness in 2016 , primarily impacting our harsh and hazardous products . within our power segment , organic net sales were slightly higher , by less than one percentage point , in 2016. cost of goods sold as a percentage of net sales , cost of goods sold increased to 68.6 % for 2016 compared to 67.8 % in 2015 . the increase was primarily due to unfavorable business and product mix , pricing headwinds in our electrical segment , the impact of our acquisitions , as well as foreign exchange headwinds . story_separator_special_tag we also incurred $ 6.4 million of higher restructuring and related costs within cost of goods sold in 2016 , primarily relating to the proposed consolidation of two of our lighting facilities . those unfavorable impacts were partially offset by higher realized savings from our restructuring and related actions in 2016 , and favorable material costs . gross profit the gross profit margin for 2016 declined to 31.4 % compared to 32.2 % in 2015 . restructuring and related costs in cost of goods sold were $ 6.4 million higher in 2016 as compared to 2015 . excluding restructuring and related costs , the adjusted gross profit margin was 32.3 % in 2016 as compared to 32.9 % in 2015 . the decrease in the adjusted gross margin is primarily due to unfavorable business and product mix , pricing headwinds in our electrical segment , the impact of our acquisitions , as well as foreign exchange headwinds . those unfavorable impacts were partially offset by higher realized savings from our restructuring and related actions in 2016 , and favorable material costs . selling & administrative expenses s & a expense in 2016 was $ 622.9 million and increased one percent compared to 2015 as we added s & a costs in 2016 from our acquisitions , made investments in our business , and experienced higher pension costs . those increases were almost completely offset by realized savings from our restructuring and related actions , $ 10.3 million lower restructuring and related costs in s & a expense in 2016 and foreign currency translation . s & a expense as a percentage of net sales declined by 40 basis points to 17.8 % in 2016 . excluding restructuring and related costs , adjusted s & a expense as a percentage of net sales declined by 20 basis points to 17.6 % in 2016 primarily due to realized savings from our restructuring and related actions and the favorable impact of higher volume , partially offset by higher pension costs and investments in our business in 2016. operating income operating income increased one percent in 2016 to $ 477.8 million while operating margin declined by 40 basis points to 13.6 % . excluding restructuring and related costs , adjusted operating income of $ 512.8 million was flat as compared to 2015 and the adjusted operating margin declined by 50 basis points to 14.6 % . the adjusted operating margin decreased primarily due to unfavorable product and business mix , pricing headwinds in our electrical segment , foreign exchange headwinds and cost increases that were greater than productivity gains . those unfavorable impacts to the adjusted operating margin were partially offset by realized savings from our restructuring and related actions and lower material costs . total other expense total other expense was $ 47.4 million in 2016 compared to $ 56.0 million in 2015 . excluding reclassification costs that were incurred in 2015 , adjusted total other expense was $ 47.4 in 2016 compared to $ 36.3 million in 2015 and increased largely due to a $ 12.4 million increase in interest expense primarily related to the $ 400 million debt offering we completed in march 2016. income taxes the effective tax rate was 30.8 % in 2016 as compared to 32.6 % in 2015 . the effective tax rate was higher in 2015 as compared to 2016 due to certain costs of the reclassification that were not deductible partially offset by international reorganization actions in 2015 as well as certain discrete items in 2016. additional information related to the company 's effective tax rate is included in note 12 — income taxes in the notes to consolidated financial statements . net income attributable to hubbell and earnings per diluted share net income attributable to hubbell was $ 293.0 million in 2016 and increased 6 % as compared to 2015 . excluding restructuring and related costs and reclassification costs , adjusted net income attributable to hubbell was $ 316.8 million in 2016 and decreased 1 % as compared to 2015 , which reflects flat adjusted operating earnings , higher interest expense in 2016 , partially offset by the benefit of a lower effective tax rate as compared to 2015. earnings per diluted share in 2016 increased 10 % compared to 2015 . adjusted earnings per diluted share in 2016 , increased 3 % and reflects a lower average number of diluted shares outstanding for the year , which declined by approximately 2.3 million as compared to 2015 . 22 hubbell incorporated - form 10-k story_separator_special_tag style= '' line-height:120 % ; font-size:9pt ; '' > electrical segment replace_table_token_9_th net sales in the electrical segment were approximately flat in 2015 compared with 2014 as the contribution of net sales from acquisitions were more than offset by the impact of foreign currency translation and lower organic net sales volume . acquisitions contributed three percentage points to net sales offset by two percentage points due to foreign currency translation and one percentage point due to lower organic volume . within the segment , net sales of our lighting business group increased six percent in 2015 compared to 2014 , while the aggregate net sales of our other business groups in the electrical segment declined by four percent in the same period . net sales of the lighting business group increased five percent due to organic growth in both the non-residential and residential construction markets , and one percent due to acquisitions . the aggregate net sales of our other business groups in the electrical segment declined by four percent due to a four percentage point decline in organic volume and three percentage points of unfavorable foreign currency translation , partially offset by three percent net sales growth from completed acquisitions . the decline in organic net sales volume is primarily due to lower net sales of products in the energy-related and industrial markets , primarily our harsh and hazardous products , partially offset by net sales growth in our other products , primarily in the non-residential and residential construction markets .
| excluding restructuring and related costs , the adjusted operating margin decreased by 90 basis points to 12.2 % in 2016 . the decrease in the adjusted operating margin is primarily due to unfavorable product and business mix , foreign exchange headwinds , cost increases that were mostly offset by productivity gains , and pricing headwinds in our lighting business group . those unfavorable impacts were partially offset by realized savings from our restructuring and related actions and lower material costs . power segment replace_table_token_8_th net sales in the power segment were $ 1.0 billion , up four percent compared to 2015 , due to the contribution of net sales from acquisitions . organic volume and the impact of foreign currency translation were effectively flat , as organic volume increased by less than one percent and was offset by foreign currency headwinds of less than one percent . operating income in the power segment increased eight percent to $ 210.4 million in 2016 . operating margin in 2016 increased by 60 basis points to 20.1 % . excluding restructuring and related costs , the adjusted operating margin in 2016 increased 30 basis points to 20.4 % . the increase in the adjusted operating margin is primarily due to favorable pricing and material costs , and productivity in excess of cost increases , including the reduction of an environmental liability in the fourth quarter of 2016 , partially offset by acquisitions , which increased operating income , but reduced operating margin by approximately 40 basis points . 2015 compared to 2014 net sales net sales for the year ended 2015 were $ 3.4 billion , an increase of one percent over 2014. acquisitions added three percentage points to net sales in 2015 , offset by the impact of foreign currency translation which reduced net sales by two percentage points . organic volume was flat as net sales growth in our power segment and in our electrical segment products in the non-residential and residential construction markets was offset
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oil and condensate prices were calculated for each property using differentials to an average for the year of the first of the month conocophillips wti price of $ 76.05 per barrel and were held constant for the lives of the property . the weighted average price over the lives of the properties was $ 78.34 per barrel . gas prices were calculated for each property using the differentials to an average for the year of the first of the month henry hub louisiana onshore price of $ 4.38 per million british thermal units and were held constant for the lives of the properties . the weighted average price over the lives of the properties was $ 4.71 per thousand cubic feet . the standardized measure is based on the average of the beginning of the month pricing for 2010. while we believe that future operating costs can be reasonably estimated , future prices are difficult to estimate since the market prices are influenced by events beyond our control . future global economic and political events will most likely result in significant fluctuations in future oil prices . successful efforts method of accounting oil and gas exploration and production companies choose one of two acceptable accounting methods , successful efforts or full cost . the most significant difference between the two methods relates to the accounting treatment of drilling costs for unsuccessful exploration wells ( dry holes ) and exploration costs . under the successful efforts method , exploration costs and dry hole costs ( the primary uncertainty affecting this method ) are recognized as expenses when incurred and the costs of successful exploration wells are capitalized as oil and gas properties . entities that follow the full cost method capitalize all drilling and exploration costs including dry hole costs into one pool of total oil and gas property costs . while it is typical for companies that drill exploration wells to incur dry hole costs , our primary activities during 2010 focused on development wells and our exploratory drilling activities were immaterial . nevertheless , we will selectively expand our exploration drilling in the future . it is impossible to accurately predict specific dry holes . because we can not predict the timing and magnitude of dry holes , quarterly and annual net income can vary dramatically . the calculation of depreciation , depletion and amortization of capitalized costs under the successful efforts method of accounting differs from the full cost method in that the successful efforts method requires us to calculate depreciation , depletion and amortization expense on individual properties rather than one pool of costs . in addition , under the successful efforts method we assess our properties individually for impairment compared to one pool of costs under the full cost method . depreciation , depletion and amortization of oil and gas properties the unit-of-production method of depreciation , depletion and amortization of oil and gas properties under the successful efforts method of accounting is applied pursuant to the simple multiplication of units produced by the costs per unit on a field by field basis . leasehold cost per unit is calculated by dividing the total cost by the estimated total proved oil and gas reserves associated with that field . well cost per unit is calculated by dividing the total cost by the estimated total proved developed oil and gas reserves associated with that field . the volumes or units produced and asset costs are known and while the proved reserves have a high probability of 30 index to financial statements recoverability , they are based on estimates that are subject to some variability . the factors which create this variability are included in the discussion of estimated proved oil and gas reserves above . impairment of oil and gas properties we test for impairment of our properties based on estimates of proved reserves . proved oil and gas properties are reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable . we estimate the future undiscounted cash flows of the affected properties to judge the recoverability of the carrying amounts . initially this analysis is based on proved reserves . however , when we believe that a property contains oil and gas reserves that do not meet the defined parameters of proved reserves , an appropriately risk adjusted amount of these reserves may be included in the impairment evaluation . these reserves are subject to much greater risk of ultimate recovery . an asset would be impaired if the undiscounted cash flows were less than its carrying value . impairments are measured by the amount by which the carrying value exceeds its fair value . impairment analysis is performed on an ongoing basis . in addition to using estimates of oil and gas reserve volumes in conducting impairment analysis , it is also necessary to estimate future oil and gas prices . the impairment evaluation triggers include a significant long-term decrease in current and projected prices or reserve volumes , an accumulation of project costs significantly in excess of the amount originally expected and historical and current negative operating losses . although we evaluate future oil and gas prices as part of the impairment analysis , we do not view short-term decreases in prices , even if significant , as impairment triggering events . exploratory drilling costs the costs of drilling an exploratory well are capitalized as uncompleted wells pending the determination of whether the well has found proved reserves . if proved reserves are not found , these capitalized costs are charged to expense . on the other hand , the determination that proved reserves have been found results in continued capitalization of the well and its reclassification as a well containing proved reserves . story_separator_special_tag asset retirement obligation the company follows fasb asc 410asset retirement and environmental obligations which requires entities to record the fair value of a liability for legal obligations associated with the retirement obligations of tangible long-lived assets in the period in which it is incurred . the fair value of asset retirement obligation liabilities has been calculated using an expected present value technique . fair value , to the extent possible , should include a market risk premium for unforeseeable circumstances . a five percent market risk premium was included in the company 's asset retirement obligation fair value estimate . when the liability is initially recorded , the entity increases the carrying amount of the related long-lived asset . over time , accretion of the liability is recognized each period and the capitalized cost is amortized over the useful life of the related asset . upon retirement of the liability , an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement . this standard requires the company to record a liability for the fair value of the dismantlement and plugging and abandonment costs , excluding salvage values . derivatives derivative financial instruments , utilized to manage or reduce commodity price risk related to dune 's production , are accounted for under the provisions of fasb asc 815derivatives and hedging . under this statement , derivatives are carried on the balance sheet at fair value . if the derivative is designated as a fair value hedge , the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings . if the derivative is designated as a cash flow hedge , the effective portions of changes in the fair value of the derivatives are recorded in other comprehensive income or loss and are recognized in the statement of operations when the hedged item affects earnings . if the derivative is not designated as a hedge , 31 index to financial statements changes in the fair value are recognized in other expense . ineffective portions of changes in the fair value of cash flow hedges are also recognized in loss on derivative liabilities . effective january 1 , 2008 , the company discontinued , prospectively , the designation of its derivatives as cash flow hedges . the net derivative loss related to the discontinued cash flow hedges , as of december 31 , 2007 , continued to be reported in accumulated other comprehensive loss through december 31 , 2009 and were charged to loss as the volumes underlying the cash flow hedges were realized . beginning january 1 , 2008 , the gain or loss on derivatives was recognized currently in earnings . associated with the wayzata credit agreement dated december 7 , 2010 , the company was no longer required to hedge and settled all hedged balances . stock-based compensation the company follows the provisions of fasb asc 718 stock compensation . the statement requires all stock-based payments to employees , including grants of employee stock options , to be recognized in the financial statements based on their fair values on the date of the grant . due to significant declines in the price of dune 's stock since the issuance of many employee grants , stock-based compensation amounts are high compared to current values . business strategy dune is an independent energy company engaged in the exploration , development , acquisition and exploitation of natural gas and crude oil properties , with interest along the gulf coast . on may 15 , 2007 , we closed the stock purchase and sale agreement to acquire all of the capital stock of goldking energy holdings , l.p. goldking was an independent energy company focused on the exploration , exploitation and development of natural gas and crude properties located onshore and in state waters along the gulf coast . the acquisition of goldking substantially increased our proved reserves , provided significant drilling upside and increased our geographic and geological well diversification . additionally , the acquisition of goldking provided us with exploration opportunities within our core geographic area . our properties now cover over 85,000 gross acres across 22 oil and natural gas fields onshore and in state waters along the texas and louisiana gulf coast . grow through exploitation , development , and exploration of our properties . our primary focus will continue to be the development and exploration efforts in our gulf coast properties . we believe that our properties and acreage position will allow us to grow organically through low risk drilling in the near term , as this property set continues to present attractive opportunities to expand our reserve base through workovers and recompletions , field extensions , delineating deeper formations within existing fields and higher risk/higher reward exploratory drilling . in addition , we will constantly review , rationalize and high-grade our properties in order to optimize our existing asset base . maintain and utilize state of the art technological expertise . we expect to maintain and utilize our technical and operations teams ' knowledge of salt-dome structures and multiple stacked producing zones common in the gulf coast to enhance our growth prospects and reserve potential . we will employ technical advancements , including 3-d seismic data and pre-stack depth and reverse-time migration to identify and exploit new opportunities in our asset base . we also plan to employ the latest drilling , completion and fracturing technology in our wells to enhance recoverability and accelerate cash flows associated with these wells . pursue opportunistic acquisitions of underdeveloped properties . we continually review opportunities to acquire producing properties , leasehold acreage and drilling prospects that are in core operating areas and require a minimum of initial upfront capital . we are seeking to acquire operational control of properties that we believe 32 index to financial statements have a solid proved reserves base coupled with significant exploitation and exploration potential .
| accretion of asset retirement obligation accretion expense for asset retirement obligations increased by $ 0.2 million for 2010 compared to 2009. this increase is the result of reevaluating abandonment cost at year end . depletion , depreciation and amortization ( dd & a ) for the year ended december 31 , 2010 , the company recorded dd & a expense of $ 27.1 million ( $ 3.70/mcfe ) compared to $ 30.0 million ( $ 3.85/mcfe ) for the year ended december 31 , 2009 representing a decrease of $ 2.9 million ( $ 0.15/mcfe ) . this reduction reflects the impact of the 2010 impairment on the company 's oil and gas properties of $ 34.6 million which directly impacts the depletable base for dd & a purposes . general and administrative expense ( g & a expense ) g & a expense for the year ended december 31 , 2010 decreased $ 3.1 million from the year ended december 31 , 2009 to $ 11.2 million . cash g & a expense for 2010 fell $ 0.8 million ( 8 % ) from 2009 to $ 9.4 million . these decreases resulted primarily from a $ 0.5 million ( 7 % ) reduction in personnel expense and a $ 2.4 million ( 57 % ) drop in share-based compensation . loss on impairment of oil and gas properties dune recorded an impairment of oil and gas properties of $ 34.6 million for the year ended december 31 , 2010 compared to an impairment of $ 2.9 million for the year ended december 31 , 2009. the increase consists primarily of expired leasehold costs on the murphy lake field of $ 5.3 million , expired drilling and leasehold costs of $ 18.5 million on the bayou couba field and $ 10.8 million split among 5 fields which did not perform as anticipated in 2010 . 36 index to financial statements other income ( expense ) interest income interest income has been minimal as a result
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land closings revenue is recognized when title is transferred to the buyer , we have no significant continuing involvement , the buyer has demonstrated sufficient investment in the property sold and the receivable , if any , from the buyer is not subject to future subordination . if the buyer has not made an adequate investment in the property , the profit on such sale is deferred until these conditions are met . mortgage operations revenue loan origination fees ( including title fees , points , and closing costs ) are recognized at the time the related real estate transactions are completed , usually upon the close of escrow . all of the loans tmhf originates are sold to third party investors within a short period of time ( typically within 15-20 business days ) on a non-recourse basis . gains and losses from the sale of mortgages are recognized in accordance with asc topic 860-20 , “ sales of financial assets . ” because tmhf does not have continuing involvement with the transferred assets , we derecognize the mortgage loans at time of sale , based on the difference between the selling price and carrying value of the related loans upon sale , recording a gain/loss on sale in the period of sale . also , we enter into irlcs to originate residential mortgage loans held for sale , at specified interest rates and within a specified period of time . these instruments meet the definition of a derivative and the realized and unrealized gain and loss from the irlcs are included in mortgage operations revenue/expenses . real estate inventory valuation and costing inventory consists of raw land , land under development , homes under construction , completed homes , and model homes , which are stated at cost . in addition to direct carrying costs , we also capitalize interest , real estate taxes , and related development costs that benefit the entire community , such as field construction supervision and related direct overhead . home construction costs are accumulated and charged to cost of sales at home closing using the specific identification method . land acquisition , development , interest , real estate taxes and overhead are allocated to homes and units using the relative sales value method . these costs are capitalized to inventory from the point development begins to the point construction is completed . changes in estimated costs to be incurred in a community are generally allocated to the remaining homes on a prospective basis . for those communities that have been temporarily closed or development has been discontinued , we do not allocate interest or other costs to the community 's inventory until activity resumes . the life cycle of the community generally ranges from two to five years , commencing with the acquisition of unentitled or entitled land , continuing through the land development phase and concluding with the sale , construction and delivery of homes . actual community lives will vary based on the size of the community , the sales absorption rate and whether we purchased the property as raw land or as finished lots . we capitalize qualifying interest costs to inventory during the development and construction periods . capitalized interest is charged to cost of sales when the related inventory is delivered or when the related inventory is charged to cost of sales . we assess the recoverability of our land inventory in accordance with the provisions of accounting standards codification ( “ asc ” ) topic 360 , “ property , plant , and equipment . ” we review our real estate inventory for indicators of impairment by community during each reporting period . if indicators of impairment are present for a community , we first perform an undiscounted cash flow analysis to determine if the carrying value of the assets in that community exceeds the undiscounted cash flows . generally , if the carrying value of the assets exceeds their estimated undiscounted cash flows , then the assets are deemed to be impaired and are recorded at fair value as of the assessment date . our determination of fair value is based on a discounted cash flow model which includes projections and estimates relating to sales prices , construction costs , sales pace , and other factors . changes in these expectations may lead to a change in the outcome of our impairment analysis , and actual results may also differ from our assumptions . insurance costs , self-insurance reserves and warranty reserves 36 we have certain deductible amounts under our workers ' compensation , automobile and general liability insurance policies , and we record expense and liabilities for the estimated costs of potential claims for construction defects . we also generally require our sub-contractors and design professionals to indemnify us and provide evidence of insurance for liabilities arising from their work , subject to certain limitations . beneva indemnity company ( “ beneva ” ) , one of our wholly owned subsidiaries , provides insurance coverage for construction defects discovered up to ten years following the closing of a home , premises operations risk and property coverage . we accrue for the expected costs associated with the deductibles and self-insured amounts under our various insurance policies based on historical claims , estimates for claims incurred but not reported , and potential for recovery of costs from insurance and other sources . the estimates are subject to significant variability due to various factors , such as claim settlement patterns , litigation trends and the length of time in which a construction defect claim might be made after the closing of a home . we offer a limited warranty to cover various defects in workmanship or materials , including structural defects . we may also facilitate a longer warranty in certain markets or to comply with regulatory requirements . warranty reserves are recorded as each home closes in an amount estimated to be adequate to cover expected future costs of materials and outside labor during warranty periods . story_separator_special_tag our warranty is not considered a separate deliverable in each sale arrangement , so it is accounted for in accordance with asc topic 450 , “ contingencies . ” in accordance with asc 450 , warranties that are not separately priced are generally accounted for by accruing the estimated costs to fulfill the warranty obligation . thus , the warranty would not be considered a separate deliverable in the arrangement since it is not priced apart from the home . as a result , we accrue the estimated costs to fulfill the warranty obligation in accordance with asc 450 at the time a home closes , as a component of cost of home closings . our reserves are based on factors that include an actuarial study for historical and anticipated claims , trends related to similar product types , number of home closings , and geographical areas . we also provide third-party warranty coverage on homes where required by federal housing administration or veterans administration lenders . we regularly review the reasonableness and adequacy of our reserves and make adjustments to the balance of the preexisting reserves to reflect changes in trends and historical data as information becomes available . self-insurance and warranty reserves are included in accrued expenses and other liabilities in the accompanying consolidated balance sheets . investments in unconsolidated entities and variable interest entities ( vies ) we are involved in joint ventures with related and unrelated third parties for homebuilding and development activities . we use the equity method of accounting for entities over which we exercise significant influence but do not have a controlling interest over the operating and financial policies of the investee . for unconsolidated entities in which we function as the managing member , we have evaluated the rights held by our joint venture partners and determined that they have substantive participating rights that preclude the presumption of control . for joint ventures accounted for using the equity method , our share of net earnings or losses is included in equity in income of unconsolidated entities when earned and distributions are credited against its investment in the joint venture when received . these joint ventures are recorded in investments in unconsolidated entities on the consolidated balance sheets . in the ordinary course of business , we enter into land and lot option purchase contracts in order to procure land or lots for the construction of homes . lot option contracts enable us to control significant lot positions with a minimal initial capital investment and substantially reduce the risks associated with land ownership and development . in accordance with asc topic 810 , “ consolidation , ” we have concluded that when we enter into an option or purchase agreement to acquire land or lots and pay a non-refundable deposit , a vie may be created because we are deemed to have provided subordinated financial support that will absorb some or all of an entity 's expected losses if they occur . if we are the primary beneficiary of the vie , we will consolidate the vie in our consolidated financial statements and reflect such assets and liabilities as real estate not owned under option agreements within our inventory balance in the accompanying consolidated balance sheets . stock based compensation we have issued stock options , performance based restricted stock units and non-performance based restricted stock units , which we account for in accordance with asc topic 718-10 , “ compensation — stock compensation. ” the fair value for stock options is measured and estimated on the date of grant using the black-scholes option pricing model and recognized evenly over the vesting period of the options . performance-based restricted stock units are measured using the closing price on the date of grant and expensed using a probability of attainment calculation which determines the likelihood of achieving the performance targets . non-performance-based restricted stock units are time based awards and measured using the closing price on the date of grant and are expensed over the vesting period on a straight-line basis . 37 valuation of deferred tax assets we account for income taxes using the asset and liability method , which requires that deferred tax assets and liabilities be recognized based on future tax consequences of both temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases . deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which the temporary differences are expected to be recovered or settled . the effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the changes are enacted . as a result of the tax act enacted on december 22 , 2017 , we have recorded a material charge to earnings in the period ending december 31 , 2017 . see note 13 - income taxes to the consolidated financial statements for additional details . in accordance with asc topic 740-10 , “ income taxes , ” we evaluate our deferred tax assets by tax jurisdiction , including the benefit from net operating loss ( “ nol ” ) carryforwards by tax jurisdiction , to determine if a valuation allowance is required . companies must assess , using significant judgments , whether a valuation allowance should be established based on the consideration of all available evidence using a “ more likely than not ” standard with significant weight being given to evidence that can be objectively verified . this assessment considers , among other matters , the nature , frequency and severity of current and cumulative losses , forecasts of future profitability , the length of statutory carryforward periods , experience with operating losses and experience of utilizing tax credit carryforwards and tax planning alternatives .
| as a result of the tax act , we have recorded a non-cash provisional income tax expense of $ 57.4 million to account for the revaluation of our existing deferred tax assets due to the lower tax rate and we have recorded an estimated $ 3.6 million charge which may be payable over eight years related to the mandatory deemed repatriation of foreign earnings related to the sale of our canadian operations in 2015. on january 26 , 2018 we amended the maturity date of our $ 500 million revolving credit facility from april 2019 to january 2022 allowing incremental financial flexibility . as of december 31 , 2017 , our total liquidity was $ 1.0 billion , including $ 573.9 million in cash . as of december 31 , 2017 our net homebuilding debt to capitalization ratio of 25.8 % . operational during 2017 , our operations were located in eight states with 297 average active communities . we sold and closed nearly 12.0 % and 9.0 % , respectively , more homes during 2017 compared to 2016. sales pace for the year ended december 31 , 2017 was 2.4 compared to 2.0 for the year ended december 31 , 2016. average sales price of homes closed was $ 473,000 for the year ended december 31 , 2017. we ended 2017 with $ 1.7 billion in sales order backlog . at december 31 , 2017 , we owned and controlled approximately 38,000 lots . for the last three consecutive years , we were awarded america 's most trusted home builder® by lifestory research . we were recognized and awarded as one of the best places to work by glassdoor . industry overview and business strategy we believe the housing market is on a positive trajectory of recovery , driven by certain positive economic and demographic factors , including decreasing unemployment , strong home values , improving household balance sheets , declines in new and existing for-sale home inventory and low interest rates . while we were encouraged by certain positive and improved trends during 2017 , several challenges still exist , such as lingering under employment concerns , stagnation in real wages and real or perceived personal wealth , national and
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in may 2015 , we entered into a stock sale and purchase agreement with nantpharma , llc , or nantpharma , a wholly-owned subsidiary of nantworks pursuant to which we agreed to sell to nantpharma all of our equity interests in igdrasol , inc. , a wholly-owned subsidiary of ours and the holder of the rights to cynviloq , a polymeric micelle based cremophor free paclitaxel injectable finished formulation . pursuant to the agreement , nantpharma agreed to pay us an upfront payment of $ 90.05 million , of which $ 60 million was obligated to fund our joint ventures . in addition , we will be entitled to receive up to $ 620 million in regulatory milestone 48 payments and up to $ 600 million in sales milestone payments should certain events occur . we will also receive specified a dditional per unit payments in excess of cost of supply from total unit sales . in addition , during the first three years after closing , we have the option to co-develop and or co-market cynviloq on terms to be negotiated . the agreement contains customary r epresentations , warranties and covenants for us and nantpharma . upon the closing of the agreement in july , the specified development milestone was satisfied and we issued 1,306,272 million shares to former igdrasol shareholders . in june 2015 , the national institutes of health , or nih announced that the clinical center suspended operations of its pharmaceutical development section after fda inspections that occurred in may 2015. an fda inspection report issued on may 29 , 2015 noted “ deficiencies in the physical facility , including flaws in the air handling system , and operational failures including inadequate quality control , insufficient employee training , and lack of compliance with standard operating procedures ” . as a result , 46 clinical programs , including the resiniferatoxin ( rtx ) study in patients with severe pain in advanced cancer , were placed on clinical hold by the fda . nih has developed an interim corrective action/preventative action plan which has not yet been approved by the fda . the company plans to continue with its already planned corporate ind for rtx . in july 2015 , we and nantbioscience established a new joint venture called nantcancerstemcell , llc , or nantstem , as a stand-alone biotechnology company with $ 100 million initial joint funding . as initially organized , nantbioscience was obligated to make a $ 60 million cash contribution to nantstem for a 60 % equity interest in nantstem , and we were obligated to make a $ 40 million cash contribution to nantstem for a 40 % equity interest in nantstem . fifty percent of these contributions were funded in july 2015 and the remaining amounts were to be made by no later than september 30 , 2015. we had nantpharma contribute our portion of the initial joint funding of $ 20 million to nantstem from the proceeds of the sale of igdrasol . pursuant to a side letter dated october 13 , 2015 , the nantstem joint venture agreement was amended to relieve us of the obligation to contribute the second $ 20 million payment , and our ownership interest in nantstem was reduced to 20 % . nantbioscience 's funding obligations were unchanged . the side letter was negotiated at the same time we issued a call option on shares of nantkwest that we owned to cambridge equities , lp , a related party to us and to nantbioscience . in the fourth quarter of 2015 , we determined our investment in nantstem had an other-than-temporary decline in the value and recognized a loss of $ 4.0 million in equity investments on our consolidated statement of operations for the year ended december 31 , 2015. i n august 2015 , we along with tnk therapeutics , inc. ( “ tnk ” ) , our subsidiary entered into a membership interest purchase agreement ( the “ membership interest purchase agreement ” ) with cargenix holdings llc ( “ cargenix ” ) and the members of cargenix ( the “ members ” ) pursuant to which the members sold all of their membership interests in cargenix to tnk for : ( 1 ) a cash payment of $ 100.00 , and ( 2 ) $ 6.0 million in shares of tnk class a common stock , subject to adjustment in certain circumstances , to be issued to the members upon a financing resulting in gross proceeds ( individually or in the aggregate ) to tnk of at least $ 50.0 million ( a “ qualified financing ” ) . in the event a qualified financing does not occur by march 15 , 2016 or tnk does not complete an initial public offering of shares of its capital stock by march 31 , 2016 , in lieu of receiving shares of tnk pursuant to the acquisition , the members shall receive an aggregate of 309,917 shares of our common stock , subject to adjustment in certain circumstances . the membership interest purchase agreement further provides that 20 % of the shares of tnk or ours , as applicable , issuable to the members shall be held in escrow to secure certain post-closing adjustment and indemnification rights of tnk for a period of 12 months following the closing of the transaction . the aggregate purchase price of $ 6.0 million was recognized as acquired in-process research and development expense in the consolidated statement of operations . story_separator_special_tag in august 2015 , we along with tnk entered into a stock purchase agreement ( the “ stock purchase agreement ” ) with bdl products , inc. ( “ bdl ” ) and the stockholders of bdl ( “ stockholders ” ) pursuant to which the stockholders sold all of their shares of capital stock in bdl to tnk for : ( 1 ) a cash payment of $ 100.00 , and ( 2 ) $ 6.0 million in shares of tnk class a common stock , subject to adjustment in certain circumstances , to be issued to the stockholders upon a qualified financing . in the event a qualified financing does not occur by march 15 , 2016 or tnk does not complete an initial public offering of shares of its capital stock by march 31 , 2016 , in lieu of receiving shares of tnk pursuant to the acquisition , the stockholders shall receive an aggregate of 309,917 shares of our common stock , subject to adjustment in certain circumstances . the stock purchase agreement further provides that 20 % of the shares of tnk or ours , as applicable , issuable to the stockholders shall be held in escrow to secure certain post-closing adjustment and indemnification rights of tnk for a period of 12 months following the closing of the transaction . the aggregate purchase price of $ 6.0 million was recognized as acquired in-process research and development expense in the consolidated statement of operations . i n august 2015 , we entered into an exclusive licensing agreement to develop and commercialize multiple pre-specified biosimilar or biobetter antibodies from mabtech limited . under the terms of the agreement , we will develop and market these four mabs for the north american , european and japanese market . we made an initial license payment of $ 10.0 million which was recognized as acquired in-process research and development expense in the consolidated statements of operations . the agreement includes additional payments totaling up to $ 190.0 million payable over the next four years . in september 2015 , we along with our subsidiary la cell , exclusively licensed certain technology from city of hope . the technology includes cell-penetrating antibody therapies that enables modified monoclonal antibodies ( mabs ) to penetrate into cells 49 and target disease-causing molecules . utilizing mabs derived from our antibody portfolio , la cell is focused on developing therapies against important oncology targets , including but not limited to c-my c , mutated kras , stat3 , and foxp3 . pursuant to the license agreement , la cell made a $ 2.0 million upfront payment to city of hope and will pay an additional payment of $ 3.0 million to city of hope by march 25 , 2016 , as well as license maintenance fees ove r the next six years . the license agreement also provides for development and sales milestone payments and royalties based on net sales , as defined in the license agreement . in addition , pursuant the license agreement , la cell issued to city of hope 2,6 48,948 shares of its class c common stock story_separator_special_tag 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 nih grants . 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 $ 7,360 is primarily attributable to preclinical testing and completion of our be registration trial prior to its sale in july 2015 , salaries and compensation related expense , 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 . 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 , the cost of acquiring , developing and manufacturing clinical trial materials , and other regulatory operating activities , ( ii ) incur incremental expenses associated with our efforts to further advance a number of potential product candidates into preclinical development activities , ( iii ) continue to identify and advance a number of fully human therapeutic antibody and adc preclinical product candidates , ( iv ) incur higher salary , lab supply and infrastructure costs incurred in connection with supporting all of our programs , and ( v ) invest in our jv 's or other third party agreements . acquired in-process research and development expenses . acquired in-process research and development expenses for the years ended december 31 , 2015 and 2014 were $ 24,013 and $ 209 , respectively . acquired in-process research and development expenses for the year ended december 31 , 2015 include costs associated with the purchase price of the license rights from mabtech limited , the purchase price of the license rights from the city of hope and the purchase price of cargenix and bdl . acquired in-process research and development expenses for the year ended december 31 , 2014 include the costs associated with a research agreement . general and administrative expenses . general and administrative expenses for the years ended december 31 , 2015 and 2014 were $ 20,132 and $ 9,987 , respectively . general and administrative expenses consist primarily of salaries and personnel related expenses for executive , finance and administrative personnel , stock-based compensation expense , professional fees , infrastructure expenses , legal and accounting expenses and other general corporate expenses . the increase of $ 10,145 is primarily attributable to higher salaries and related compensation expenses , stock-based compensation , legal costs related to acquisitions , general corporate and ip matters , consulting and business development expenses and higher compliance costs associated with our public reporting obligations .
| in june 2014 , the national institute of allergy and infectious diseases , or niaid , a division of the national institutes of health , or nih awarded us a phase ii sttr grant to support the advanced preclinical development of human bispecific antibody therapeutics to prevent and treat staphylococcus aureus ( s. aureus or staph ) infections , including methicillin-resistant s. aureus ( mrsa ) , or the staph grant iii award . the project period for this phase ii grant covers a two-year period which commenced in june 2014 , with total funds available of approximately $ 1 million per year for up to 2 years . during the years ended december 31 , 2015 and 2014 , we recorded $ 884 and $ 220 of revenue , respectively , associated with the staph grant iii award . in june 2014 , we were awarded a phase i sttr grant entitled “ anti-pseudomonas immunotherapy and targeted drug delivery ” from the niaid . this grant will support the preclinical development of novel anti- pseudomonas aeruginosa mab immunotherapy or an antibody-mediated targeted antibiotic delivery vehicle . each modality may be an effective and safe stand-alone therapy and or a component of a “ cocktail ” therapeutic option for prevention and treatment of p. aeruginosa infections . the project period for this phase i grant covers a two-year period which commenced in july 2014 , with total funds available of approximately $ 300 per year for up to 2 years . during the years ended december 31 , 2015 and 2014 , we recorded $ 302 and $ 28 of revenue , respectively , associated with the phase i sttr grant award . in july 2014 , we were awarded a phase i sttr grant from the national cancer institute ( nci ) , a division of the nih , entitled “ targeting of myc-max dimerization for the treatment of cancer ” . this grant will support the preclinical development of the myc inhibitor , which interferes with the protein-protein interaction ( ppi ) between myc and its obligatory dimerization partner , max , preventing sequence-specific binding to dna and subsequent initiation of oncogenic transformation . the project period for this phase i grant covers a one-year period
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capital expenditures we are making significant capital investments in generation , transmission and distribution systems to preserve and enhance service reliability for our customers and replace aging infrastructure . utility capital expenditures were $ 294.4 million for 2013 . we expect utility capital expenditures to be about $ 335 million for 2014 and $ 355 million in 2015 . we increased our estimates for future capital expenditures from the previous estimates of $ 260 million annually in 2014 and 2015 due to the increased scope and costs of updating and maintaining our generation , transmission and energy distribution systems to ensure reliability . these estimates of capital expenditures are subject to continuing review and adjustment ( see discussion under “ avista utilities capital expenditures ” ) . customer contract renewal an agreement with one of our largest electric customers , which has consumed approximately 100 amws per year , expired on june 30 , 2013. we negotiated a new agreement with this customer that became effective on july 1 , 2013 which has a five-year term . a joint application requesting approval of the new agreement was approved by the ipuc on june 28 , 2013. this 29 avista corporation customer intends to generate a significant portion of its electricity requirements . accordingly , under the new agreement , we expect a decrease in annual power sales to this customer of approximately $ 21 million and a resulting decrease in resource costs of approximately $ 19 million . according to the approved joint application , any change in revenues and expenses associated with the new agreement , as compared with the revenues and expenses included in the last general rate case for this customer , will be tracked through the pca in idaho at 100 percent , until such time as the contract is included in our base rates . as such , we expect no impact on our earnings from the new agreement . colstrip generating facility outage we own a 15 percent interest in units 3 and 4 of the colstrip generating plant in southeastern montana , a coal-fired facility which is operated by ppl montana , llc . on july 1 , 2013 , an unplanned outage occurred to colstrip unit 4 , with identified damage to the stator and rotor assembly . on january 23 , 2014 , the required repairs were completed and unit 4 was returned to service . the total repair costs through december 31 , 2013 were $ 26.9 million with our 15 percent share being $ 4.0 million . it is expected that these costs will be fully reimbursed less our portion of the $ 2.5 million insurance deductible ( $ 0.4 million ) . through december 31 , 2013 we have received $ 3.0 million in insurance proceeds and we expect all costs related to the repairs to be accumulated and the remaining reimbursement from the insurance company to occur by mid-year 2014. the insurance reimbursement will be offset against the costs incurred throughout the project and we expect the final out-of-pocket costs of $ 0.4 million to be allocated between capital and operating expenses at approximately 90 percent and 10 percent , respectively . the lost generation of colstrip unit 4 resulted in a combination of lower surplus wholesale sales and increased thermal fuel costs and purchased power costs to replace the energy , which resulted in increased net power supply costs . our estimates showed an increase in power supply costs of approximately $ 12 million system-wide for 2013 as a result of the outage . all of the additional costs were included in the erm in washington and the pca in idaho . after consideration of the impacts of the two recovery mechanisms and the sharing between us and our customers , the outage was estimated to have a negative impact on gross margin ( operating revenues less resource costs ) in the range of approximately $ 6 million to $ 7 million for 2013. in addition , based on our calculations , the colstrip generating plant dropped below a 70 percent availability factor during 2013. as a result , a provision associated with the erm was triggered and an automatic prudence review surrounding the cause of the outage and the costs to replace the lost power will be performed by the utc . we do not expect this prudence review to have a material impact on our cost recovery . in addition to the availability factor calculations , actual fixed costs of the plant must be compared to authorized costs and if the fixed costs are below authorized costs , the difference is credited back to customers through the erm . based on our calculations , the difference between actual and authorized fixed costs for 2013 was not material . alaska energy and resources company planned transaction on november 4 , 2013 , we entered into an agreement and plan of merger ( merger agreement ) with aerc , a privately-held company based in juneau , alaska . when the transaction is complete , aerc will become a wholly-owned subsidiary of avista corp. the primary subsidiary of aerc is ael & p , the sole provider of electric services to approximately 16,000 customers in the city and borough of juneau , alaska . in 2012 , ael & p had annual revenues of $ 42 million and a total rate base of $ 111 million . the utility has a firm retail peak load of approximately 80 mw . ael & p owns four hydroelectric generating facilities , having a total present capacity of 24.7 mw , and has a power purchase commitment for the output of the snettisham hydroelectric project , having a present capacity of 78 mw , for a total hydroelectric capacity of 102.7 mw . ael & p is not interconnected to any other electric system ; therefore , the utility has 93.9 mw of diesel generating present capacity to provide back-up service to firm customers when necessary . story_separator_special_tag in addition to the regulated utility , aerc owns 100 percent of ajt mining , which is an inactive mining company holding certain mining properties . the merger consideration at closing will be $ 170 million , less aerc 's indebtedness and subject to other customary closing adjustments . the transaction will be funded primarily through the issuance of avista corp. common stock to the shareholders of aerc . the transaction is expected to close by july 1 , 2014 , following the approval of the merger transaction by the requisite number of aerc shareholders , the receipt of necessary regulatory approvals and the satisfaction of other closing conditions . avista corp. shareholder approval is not required . we expect that the addition of aerc will be slightly dilutive to earnings per share in 2014 , and that it will be slightly accretive to earnings per share in 2015. the transaction is expected to result in the recording of a significant amount of goodwill , currently estimated at $ 48 million . ael & p currently has an authorized utility capital structure of 53.8 percent equity and an authorized return on equity of 12.875 percent . we expect that ael & p will maintain this capital structure following the merger . the consolidated capital structure of aerc is expected to be similar to the capital structure of avista corp. 30 avista corporation for additional information regarding the aerc transaction , including the valuation and number of shares of avista corp. common stock to be delivered to aerc shareholders , see “ note 4 of the notes to consolidated financial statements ” and our current report on form 8-k dated november 4 , 2013. ecova ecova plans to continue to grow organically and possibly through strategic acquisitions . ecova 's acquisitions since 2008 have been funded through internally generated cash , borrowings under ecova 's credit facility and an equity infusion from existing shareholders . if ecova 's capital needs exceed its credit facility capacity or management determines a different capital structure is necessary , ecova may require additional equity infusions from existing shareholders and or new funding sources . we may seek to monetize all or part of our investment in ecova in the future . we regularly engage in discussions with potential investors and acquirors to explore opportunities for such a transaction . the value of a potential monetization would depend on future market conditions , growth of the business , transaction structure and other factors . a strategic change to ecova 's ownership structure could provide access to public market capital and provide potential liquidity to avista corp. and the other owners of ecova . there can be no assurance that the terms for a proposed transaction , if any , would be acceptable to avista corp. or that any such transaction would be completed . liquidity and capital resources we have a committed line of credit with various financial institutions in the total amount of $ 400.0 million with an expiration date of february 2017 . as of december 31 , 2013 , there were $ 171.0 million of cash borrowings and $ 27.4 million in letters of credit outstanding leaving $ 201.6 million of available liquidity under this line of credit . ecova has a five-year $ 125.0 million committed line of credit agreement with various financial institutions that has an expiration date of july 2017 . as of december 31 , 2013 , ecova had $ 46.0 million of borrowings outstanding under its committed line of credit agreement . based on certain covenant conditions contained in the credit agreement , at december 31 , 2013 , ecova could borrow an additional $ 35.3 million and still be compliant with the covenants . the covenant restrictions are calculated on a rolling twelve month basis , so this additional borrowing capacity could increase or decrease or ecova could be required to pay down the outstanding debt as future results change . see further discussion of the specific covenants below under `` ecova credit agreement . '' in august 2013 , we entered into a $ 90.0 million term loan agreement with an institutional investor bearing an annual interest rate of 0.84 percent and maturing in 2016 . the net proceeds from the term loan agreement were used to repay a portion of corporate indebtedness in anticipation of the maturity of $ 50.0 million in first mortgage bonds which occurred in december 2013. we expect to issue approximately $ 190.0 million of long-term debt during 2014 , including about $ 90.0 million of debt issuances combined by aerc or ael & p associated with rebalancing the consolidated capital structure at aerc . this amount assumes we are going to refinance the existing net debt , estimated to be about $ 25.0 million at closing . the net debt outstanding at ael & p does not include the snettisham obligation which had a balance of $ 74.0 million as of december 31 , 2012 , as this relates to a power purchase commitment for which ael & p has recorded a long-term power purchase asset and corresponding liability . in addition to rebalancing the consolidated capital structure at aerc , the proceeds from the issuance of long-term debt will be used to repay a portion of short-term borrowings , fund utility capital expenditures and other contractual commitments . in august 2012 , we entered into two sales agency agreements under which we may sell up to 2.7 million shares of our common stock from time to time . we did not issue any shares under these agreements during 2013 and as of december 31 , 2013 , we had 1.8 million shares available to be issued under these agreements . in 2013 , we issued $ 4.6 million ( net of issuance costs ) of common stock under the dividend reinvestment and direct stock purchase plan , and employee plans .
| cash paid for interest was $ 75.4 million for 2013 , compared to $ 74.9 million for 2012 . investing activities net cash used in investing activities was $ 312.2 million for 2013 , an increase compared to $ 294.7 million for 2012 . utility property capital expenditures increased by $ 23.2 million for 2013 compared to 2012 . a significant portion of ecova 's funds held for clients are held as securities available for sale with purchases of $ 35.9 million and sales and maturities of $ 23.0 million in 2013 . for 2012 , ecova had purchases of $ 100.4 million and sales and maturities of $ 138.0 million . in 2012 , ecova paid $ 50.3 million for the acquisition of lpb . financing activities net cash provided by financing activities was $ 76.8 million for 2013 compared to net cash used of $ 21.1 million for 2012 . cash inflows during 2013 were from a $ 119.0 million increase in short-term borrowings on avista corp. 's committed line of credit , the issuance of $ 90.0 million of long-term debt and the issuance of $ 4.6 million of common stock . we also cash settled interest rate swap agreements for $ 2.9 million related to the pricing of the $ 90.0 million of long-term debt . cash outflows during 2013 were from the maturity of long-term debt of $ 50.5 million and a net decrease in borrowings on ecova 's committed line of credit of $ 8.0 million ( borrowings of $ 3.0 million and repayments of $ 11.0 million ) . cash dividends paid increased to $ 73.3 million ( or $ 1.22 per share ) for 2013 from $ 68.6 million ( or $ 1.16 per share ) for 2012 . during 2012 , short-term borrowings on avista corp. 's committed line of credit decreased $ 9.0 million .
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as such , our season pass program drives strong customer loyalty ; mitigates exposure to many weather sensitive guests ; and generates additional ancillary spending . in addition , our season pass products attract new guests to our resorts . all of our season pass products , including the epic season pass , are sold predominately prior to the start of the ski season . season pass revenue , although primarily collected prior to the ski season , is recognized in the consolidated statement of operations ratably over the ski season . for the 2011/2012 , 2010/2011 and 2009/2010 ski seasons approximately 40 % , 35 % and 35 % , respectively , of total lift ticket revenue recognized was comprised of season pass revenue . the cost structure of our ski resort operations has a significant fixed component with variable expenses including , but not limited to , forest service fees , credit card fees , retail/rental cost of sales and labor , ski school labor and dining operations ; as such , profit margins can fluctuate greatly based on the level of revenues . lodging segment operations within the lodging segment include ( i ) ownership/management of a group of luxury hotels through the rockresorts brand , the majority of which are proximate to our ski resorts ; ( ii ) ownership/management of non-rockresorts branded hotels and condominiums proximate to our ski resorts ; ( iii ) nps concessionaire properties including gtlc ; ( iv ) cme , a resort ground transportation company ; and ( v ) golf courses . the performance of lodging properties ( including managed condominium rooms ) proximate to our ski resorts , and cme , is closely aligned with the performance of the mountain segment and generally experiences similar seasonal trends , particularly with respect to visitation by destination guests , and represented approximately 67 % , 69 % and 67 % of lodging segment net revenue ( excluding lodging segment revenue associated with reimbursement of payroll costs ) for fiscal 2012 , fiscal 2011 and fiscal 2010 , respectively . management primarily focuses on lodging net revenue excluding payroll cost reimbursement and lodging operating expense excluding reimbursed payroll costs ( which are not measures of financial performance under gaap ) as the reimbursements are made based upon the costs incurred with no added margin , as such the revenue and corresponding expense have no effect on our lodging reported ebitda which we use to evaluate lodging segment performance . revenue of the lodging segment during our first and fourth fiscal quarters is generated primarily by the operations of our nps concessionaire properties ( as their operating season generally occurs from mid-may to mid-october ) ; golf operations and seasonally low operations from our other owned and managed properties and businesses . real estate segment the real estate segment owns and develops real estate in and around our resort communities and primarily engages in vertical development of projects . currently , the principal activities of our real estate segment include the marketing and selling of remaining condominium units that are available for sale , planning for future real estate development projects , including zoning and acquisition of applicable permits and the purchase of selected strategic land parcels for future development . revenue from vertical development projects is not recognized until closing of individual units within a project , which occurs after substantial completion of the project . we attempt to mitigate the risk of vertical development by often utilizing guaranteed maximum price construction contracts ( although certain construction costs may not be covered by contractual limitations ) , pre-selling a portion of the project , requiring significant non-refundable deposits , and potentially obtaining non-recourse financing for certain projects ( although our last two major vertical development projects have not incurred any such direct third party financing ) . additionally , our real estate development projects most often result in the creation of certain resort assets that provide additional benefit to the mountain and lodging segments . our revenue from the real estate segment , and associated expense , can fluctuate significantly based upon the timing of closings and the type of real estate being sold , causing volatility in the real estate segment 's operating results from period to period . recent trends , risks and uncertainties the data provided in this section should be read in conjunction with the risk factors identified in item 1a and elsewhere in this form 10-k. we have identified the following important factors ( as well as uncertainties associated with such factors ) that could impact our future financial performance : the timing and amount of snowfall can have an impact on mountain and lodging revenue particularly in regards to skier visits and the duration and frequency of guest visitation . to help mitigate this impact , we sell a variety of season pass products prior to the beginning of the ski season resulting in a more stabilized stream of lift revenue . additionally , our season pass products provide a value option to our guests , which in turn creates a guest commitment predominantly prior to the start of the ski season . in march 2012 , we began our pre-season pass sales program for the 2012/2013 ski season . through september 23 , 2012 , our pre-season pass sales for the upcoming 2012/2013 ski season ( including kirkwood for both the current and 33 prior year , which prior year includes pass sales that occurred before our acquisition of kirkwood ) have increased approximately 17 % in units and increased approximately 21 % in sales dollars , compared to the prior year period ended september 25 , 2011. we can not predict if this favorable trend will continue through the fall 2012 pass sales campaign , nor can we predict the overall impact that season pass sales will have on lift ticket revenue for the 2012/2013 ski season . in fiscal 2012 there was unprecedented low snowfall conditions throughout the ski season across the united states that resulted in a reduction of approximately 9.6 million , or 15.8 story_separator_special_tag % , visits industry wide and a 12.1 % decline in our total visitation as compared to the prior year which had record snowfall . despite the decline in visitation our lift revenue and ancillary services revenue did not decline at those levels given the strength of our operating model , including the high proportion of season pass sales , the demographic mix of our guests , and the quality of our mountain resorts , including significant snowmaking capabilities . there can be no certainty that snowfall levels will return to historical averages for the 2012/2013 ski season or the impact to advance bookings , guest travel , season pass sales , lift ticket revenue ( excluding season passes ) , retail/rental sales or other ancillary services revenue next season as a result of last season 's low snowfall or if snowfall levels do not return to their historical average levels . weak economic conditions currently present or recently present in the united states , europe and parts of the rest of the world including high unemployment , erosion of consumer confidence , sovereign debt issues , and financial instability in the global markets , may potentially have negative effects on the travel and leisure industry and on our results of operations . given the current uncertainties around global economic trends , we can not predict what impact this will have on overall travel and leisure or more specifically , on our guest visitation , guest spending or other related trends for the upcoming 2012/2013 ski season . in fiscal 2012 , our lift ticket revenue was favorably impacted by price increases that were implemented during the 2011/2012 ski season which was offset by lower skier visitation excluding season pass holders which we believe was a result of historically low snowfall . prices for the 2012/2013 ski season have not yet been finalized ; and as such , there can be no assurances as to the level of price increases , if any , which will occur and the impact that pricing may have on visitation or revenue . in july 2012 , we announced our new comprehensive summer activities plan for epic discovery , a summer mountain adventure at vail mountain . the plan includes a number of new activities , including among other activities , zip lines , ropes courses , mountain excursions and forest flyers . the construction of the new activities and amenities at vail mountain will be implemented in two phases based upon permitting and approvals . we anticipate investing approximately $ 25.0 million in resort capital expenditures for both phases . similar sized plans are being finalized for breckenridge and heavenly with smaller scale improvements planned for our other resorts . we anticipate that if our proposed plans are approved and implemented , and once these summer activities mature , we could realize substantial incremental summer guest visitation and revenue . however , our new summer activities plan may not generate the initial projected revenue and profit margins we expect , and even if our plans are successful , we do not expect that these enhanced summer operations will fully mitigate the seasonal losses that our mountain operations experience from late spring to late fall . real estate reported ebitda is highly dependent on , among other things , the timing of closings on condominium units available for sale , which determines when revenue and associated cost of sales is recognized . changes to the anticipated timing or mix of closing on one or more real estate projects , or unit closings within a real estate project , could materially impact real estate reported ebitda for a particular quarter or fiscal year . we currently have 32 units at the ritz-carlton residences , vail and 41 units at one ski hill place in breckenridge available for sale . we can not predict the ultimate number of units that we will sell , the ultimate price we will receive , or when the units will sell , although we currently believe the selling process will take multiple years . additionally , if a prolonged weakness in the real estate market or general economic conditions were to occur we may have to adjust our selling prices more than currently anticipated in an effort to sell and close on units available for sale . however , our risk associated with adjusting selling prices to levels that may not be acceptable to us is partially mitigated by the fact that we do generate cash flow from placing unsold units into our rental program until such time selling prices are at acceptable levels to us . furthermore , if the current weakness in the real estate market were to persist for multiple years thus requiring us to sell remaining units below recent pricing levels ( including any sales concessions and discounts ) for the remaining inventory of units at the ritz-carlton residences , vail or one ski hill place in breckenridge , it may result in an impairment charge on one or both projects ( see critical accounting policies in this section of this form 10-k ) . we had $ 46.1 million in cash and cash equivalents as of july 31 , 2012 as well as $ 332.7 million available 34 under the revolver component of our credit agreement ( which represents the total commitment of $ 400.0 million less certain letters of credit outstanding of $ 67.3 million ) . additionally , we believe that the terms of our 6.50 % notes and our credit agreement allow for sufficient flexibility in our ability to make future acquisitions , investments , distributions to stockholders and incur additional debt .
| % , increase in season pass revenue , offset by a $ 15.9 million , or 7.1 % , decrease in lift revenue excluding season pass revenue . the increase in season pass revenue was driven primarily by an increase in pricing for season pass products as well as a 3 % increase in unit sales . the decline in lift revenue excluding season pass revenue was due to a decline in visitation excluding season pass holders of 15.0 % , compared to fiscal 2011 , partially offset by an increase in etp excluding season pass holders of $ 6.30 , or 9.3 % . the increase in etp excluding season pass holders was due primarily to price increases and a change in mix as a greater percentage of higher priced lead/window lift ticket products were sold in fiscal 2012 compared to fiscal 2011. total etp increased $ 6.76 , or 13.8 % , compared to fiscal 2011 , due primarily to price increases , as discussed above , and a decline from fiscal 2011 in visitation from our season pass holders of approximately 1.2 days per pass , or 11.3 % . ski school revenue increased $ 0.5 million , or 0.6 % , for fiscal 2012 compared to fiscal 2011 , with our colorado resorts ski school revenue increasing $ 2.4 million , or 3.4 % , compared to fiscal 2011. although all of our resorts were negatively impacted by a decline in skier visitation as discussed above , the impact to ski school revenue resulting from lower visitation was entirely 36 offset by improved yields per skier visit . ski school revenue benefited from an overall 14.4 % increase in yield per skier visit primarily due to higher guest penetration and pricing compared to fiscal 2011. dining revenue increased $ 0.3 million , or 0.5 % , for fiscal 2012 compared to fiscal 2011 , which was primarily driven by a 12.9 % increase in yield per skier visit during the 2011/2012 ski season , offset by the decline in skier
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impact of legislation that restricts or prohibits the use of wireless handsets while driving on our future sales ; our expectations regarding days sales outstanding ; our plans regarding improvement of our internal supply chain and inventory management processes ; our expectations regarding our product cost reduction efforts ; our expectations regarding the reliability of stock-based compensation valuation models and the impact of sfas 123 ( r ) ; and our expectations regarding our ability to implement and enhance our administrative infrastructure . additional forward-looking statements may be identified by the words anticipate , expect , believe , intend , will , may , and similar expressions , as they relate to us or our management , or by the words designed , intended and similar expressions , as they relate to our products and services . investors are cautioned that these forward-looking statements are inherently uncertain . these statements are subject to risks and uncertainties that may cause actual results and events to differ materially . for a detailed discussion of these risks and uncertainties , see item 1a , risk factors section of this form 10-k. we do not guarantee future results and undertake no obligation to update the forward-looking statements to reflect events or circumstances occurring after the date of this form 10-k. restatement of consolidated financial statements our consolidated financial statements and financial information in this annual report on form 10-k for accounting periods prior to the third quarter of 2006 have been restated . summary in july 2007 , the company announced the audit committee was conducting an independent investigation of historical sales with certain customers in china and stated that it could not rule out the possibility that the outcome of the investigation could impact revenue recognized for certain of such contracts as recorded in previously issued financial statements . in september 2007 , the company announced the investigative phase of the audit committee 's investigation had been completed . after consultation with and upon the recommendation of management , the audit committee determined revenue in the company 's western region of china was recognized earlier than it should have been and that the financial statements for the affected periods should be restated . the company also announced that its previously issued financial statements for each of the fiscal years ended december 31 in the period 2000 through 2005 , the financial statements for the interim periods contained in the quarterly reports on 64 form 10-q filed with respect to each of these years , and the quarterly reports on form 10-q filed with respect to each of the quarterly periods ended march 31 and june 30 , 2006 should not be relied upon . in this annual report we have corrected for the effects of net sales and related costs of net sales that were recorded earlier than they should have been . the net effect at december 31 , 2005 was to reduce and defer previously recognized revenue and gross profit of $ 278.6 million and $ 97.7 million , respectively . we also conducted a voluntary review of historical stock option practices under the direction of the nominating and corporate governance committee of our board of directors ( governance committee ) . this review considered all option grant awards made in the period from february 29 , 2000 , shortly before the initial public offering of our common stock , through august 2006 for compliance with the various stock-based compensation accounting standards applicable during this period as well as the rules of our stock option plans . we found that in a number of instances we did not use the proper date as the measurement date in determining whether stock options had been issued with exercise prices below the fair value of our common stock . therefore , we have restated our previously issued financial statements for the years ended december 31 , 1998 through 2005 to account for an additional $ 25.5 million of stock compensation expense that should have been recognized over the period together with an equal increase in additional paid-in capital to recognize the intrinsic value assigned to these issuances of equity securities . related adjustments of payroll and income taxes resulted in an additional $ 0.5 million of expense being recognized for the 1998 through 2005 period and total stockholders ' equity being reduced by a total of $ 2.1 million at december 31 , 2005. during the first six months of 2006 an additional $ 1.2 million of stock compensation expense was recognized , which reduces our previously reported operating results for this period . in restating our previously issued financial statements for the investigations described above , we also corrected other previously reported amounts . we corrected our reporting for $ 80.3 million of net sales to certain third party resellers and $ 41.2 million of associated cost of net sales in 2005 to classify these amounts as related party net sales and related party cost of net sales classifications , respectively , because in 2006 we determined that sales to these entities were , in substance , sales to one of our significant shareholders , softbank corp. the accounts receivable from these sales was similarly reclassified into accounts receivable from related parties in our 2005 balance sheets . we also corrected our reporting of $ 6.3 million of time deposits at march 31 and june 30 , 2006 because they did not mature within three months . formerly the time deposits had been reported in error as cash equivalents , but now these amounts are included in short-term investments in these balance sheets and in the statements of cash flows for the march and june 2006 reporting periods . the corrections for all 2006 and 2005 interim periods have been recorded in the condensed consolidated financial statements included in exhibit 99.1 of this annual report . story_separator_special_tag none of these restatements has any effect on any of our december 31 cash balances ; however , cash equivalents were reduced in the march and june 2006 periods due to the reclassifications described above . additional information about these restatements and their effects on our financial statements is presented below as well as in the notes to consolidated financial statements . china sales investigation the audit committee of the company 's board of directors ( audit committee ) engaged independent counsel to conduct an investigation of sales in china following a determination by the internal audit group that allegations of improper activities in a sales office in the western region were credible . the allegations were made by a company employee using the company 's whistle blower program . the independent counsel engaged forensic accountants , and this group is collectively referred to as the investigating team in the rest of this discussion . in conducting its procedures , the investigating team found instances where the customer contracts that evidenced the arrangement contained obligations for the company to deliver software upgrades when 65 and if made available for the equipment sold for no additional consideration and for an unspecified period that could extend over the term of the contract . this additional contract obligation is an element of post contract support. in these cases , the investigating team found that the contract documentation for the same transaction submitted by the sales office to the company 's china headquarters for accounting purposes and utilized by the company in determining the amount of revenue recognized did not include evidence of such post contract support obligations . accounting standards governing revenue recognition for system sales require all revenue to be deferred while there are undelivered elements under the arrangement unless the seller has established vendor specific objective evidence ( vsoe ) of fair value for such contract elements . because these arrangements included such undelivered elements , revenue should be deferred based on the vsoe of the fair value of the underlying elements . vsoe of fair value represents the price charged when the same element is sold separately . since the company does not sell this element separately , it has not established vsoe for such undelivered elements , and as such the revenue from such contracts is required to be deferred and recognized over the period the company is obligated to provide the post contract support . the china sales investigation covered each of the seven years in the period ended december 31 , 2006 and included : investigating approximately 1,200 contracts in all of our five regions in china ; reviews of the electronic files of 45 employees ; and formal interviews of 96 employees in china . additionally , the china sales investigation included reviewing contract files , performing various financial analyses including comparison of payments received per our accounting records to the contract terms , and computer forensic procedures where destruction of electronic documents was suspected . in the aggregate , the investigating team expended approximately 25,000 hours in conducting this investigation , which commenced in february 2007 and was completed in september 2007 when the independent counsel and forensic accountants presented their final report to the audit committee . in july 2007 , we announced the audit committee was conducting an independent investigation of historical sales with certain customers in china and we stated that we could not rule out the possibility that the outcome of the investigation could impact revenue recognized for certain of such contracts as recorded in our previously issued financial statements . upon completion of the investigative phase of the independent investigation by the audit committee , our management : · conducted follow-up procedures to attempt to locate any additional relevant information to ensure the company considered all available information and documents ; · evaluated the accounting for identified system sales using the contract template and documentation found in the sales contract files from the western region offices . this included calculating the financial statement effects of correcting the accounting for all system sales where the contract template found at our sales offices contained post contract support obligations to recognize revenue and cost of net sales over estimated period of post contract support ; · concluded that as a result of the existence of this undelivered post contract support obligation our previously issued financial statements should be restated to defer system sales contract revenue and the related cost of net sales over the estimated period of post contract support when a contract contained unspecified software upgrade rights . the audit committee concurred with management 's decisions . 66 the effect of correcting improperly recognized revenue and cost of net sales is to ( reduce ) increase previously reported net sales , gross profit and net income by the following amounts ( in thousands of dollars ) : replace_table_token_14_th replace_table_token_15_th the cumulative effect of all of the china sales restatement adjustments to our consolidated balance sheet as of december 31 , 2003 resulted in a decrease in retained earnings of $ 36.6 million , an increase in deferred revenue of $ 115.4 million to account for previously recognized sales , an increase in deferred costs of $ 75.7 million to account for previously recognized cost of net sales , and an increase in deferred tax assets of $ 3.0 million . in our consolidated balance sheet at december 31 , 2006 , deferred revenue is $ 275.7 million , of which $ 35.6 million is classified as current and $ 240.1 million as non-current , and the deferred costs balance is $ 176.6 million . these amounts will be recognized in our consolidated statements of operations over the estimated remaining period of post contract support .
| formerly the time deposits had been reported in error as cash equivalents , but now these amounts are included in short-term investments in these balance sheets and in the statements of cash flows for the march and june 2006 reporting periods . all amounts in the following sections of this management 's discussion and analysis of financial condition and results of operations , except those identified as previously reported in tables within the quarterly data ( unaudited ) , as restated caption , reflect the effects of the restatement of our financial statements to correct our revenue recognition for certain sales contracts in china and our historical stock option accounting , as well as certain 2005 sales , cost of sales and accounts receivables amounts discovered to be related party transactions and the correction of the classification of a time deposit from cash to short-term investments in the first two quarters of 2006 . 74 late sec filings and nasdaq delisting proceedings as a result of the nominating and corporate governance 's committee 's review of our historical stock option accounting and the resulting restatements , we did not timely file our quarterly report on form 10-q for the quarter ended september 30 , 2006 ( q3 2006 form 10-q ) , our annual report on form 10-k for the fiscal year ended december 31 , 2006 ( 2006 form 10-k ) , and our quarterly report on form 10-q for the quarter ended march 31 , 2007 ( q1 2007 form 10-q ) with the securities and exchange commission . in addition , as a result of the audit committee 's review of certain historical sales contracts in china , we did not timely file our quarterly report on form 10-q for the quarter ended june 30 , 2007 ( q2 2007 form 10-q ) with the securities and exchange commission . in connection with our failure to timely file our periodic reports , we received four nasdaq staff determination letters , dated november 15 , 2006 , march 7 ,
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the following provides an overview of the company 's key financial metrics ( see non-gaap financial measures , ffo ) ( in thousands except per share amounts ) : replace_table_token_20_th the following discussion of the company 's financial condition and results of operations provides information that will assist in the understanding of the company 's financial statements , the changes in certain key items and the factors that accounted for changes in the financial statements , as well as critical accounting policies that affected these financial statements . critical accounting policies the consolidated financial statements of the company include the accounts of the company and all subsidiaries where the company has financial or operating control . the preparation of financial statements in conformity with generally accepted accounting principles ( “ gaap ” ) requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes . in preparing these financial statements , management has used available information , including the company 's history , industry standards and the current economic environment , among other factors , in forming its estimates and judgments of certain amounts included in the company 's consolidated financial statements , giving due consideration to materiality . it is possible that the ultimate outcome as anticipated by management in formulating its estimates inherent in these financial statements might not materialize . application of the critical accounting policies described below involves the exercise of judgment and the use of assumptions as to future uncertainties . accordingly , actual results could differ from these estimates . in addition , other companies may use different estimates that may affect the comparability of the company 's results of operations to those of companies in similar businesses . revenue recognition and accounts receivable the company has adopted the new accounting guidance for revenue from contracts with customers ( “ topic 606 ” ) on january 1 , 2018 , using the modified retrospective approach and , therefore , the comparative information has not been adjusted . the guidance has been applied to contracts that were not completed as of the date of initial application , january 1 , 2018. most significantly for the real estate industry , leasing transactions are not within the scope of the new standard . a majority of the company 's tenant-related revenue is recognized pursuant to lease agreements . this new standard and its impact on the company is more fully described in note 1 , “ summary of significant accounting policies – new accounting standards to be adopted , ” and note 2 – “ revenue recognition ” of the company 's consolidated financial statements included herein . historically , the majority of the company 's lease commission revenue has been recognized 50 % upon lease execution and 50 % upon tenant rent commencement . upon adoption of topic 606 , lease commission revenue will generally be recognized in its entirety upon lease execution . the impact of adopting topic 606 on the company 's consolidated financial statements with respect to the change in revenue recognition as related to lease commission revenue at january 1 , 2018 , and for the year ended december 31 , 2018 , was not material . rental revenue is recognized on a straight-line basis that averages minimum rents over the noncancelable term of the leases . certain of these leases provide for percentage and overage rents based upon the level of sales achieved by the tenant . percentage and overage rents are recognized after a tenant 's reported sales have exceeded the applicable sales breakpoint set forth in the applicable lease . the leases also typically provide for tenant reimbursements of common area maintenance and other operating expenses and real estate taxes . accordingly , revenues associated with tenant reimbursements are recognized in the period in which the expenses are incurred based upon the tenant lease provision . ancillary and other property-related income , which includes the leasing of vacant space to temporary tenants , is recognized in the period earned . lease termination fees are included in other revenue and recognized and earned upon termination of a tenant 's lease and relinquishment of space in which the company has no further obligation to the tenant . management fees are recorded in the period earned . fee income derived from the company 's unconsolidated joint venture investments is recognized to the extent attributable to the unaffiliated ownership interest . payments received in 2018 and 2017 from 33 the company 's insurance company related to its claims for business interruption losses incurred as a result of hurricane losse s are recorded as business interruption income . the company makes estimates of the collectability of its accounts receivable related to base rents , including straight-line rentals , expense reimbursements and other revenue or income . the company analyzes accounts receivable , tenant credit worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts . in addition , with respect to tenants in bankruptcy , the company makes estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable . the time to resolve these claims may exceed one year . these estimates have a direct impact on the company 's earnings because a higher bad debt reserve and or a subsequent write-off in excess of an estimated reserve results in reduced earnings . consolidation all significant inter-company balances and transactions have been eliminated in consolidation . investments in real estate joint ventures in which the company has the ability to exercise significant influence , but does not have financial or operating control , are accounted for using the equity method of accounting . accordingly , the company 's share of the earnings ( or loss ) of these joint ventures is included in consolidated net income . the company has a number of joint venture arrangements with varying structures . story_separator_special_tag the company consolidates entities in which it owns less than a 100 % equity interest if it is determined that it is a variable interest entity ( “ vie ” ) , and the company has a controlling interest in that vie or is the controlling general partner . the analysis to identify whether the company is the primary beneficiary of a vie is based upon which party has ( a ) the power to direct activities of the vie that most significantly affect the vie 's economic performance and ( b ) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the vie . in determining whether it has the power to direct the activities of the vie that most significantly affect the vie 's performance , the company is required to assess whether it has an implicit financial responsibility to ensure that a vie operates as designed . this qualitative assessment has a direct impact on the company 's financial statements , as the detailed activity of off-balance sheet joint ventures is not presented within the company 's consolidated financial statements . real estate and long-lived assets properties are depreciated using the straight-line method over the estimated useful lives of the assets . the company is required to make subjective assessments as to the useful lives of its properties to determine the amount of depreciation to reflect on an annual basis with respect to those properties . these assessments have a direct impact on the company 's net income . if the company were to extend the expected useful life of a particular asset , it would be depreciated over more years and result in less depreciation expense and higher annual net income . on a periodic basis , management assesses whether there are any indicators that the value of real estate assets , including undeveloped land and construction in progress , and intangibles may be impaired . a property 's value is impaired only if management 's estimate of the aggregate future cash flows ( undiscounted and without interest charges ) to be generated by the property are less than the carrying value of the property . the determination of undiscounted cash flows requires significant estimates by management . in management 's estimate of cash flows , it considers factors such as expected future operating income ( loss ) , trends and prospects , the effects of demand , competition and other factors . if the company is evaluating the potential sale of an asset or development alternatives , the undiscounted future cash flows analysis is probability-weighted based upon management 's best estimate of the likelihood of the alternative courses of action . subsequent changes in estimated undiscounted cash flows arising from changes in anticipated actions could affect the determination of whether an impairment exists and whether the effects could have a material impact on the company 's net income . to the extent an impairment has occurred , the loss will be measured as the excess of the carrying amount of the property over the fair value of the property . the company is required to make subjective assessments as to whether there are impairments in the value of its real estate properties and other investments . these assessments have a direct impact on the company 's net income because recording an impairment charge results in an immediate negative adjustment to net income . if the company 's estimates of the projected future cash flows , anticipated holding periods or market conditions change , its evaluation of the impairment charges may be different , and such differences could be material to the company 's consolidated financial statements . plans to hold properties over longer periods decrease the likelihood of recording impairment losses . the company allocates the purchase price to assets acquired and liabilities assumed at the date of acquisition . in estimating the fair value of the tangible and intangible assets and liabilities acquired , the company considers information obtained about each property as a result of its due diligence , marketing and leasing activities . it applies various valuation methods , such as estimated cash flow projections using appropriate discount and capitalization rates , estimates of replacement costs net of depreciation and available market information . if the company determines that an event has occurred after the initial allocation of the asset or liability that 34 would change the estimated useful life of the asset , the company will reassess the depreciatio n and amortization of the asset . the company is required to make subjective estimates in connection with these valuations and allocations . the company generally considers assets to be held for sale when the transaction has been approved by the appropriate level of management and there are no known significant contingencies relating to the sale such that the sale of the property within one year is considered probable . this generally occurs when a sales contract is executed with no contingencies and the prospective buyer has significant funds at risk to ensure performance . measurement of fair value—real estate and unconsolidated joint venture investments the company is required to assess the value of certain impaired consolidated and unconsolidated joint venture investments as well as the underlying collateral for its preferred equity interests and certain financing notes receivable . the fair value of real estate investments used in the company 's impairment calculations is estimated based on the price that would be received to sell an asset in an orderly transaction between marketplace participants at the measurement date . investments without a public market are valued based on assumptions made and valuation techniques used by the company . the availability of observable transaction data and inputs can make it more difficult and or subjective to determine the fair value of such investments . as a result , amounts ultimately realized by the company from investments sold may differ from the fair values presented , and the differences could be material .
| signed leases and renewals for approximately four million square feet of gla , which included 1.0 million square feet of new leasing volume both on a pro rata share ; achieved blended leasing spreads of 8.2 % for both new leases and renewals at site centers ' share ; increased the annualized base rent per occupied square foot on a pro rata basis to $ 17.86 at december 31 , 2018 , as compared to $ 17.30 at december 31 , 2017 , an increase of 3.2 % : continued to maintain strong aggregate occupancy on a pro rata basis of 89.9 % at december 31 , 2018 , as compared to 91.6 % and 92.7 % at december 31 , 2017 and 2016 , respectively , with the net decrease in occupancy primarily attributed to anchor tenant expirations and tenant bankruptcies and reduced general and administrative expenses by approximately $ 2.2 million in 2018 as compared to 2017 due to a review of internal expenses and staffing reductions . retail environment the company continues to see demand from a broad range of tenants for its space , even as many retailers continue to adapt to an omni-channel retail environment . value-oriented retailers continue to take market share from conventional and national chain department stores . as a result , while certain of those conventional and national department stores have announced store closures and or reduced expansion plans , other retailers , specifically those in the value and convenience category , continue to have store opening plans for 2019. many of the company 's largest tenants , including tjx companies , walmart , five below and ulta , have reported increased same-store sales on an annual basis and remained well capitalized while outperforming other retail categories on a relative basis . the company has also been increasing its leasing to service tenants , such as fitness , restaurant and medical users , and specialty grocers , which is an expanding category with strong traffic generation . company fundamentals the following table lists the company 's 10 largest tenants based on total annualized rental revenues of the wholly-owned properties and the company 's proportionate share of unconsolidated joint venture properties combined as of december 31 , 2018 : replace_table_token_18_th 31 ( a ) includes t.j. maxx , marshalls , homegoods , sierra trading post and homesense ( b ) includes bed bath & beyond , cost plus world market , buybuy baby and christmas tree shops ( c ) includes dick 's sporting goods and golf galaxy ( d ) includes gap , old navy and banana republic ( e ) includes ross dress for less and
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vehicles gross billings increased 1 % , of which 3 % was driven by higher billings of hot wheels products , partially offset by lower billings of cars products of 2 % following its movie launch in a prior year . action figures , building sets , games , and other gross billings increased 1 % , of which 7 % was driven by initial billings of star wars : the child plush products , 7 % was driven by higher billings of card games products including uno , and 3 % was driven by higher billings of family games products including pictionary and scrabble . this was partially offset by lower billings of toy story 4 products of 15 % following its 2019 theatrical release . sales adjustments represent arrangements with mattel 's customers to provide sales incentives , support customer promotions , and provide allowances for returns and defective merchandise . such programs are based primarily on customer purchases , customer performance of specified promotional activities , and other specified factors such as sales to consumers . sales adjustments as a percent of net sales was relatively consistent at 12.1 % in 2020 as compared to 12.4 % in 2019 . 29 cost of sales cost of sales as a percentage of net sales was 51.1 % in 2020 , as compared to 56.0 % in 2019. cost of sales decreased by $ 183.7 million , or 7 % , to $ 2.34 billion in 2020 from $ 2.52 billion in 2019 , as compared to a 2 % increase in net sales . within cost of sales , product and other costs decreased by $ 128.6 million , or 6 % , to $ 1.93 billion in 2020 from $ 2.06 billion in 2019 ; freight and logistics expenses increased by $ 6.59 million , or 3 % , to $ 253.5 million in 2020 from $ 247.0 million in 2019 ; and royalty expense decreased by $ 61.8 million , or 28 % , to $ 158.5 million in 2020 from $ 220.2 million in 2019. cost of sales in 2019 included the impact of approximately $ 22 million related to the inclined sleeper product recalls . within cost of sales , certain inbound freight costs were previously classified as freight and logistics costs . mattel reclassified such inbound freight costs from freight and logistics expenses to present all inbound freight costs within product and other costs for the periods and segments presented . gross margin gross margin increased to 48.9 % in 2020 from 44.0 % in 2019. the increase in gross margin was primarily driven by incremental realized savings from cost savings programs and a decrease in royalty expense resulting from lower sales of licensed products . advertising and promotion expenses advertising and promotion expenses primarily consist of : ( i ) media costs , which include the media , planning , and buying fees for television , print , and online advertisements , ( ii ) non-media costs , which include commercial and website production , merchandising , and promotional costs , ( iii ) retail advertising costs , which include consumer direct catalogs , newspaper inserts , fliers , and mailers , and ( iv ) generic advertising costs , which include trade show costs . advertising and promotion expenses as a percentage of net sales decreased to 11.3 % in 2020 from 12.2 % in 2019 , primarily driven by strategic reductions in advertising spend due to strong pos and the impact of covid-19 . other selling and administrative expenses other selling and administrative expenses were $ 1.35 billion , or 29.4 % of net sales , in 2020 , as compared to $ 1.39 billion , or 30.9 % of net sales , in 2019. the decrease in other selling and administrative expenses was mainly driven by incremental realized savings from cost savings programs , the absence of write-offs of american girl retail store assets of approximately $ 26 million in 2019 , and lower severance and other restructuring charges . this was partially offset by increased costs related to the impact of the inclined sleeper product recalls and higher incentive and share based compensation expense . interest expense interest expense was $ 198.3 million in 2020 , as compared to $ 201.0 million in 2019. the reduction in interest expense was due to debt extinguishment costs of $ 9.2 million in 2019 associated with the early redemption in the fourth quarter of 2019 of the 2010 senior notes due october 2020 and the 2016 senior notes due august 2021 as well as lower fees associated with the $ 1.60 billion senior secured revolving credit facilities . the reduction in interest expense was partially offset by the higher interest rates associated with the 2019 senior notes due december 2027 issued in the fourth quarter of 2019 as compared to the 2010 senior notes and 2016 senior notes . provision for income taxes mattel 's provision for income taxes was $ 68.6 million in 2020 , as compared to $ 55.2 million in 2019. the 2020 income tax provision included a $ 5.1 million tax expense related to enacted tax law changes and the assessment of the future realizability of certain deferred tax assets , and a $ 4.3 million tax expense related to reassessments of prior year 's tax liabilities based on the status of audits and settlements in various jurisdictions . the 2019 income tax provision included a $ 13.4 million tax benefit related to the release of valuation allowances in certain foreign tax jurisdictions , and a $ 16.9 million tax benefit related to reassessments of prior year 's tax liabilities based on the status of audits and settlements in various jurisdictions . story_separator_special_tag 30 mattel recorded a valuation allowance against certain domestic and foreign deferred tax assets as of both december 31 , 2020 and december 31 , 2019. evaluating the need for and the amount of a valuation allowance for deferred tax assets often requires significant judgment and extensive analysis of all available evidence to determine whether it is more likely than not that these assets will be realized . mattel intends to continue maintaining a valuation allowance on its deferred tax assets until there is sufficient evidence to support the release of all or some portion of these allowances . however , given mattel 's improved operating results for the year ended december 31 , 2020 , and if its financial results continue to improve , sufficient positive evidence may become available to allow mattel to reach a conclusion that a portion of the valuation allowance will no longer be needed . release of the valuation allowance would result in the recognition of a portion of these deferred tax assets and a decrease to income tax expense for the period the release is recorded . however , the exact timing and amount of the valuation allowance release are subject to change depending on the level of profitability that mattel is able to achieve in the tax jurisdictions in which a valuation allowance has been recorded . income ( loss ) from equity method investments income from equity method investments was $ 11.5 million in 2020 , as compared to a loss from equity method investments of $ 0.8 million in 2019. the increase in income from equity method investments was largely due to higher net sales of an equity method investment . story_separator_special_tag roman ' , sans-serif ; font-size:10pt ; font-weight:400 ; line-height:120 % '' > mattel estimates the cost of incremental actions for the program to be as follows : optimizing for growth - incremental actions estimate of cost employee severance $ 40 to $ 50 million real estate/supply chain optimization and other restructuring costs $ 15 to $ 20 million asset impairments and other non-cash charges $ 25 to $ 30 million total estimated severance and restructuring costs $ 80 to $ 100 million information technology enhancements and other investments $ 45 to $ 55 million total estimated incremental charges $ 125 to $ 155 million cumulatively , in conjunction with previous actions taken under the capital light program , targeted annual gross cost savings for the program are $ 325 million by 2023 , with total expected cash expenditures of approximately $ 140 to $ 165 million , and total non-cash charges of $ 40 to $ 45 million . of the $ 325 million in targeted gross cost savings , approximately 60 % is expected to benefit cost of sales , 30 % to benefit other selling and administrative expenses , and 10 % to benefit advertising and promotion expense . in connection with the program , mattel has recorded severance and other restructuring costs in the following cost and expense categories within the consolidated statements of operations : replace_table_token_7_th ( a ) severance and other restructuring costs recorded within cost of sales in the consolidated statements of operations are included in segment income ( loss ) in `` note 13 to the consolidated financial statements—segment information . '' during the year ended december 31 , 2020 , $ 5.7 million was recorded within cost of sales , of which $ 3.5 million and $ 2.2 million are included in the north america and international segments , respectively . during the year ended december 31 , 2019 , $ 18.6 million was recorded within cost of sales , of which $ 10.4 million , $ 8.0 million , and $ 0.2 million are included in north america , international , and american girl segments , respectively . ( b ) severance and other restructuring costs recorded within other selling and administrative expenses in the consolidated statements of operations are included in corporate and other expense in `` note 13 to the consolidated financial statements—segment information . '' as of december 31 , 2020 , mattel has recorded cumulative severance and other restructuring charges related to the program of approximately $ 51 million , which include approximately $ 15 million of non-cash charges . mattel realized cumulative cost savings ( before severance , restructuring costs , and cost inflation ) of approximately $ 75 million , primarily within gross profit , as of december 31 , 2020 in connection with the program . 34 other cost savings actions in connection with mattel 's continued efforts to further streamline its organizational structure and restore profitability , on may 4 , 2020 , mattel committed to a planned 4 % reduction in its non-manufacturing workforce . the timing of this action was accelerated due to the impact of covid-19 . as a result of the reduction in force actions initiated in 2020 , mattel realized approximately $ 40 million of run-rate cost savings exiting 2020. during the year ended december 31 , 2020 , mattel recorded severance charges of approximately $ 19 million , primarily related to actions taken to further streamline its organizational structure . during the year ended december 31 , 2020 , mattel recorded additional severance and other restructuring charges of approximately $ 9 million , related to actions initiated in the prior year associated with the structural simplification cost savings program . income taxes see part ii , item 7 `` management 's discussion and analysis of financial condition and results of operations—results of operations—provision for income taxes . '' liquidity and capital resources mattel 's primary sources of liquidity are its cash and equivalents balances , including access to earnings of certain foreign subsidiaries , short-term borrowing facilities , including its $ 1.60 billion senior secured revolving credit facilities , and access to capital markets to fund its operations and obligations . such obligations may include investing and financing activities such as capital expenditures and debt service .
| sales adjustments as a percent of net sales was relatively consistent at 6.7 % in 2020 as compared to 6.9 % in 2019. cost of sales decreased 6 % in 2020 , as compared to a 7 % increase in net sales , primarily driven by lower product and other costs and royalty expense . gross margin in 2020 increased primarily due to lower product costs driven by incremental realized savings from the cost savings programs , lower royalty expense , and the absence of the inclined sleeper product recall expense of approximately $ 26 million in 2019. north america segment income was $ 608.1 million in 2020 , as compared to segment income of $ 357.0 million in 2019 , mainly driven by higher gross profit . international segment the following table provides a summary of mattel 's net sales , segment income , and gross billings by categories , along with supplemental information by brand , for the international segment for 2020 and 2019 : replace_table_token_5_th gross billings for the international segment were $ 2.28 billion in 2020 , a decrease of $ 80.3 million , or 3 % , as compared to $ 2.36 billion in 2019 , with an unfavorable impact from changes in currency exchange rates of two percentage points . the decrease in international segment gross billings was primarily due to lower billings of infant , toddler , and preschool . dolls gross billings increased 4 % , of which 6 % was driven by higher billings of barbie products , partially offset by lower billings of enchantimals products of 2 % . 32 infant , toddler , and preschool gross billings decreased 15 % , of which 10 % was due to lower billings of fisher-price and thomas & friends products , including the impact of retail store closures due to covid-19 , and 4 % was due to lower billings of fisher-price friends products , primarily driven by the exiting of certain licensing partnerships . vehicles gross billings decreased 2 % , of which 3 % was due to lower billings of cars products following its movie launch in a prior year , partially offset by higher billings of matchbox products of 1 % . action figures , building sets , games , and other gross billings decreased 5 % , of which 16 % was due to
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monthly recurring tuition cash payments for monthly payment programs is approximately $ 435,000 per month , as compared to approximately $ 100,000 per month a year ago . finally , as a consequence of monthly payment programs becoming the payment method of choice among the majority of aspen 's degree-seeking student body , our hea , title iv program revenue dropped from 33 % of total cash receipts in fiscal year 2015 to approximately 28 % for fiscal year 2016. marketing efficiency analysis aspen has developed a marketing efficiency ratio to continually monitor the performance of its business model . revenue per enrollment ( rpe ) marketing efficiency ratio = cost per enrollment ( cpe ) cost per enrollment ( cpe ) the cost per enrollment measures the marketing investment spent in a given quarter , divided by the number of new student enrollments achieved in that given quarter , in order to obtain an average cpe for the quarter measured . 40 revenue per enrollment ( rpe ) the revenue per enrollment takes each quarterly cohort of new degree-seeking student enrollments , and measures the amount of earned revenue including tuition and fees to determine the average rpe for the cohort measured . for the later periods of a cohort , in particular students four years or older , we have used reasonable projections based off of historical results to determine the amount of revenue we will earn in later periods of the cohort . we created the reporting to track the cpe and rpe starting in 2012 and can accurately predict the cpe and rpe for each new student cohort . our current cpe/rpe marketing efficiency ratio is reflected in the below table . quarterly new student cohort actuals data : replace_table_token_4_th the average rpe is approximately $ 7,000. of the $ 7,000 , $ 6,400 of the rpe is earned through tuition , with the remaining $ 600 on average earned through miscellaneous fees ( includes annual technology fee , withdrawal fees , graduation fees , proctored exams , course specific fees , etc . ) aspen is projecting to average a marketing efficiency ratio of 8.5x , in other words an 8.5x return on our marketing investment . third-party companies in the higher education industry that manage the enrollment and marketing functions on behalf of universities ( also referred to as managed services companies ) reportedly average 3-4x return on their marketing investments , meaning that aspen 's business model is currently performing at more than double the efficiency level of that sector . story_separator_special_tag to this lower loss was the increase in revenues in the 2016 quarter growing at a higher rate than the increase of costs , offset by lower interest expense , stock compensation expense and non-recurring one-time expenses including legal . the company forecasts to achieve positive net income before the end of the 2017 fiscal year . 43 non-gaap financial measures the following discussion and analysis includes both financial measures in accordance with generally accepted accounting principles , or gaap , as well as non-gaap financial measures . generally , a non-gaap financial measure is a numerical measure of a company 's performance , financial position or cash flows that either excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with gaap . non-gaap financial measures should be viewed as supplemental to , and should not be considered as alternatives to net income , operating income , and cash flow from operating activities , liquidity or any other financial measures . they may not be indicative of the historical operating results of aspen group nor are they intended to be predictive of potential future results . investors should not consider non-gaap financial measures in isolation or as substitutes for performance measures calculated in accordance with gaap . our management uses and relies on adjusted ebitda and ebitda , which are non-gaap financial measures . we believe that both management and shareholders benefit from referring to the following non-gaap financial measures in planning , forecasting and analyzing future periods . our management uses these non-gaap financial measures in evaluating its financial and operational decision making and as a means to evaluate period-to-period comparison . our management recognizes that the non-gaap financial measures have inherent limitations because of the described excluded items . aspen group defines adjusted ebitda as earnings ( or loss ) from continuing operations before the items in the table below including non-recurring charges of $ 548,150. adjusted ebitda is an important measure of our operating performance because it allows management , investors and analysts to evaluate and assess our core operating results from period-to-period after removing the impact of items of a non-operational nature that affect comparability . we have included a reconciliation of our non-gaap financial measures to the most comparable financial measure calculated in accordance with gaap . we believe that providing the non-gaap financial measures , together with the reconciliation to gaap , helps investors make comparisons between aspen group and other companies . in making any comparisons to other companies , investors need to be aware that companies use different non-gaap measures to evaluate their financial performance . investors should pay close attention to the specific definition being used and to the reconciliation between such measure and the corresponding gaap measure provided by each company under applicable sec rules . story_separator_special_tag the following table presents a reconciliation of adjusted ebitda to net loss allocable to common shareholders , a gaap financial measure : replace_table_token_5_th replace_table_token_6_th 44 liquidity and capital resources a summary of our cash flows is as follows : replace_table_token_7_th net cash used in operating activities net cash used in operating activities during the 2016 period totaled ( $ 2,444,421 ) and resulted primarily from a net loss of continuing operations of ( $ 2,246,705 ) and a net change in operating assets and liabilities of ( $ 1,379,911 ) , both offset by non-cash items of $ 1,182,195. the most significant change in operating assets and liabilities was ( $ 1,292,190 ) in accounts receivable . the most significant non-cash item was $ 598,303 in depreciation and amortization . net cash used in operating activities during the 2015 period totaled ( $ 2,741,466 ) and resulted primarily from a net loss from continuing operations of ( $ 4,268,288 ) offset by non-cash items of $ 2,133,143 , comprised of $ 416,587 from the non-cash portion of the loss on extinguishment of debt , $ 166,241 of amortization of debt discount , $ 528,496 in depreciation and amortization , $ 75,458 of amortization of debt discount , $ 456,871 of stock compensation expense , $ 333,323 of warrant conversion exercise expense and $ 156,165 of bad debt expense , and a net change in operating assets and liabilities of $ ( 606,321 ) , of which the $ ( 275,674 ) decrease in accounts payable was the most significant . net cash used in investing activities net cash provided by investing activities during the 2016 period totaled $ 564,977 , reflecting primarily the $ 1,122,485 release of our letter of credit by the doe , offset by fixed asset purchases of $ 466,884. net cash used in investing activities during the 2015 period totaled ( $ 777,432 ) and resulted primarily from capitalized technology expenditures and the increase in restricted cash . net cash provided by financing activities net cash provided by financing activities during the 2016 period totaled $ 503,777 , reflecting primarily proceeds from warrant exercises of $ 752,500 offset by the reduction of our line of credit of $ 242,206. net cash provided by financing activities during the 2015 period totaled $ 5,425,731 which resulted primarily from proceeds from the private placements of $ 5,547,825 and $ 2,268,670 from the exercise of warrants , offset by debt repayments of $ 2,240,000. historical financings historically , our primary source of liquidity is cash receipts from tuition and the issuances of debt and equity securities . the primary uses of cash are payroll related expenses , professional expenses and instructional and marketing expenses . on july 1 , 2013 , mr. michael mathews , our chief executive officer , loaned aspen group $ 1 million and was issued a $ 1 million promissory note . the promissory note bears 10 % interest per annum , payable monthly in arrears . mr. mathews also holds a $ 300,000 convertible note which is convertible at $ 0.19 per share . the due dates of both notes held by mr. mathews were recently extended to may 31 , 2017. see below for disclosure on another $ 300,000 convertible note issued to mr. mathews that was recently converted . in september 2013 , the company sold a $ 2,240,000 original issue discount secured convertible debenture ( the debenture ) and 6,736,842 five-year warrants ( exercisable at $ 0.3325 ) in a private placement offering to an institutional investor . the company received net proceeds of approximately $ 1.7 million from this offering . 45 on january 15 , 2014 , a warrant exercise offering was completed whereby 4,231,840 warrants were exercised at an exercise price of $ 0.19 per warrant . the total proceeds received were $ 804,049 and since the exercise price was discounted from the stated prices of either $ 0.50 or $ 0.3325. related to this , additional 5,178,947 new warrants were issued at $ 0.19 per warrant as part of a price protection agreement with two investors . on march 10 , 2014 , several members of the board of directors invested $ 600,000 in exchange for 3,157,895 shares of common stock and 3,157,895 warrants at $ 0.19 per share . on july 29 , 2014 , in the first part of a two part private placement offering , seven accredited investors , including the company 's chief financial officer , paid a total of $ 1,631,500 in exchange for 10,525,809 shares of common stock and 5,262,907 five-year warrants exercisable at $ 0.19 per share . aspen reimbursed expenses in total of $ 75,000 related to this offering . as a result of this private placement , on july 31 , 2014 , aspen issued 3,473,259 shares of common stock to prior investors who had price protection on their investments , issued 2,662,139 warrants to a prior investor who had price protection on their investment and reduced the exercise and conversion price on 14,451,613 outstanding warrants and its outstanding debenture to $ 0.155. on september 4 , 2014 , aspen raised $ 3,766,325 from the sale of 24,298,877 shares of common stock and 12,149,439 five-year warrants exercisable at $ 0.19 per share in the second part of a two part private placement offering to 15 accredited investors . the net proceeds to aspen were approximately $ 3.7 million . with the proceeds from this offering , we pre-paid the full principal owed and interest due under the debenture ( described above ) . in april 2015 , aspen raised $ 2,268,670 closed on its offering to warrant holders whereby it issued 14,747,116 shares of common stock to the holders in exchange for their early exercise of warrants at the reduced exercise price of $ 0.155. the company received gross proceeds of $ 2,268,670 , which included warrants exercised by the company 's chief financial officer .
| costs and expenses general and administrative general and administrative costs for the 2016 period were $ 6,403,708 compared to $ 5,924,263 during the 2015 period , an increase of $ 479,445 or 8 % . this increase reflects higher salary costs related to expanding the call center staff as well as several supporting academic and operational positions . the company expects g & a increases to continue to materially decline on a percentage basis relative to revenue . for example , g & a as a percentage of revenue declined from 113 % of revenue in the 2015 period to 76 % of revenue in the 2016 period . g & a as a percentage of revenue is forecasted to decline to below 50 % over the next 24 months . depreciation and amortization depreciation and amortization costs for the 2016 period rose to $ 598,303 from $ 528,496 for the 2015 period , an increase of $ 69,807 or 13 % . other income ( expense ) other income for the 2016 period increased to $ 9,985 from $ 9,196 in the 2015 period , an increase of $ 789 or 8.58 % . interest expense decreased from $ 421,653 to $ 121,320 , a decrease of $ 300,333 or 71 % . income taxes income taxes expense ( benefit ) for the comparable years was $ 0 as aspen group experienced operating losses in both periods . as management made a full valuation allowance against the deferred tax assets stemming from these losses , there was no tax benefit recorded in the statement of operations in both periods . net loss net loss for 2016 period was ( $ 2,246,705 ) as compared to ( $ 4,268,288 ) for the 2015 period , a decrease in the loss of $ 2,021,583 or approximately 47 % . contributing to this lower loss was the increase in revenues in the 2016 period growing at a higher rate than the increase of costs . the company forecasts to achieve positive net
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we have multiple growth initiatives and innovations in our development pipeline , including expanded merchandise assortments and new collections , additional galleries and guesthouses , new concepts and businesses including through investment in joint ventures and acquisitions . the covid-19 health crisis had a short-term impact on some of those efforts and initiatives such as the timing of some construction efforts with respect to opening new gallery locations and optimizing our inventory . from the second quarter of fiscal 2020 , we have resumed many investments and previously deferred expenditures , but we anticipate that our decisions regarding these matters will continue to evolve in response to changing business circumstances including further developments with respect to the pandemic . for example , real estate development counterparties with respect to some of our gallery development projects have withdrawn from these projects as a result of capital or liquidity constraints due to covid-19 related difficulties , and these and other similar factors may impact the timing or scope of some of our new galleries . the ongoing global impact of covid-19 , including travel restrictions imposed by various countries , will continue to affect certain aspects of our planned international expansion and has been a major factor in our decision to delay the timing of our previous plans to open a number of our international locations . given the pace at which business conditions are evolving in response to the covid-19 health crisis , any negative developments could cause us to decide to curtail and or further postpone business investments including those related to opening new galleries in the u.s. as well as other initiatives including our international expansion . for more information , refer to item 1a—risk factors— the covid-19 pandemic poses significant and widespread risks to our business as well as to the business environment and the markets in which we operate . key value driving strategies in order to drive growth across our business , we are focused on the following long-term key strategies and business initiatives : product elevation . our goal is to establish rh as the undisputed design and quality leader of the luxury home furnishings sector . we have multiple growth initiatives and innovations that will further elevate the design and quality of every product category as we climb the luxury mountain and continue to differentiate our products in the market , including the introduction of rh couture upholstery and rh bespoke , over the next several years . assortment expansion . we are expanding our assortment and introducing new concepts to increase market share and brand awareness . this will include the launch of rh contemporary in 2021 , a new collection that bridges the gap between rh interiors and rh modern , while elevating our brand and expanding our market , and rh color in the next several years . gallery transformation . our product is elevated and rendered more valuable by our architecturally inspiring galleries . we believe our strategy to open new design galleries in every major market will unlock the value of our vast assortment , generating a revenue opportunity for our business of $ 5 to $ 6 billion in north america . we believe we can significantly increase our sales by transforming our real estate platform from our existing legacy retail footprint to a portfolio of design galleries that is sized to the potential of each market and the size of our assortment . in addition , we plan to incorporate hospitality into most of the new design galleries that we open in the future , which further elevates and renders our product and brand more valuable . we believe hospitality has created a unique new retail experience that can not be replicated online , and that the addition of hospitality will help drive incremental sales of home furnishings in these galleries . global expansion . we believe that our luxury brand positioning and unique aesthetic has strong international appeal , and that pursuit of global expansion will provide rh access to a substantial long-term market opportunity to build a $ 20 to $ 25 billion global brand over time . as such , we are actively pursuing expanding the rh brand globally with the objective of launching international locations in europe beginning in 2022. we have secured a number of locations in various markets in the united kingdom and continental europe in which we expect to introduce our first galleries outside of the u.s. and canada . part ii form 10-k | 55 brand elevation . our vision is to move the brand beyond curating and selling product to conceptualizing and selling spaces by building an ecosystem of products , places , services and spaces that elevate and establish the rh brand as a global thought leader , taste and place maker . our ecosystem , with its immersive experiences , exposes existing and new customers to our evolving authority in design , architecture and hospitality while acting as a next-generation brand elevation and marketing strategy . digital reimagination . we are reimagining our website into the world of rh , a digital portal presenting our products , places , services and spaces . this will enable existing and new customers to experience the immersive and multi-dimensional world of rh , inclusive of our products : interiors , modern , contemporary , color , beach house , ski house , baby & child , teen and waterworks ; our places : galleries , guesthouses , restaurants and residences ; our services : interior design , architecture and landscape architecture ; and our spaces : plane and yacht design and charter . business optimization . we continue to evolve our operating platform to elevate the customer experience and enhance decision-making . story_separator_special_tag these efforts include initiatives such as ( i ) rh in-your-home , a reimagined home delivery experience that sets a new standard for “ white glove ” delivery and extends the gallery into the customer 's home , ( ii ) the opening of a new la-based distribution center , which will allow us to reduce delivery times by seven to ten days for both outdoor furniture and special order upholstery in most major markets , and ( iii ) an internal digital transformation that will leapfrog the way we work and drive significant productivity in the product development process , which will begin with the reimagination of the center of innovation and product leadership . factors affecting our results of operations the disruption to our business operations from the covid-19 pandemic has had a significant impact on the comparability of certain ratios and year-over-year trends for our operating results for fiscal 2020 as compared to fiscal 2019. the primary negative impact to our revenues from store closures occurred during the first half of fiscal 2020 , but despite the reopening of most of our galleries during the second and third fiscal quarters and a strong resurgence in customer demand for our products , we have continued to address a range of business circumstances related to covid-19 including delays in inventory receipts and manufacturing as our supply chain recovers from the impact of the global health crisis . we have also changed the cadence of our expenses and investments as we have sought to address the impact of the pandemic on the business and delayed the opening of certain new gallery locations due to issues related to covid-19 including the extensive travel restrictions that have been in place in europe . from the second quarter of fiscal 2020 , we have resumed many investments and previously deferred expenditures but we anticipate that our decisions regarding these matters will continue to evolve in response to changing business circumstances including further developments with respect to the pandemic . we also expect that direct and indirect effects of the covid-19 pandemic may continue to affect the comparability of our results during fiscal 2021. although we have experienced strong demand for our products during the second half of fiscal 2020 , for example , some of the demand may have been driven by stay-at-home restrictions that have been in place throughout many parts of the united states and canada . the relaxation of the stay-at-home restrictions may trigger a shift in consumer spending patterns toward other categories such as travel and leisure activities and away from the purchase of merchandise related to the home including home furnishings which could affect our results of operation in fiscal 2021. apart from the impact of the covid-19 pandemic on our business operations and on macroeconomic conditions , below are certain factors that affect our results of operations . our strategic initiatives . we are in the process of implementing a number of significant business initiatives that have had and will continue to have an impact on our results of operations . as a result of the number of current business initiatives we are pursuing , we have experienced in the past and may experience in the future significant period-to-period variability in our financial performance and results of operations . while we anticipate that these initiatives will support the growth of our business , costs and timing issues associated with pursuing these initiatives can negatively affect our growth rates in the short term and may amplify fluctuations in our growth rates from quarter to quarter . delays in the rate of opening new galleries and in pursuit of our international expansion as a result of covid-19 have results in delays in the corresponding increase in revenues that we experience as new design galleries are introduced . in addition , we anticipate that our net revenues , adjusted net income and other performance metrics will remain variable as our business model continues to emphasize high growth and numerous , concurrent and evolving business initiatives . our ability to source and distribute products effectively . our net revenues and gross profit are affected by our ability to purchase our merchandise in sufficient quantities at competitive prices . our current and anticipated demand , and our level of net revenues have been adversely affected in prior periods by constraints in our supply chain , including the inability of our vendors to produce sufficient quantities of some merchandise to match market demand from our customers , leading to higher levels of customer back orders and lost sales . for example , a number of our vendors are experiencing delays in 56 | form 10-k part ii production and shipment of merchandise orders related to direct and indirect effects of the covid-19 pandemic . in addition , as we introduce new products and expand our merchandise assortments into new categories , we expect to experience delays in the production of some new offerings as we have had similar experiences during prior periods when we adopted substantial newness in our business such as with the introduction of rh modern in 2015. during fiscal 2020 , the lag in manufacturing and inventory receipts related to the covid-19 pandemic , together with dislocations in our supply chain , resulted in some delays in our ability to convert demand into revenues and our global supply chain has not fully recovered from the impact of this dislocation . while we expect this dislocation to be resolved by the second half of fiscal 2021 , there can be no assurance as to the exact course that the recovery in our supply chain will occur and a number of factors could contribute to further complications in our supply chain including covid-19 developments in countries where our vendors produce and ship merchandise . based on total dollar volume of purchases for fiscal 2020 , approximately 72 % of our products were sourced from asia , 15 % from the united states and the remainder from other countries and regions .
| rh segment core net revenues increased due to strong customer demand for our products primarily beginning in june 2020 through the end of fiscal 2020. the strong customer demand in the second half of fiscal 2020 more than offset the negative impact to demand we experienced in our business due to gallery closures and macroeconomic conditions resulting from covid-19 in march and april of 2020. outlet sales decreased $ 33.9 million to $ 187.5 million in fiscal 2020 compared to $ 221.4 million in fiscal 2019 due to covid-19 related closures in the first quarter of fiscal 2020. rh segment net revenues also decreased in our contract business and rh hospitality operations due to covid-19 related factors including a slowdown in commercial purchasing activities , as well as closures and reduced capacity in our rh hospitality locations . despite our revenue growth during the year , the growth in revenue was lower than the growth in customer demand for our products during the second half of fiscal 2020 primarily due to the effects of higher than anticipated demand and disruptions across our global supply chain as a result of covid-19 . it may take several quarters for inventory receipts and manufacturing to catch up to the increase in customer demand . waterworks net revenues waterworks net revenues decreased $ 13.9 million , or 10.5 % , to $ 119.2 million in fiscal 2020 compared to $ 133.1 million in fiscal 2019 primarily due to temporary showroom closures and construction delays related to covid-19 . gross profit consolidated gross profit increased $ 230.5 million , or 21.1 % , to $ 1,325.5 million in fiscal 2020 compared to $ 1,095.0 million in fiscal 2019. as a percentage of net revenues , gross margin increased 510 basis points to 46.5 % of net revenues in fiscal 2020 compared to 41.4 % of net revenues in fiscal 2019. rh segment gross profit for fiscal 2020 was negatively impacted by $ 5.9 million related to product recalls and includes asset impairments of $ 2.4 million related to outlet
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the company generates operating revenues primarily by leasing apartment units to residents and leasing office , retail and industrial space to commercial tenants . the company has historically engaged in and may continue to engage in certain business transactions with related parties , including but not limited to asset acquisition and dispositions . transactions involving related parties can not be presumed to be carried out on an arm 's length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities . related party transactions may not always be favorable to our business and may include terms , conditions and agreements that are not necessarily beneficial to or in our best interest . effective since april 30 , 2011 , pillar is the company 's external advisor and cash manager under a contractual arrangement that is reviewed annually by our board of directors . pillar 's duties include , but are not limited to , locating , evaluating and recommending real estate and real estate-related investment opportunities . pillar also arranges , for tci 's benefit , debt and equity financing with third party lenders and investors . pillar also serves as an advisor and cash manager to arl and iot . as the contractual advisor , pillar is compensated by tci under an advisory agreement that is more fully described in part iii , item 10 . “ directors , executive officers and corporate governance – the advisor ” . tci has no employees . employees of pillar render services to tci in accordance with the terms of the advisory agreement . effective since january 1 , 2011 , regis manages our commercial properties and provides brokerage services . regis is entitled to receive a fee for its property management and brokerage services . see part iii , item 10 . “ directors , executive officers and corporate governance – property management and real estate brokerage ” . the company contracts with third-party companies to lease and manage our apartment communities . critical accounting policies we present our financial statements in accordance with generally accepted accounting principles in the united states ( “ gaap ” ) . in june 2009 , the financial accounting standards board ( “ fasb ” ) completed its accounting guidance codification project . the fasb accounting standards codification ( “ asc ” ) became effective for our financial statements issued subsequent to june 30 , 2009 and is the single source of authoritative accounting principles recognized by the fasb to be applied by nongovernmental entities in the preparation of financial statements in conformity with gaap . as of the effective date , we no longer refer to the authoritative guidance dictating its accounting methodologies under the previous accounting standards hierarchy . instead , we refer to the asc codification as the sole source of authoritative literature . the accompanying consolidated financial statements include our accounts , our subsidiaries , generally all of which are wholly-owned , and all entities in which we have a controlling interest . arrangements that are not controlled through voting or similar rights are accounted for as a variable interest entity ( vie ) , in accordance with the provisions and guidance of asc topic 810 “ consolidation ” , whereby we have determined that we are a primary beneficiary of the vie and meet certain criteria of a sole general partner or managing member as identified in accordance with emerging issues task force ( “ eitf ” ) issue 04-5 , investor 's accounting for an investment in a limited partnership when the investor is the sole general partner and the limited partners have certain rights ( “ eitf 04-5 ” ) . vies are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders as a group lack adequate decision making ability , the obligation to absorb expected losses or residual returns of the entity , or have voting rights that are not proportional to their economic interests . the primary beneficiary generally is the entity that provides financial support and bears a majority of the financial risks , authorizes certain capital transactions , or makes operating decisions that materially affect the entity 's financial results . all significant intercompany balances and transactions have been eliminated in consolidation . in determining whether we are the primary beneficiary of a vie , we consider qualitative and quantitative factors , including , but not limited to : the amount and characteristics of our investment ; the obligation or likelihood for us or other investors to provide financial support ; our and the other investors ' ability to control or significantly influence key decisions for the vie ; and the similarity with and significance to the business activities of us and the other investors . significant judgments related to these determinations include estimates about the current future fair values and performance of real estate held by these vies and general market conditions . for entities in which we have less than a controlling financial interest or entities where we are not deemed to be the primary beneficiary , the entities are accounted for using the equity method of accounting . accordingly , our share of the net earnings or losses of these entities are included in consolidated net income . tci 's investment in arl is accounted for under the equity method . 23 the company in accordance with the vie guidance in asc 810 “ consolidations ” consolidates 35 and 33 multifamily residential properties located throughout the united states at december 31 , 2014 and december 31 , 2013 , respectively , ranging from 32 units to 290 units . assets totaling $ 362.3 million and $ 343.9 million at december 31 , 2014 and 2013 , respectively , are consolidated and included in “ real estate , at cost ” on the balance sheet and are all collateral for their respective mortgage notes payable , none of which are recourse to the partnership in which they are in or to the company . story_separator_special_tag assets totaling $ 0.0 and $ 16.4 million at december 31 , 2014 and 2013 , respectively , are consolidated and included in “ real estate held for sale at cost ” on the balance sheet and are all collateral for their respective mortgage notes payable , none of which are recourse to the partnership in which they are in or to the company . real estate upon acquisitions of real estate , we assess the fair value of acquired tangible and intangible assets , including land , buildings , tenant improvements , “ above- ” and “ below-market ” leases , origination costs , acquired in-place leases , other identified intangible assets and assumed liabilities in accordance with asc topic 805 “ business combinations ” , and allocate the purchase price to the acquired assets and assumed liabilities , including land at appraised value and buildings at replacement cost . we assess and consider fair value based on estimated cash flow projections that utilize appropriate discount and or capitalization rates , as well as available market information . estimates of future cash flows are based on a number of factors including the historical operating results , known and anticipated trends , and market and economic conditions . the fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant . we also consider an allocation of purchase price of other acquired intangibles , including acquired in-place leases that may have a customer relationship intangible value , including ( but not limited to ) the nature and extent of the existing relationship with the tenants , the tenants ' credit quality and expectations of lease renewals . based on our acquisitions to date , our allocation to customer relationship intangible assets has been immaterial . we record acquired “ above- ” and “ below-market ” leases at their fair values ( using a discount rate which reflects the risks associated with the leases acquired ) equal to the difference between ( 1 ) the contractual amounts to be paid pursuant to each in-place lease and ( 2 ) management 's estimate of fair market lease rates for each corresponding in-place lease , measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases . other intangible assets acquired include amounts for in-place lease values that are based on our evaluation of the specific characteristics of each tenant 's lease . factors to be considered include estimates of carrying costs during hypothetical expected lease-up periods considering current market conditions , and costs to execute similar leases . in estimating carrying costs , we include real estate taxes , insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods , depending on local market conditions . in estimating costs to execute similar leases , we consider leasing commissions , legal and other related expenses . acquisitions from our parent , arl , have previously been reflected at the fair value purchase price . upon discussion with the sec and in review of the guidance pursuant to asc 250-10-45-22 to 24 , we have adjusted those assets , in the prior year , to reflect a basis equal to arl 's cost basis in the asset at the time of the sale . the related party payables to arl were reduced for the lower asset price . depreciation and impairment real estate is stated at depreciated cost . the cost of buildings and improvements includes the purchase price of property , legal fees and other acquisition costs . costs directly related to the development of properties are capitalized . capitalized development costs include interest , property taxes , insurance , and other direct project costs incurred during the period of development . a variety of costs are incurred in the acquisition , development and leasing of properties . after determination is made to capitalize a cost , it is allocated to the specific component of a project that is benefited . determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment . our capitalization policy on development properties is guided by asc topic 835-20 “ interest - capitalization of interest ” and asc topic 970 “ real estate—general ” . the costs of land and buildings under development include specifically identifiable costs . the capitalized costs include pre-construction costs essential to the development of the property , development costs , construction costs , interest costs , real estate taxes , salaries and related costs and other costs incurred during the period of development . we consider a construction project as substantially completed and held available for occupancy upon the receipt of certificates of occupancy , but no later than one year from cessation of major construction activity . we cease capitalization on the portion ( 1 ) substantially completed and ( 2 ) occupied or held available for occupancy , and we capitalize only those costs associated with the portion under construction . management reviews its long-lived assets used in operations for impairment when there is an event or change in circumstances that indicates impairment in value . an impairment loss is recognized if the carrying amount of its assets is not recoverable and exceeds its fair value . fair value is determined by a recent appraisal , comparables based upon prices for similar assets , executed sales contract , a present value and or a valuation technique based upon a multiple of earnings or revenue . if such impairment is present , an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value . the evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy , rental rates and capital requirements that could differ materially from actual results in future periods .
| the total property portfolio represents all income-producing properties held as of december 31 for the year presented . sales subsequent to year end represent properties that were held as of year end for the years presented , but sold in subsequent years . continued operations represents all properties that have not been reclassed to discontinued operations as of december 31 , 2014 for the year presented . the table below shows the number of income-producing properties held by year : replace_table_token_8_th comparison of the year ended december 31 , 2014 to the same year ended 2013 : for the twelve months ended december 31 , 2014 , we reported net income applicable to common shares of $ 40.6 million or $ 4.74 per diluted earnings per share , as compared to a net income applicable to common shares of $ 57.4 million or $ 6.83 per diluted earnings per share for the same year ended 2013. the current year net income applicable to common shares of $ 40.6 million includes gain on land sales of $ 0.6 million and net income from discontinued operations of $ 37.9 million , as compared to the prior year net income applicable to common shares of $ 57.4 million , which includes loss on land sales of $ 1.1 million , provisions on the impairment of notes receivable and real estate assets of $ 11.3 million , and net income from discontinued operations of $ 61.6 million . revenues rental and other property revenues were $ 75.9 million for the twelve months ended december 31 , 2014. this represents a decrease of $ 1.5 million , as compared to the prior year revenues of $ 77.4 million . this change , by segment , is an increase in the apartment portfolio of $ 2.4 million , offset by a decrease in the commercial portfolio of $ 3.8 million and a decrease in the other portfolio of $ 0.1 million . our apartment portfolio continues to excel in the
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store count during fiscal 2013 , the company opened 40 new dick 's sporting goods stores , one new golf galaxy store , two new field & stream stores and one new true runner store . additionally , the company relocated one dick 's sporting goods store , repositioned one golf galaxy store and closed three underperforming golf galaxy stores . as of february 1 , 2014 , the company operated 558 dick 's sporting goods stores in 46 states , 79 golf galaxy stores in 29 states , two field & stream stores in two states and three true runner stores in three states , with approximately 31.6 million square feet on a consolidated basis . income from operations income from operations increased $ 13.1 million to $ 536.8 million in fiscal 2013 from $ 523.7 million in fiscal 2012 . gross profit increased 6 % to $ 1,944.0 million in fiscal 2013 from $ 1,837.2 million in fiscal 2012 , but decreased as a percentage of net sales by 19 basis points compared to fiscal 2012. occupancy costs and shipping expenses increased as a percentage of net sales by 61 basis points in the current year . occupancy costs increased at a higher rate than the 1.9 % increase in consolidated same store sales during the fiscal year and were unfavorably affected by 13 basis points due to the inclusion of sales from the 53 rd week in fiscal 2012. shipping expenses as a percentage of sales increased due to the growth in ecommerce sales relative to the sales growth at our brick and mortar stores . the decrease in gross profit as a percentage of net sales was partially offset by merchandise margin expansion of 35 basis points . every 10 basis point change in merchandise margin would impact earnings before income taxes for the current period by approximately $ 6 million . selling , general and administrative expenses increased approximately 7 % to $ 1,386.3 million in fiscal 2013 from $ 1,297.4 million in fiscal 2012 , and increased as a percentage of net sales by 8 basis points primarily due to increased payroll costs for planned growth initiatives and a $ 7.9 million non-cash impairment charge to reduce the carrying value of a gulfstream g450 corporate aircraft held for sale to its fair market value . the increase in selling , general and administrative expenses was partially offset by lower incentive compensation during the 52 weeks ended february 1 , 2014 and a contribution to the dick 's sporting goods foundation during the 53 weeks ended february 2 , 2013 . pre-opening expenses increased to $ 20.8 million in fiscal 2013 from $ 16.1 million in fiscal 2012 . pre-opening expenses in any period fluctuate depending on the timing and number of store openings and relocations . during fiscal 2013 , the company opened 40 new dick 's sporting goods stores , one new golf galaxy store , two new field & stream stores and one new true runner store . additionally , the company relocated one dick 's sporting goods store and repositioned one golf galaxy store in the current year . during fiscal 2012 , the company opened 38 new dick 's sporting goods stores and two new true runner stores , relocated five dick 's sporting goods stores and repositioned one golf galaxy store . impairment of available-for-sale investments impairment of available-for-sale investments was $ 32.4 million in fiscal 2012 resulting from the full impairment of the company 's investment in jjb sports , as further described in note 15 to the consolidated financial statements . interest expense interest expense totaled $ 2.9 million for fiscal 2013 compared to $ 6.0 million for fiscal 2012 . interest expense for fiscal 2012 included $ 2.9 million related to rent payments under the company 's financing lease for its corporate headquarters building . the decrease in interest expense year over year reflects the company 's purchase of its corporate headquarters building on may 7 , 2012 . 28 other income other income was $ 12.2 million for fiscal 2013 compared to $ 4.6 million for fiscal 2012. the company recognizes investment income to reflect changes in the investment value of assets held in its deferred compensation plans with a corresponding charge to selling , general and administrative costs for the same amount . the company recognized investment income totaling $ 6.0 million in fiscal 2013 compared to $ 3.2 million for fiscal 2012 due to an overall improvement in the equity markets , which impacted the deferred compensation plan investment values . during the first quarter of 2013 , the company recorded $ 4.3 million related to the partial recovery of the company 's investment in jjb sports , which it had previously fully impaired . income taxes the company 's effective tax rate was 38.2 % for fiscal 2013 as compared to 40.7 % for fiscal 2012 . during fiscal 2012 , the company determined that a valuation allowance totaling $ 7.9 million was required for a portion of the deferred tax asset related to a $ 32.4 million net capital loss carryforward resulting from the impairment of its investment in jjb sports , as the company did not believe that it was more likely than not that the company would generate sufficient capital gains in future periods to recognize that portion of the expected net capital loss . during the first quarter of fiscal 2013 , the company determined that it would recover $ 4.3 million of its investment in jjb sports . there is no related tax expense , as the company reversed a portion of the deferred tax valuation allowance it recorded during fiscal 2012 for net capital loss carryforwards it did not expect to realize at that time . fiscal 2012 ( 53 weeks ) compared to fiscal 2011 ( 52 weeks ) net income the company reported net income for the year ended february 2 , 2013 of $ 290.7 million , or $ 2.31 per diluted share , as compared to net income of $ 263.9 story_separator_special_tag million , or $ 2.10 per diluted share , in fiscal 2011 . fiscal 2012 net income included a charge of $ 27.6 million , net of tax , or $ 0.22 per diluted share , related to the company 's impairment of its investment in jjb sports . additionally , fiscal 2012 included approximately $ 0.03 per diluted share for the 53 rd week . fiscal 2011 net income included a gain on sale of investment of $ 8.7 million , net of tax , or $ 0.07 per diluted share , and an increase to net income of $ 1.3 million , net of tax , or $ 0.01 per diluted share , resulting from a partial reversal of litigation settlement costs previously accrued during fiscal 2010. net sales net sales increased 12 % to $ 5,836.1 million in fiscal 2012 from $ 5,211.8 million in fiscal 2011 due primarily to a 4.3 % increase in consolidated same store sales measured on a 52-week to 52-week basis , growth of our store network and the inclusion of the 53 rd week of sales . sales during the 53 rd week of fiscal 2012 totaled approximately $ 74 million . the 4.3 % consolidated same store sales increase consisted of a 2.4 % increase at dick 's sporting goods and a 5.5 % increase at golf galaxy . ecommerce sales penetration was 5.3 % of total sales in fiscal 2012 compared to 4.0 % of total sales in fiscal 2011 . the increase in consolidated same store sales was broad based , with larger increases in athletic apparel , hunting , athletic footwear , golf , accessories and team sports , partially offset by a sales decrease in outerwear and cold weather accessories due to a second consecutive warm winter season and a decline in sales of large fitness equipment , such as treadmills and ellipticals . the same store sales increase at dick 's sporting goods was driven by an increase in sales per transaction of approximately 3.3 % , offset by a decrease in transactions of approximately 0.9 % . based upon our fiscal 2012 sales mix , every 1 % change in consolidated same store sales would have impacted fiscal 2012 earnings before income taxes by approximately $ 17 million . store count during fiscal 2012 , the company opened 38 new dick 's sporting goods stores and two new true runner stores . additionally , the company relocated five dick 's sporting goods stores and repositioned one golf galaxy store . as of february 2 , 2013 , the company operated 518 dick 's sporting goods stores in 44 states and 81 golf galaxy stores in 30 states , with approximately 29.6 million square feet on a consolidated basis . income from operations income from operations increased $ 91.7 million to $ 523.7 million in fiscal 2012 from $ 432.0 million in fiscal 2011 . 29 gross profit increased 15 % to $ 1,837.2 million in fiscal 2012 from $ 1,594.9 million in fiscal 2011 . as a percentage of net sales , gross profit increased to 31.48 % in fiscal 2012 from 30.60 % in fiscal 2011 . the 88 basis point increase was due primarily to a 58 basis point decrease in fixed occupancy costs resulting primarily from the leverage on the increase in sales compared to fiscal 2011 , including 13 basis points due to the inclusion of sales from the 53 rd week in fiscal 2012 and merchandise margin expansion of 40 basis points resulting from continued inventory management efforts . every 10 basis point change in merchandise margin would have impacted fiscal 2012 earnings before income taxes by approximately $ 6 million . selling , general and administrative expenses increased 13 % to $ 1,297.4 million in fiscal 2012 from $ 1,148.3 million in fiscal 2011 , representing a 20 basis point increase as a percentage of net sales . administrative expenses increased 54 basis points as a percentage of net sales as a result of payroll increases relative to sales , charitable contributions made in 2012 and the partial reversal in 2011 of previously accrued litigation settlement costs . higher administrative expenses were substantially offset by a 16 basis point reduction in both store payroll expenses and advertising expenses from fiscal 2011 due to leverage on the increase in net sales in fiscal 2012. pre-opening expenses increased $ 1.5 million to $ 16.1 million in fiscal 2012 from $ 14.6 million in fiscal 2011 . pre-opening expenses in any period fluctuate depending on the timing and number of store openings and relocations . during fiscal 2012 , the company opened 38 new dick 's sporting goods stores and two new true runner stores , relocated five dick 's sporting goods stores and repositioned one golf galaxy store . during fiscal 2011 , the company opened 36 new dick 's sporting goods stores and relocated one golf galaxy store . gain on sale of investment gain on sale of investment was $ 13.9 million in fiscal 2011 resulting from the sale of the company 's remaining investment in gsi commerce , inc. , the company 's ecommerce service provider . impairment of available-for-sale investments impairment of available-for-sale investments was $ 32.4 million in fiscal 2012 resulting from the full impairment of the company 's investment in jjb sports , as further described in note 15 to the consolidated financial statements . interest expense interest expense totaled $ 6.0 million for fiscal 2012 compared to $ 13.9 million for fiscal 2011 . interest expense included rent payments under the company 's financing lease for its corporate headquarters building for fiscal 2012 and fiscal 2011 of $ 2.9 million and $ 10.6 million , respectively . the decrease in interest expense reflected the company 's purchase of its corporate headquarters building on may 7 , 2012. income taxes the company 's effective tax rate was 40.7 % for fiscal 2012 as compared to 38.9 % for fiscal 2011 .
| million shares of common stock for $ 255.6 million . made substantial capital investments in the business , increasing capital expenditures to $ 285.7 million in fiscal 2013 from $ 219.0 million in fiscal 2012. the company ended fiscal 2013 with no outstanding borrowings under the current senior secured credit agreement ( the `` credit agreement '' ) . results of operations the following table presents for the periods indicated selected items in the consolidated statements of income as a percentage of the company 's net sales , as well as the basis point change in percentage of net sales from the prior year : replace_table_token_8_th 26 ( a ) column does not add due to rounding . ( 1 ) revenue from retail sales is recognized at the point of sale , net of sales tax . revenue from ecommerce sales is recognized upon shipment of merchandise . service-related revenue is recognized as the services are performed . a provision for anticipated merchandise returns is provided through a reduction of sales and cost of goods sold in the period that the related sales are recorded . revenue from gift cards and returned merchandise credits ( collectively the `` cards '' ) are deferred and recognized upon the redemption of the cards . these cards have no expiration date . income from unredeemed cards is recognized on the consolidated statements of income within selling , general and administrative expenses at the point at which redemption becomes remote . the company performs an evaluation of the aging of the unredeemed cards , based on the elapsed time from the date of original issuance , to determine when redemption becomes remote . ( 2 ) cost of goods sold includes the cost of merchandise , inventory shrinkage and obsolescence , freight , distribution , shipping and store occupancy costs . store occupancy costs include rent , common area maintenance charges , real estate and other asset-based taxes , store maintenance , utilities , depreciation , fixture lease expenses
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the 13-month performance obligation period begins at the start of the relevant episodes of care and extends through the receipt or generation of the semiannual reconciliation for the relevant performance measurement period , as well as the provision and explanation of statements of performance to each of our customers . as a result , during the first and third quarters of each year , we recognize three months of revenue for each of two overlapping performance obligation periods ( i.e. , three months of revenue from one performance obligation period , and three months of revenue from a second , overlapping performance obligation period ) . in contrast , during the second and fourth quarters of each year , we recognize revenue relating to three overlapping performance obligation periods—three months of revenue from one performance obligation period , three months of revenue from a second , overlapping performance obligation period , and one month of revenue from a third , overlapping performance obligation period ( representing the thirteenth month of the third performance obligation period ) . we also recognize episodes revenue based on our estimates of savings realized . the semiannual reconciliations for each performance measurement period under our episodes programs are received or generated in the second and fourth quarters of each year , and indicate the actual savings realized . see “ —critical accounting policies—revenue recognition. ” in addition , due to the semiannual reconciliations for our episodes programs , and bpci-a in particular , we typically receive cash during the first and third quarters of each year , which can cause our liquidity to fluctuate from quarter to quarter . see “ —liquidity and capital resources. ” customer mix our customer mix can affect our revenue and profitability in both of our segments . for example , due to the different contractual arrangements we have with different health plans , health plan mix during the period can affect our average per-visit fee , the geographic mix of plan members we are visiting , the mix of members we see that are covered by medicare versus medicaid and the selection of ihe , vihe or ihe+ solutions , each of which has a different price point , and can affect the conversion rate associated with the number of members who agree to receive ihes , the total number of ihes completed and the number and type of ancillary services selected . the amounts we receive for our services in our episodes of care services segment are similarly determined by customer mix , as the amount of our administrative fee , our share of episode savings and risk for episode losses and the payors ' and providers ' share of savings , as well as the overall program size and the savings rate generated under each managed episode vary by customer . impact of ihe volume and margins our revenue and profitability in our home & community services segment are affected by the number of ihes we complete during a period and how cost effectively we are able to complete them . the number of ihes we are able to complete during a period can be affected by a variety of factors . for example , decisions by our customers with respect to the tml , including any increase or reduction in the number of members included in the tml ( or the member list from which it is derived ) , may impact our ihe completion rate and , as a result , our revenue . similarly , our ability to complete ihes is affected by the level of member engagement . in our experience , members of existing customers are more likely to have had an ihe from signify health in the past and are more likely to be responsive to our outreach . in contrast , for new customers , their members are often just getting to know signify health and may have never had an ihe before , which can make it harder to successfully contact them and obtain their consent to an ihe . our ability to complete ihes is also affected by the capacity of our mobile network of providers , which impacts our ability to efficiently reach all of the members on our tml . 77 we believe we will benefit from demographic trends in the coming years . as the u.s. population ages , the number of medicare eligible individuals is increasing . moreover , medicare advantage is growing faster than the medicare classic or ffs program according to cms . we believe we are well positioned to capture the growth in medicare advantage enrollment in the coming years and further increase the number of members to whom we provide ihes . our long-term profitability in the home & community services segment is also impacted by how cost-effectively we are able to complete ihes . for example , it tends to be less costly for us to perform ihes in densely populated urban areas and more costly for us to perform ihes in difficult-to-reach jurisdictions . our ability to cost-effectively perform ihes is also affected by how efficiently we are able to schedule a provider 's day to maximize the number of ihes he or she is able to complete in a day . the mix of providers we use may also impact our costs . we use a mix of physicians , nurse practitioners and physicians assistants , with physicians being the most costly to contract with for ihes . if we increase or decrease our usage of a particular type of provider , it impacts the cost of performing ihes and our margins . in 2020 , we completed and invoiced to customers over 1.4 million ihes , including vihes , compared to 1.1 million ihes and 0.9 million ihes in 2019 and 2018 , respectively . story_separator_special_tag impact of program size and savings rate our revenue and profitability in our episodes of care services segment are affected by the program size of our episodes programs and the savings rates we are able to achieve under these programs . program size for a particular customer represents the number of episodes we managed for a customer during a period multiplied by the respective baseline price of each episode , which represents the benchmark price set by the relevant program prior to any discounts . our program size grows by increasing the number of episodes we manage . in connection with our episodes offerings , we receive an administrative fee that is based on the program size we manage for a customer . the bpci-a program in its current form expires at the end of 2023 , and as of the end of 2020 , participation in the bpci-a program was locked in place , meaning that new healthcare providers can not enter the program , and participating healthcare providers can not choose to participate in any additional episode types . accordingly , our ability to grow our revenue under the bpci-a program going forward will require us to maximize savings rates . see “ changes to the bpci program ” below . revenue in our episodes of care services segment is also affected by the savings rate we are able to achieve . under our contracts with our provider partners in our episodes of care programs , we receive a share of any savings generated by the relevant provider for each episode managed . the savings rate during each period therefore affects our revenue period to period . the savings rate during each period is affected by a variety of factors , including how quickly new customers are able to integrate with our technology and data analytics tools , how long provider partners have been participating in an episode program and their resulting level of familiarity with the program and the degree of implementation of care redesign . the savings rate also varies by the type of solution we offer , and as a result the savings rate will fluctuate depending on the number of episodes we manage under one type of program , such as bpci-a , versus another program , such as our commercial episodes of care programs . our ability to increase program size and savings rate will depend on a number of factors , including the effectiveness of our advanced data analytics capabilities and operating platform , market adoption of our solutions and the adoption of care redesign and bundled payment models overall . the following table shows our weighted average program size and weighted average savings rates for the periods presented . weighted average program size and weighted average savings rates did not apply for 2018 as these relate to our episodes of care services segment which was formed following the remedy partners acquisition in 2019 . 78 replace_table_token_0_th ( 1 ) weighted average program size represents the weighted average program size for performance obligation periods included in a calendar quarter or calendar year . we manage episodes in six-month blocks , which we refer to as performance measurement periods . in each performance measurement period , we reconcile those episodes of care that concluded during such performance measurement period . we recognize the revenue attributable to episodes reconciled during each six-month performance measurement period over a 13-month performance obligation period , which we refer to as performance obligation periods . accordingly , our weighted average program size during a given calendar quarter or calendar year reflects the results of multiple overlapping performance obligation periods . we define program size for a performance obligation period as ( x ) the number of episodes we managed during the relevant performance measurement period multiplied by ( y ) the baseline price of each episode , which represents the benchmark price set by the relevant program prior to any discounts . we define weighted average program size as the sum of the following for each performance obligation period included in a calendar quarter or calendar year : ( x ) the program size for the relevant performance obligation period , ( y ) divided by 13 , which represents the approximately 13-month performance obligation period required to complete performance obligations under our episodes programs , and ( z ) multiplied by the number of months of the relevant performance obligation period included in the calendar quarter or calendar year . for 2019 , this does not include amounts related to the bpci classic program , as these were not comparable to the current bpci-a program and therefore are not indicative of future performance . the remedy partners acquisition and the subsequent remedy partners combination occurred in 2019 , and as a result , we did not have any episodes of care programs in 2018 . ( 2 ) weighted average savings rate represents the weighted average savings rate generated during performance obligation periods included in a calendar quarter or calendar year . the gross savings for each performance obligation period ( i.e. , the 13-month period over which we recognize revenue attributable to episodes that concluded during a six-month performance measurement period ) is equal to the gross amount of savings generated under the episode programs we manage during the performance measurement period to which such performance obligation period relates . the gross savings for a performance measurement period is defined as ( x ) the sum of the baseline episode prices of each such episode less ( y ) the total actual cost of each episode that concluded during such performance measurement period , which baseline prices represent the benchmark price set by the relevant program prior to any discounts .
| additionally , the following expenses increased in 2020 primarily driven by the overall higher ihe volume ; ( 1 ) the costs of providing other ancillary services , including certain laboratory and testing fees , increased by $ 4.2 million ; ( 2 ) member outreach and other related expenses increased by approximately $ 3.2 million ; and ( 3 ) other variable costs increased by $ 1.2 million . the impact of covid-19 also resulted in approximately $ 2.1 million in incremental costs for personal protective equipment used by our providers while conducting ihes during the pandemic and $ 2.0 million in one-time costs , including costs related to covid-19 tests for our providers , which were partially offset by a decrease in travel and entertainment costs for both segments of $ 1.9 million due to the covid-19 imposed travel restrictions . 86 selling , general and administrative expense— our total sg & a expense was $ 208.0 million in 2020 , representing an increase of $ 39.4 million , or 23.4 % , from $ 168.6 million in 2019. this increase was primarily driven by compensation-related expenses , which increased by $ 33.6 million due to additional headcount to support the overall growth in our business and including higher bonus expense as a result of outperforming established bonus targets in 2020. additionally , stock-based compensation expense increased $ 8.2 million due to additional equity-based grants . other costs also increased , primarily to support the growth in our business , including : professional and consulting fees , which increased by $ 8.0 million ; facilities-related expenses , including rent expense under our operating leases , which increased by $ 1.7 million ; and information technology-related expenses , including infrastructure and software costs of $ 0.8 million . these increases were partially offset by a decrease in employee travel and entertainment of $ 4.2 million , driven by covid-19 related travel restrictions , and a decrease in other variable costs of $ 0.5 million . transaction-related expenses— our total transaction-related expenses were $ 15.2 million in 2020 , representing a decrease of $ 7.2 million , or 32.3 % , from $ 22.4 million in
| 15,769 |
million , primarily due to an additional $ 4.8 million in incremental expense in fiscal 2015 related to the operation of new stores , net of expense reductions for stores that have closed since the beginning of fiscal 2014. incentive compensation , inclusive of stock-based compensation , increased $ 4.4 million in fiscal 2015 compared to fiscal 2014. of this increase , $ 1.8 million was attributable to higher financial performance against the defined metrics associated with our performance-based cash compensation . the remaining increase of $ 2.6 million was mainly attributable to additional expense for performance-based awards granted in fiscal 2015 and our reversal of $ 2.3 million of cumulative prior period expense recorded in fiscal 2014 for certain performance-based restricted stock grants that were deemed not probable to vest prior to their expiration . the reversal of expense recorded in fiscal 2014 did not recur in 2015. we also experienced an increase in self-insured health care costs of $ 1.8 million in fiscal 2015 when compared to last year . costs related to our self-insured health care programs are subject to a significant degree of volatility . in fiscal 2015 , pre-opening costs included in selling , general and administrative expenses were $ 1.2 million , or 0.1 % as a percentage of sales , compared to $ 2.1 million , or 0.2 % as a percentage of sales , for fiscal 2014. we opened 20 stores during fiscal 2015 at an average cost of $ 60,000 compared to 31 stores last year at an average cost of $ 68,000. pre-opening costs , such as advertising , payroll and supplies , incurred prior to the opening of a new store are charged to expense in the period in which they are incurred . the total amount of pre-opening expense incurred will vary by store depending on the specific market and the promotional activities involved . the portion of store closing costs and non-cash asset impairment charges included in selling , general and administrative expenses for fiscal 2015 was $ 2.8 million or 0.3 % as a percentage of sales . these costs related to the closing of 15 stores , non-cash asset impairment of certain underperforming stores and acceleration of expenses associated with management 's determination to close certain underperforming stores in future periods . the portion of store closing costs and non-cash asset impairment charges included in selling , general and administrative expenses for fiscal 2014 was $ 1.5 million or 0.2 % as a percentage of sales . these costs related to the closing of seven stores , non-cash asset impairment of certain underperforming stores and acceleration of expenses associated with management 's determination to close certain underperforming stores in future periods . the timing and actual amount of expense recorded in closing a store can vary significantly depending , in part , on the period in which 26 management commits to a closing plan , the remaining basis in the fixed assets to be disposed of at closing and the amount of any lease buyout . income taxes the effective income tax rate for fiscal 2015 was 38.1 % compared to 38.8 % for fiscal 2014. our provision for income tax expense is based on the current estimate of our annual effective tax rate . liquidity and capital resources our sources and uses of cash are summarized as follows : replace_table_token_8_th we anticipate that our existing cash and cash flows from operations will be sufficient to fund our planned store expansion along with other capital expenditures , working capital needs , potential dividend payments , potential share repurchases under our share repurchase program , and various other commitments and obligations , as they arise , for at least the next 12 months . cash flow - operating activities our net cash provided by operating activities was $ 63.8 million , $ 58.6 million and $ 57.7 million in fiscal years 2016 , 2015 and 2014 , respectively . these amounts reflect our income from operations adjusted for non-cash items and working capital changes . working capital was $ 265.5 million , $ 282.1 million and $ 276.0 million at january 28 , 2017 , january 30 , 2016 and january 31 , 2015 , respectively . working capital decreased $ 16.6 million at january 28 , 2017 compared to january 30 , 2016 primarily due to a $ 13.2 million decrease in merchandise inventories . the current ratio was 4.1 , 4.2 and 4.3 at january 28 , 2017 , january 30 , 2016 and january 31 , 2015 , respectively . cash flow - investing activities our cash outflows for investing activities were primarily for capital expenditures . during fiscal 2016 , we expended $ 21.8 million for the purchase of property and equipment , of which $ 16.4 million was for the construction and fixturing of new stores , remodeling and relocations . during fiscal 2015 , we expended $ 27.9 million for the purchase of property and equipment , of which $ 18.2 million was for the construction and fixturing of new stores , remodeling and relocations . during fiscal 2014 , we expended $ 33.5 million for the purchase of property and equipment , of which $ 27.2 million was for the construction of new stores , remodeling and relocations . the remaining capital expenditures in all periods were for continued investments in technology and normal asset replacement activities . cash flow - financing activities cash outflows for financing activities have represented cash dividend payments and share repurchases . shares of our common stock can be either acquired as part of a publicly announced repurchase program or withheld by us in connection with employee payroll tax withholding upon the vesting of restricted stock awards . our cash inflows 27 from financing activities have represented proceeds from the issuance of shares as a result of stock option exercises and purchases under our employee stock purchase plan . during fiscal 2016 , net story_separator_special_tag million , primarily due to an additional $ 4.8 million in incremental expense in fiscal 2015 related to the operation of new stores , net of expense reductions for stores that have closed since the beginning of fiscal 2014. incentive compensation , inclusive of stock-based compensation , increased $ 4.4 million in fiscal 2015 compared to fiscal 2014. of this increase , $ 1.8 million was attributable to higher financial performance against the defined metrics associated with our performance-based cash compensation . the remaining increase of $ 2.6 million was mainly attributable to additional expense for performance-based awards granted in fiscal 2015 and our reversal of $ 2.3 million of cumulative prior period expense recorded in fiscal 2014 for certain performance-based restricted stock grants that were deemed not probable to vest prior to their expiration . the reversal of expense recorded in fiscal 2014 did not recur in 2015. we also experienced an increase in self-insured health care costs of $ 1.8 million in fiscal 2015 when compared to last year . costs related to our self-insured health care programs are subject to a significant degree of volatility . in fiscal 2015 , pre-opening costs included in selling , general and administrative expenses were $ 1.2 million , or 0.1 % as a percentage of sales , compared to $ 2.1 million , or 0.2 % as a percentage of sales , for fiscal 2014. we opened 20 stores during fiscal 2015 at an average cost of $ 60,000 compared to 31 stores last year at an average cost of $ 68,000. pre-opening costs , such as advertising , payroll and supplies , incurred prior to the opening of a new store are charged to expense in the period in which they are incurred . the total amount of pre-opening expense incurred will vary by store depending on the specific market and the promotional activities involved . the portion of store closing costs and non-cash asset impairment charges included in selling , general and administrative expenses for fiscal 2015 was $ 2.8 million or 0.3 % as a percentage of sales . these costs related to the closing of 15 stores , non-cash asset impairment of certain underperforming stores and acceleration of expenses associated with management 's determination to close certain underperforming stores in future periods . the portion of store closing costs and non-cash asset impairment charges included in selling , general and administrative expenses for fiscal 2014 was $ 1.5 million or 0.2 % as a percentage of sales . these costs related to the closing of seven stores , non-cash asset impairment of certain underperforming stores and acceleration of expenses associated with management 's determination to close certain underperforming stores in future periods . the timing and actual amount of expense recorded in closing a store can vary significantly depending , in part , on the period in which 26 management commits to a closing plan , the remaining basis in the fixed assets to be disposed of at closing and the amount of any lease buyout . income taxes the effective income tax rate for fiscal 2015 was 38.1 % compared to 38.8 % for fiscal 2014. our provision for income tax expense is based on the current estimate of our annual effective tax rate . liquidity and capital resources our sources and uses of cash are summarized as follows : replace_table_token_8_th we anticipate that our existing cash and cash flows from operations will be sufficient to fund our planned store expansion along with other capital expenditures , working capital needs , potential dividend payments , potential share repurchases under our share repurchase program , and various other commitments and obligations , as they arise , for at least the next 12 months . cash flow - operating activities our net cash provided by operating activities was $ 63.8 million , $ 58.6 million and $ 57.7 million in fiscal years 2016 , 2015 and 2014 , respectively . these amounts reflect our income from operations adjusted for non-cash items and working capital changes . working capital was $ 265.5 million , $ 282.1 million and $ 276.0 million at january 28 , 2017 , january 30 , 2016 and january 31 , 2015 , respectively . working capital decreased $ 16.6 million at january 28 , 2017 compared to january 30 , 2016 primarily due to a $ 13.2 million decrease in merchandise inventories . the current ratio was 4.1 , 4.2 and 4.3 at january 28 , 2017 , january 30 , 2016 and january 31 , 2015 , respectively . cash flow - investing activities our cash outflows for investing activities were primarily for capital expenditures . during fiscal 2016 , we expended $ 21.8 million for the purchase of property and equipment , of which $ 16.4 million was for the construction and fixturing of new stores , remodeling and relocations . during fiscal 2015 , we expended $ 27.9 million for the purchase of property and equipment , of which $ 18.2 million was for the construction and fixturing of new stores , remodeling and relocations . during fiscal 2014 , we expended $ 33.5 million for the purchase of property and equipment , of which $ 27.2 million was for the construction of new stores , remodeling and relocations . the remaining capital expenditures in all periods were for continued investments in technology and normal asset replacement activities . cash flow - financing activities cash outflows for financing activities have represented cash dividend payments and share repurchases . shares of our common stock can be either acquired as part of a publicly announced repurchase program or withheld by us in connection with employee payroll tax withholding upon the vesting of restricted stock awards . our cash inflows 27 from financing activities have represented proceeds from the issuance of shares as a result of stock option exercises and purchases under our employee stock purchase plan . during fiscal 2016 , net
| gross profit gross profit decreased $ 1.3 million to $ 289.2 million in fiscal 2016. our gross profit margin in fiscal 2016 decreased to 28.9 % from 29.5 % in the prior fiscal year . our merchandise margin decreased 0.6 % while buying , distribution and occupancy costs , as a percentage of sales , remained flat compared to prior year . our merchandise margin decreased primarily due to an increase in expenses related to our multi-channel sales initiatives . selling , general and administrative expenses selling , general and administrative expenses increased $ 7.4 million to $ 251.3 million in fiscal 2016 compared to $ 243.9 million in the prior year . as a percentage of sales , these expenses increased to 25.1 % in fiscal 2016 from 24.8 % in fiscal 2015. significant changes in expense between the periods included the following : · on an overall basis , the net change in selling , general and administrative expenses was primarily driven by increases in non-cash impairments and fixed asset write-offs , wages , other employee benefits , advertising and depreciation expense , partially offset by reductions in incentive compensation and employee health care expense in addition to an increase in insurance proceeds received in fiscal 2016 compared to the prior year . · we incurred additional selling expense of $ 2.3 million during fiscal 2016 compared to the prior year related to the operation of 39 new stores opened since the beginning of fiscal 2015 , net of expense reductions associated with the closure of 24 stores since the beginning of the same period . · stock-based compensation expense increased $ 120,000 in fiscal 2016 compared to fiscal 2015. this was primarily attributable to the expense related to performance and service-based stock awards granted in fiscal 2016 , partially offset by management adjustments related to the timing and probability of the vesting of performance-based stock awards and the net impact of the related adjustments
| 15,770 |
net income attributable to class a common stock for the year ended december 31 , 2019 was reduced by $ 2.8 million related to the non-cash deemed dividend as a result of a warrant exchange for class a common stock . magnolia also recognized net income of $ 85.0 million , which includes noncontrolling interest of $ 34.8 million related to the class b common stock held by certain affiliates of enervest for the year ended december 31 , 2019 . in july 2019 , the company exchanged all of its warrants for an aggregate of 9.2 million shares of class a common stock . for more information , see note 13 - stockholders ' equity in the company 's consolidated financial statements included in this annual report on form 10-k. on august 5 , 2019 , the company 's board of directors authorized a share repurchase program of up to 10 million shares . the program does not require purchases to be made within a particular timeframe . during the year ended december 31 , 2019 , the company repurchased 1.0 million shares at a weighted average price of $ 10.28 , for a total cost of approximately $ 10.3 million . 31 on december 18 , 2019 , outside of the share repurchase program , magnolia llc repurchased and subsequently canceled 6.0 million magnolia llc units with an equal number of shares of corresponding class b common stock for $ 69.1 million of cash consideration ( the “ class b common stock repurchase ” ) . as a result of the class b common stock repurchase , the company 's ownership in magnolia llc increased from 64.6 % to 66.1 % and the karnes county contributors ' ownership of magnolia llc decreased from 35.4 % to 33.9 % . story_separator_special_tag style= '' line-height:120 % ; text-align : justify ; text-indent:48px ; font-size:10pt ; '' > as a result of the factors listed above , the combined historical results of operations and period-to-period comparisons of these results and certain financial data may not be comparable or indicative of future results . 32 year ended december 31 , 2019 compared to the year ended december 31 , 2018 oil , natural gas and natural gas liquids sales revenues . the following table provides the components of magnolia 's revenues for the periods indicated , as well as each period 's respective average prices and production volumes . this table shows production on a boe basis in which natural gas is converted to an equivalent barrel of oil based on a ratio of six mcf to one barrel . this ratio may not be reflective of the current price ratio between the two products . replace_table_token_7_th oil revenues were 82 % , 79 % , and 89 % of the company 's total revenues for the 2019 successor period , the 2018 successor period , and the 2018 predecessor period , respectively . oil production was 53 % , 55 % , and 71 % of total production volume for the 2019 successor period , the 2018 successor period , and the 2018 predecessor period , respectively . the 2019 successor period oil revenues were $ 30.8 million higher than the combined 2018 successor period and 2018 predecessor period due to 19 % higher production partially offset by a 12 % decrease in average prices . the 2,034 mbbls higher volumes in the 2019 successor period compared to the combined 2018 successor period and 2018 predecessor period are attributable to the inclusion of the giddings assets , recent acquisitions , and continued development . natural gas revenues were 10 % , 10 % , and 5 % of the company 's total revenues for the 2019 successor period , the 2018 successor period , and the 2018 predecessor period , respectively . natural gas production was 28 % , 25 % , and 16 % of total production volume for the 2019 successor period , the 2018 successor period , and the 2018 predecessor period , respectively . 2019 successor period natural gas revenues were $ 28.6 million higher than the combined 2018 successor period and 2018 predecessor period due to 19,541 mmcf , or 90 % , higher natural gas production primarily attributable to the successor 's inclusion of the giddings assets and the acquisition of the highlander well , partially offset by a 24 % decrease in average prices . natural gas liquids ( “ ngls ” ) revenues were 8 % , 11 % , and 6 % of the company 's total revenues for the 2019 successor period , the 2018 successor period , and the 2018 predecessor period , respectively . ngl production was 19 % , 20 % , and 14 % of total production volume for the 2019 successor period , the 2018 successor period , and the 2018 predecessor period , respectively . 2019 successor period natural gas liquids revenues were $ 5.7 million lower than the combined 2018 successor period and 2018 predecessor period due to a 33 41 % decrease in average prices partially offset by 57 % , or 1,689 mbbls , higher production . the higher production volumes are primarily attributable to the successor 's inclusion of the giddings assets , recent acquisitions , and continued development . operating expenses and other income ( expense ) . the following table summarizes the company 's operating expenses and other income ( expense ) for the periods indicated . replace_table_token_8_th lease operating expenses are the costs incurred in the operation of producing properties , including expenses for utilities , direct labor , water disposal , workover rigs , workover expenses , materials , and supplies . the 2019 successor period lease operating expenses were $ 39.5 million higher than the combined 2018 successor period and 2018 predecessor period primarily due to the inclusion of the giddings assets , recent acquisitions , and continued development . story_separator_special_tag the higher per boe cost in the 2019 successor period compared to the combined 2018 successor period and 2018 predecessor period was primarily due to higher fixed costs per boe in the giddings area . gathering , transportation , and processing costs are costs incurred to deliver oil , natural gas , and ngls to the market . cost levels of these expenses can vary based on the volume of oil , natural gas , and ngls produced as well as the cost of commodity processing . the 2019 successor period gathering , transportation , and processing costs were $ 7.6 million higher than the combined 2018 successor period and 2018 predecessor period primarily due to the inclusion of the giddings assets as the giddings assets produce more gas than the karnes county assets and require more gathering , transportation , and processing than the karnes county assets . the lower cost per boe in the 2019 successor period compared to the combined 2018 successor period and 2018 predecessor period was primarily attributable to the adoption of the new revenue recognition requirements that were not retroactively applied to the 2018 predecessor period . 34 taxes other than income include production and ad valorem taxes . these taxes are based on rates primarily established by state and local taxing authorities . production taxes are based on the market value of production . ad valorem taxes are based on the fair market value of the mineral interests or business assets . the 2019 successor period taxes other than income were $ 6.8 million higher than the combined 2018 successor period and 2018 predecessor period primarily due to an increase in revenues . the lower costs per boe in the 2019 successor period compared to the combined 2018 successor period and 2018 predecessor period were primarily due to the inclusion of the giddings assets as the giddings assets incur lower production taxes . exploration costs are geological and geophysical costs that include seismic surveying costs , costs of unsuccessful exploratory dry wells , costs of expired or abandoned leases , and delay rentals . the 2019 successor period exploration costs were $ 0.4 million higher than the combined 2018 successor period and 2018 predecessor period due to an increase in seismic surveying costs , but $ 0.19 lower on a boe basis as a result of higher volumes attributable to the inclusion of the giddings assets . asset retirement obligation accretion during the 2019 successor period was higher than the combined 2018 successor and 2018 predecessor period . the 2019 successor period asset retirement obligation accretion was driven by the inclusion of the giddings assets . this resulted in higher accretion expense in the 2019 successor period of $ 0.23 per boe . depreciation , depletion and amortization ( “ dd & a ” ) during the 2019 successor period was $ 207.8 million higher than the combined 2018 successor period and 2018 predecessor period . the 2019 successor period dd & a and dd & a rate per boe were higher than the combined 2018 successor period and 2018 predecessor period mostly due to magnolia 's higher property , plant , and equipment balances recorded as a result of the new basis of accounting related to the business combination , recent acquisitions , and decrease in proved reserves . the predecessor 's reserves were based on a five-year development plan , whereas the vast majority of the successor 's proved undeveloped reserves are planned to be developed within one year . in connection with the close of the business combination , the company recorded an estimated cost of $ 44.4 million for a non-compete agreement entered into with certain affiliates of enervest on the closing date as “ amortization of intangible assets ” on the company 's consolidated balance sheet . the 2019 successor period amortization of intangible assets was $ 8.5 million higher than the 2018 successor period due to twelve months of amortization in the 2019 successor period as compared to approximately five months of amortization in the 2018 successor period . these intangible assets have a definite life and are subject to amortization utilizing the straight-line method over their economic life , currently estimated to be two and one half to four years . there was no amortization of intangible assets in the 2018 predecessor period . general and administrative ( “ g & a ” ) expenses during the 2019 successor period were $ 27.9 million higher than the combined 2018 successor period and 2018 predecessor period primarily due to the successor incurring certain additional g & a expenses related to fees payable to enervest operating l.l.c . ( “ evoc ” ) under the services agreement as well as increased salaries and wages and stock-based compensation costs . transaction related costs are costs incurred related to the execution of the business combination and harvest acquisition , including legal fees , advisory fees , consulting fees , accounting fees , employee placement fees , and other transaction and facilitation costs . the 2019 successor period transaction related costs were $ 24.2 million lower than the 2018 successor period , as the majority of the business combination costs were incurred during the 2018 successor period . interest expense incurred in the 2019 successor period and 2018 successor period is due to interest and amortization of debt issuance costs related to the company 's 6.0 % senior notes due 2026 ( the “ 2026 senior notes ” ) and the company 's secured reserve-based revolving credit facility ( the “ rbl facility ” ) . the 2019 successor period interest expense incurred was higher than the 2018 successor period due to twelve months of expense in the 2019 successor period as compared to approximately five months of expense incurred in the 2018 successor period . loss on derivatives , net was $ 18.1 million for the 2018 predecessor period . magnolia has not engaged in any hedging activities during the 2019 successor period or the 2018 successor period with respect to the commodity price risk to which the company is exposed .
| for more information , please see note 1 - description of business and basis of presentation in the notes to the consolidated and combined financial statements in this annual report on form 10-k. these allocations may not be indicative of the cost of future operations or the amount of future allocations ; the predecessor completed the acquisition of certain assets from gulftex energy iii , l.p. and gulftex energy iv , l.p. on march 1 , 2018 during the predecessor period , and accordingly the results of operations of the predecessor reflect the impact of the assets acquired in that acquisition only from their respective acquisition date ; as a corporation , the company is subject to u.s. federal income taxes at a statutory rate of 21 % of pretax earnings whereas the karnes county contributors were treated as partnerships for income tax purposes . as a result , items of income , expense , gains , and losses flowed through to the owners of the karnes county contributors and were taxed at the owner level . accordingly , no u.s. tax provision for federal income taxes is included in the financial statements of the predecessor ; on august 31 , 2018 , the company acquired substantially all of the south texas assets of harvest oil & gas corporation ( the “ harvest acquisition ” ) for approximately $ 133.3 million in cash and 4.2 million shares of the company 's class a common stock . the harvest acquisition added an undivided working interest across a portion of the karnes county assets and all of the giddings assets ; on february 5 , 2019 , magnolia operating formed a joint venture , highlander oil & gas holdings llc , to complete the acquisition of a 72 % working interest in the eocene-tuscaloosa zone , ultra deep structure gas well located in st. martin parish , louisiana ( the “ highlander well ” ) ; and the financial results for the 2019 successor period and the 2018 successor period reflect the adoption of asu no . 2014-09 , revenue from contracts with customers , which the company adopted on december 31 , 2018 and applied to
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we now recognize revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services . under the new revenue recognition standard , we apply the following five step approach : ( 1 ) identify the contract with a customer , ( 2 ) identify the performance obligations in the contract , ( 3 ) determine the transaction price , ( 4 ) allocate the transaction price to the performance obligations in the contract , and ( 5 ) recognize revenue when a performance obligation is satisfied . we enter into contracts that may include various combinations of products and services that are capable of being distinct and accounted for as separate performance obligations . to date , the majority of the revenue has been generated by sales associated with storage and networking products . revenue from services has been insignificant . performance obligations associated with product sales transactions are generally satisfied when control passes to customers upon shipment . accordingly , product revenue is recognized at a point in time when control of the asset is transferred to the customer . we recognize revenue when we satisfy a performance obligation by transferring control of a product to a customer in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services . for product revenue , the performance obligation is deemed to be the delivery of the product and therefore , the revenue is generally recognized upon shipment to customers , net of accruals for estimated sales returns and rebates . these estimates are based on historical returns , analysis of credit memo data and other known factors . actual returns could differ from these estimates . we account for rebates by recording reductions to revenue for rebates in the same period that the related revenue is recorded . the amount of these reductions is based upon the terms agreed to with the customer . some of our sales are made to distributors under agreements allowing for price protection , price discounts and limited rights of stock rotation on products unsold by the distributors . control passes to the distributor upon shipment , and terms and payment by our distributors is not contingent on resale of the product . product revenue on sales made to distributors with price protection and stock rotation rights is recognized upon shipment to distributors , with an accrual for the variable consideration aspect of sales to distributors , estimated based on historical experience , including estimates for price discounts , price protection , rebates , and stock rotation programs . actual variable consideration could differ from these estimates . a portion of our net revenue is derived from sales through third-party logistics providers who maintain warehouses in close proximity to our customer 's facilities . revenue from sales through these third-party logistics providers is not recognized until the product is pulled from stock by the customer . our products are generally subject to warranty , which provides for the estimated future costs of replacement upon shipment of the product . our products carry a standard one-year warranty , with certain exceptions in which the warranty period can extend to more than one year based on contractual agreements . the warranty accrual is estimated primarily based on historical claims compared to historical revenues and assumes that we will have to replace products subject to a claim . from time to time , we become aware of specific warranty situations , and we record specific accruals to cover these exposures . warranty expenses were not material for the periods presented . accounting for income taxes . we estimate our income taxes in each of the jurisdictions in which we operate . this process involves estimating our actual tax exposure together with assessing temporary differences resulting from the differing treatment of certain items for tax return and financial statement purposes . these differences result in deferred tax assets and liabilities , which are included in our consolidated balance sheets . we recognize income taxes using an asset and liability approach . this approach requires the recognition of taxes payable or refundable for the current year , and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns . the measurement of current and deferred taxes is based on provisions of the enacted tax law and the effects of future changes in tax laws or rates are not anticipated . evaluating the need for an amount of a valuation allowance for deferred tax assets often requires judgment and analysis of all the positive and negative evidence available , including cumulative losses in recent years and projected future taxable income , to determine whether all or some portion of the deferred tax assets will not be realized . using available evidence and judgment , we establish a valuation allowance for deferred tax assets , when it is determined that it is more likely than not that they will not be realized . valuation allowances have been provided primarily against the u.s. research and development credits . valuation allowances have also been provided against certain acquired operating losses and the deferred tax assets of foreign subsidiaries . a change in the assessment of the realization of deferred tax assets may materially impact our tax provision in the period in which a change of assessment occurs . 33 as a multinational corporation , we conduct our business in many countries and are subject to taxation in many jurisdictions . the taxation of our business is subject to the application of various and sometimes conflicting tax laws and regulations as well as multinational tax conventions . story_separator_special_tag our effective tax rate is highly dependent upon the geographic distribution of our worldwide earnings or losses , the tax regulations and tax holidays in each geographic region , the availability of tax credits and carryforwards , and the effectiveness of our tax planning strategies . the application of tax laws and regulations is subject to legal and factual interpretation , judgment and uncertainty . tax laws themselves are subject to change as a result of changes in fiscal policy , changes in legislation , and the evolution of regulations and court rulings . consequently , taxing authorities may impose tax assessments or judgments against us that could materially impact our tax liability and or our effective income tax rate . we are subject to income tax audits by the respective tax authorities in all of the jurisdictions in which we operate . we recognize the effect of income tax positions only if these positions are more likely than not of being sustained . recognized income tax positions are measured at the largest amount that is more than 50 % likely of being realized . changes in recognition or measurement are reflected in the period in which the change in judgment occurs . we record interest and penalties related to unrecognized tax benefits in income tax expense . the calculation of our tax liabilities involves the inherent uncertainty associated with the application of gaap and complex tax laws . we believe we have adequately provided for in our financial statements additional taxes that we estimate may be required to be paid as a result of such examinations . while we believe that we have adequately provided for all tax positions , amounts asserted by tax authorities could be greater or less than our accrued position . these tax liabilities , including the interest and penalties , are released pursuant to a settlement with tax authorities , completion of audit or expiration of various statutes of limitation . the material jurisdictions in which we may be subject to potential examination by tax authorities throughout the world include china , israel , singapore , switzerland and the united states . the recognition and measurement of current taxes payable or refundable , and deferred tax assets and liabilities require that we make certain estimates and judgments . changes to these estimates or a change in judgment may have a material impact on our tax provision in a future period . long-lived assets and intangible assets . we assess the impairment of long-lived assets and intangible assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable . circumstances which could trigger a review include , but are not limited to the following : significant decreases in the market price of the asset ; significant adverse changes in the business climate or legal factors ; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset ; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset ; and current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life . whenever events or changes in circumstances suggest that the carrying amount of long-lived assets and intangible assets may not be recoverable , we estimate the future cash flows expected to be generated by the asset from its use or eventual disposition . if the sum of the expected future cash flows is less than the carrying amount of those assets , we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets . significant management judgment is required in the forecasts of future operating results that are used in the discounted cash flow method of valuation . these significant judgments may include future expected revenue , expenses , capital expenditures and other costs , and discount rates . goodwill . we record goodwill when the consideration paid for a business acquisition exceeds the fair value of net tangible and intangible assets acquired . we review goodwill for impairment annually on the last business day of our fiscal fourth quarter , and more frequently , if an event occurs or circumstances change that indicate the fair value of the reporting unit may be below its carrying amount . we have identified that our business operates as a single operating segment which can further be divided into two components ; storage and networking . management concluded that goodwill is recoverable from these two components working jointly due to a fact pattern demonstrating significant sharing of assets , corporate resources , and benefits from common research and development . the two components also exhibit similar economic characteristics . accordingly , management concluded that these two components should be aggregated into a single reporting unit for purposes of testing goodwill impairment . as part of our restructuring announced in november 2016 , our former smart networked devices and solutions product group was changed to networking and connectivity . as part of our restructuring initiated in july 2018 , our former networking and connectivity product group was combined and named networking . 34 when testing goodwill for impairment , we 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 value or we may determine to proceed directly to the quantitative impairment test . factors we consider important in the qualitative assessment which could trigger a goodwill impairment review include ; significant underperformance relative to historical or projected future operating results ; significant changes in the manner of our use of the acquired assets or the strategy for our overall business ; significant negative industry or economic trends ; a significant decline in our stock price for a sustained period ; and a significant change in our market capitalization relative to our net book value .
| as part of this restructuring plan , revenue from our former networking and connectivity product groups were combined into one group named networking . during fiscal 2019 , we recorded restructuring and other related charges of $ 76.8 million . see “ note 4 - restructuring and other related charges ” in the notes to the consolidated financial statements for further information . in november 2016 , we announced a restructuring plan intended to refocus our research and development , increase operational efficiency and improve profitability . in connection with this restructuring plan , we divested three businesses during fiscal 2018. during the year ended february 3 , 2018 , we received cash proceeds of $ 165.9 million and recognized a gain on sale of $ 88.4 million from the sale of our multimedia , lte thin-modem , and broadband businesses . these businesses are classified as discontinued operations for all periods presented in our accompanying consolidated financial statements . see “ note 4 - restructuring and other related charges ” and “ note 6 - discontinued operations ” in the notes to the consolidated financial statements for further information . unless noted otherwise , our discussion under part ii , item 7 , management 's discussion and analysis of financial condition and results of operations refers to our continuing operations . capital return program . we remain committed to delivering shareholder value through our share repurchase and dividend programs . on october 16 , 2018 , we announced that our board of directors authorized a $ 700 million addition to the balance of our existing share repurchase plan . under the program authorized by our board of directors , we may repurchase shares in the open-market or through privately negotiated transactions . the extent to which we repurchase our shares and the timing of such repurchases will depend upon market conditions and other corporate considerations , as determined by our management team . the repurchase program may be suspended or discontinued at any time . we returned $ 252.1 million to stockholders in fiscal 2019 , including $ 104.0 million through repurchases of common
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we expect to report initial clinical data from this portion of the trial by the end of 2021. other product candidates we are currently progressing two gene therapy product development candidates for the treatment of lysosomal storage diseases : hmi-203 for the treatment of mucopolysaccharidosis type ii ( mps ii ) , or hunter syndrome , and hmi-202 for the treatment of metachromatic leukodystrophy , or mld . we are in later-stage ind-enabling studies with hmi-203 , an in vivo gene therapy product development candidate for the treatment of hunter syndrome . hmi-203 is a potential one-time aavhsc treatment designed to deliver functional copies of the ids gene to multiple target organs , including those in the pns and cns , following a single i.v . administration . in preclinical studies , a single i.v . administration of hmi-203 resulted in robust biodistribution and human i2s , or hi2s , enzyme expression , leading to a significant reduction in heparin sulfate glycosaminoglycans , or gags , levels in the cerebrospinal fluid , brain , liver , heart , spleen , lung and kidney , compared with the vehicle-treated disease model . hmi-203 also led to significant changes in skeletal deformities compared with vehicle . we expect to initiate a phase 1/2 dose-escalation clinical trial with hmi-203 in 2021 . 91 we completed ind-enabling studies with hmi-202 , a gene therapy cns product development candidate for the treatment of mld . we have generated preclinical data that demonstrate s that a single i.v . administration of hmi-202 crossed the blood-brain-barrier and blood-nerve-barrier and led to durable reduction of sulfatides in all brain regions of the disease model . we are applying the learnings from the ind-enabling studies to further optimize an hmi-202 vector that may lead to a better therapeutic profile . we are in later-stage ind-enabling studies with hmi-103 , our lead gene editing product development candidate for the treatment of pku in pediatric patients . we have generated in vivo preclinical data demonstrating phe reduction following a single i.v . administration of the murine surrogate of hmi-103 in the pku disease model out to 43 weeks ( end of study ) . in addition , using quantitative molecular methods , we have demonstrated achievement of gene integration efficiencies in a humanized murine liver model that corresponded with phe correction in the pku murine model . these findings were peer-reviewed and published in plos one in may 2020. we expect to initiate a phase 1/2 dose-escalation clinical trial with hmi-103 in 2021. we also plan to name a development candidate in a new therapeutic area in 2021 , demonstrating the broader capability of our aavhsc platform , which we believe may allow us to target diseases with larger patient populations in the future . on november 9 , 2020 , we entered into a stock purchase agreement , or the stock purchase agreement , with pfizer inc. , or pfizer , pursuant to which pfizer purchased 5,000,000 shares of our common stock through a private placement transaction at a purchase price of $ 12.00 per share , for an aggregate purchase price of $ 60.0 million . for additional information , see “ liquidity and capital resources. ” on february 26 , 2021 , we received notice from novartis institutes of biomedical research , inc. , or novartis , that they had elected to terminate the collaboration and license agreement with respect to the ophthalmic target , which was the only remaining target under the agreement . accordingly , the notice served as notice of novartis ' termination of the agreement in its entirety , with an effective date of august 26 , 2021 , which is six months from the date of the notice . novartis has agreed to work with us to effect the orderly wind down of activities in accordance with the agreement . as a result of this notice , we have regained worldwide exclusive rights from novartis to research , develop , manufacture and commercialize our proprietary nuclease-free gene editing technology platform for the ophthalmic target . we plan to continue to advance the program toward naming a development candidate . the companies believe that results of studies conducted under the agreement provide early proof-of-principle and support a nuclease-independent approach to editing of relevant cell types in the eye after sub-retinal injection , and are the subject of a planned presentation at an upcoming scientific meeting . see note 15 to our consolidated financial statements included elsewhere in this annual report on form 10-k for additional information regarding the novartis collaboration and license agreement . we have fully integrated process development and good manufacturing practice , or gmp , manufacturing capabilities that support the full breadth and flexibility of our aavhsc capsid library . our process development expertise covers all gene therapy and gene editing development functions and incorporates deep characterization and understanding of vector design and their consequences . our manufacturing process is a versatile system that rapidly delivers high quality vector at scale . the manufacturing capacity within our 25,000 square foot gmp manufacturing facility includes multi-suite and multi-product capabilities to support our clinical development programs in both gene therapy and gene editing and we are now producing all of the clinical material for the phenix trial in this facility . our plug and play process and manufacturing platform is a commercial manufacturing process that has successfully produced several of our product candidates . we are currently operating three 500-liter bioreactors in our internal manufacturing facility and have successfully produced gmp material at the 500-liter scale for multiple pipeline candidates . additionally , we have successfully executed our manufacturing platform with multiple product candidates at the 2,000-liter bioreactor scale . our management team has a successful track record of discovering , developing and commercializing therapeutics with a particular focus on rare diseases . story_separator_special_tag we have a robust intellectual property portfolio with issued composition of matter patents in the united states for our family of 15 aavhscs and we believe the breadth and depth of our intellectual property is a strategic asset that has the potential to provide us with a significant competitive advantage . we continue to build on our intellectual property estate through our ongoing product and platform development efforts . since our inception in 2015 , we have raised approximately $ 539 million in aggregate net proceeds through our initial public offering , or ipo , in april 2018 , a follow-on public offering of common stock in april 2019 , proceeds from the sale of common stock under an “ at-the-market ” sales agreement , equity investments and preferred stock financings . included in our net proceeds is $ 50.0 million from a former collaboration partner , comprised of an up-front payment of $ 35.0 million and a $ 15.0 million equity investment and a $ 60.0 million equity investment from pfizer inc. , or pfizer , through a private placement transaction . we will require additional capital in order to advance hmi-102 and our other product candidates through clinical development and commercialization . we believe that our compelling preclinical data , positive clinical data with hmi-102 , 92 scientific expertise , product development strategy , manufacturing capabilities , and robust intellectual property position us as a leader in the development of genetic medicines . we were incorporated and commenced operations in 2015. since our incorporation , we have devoted substantially all of our resources to organizing and staffing our company , business planning , raising capital , developing our technology platform , advancing our lead product candidate , hmi-102 for the treatment of pku , through ind-enabling studies and into a phase 1/2 clinical trial , advancing hmi-103 , hmi-203 , and hmi-202 into ind-enabling studies , researching and identifying additional product candidates , developing and implementing manufacturing processes and internal manufacturing capabilities , building out our manufacturing and research and development space , enhancing our intellectual property portfolio , and providing general and administrative support for these operations . to date , we have financed our operations primarily through the sale of common stock , through the sale of preferred stock , and through funding from our collaboration partner . to date , we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the foreseeable future , if at all . we recognized $ 2.7 million and $ 1.7 million in collaboration revenue for the years ended december 31 , 2020 and 2019 , respectively . since inception , we have incurred significant operating losses . our net losses for the years ended december 31 , 2020 and 2019 were $ 128.7 million and $ 103.9 million , respectively . as of december 31 , 2020 , we had an accumulated deficit of $ 328.4 million . our total operating expenses were $ 133.0 million and $ 111.6 million for the years ended december 31 , 2020 and 2019 , respectively . we expect our operating expenses to continue to increase in connection with our ongoing development activities related to our product candidates . specifically , we anticipate that our expenses will increase due to costs associated with our phase 1/2 phenix clinical trial with hmi-102 , development activities including ind-enabling studies and clinical trials associated with our other product candidates , including hmi-103 , our gene editing product candidate for pku , hmi-203 , our gene therapy product candidate for hunter syndrome , hmi-202 , our gene therapy product candidate for mld , for which we are focusing on optimization of the vector , and research activities in additional therapeutic areas to expand our pipeline , hiring additional personnel in manufacturing , research , clinical and regulatory , quality and other functional areas , increased expenses incurred with contract manufacturing organizations , or cmos , to supply us with product for our clinical studies , costs to manufacture product for preclinical and clinical studies in our internal manufacturing facility and other costs including the maintenance and expansion of our intellectual property portfolio . in addition , we expect to continue to incur additional costs associated with operating as a public company . we have incurred significant capital expenditures for the buildout of a facility we have leased , including research and development labs , office space and manufacturing suites and the procurement of equipment and furniture for this facility and in support of our product development candidates and research initiatives . we expect to incur additional capital expenditures in support of our research and development activities and our manufacturing facility . because of the numerous risks and uncertainties associated with the development of our current and any future product candidates and our platform and technology and because the extent to which we may enter into collaborations with third parties for development of any of our product candidates is unknown , we are unable to predict the timing and amount of increased operating expenses and capital expenditures associated with completing the research and development of our product candidates . our future capital requirements will depend on many factors , including : the costs , timing , and results of our ongoing research and development efforts , including clinical trials , on hmi-102 ; the costs , timing , and results of our ongoing research and development efforts for hmi-103 , hmi-202 and hmi-203 , all of which are in ind-enabling studies ; the costs , timing , and results of our research and development efforts for current and future product candidates in our gene therapy and gene editing pipeline ; the costs and timing of process development and manufacturing scale-up activities , and the adequacy of supply of our product candidates for preclinical studies and clinical trials through cmos and internal manufacturing ; the costs and timing of capital expenditures for potential additional manufacturing capacity and related equipment and furniture ; the costs and timing of
| partially offsetting these increases was a $ 13.5 million decrease in research and development costs related to laboratory supplies and research materials for our early-stage research programs . general and administrative expenses general and administrative expenses for the year ended december 31 , 2020 were $ 32.6 million , compared to $ 22.2 million for the year ended december 31 , 2019. the increase of $ 10.4 million was due to an increase in employee-related 100 expenses of $ 5.2 million , which included $ 3.4 million of increased stock-based compensation expense , an increase in facility costs of $ 1.4 million , an increase in legal costs and other professional fees of $ 0.9 million , an increase in insurance and taxes of $ 0.8 million , an increase in software expense of $ 0 . 7 million , an increase in consulting expense of $ 0.6 million , an increase in recruiting fees of $ 0.4 million and an increase in market research of $ 0.4 million . interest income interest income for the year ended december 31 , 2020 was $ 1.6 million , compared to $ 6.0 million for the year ended december 31 , 2019. the decrease was the result of lower invested balances in cash , cash equivalents and short-term investments for the year ended december 31 , 2020 compared to the year ended december 31 , 2019 , as well as significantly lower yields on invested funds . net loss net loss for the year ended december 31 , 2020 was $ 128.7 million , compared to $ 103.9 million for the year ended december 31 , 2019. the increase in net loss was primarily due to the increases in research and development and general and administrative expenses discussed above . liquidity and capital resources since our inception , we have incurred significant operating losses . we expect to incur significant expenses and operating losses for the foreseeable future
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no cost of goods sold is associated with license revenues . we include outbound freight costs associated with shipping goods to customers as cost of goods sold ; however , we include the majority of outbound handling costs as a component of selling , general and administrative expenses . as a result , our gross profit may not be comparable to that of other companies that include outbound handling costs in their cost of goods sold . outbound handling costs include costs associated with preparing goods to ship to customers and certain costs to operate our distribution facilities . these costs were $ 46.1 million , $ 34.8 million and $ 26.1 million for the years ended december 31 , 2013 , 2012 and 2011 , respectively . our selling , general and administrative expenses consist of costs related to marketing , selling , product innovation and supply chain and corporate services . personnel costs are included in these categories based on the employees ' function . personnel costs include salaries , benefits , incentives and stock-based compensation related to our employees . our marketing costs are an important driver of our growth . marketing costs consist primarily of commercials , print ads , league , team , player and event sponsorships and depreciation expense specific to our in-store fixture program for our concept shops . selling costs consist primarily of costs relating to sales through our wholesale channel , commissions paid to third parties and the majority of our direct to consumer sales channel costs , including the cost of brand and factory house store leases . product innovation and supply chain costs include our apparel , footwear and accessories product innovation , sourcing and development costs , distribution facility operating costs , and costs relating to our hong kong and guangzhou , china offices which help support product development , manufacturing , quality assurance and sourcing efforts . corporate services primarily consist of corporate facility operating costs and company-wide administrative expenses . other expense , net consists of unrealized and realized gains and losses on our foreign currency derivative financial instruments and unrealized and realized gains and losses on adjustments that arise from fluctuations in foreign currency exchange rates relating to transactions generated by our international subsidiaries . results of operations the following table sets forth key components of our results of operations for the periods indicated , both in dollars and as a percentage of net revenues : replace_table_token_5_th 25 replace_table_token_6_th story_separator_special_tag well as higher personnel costs to support our growth in net revenues . as a percentage of net revenues , product innovation and supply chain costs increased to 9.0 % in 2013 from 8.6 % in 2012 . corporate services costs increased $ 45.3 million to $ 176.0 million in 2013 from $ 130.7 million in 2012 . this increase was primarily attributable to higher incentive compensation as well as higher corporate personnel costs necessary to support our growth . as a percentage of net revenues , corporate services costs increased to 7.5 % in 2013 from 7.1 % in 2012 . income from operations increase d $ 56.4 million , or 27.0 % , to $ 265.1 million in 2013 from $ 208.7 million in 2012 . income from operations as a percentage of net revenues remained unchanged at 11.4 % in 2013 and 2012 . interest expense , net decreased $ 2.3 million to $ 2.9 million in 2013 from $ 5.2 million in 2012 . this decrease was primarily due to the refinancing in december 2012 of the debt assumed in connection with the acquisition of our corporate headquarters . other expense , net increased $ 1.1 million to $ 1.2 million in 2013 from $ 0.1 million in 2012 . this increase was due to higher net losses in 2013 on the combined foreign currency exchange rate changes on transactions denominated in foreign currencies and our foreign currency derivative financial instruments as compared to 2012 . provision for income taxes increase d $ 24.0 million to $ 98.7 million in 2013 from $ 74.7 million in 2012 . our effective tax rate was 37.8 % in 2013 compared to 36.7 % in 2012 . our effective tax rate for 2013 was higher than the effective tax rate for 2012 primarily due to increased foreign investments driving a lower proportion of foreign taxable income , along with increased non-deductible expenses , including acquisition related expenses , in the current year . year ended december 31 , 2012 compared to year ended december 31 , 2011 net revenues increased $ 362.2 million , or 24.6 % , to $ 1,834.9 million in 2012 from $ 1,472.7 million in 2011 . net revenues by product category are summarized below : replace_table_token_8_th net sales increased $ 354.0 million , or 24.7 % , to $ 1,790.1 million in 2012 from $ 1,436.1 million in 2011 as noted in the table above . the increase in net sales primarily reflects : 27 $ 134.7 million , or 33.8 % , increase in direct to consumer sales , which includes 22 additional factory house stores , or a 27.5 % increase , since december 31 , 2011 ; and unit growth driven by increased distribution and new offerings in multiple product categories , most significantly in our training , hunting , running , baselayer and studio apparel product categories and running footwear category , including the launch of coldblack apparel , armour bra and under armour scent control products and our ua spine footwear ; and increased average selling prices due to a higher mix in the current year period of direct to consumer sales , along with increasing sales of our higher priced products such as fleece , our women 's ua studio line and ua spine footwear . license revenues increased $ 8.2 million , or 22.5 % , to $ 44.8 million in 2012 from $ 36.6 million in 2011 . this increase in license revenues was a result of increased distribution and continued unit volume growth by our licensees . story_separator_special_tag gross profit increased $ 166.5 million to $ 879.3 million in 2012 from $ 712.8 million in 2011. gross profit as a percentage of net revenues , or gross margin , decreased 50 basis points to 47.9 % in 2012 compared to 48.4 % in 2011. the decrease in gross margin percentage was primarily driven by the following : approximate 35 basis point decrease driven by sales mix . the sales mix impact was partially driven by increased sales of excess inventory through our factory house stores at lower prices , along with a larger proportion of footwear sales , primarily due to new 2012 running styles and growth within our cleated shoe sales ; and approximate 25 basis point decrease driven by higher inbound freight , partially due to supply chain challenges , required to meet customer demand . the above decreases were partially offset by the below increase : approximate 20 basis point increase driven primarily by lower north american apparel product input costs , partially offset by higher north american accessories and footwear input costs . selling , general and administrative expenses increased $ 120.5 million to $ 670.6 million in 2012 from $ 550.1 million in 2011. as a percentage of net revenues , selling , general and administrative expenses decreased to 36.5 % in 2012 from 37.3 % in 2011. these changes were primarily attributable to the following : marketing costs increased $ 37.5 million to $ 205.4 million in 2012 from $ 167.9 million in 2011 primarily due to increased marketing campaigns for key apparel and footwear launches in 2012 and sponsorship of collegiate and professional teams and athletes , including tottenham hotspur football club . as a percentage of net revenues , marketing costs decreased slightly to 11.2 % in 2012 from 11.4 % in 2011. selling costs increased $ 37.2 million to $ 176.0 million in 2012 from $ 138.8 million in 2011. this increase was primarily due to higher personnel and other costs incurred primarily for the continued expansion of our direct to consumer distribution channel . as a percentage of net revenues , selling costs increased slightly to 9.6 % in 2012 from 9.4 % in 2011. product innovation and supply chain costs increased $ 29.4 million to $ 158.5 million in 2012 from $ 129.1 million in 2011 primarily due to higher distribution facilities operating and personnel costs to support our growth in net revenues and higher personnel costs for the design and sourcing of our expanding apparel , footwear and accessory lines . as a percentage of net revenues , product innovation and supply chain costs decreased slightly to 8.6 % in 2012 from 8.8 % in 2011. corporate services costs increased $ 16.4 million to $ 130.7 million in 2012 from $ 114.3 million in 2011. this increase was primarily attributable to higher corporate personnel cost and information technology initiatives necessary to support our growth . as a percentage of net revenues , corporate services costs decreased to 7.1 % in 2012 from 7.7 % in 2011 primarily due to decreased corporate personnel costs as a percentage of net revenues in 2012. income from operations increased $ 45.9 million , or 28.2 % , to $ 208.7 million in 2012 from $ 162.8 million in 2011. income from operations as a percentage of net revenues increased to 11.4 % in 2012 from 11.1 % in 2011. this increase was a result of the items discussed above . interest expense , net increased $ 1.4 million to $ 5.2 million in 2012 from $ 3.8 million in 2011. this increase was primarily due to a full year of interest on the debt related to the acquisition of our corporate headquarters in 2012 as compared to 2011 . 28 other expense , net decreased $ 2.0 million to $ 0.1 million in 2012 from $ 2.1 million in 2011. this decrease was due to lower net losses in 2012 on the combined foreign currency exchange rate changes on transactions denominated in foreign currencies and our foreign currency derivative financial instruments as compared to 2011. provision for income taxes increased $ 14.8 million to $ 74.7 million in 2012 from $ 59.9 million in 2011. our effective tax rate was 36.7 % in 2012 compared to 38.2 % in 2011 , primarily due to state tax credits received in 2012. segment results of operations the net revenues and operating income ( loss ) associated with our segments are summarized in the following tables . the majority of corporate expenses within north america have not been allocated to other foreign countries and businesses . certain corporate services costs , previously included within north america , have been allocated to other foreign countries and businesses . prior period segment data has been recast within the tables to conform to current year presentation . year ended december 31 , 2013 compared to year ended december 31 , 2012 net revenues by segment are summarized below : replace_table_token_9_th net revenues in our north american operating segment increase d $ 467.0 million to $ 2,193.7 million in 2013 from $ 1,726.7 million in 2012 primarily due to the items discussed above in the consolidated results of operations . net revenues in other foreign countries and businesses increase d by $ 30.1 million to $ 138.3 million in 2013 from $ 108.2 million in 2012 primarily due to unit sales growth in our emea and asia operating segments and to distributors in our latin american operating segment . operating income ( loss ) by segment is summarized below : replace_table_token_10_th operating income in our north american operating segment increased $ 71.2 million to $ 271.3 million in 2013 from $ 200.1 million in 2012 primarily due to the items discussed above in the consolidated results of operations .
| the increase in gross margin percentage was primarily driven by the following : approximate 60 basis point increase driven by sales mix . the sales mix impact was primarily driven by decreased sales mix of excess inventory through our factory house outlet stores at lower prices , along with a lower proportion of north american wholesale footwear sales . we expect the north american wholesale footwear proportion of sales will increase during the first half of 2014 driving a negative sales mix impact ; and approximate 50 basis point increase driven by lower north american apparel and accessories product input costs . we expect north american wholesale product input costs will continue to positively impact year over year margins during the first half of 2014 , but on a more limited basis . 26 the above increases were partially offset by the below decrease : approximate 20 basis point decrease as a result of higher duty costs on certain products previously imported , which were identified and reserved for during the third quarter of 2013. we do not expect this negative impact will continue in 2014. selling , general and administrative expenses increase d $ 201.0 million to $ 871.6 million in 2013 from $ 670.6 million in 2012 . as a percentage of net revenues , selling , general and administrative expenses increase d to 37.3 % in 2013 from 36.5 % in 2012 . these changes were primarily attributable to the following : marketing costs increased $ 41.1 million to $ 246.5 million in 2013 from $ 205.4 million in 2012 primarily due to increased sponsorship of collegiate and professional teams and athletes and marketing to support our international expansion . as a percentage of net revenues , marketing costs decreased to 10.5 % in 2013 from 11.2 % in 2012 . selling costs increased $ 63.9 million to $ 239.9 million in 2013 from $ 176.0 million in 2012 . this increase was primarily due to higher personnel and other
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the company 's capital expenditure payments aggregated approximately $ 259 million for the three fiscal years ended november 1 , 2015 , which has significantly contributed to the company 's operating expenses . the company intends to continue to make the required investments to support the technological demands of its customers and position itself for future growth , and expects capital expenditure payments to be between $ 50 million and $ 75 million in fiscal 2016 . 18 the manufacture of photomasks for use in fabricating ics and other related products built using comparable photomask-based process technologies has been , and continues to be , capital intensive . the company 's integrated global manufacturing network , which consists of nine manufacturing sites , and its employees represent a significant portion of its fixed operating cost base . should sales volumes decrease as a result of a decrease in design releases from the company 's customers , the company may have excess or underutilized production capacity that could significantly impact operating margins , or result in write-offs from asset impairments . in the second quarter of fiscal 2015 the company announced that the mp mask joint venture would not be renewed after may 5 , 2016. the mp mask operating agreement provides that micron will make a payment to the company to purchase the company 's equity interest in mp mask based on the company 's ownership percentage of the net book value of mp mask at that time , which , as of september 3 , 2015 , was approximately $ 93 million . the company does not expect that it will incur a significant gain or loss on this transaction . concurrently , the company announced that it entered into supply and technology license agreements with micron . this supply agreement , which commences on may 6 , 2016 , with a one-year term subject to mutually agreeable renewals , provides that the company will be the majority outsource supplier of micron 's photomasks and related services . the technology license agreement commenced in march 2015 and continues through the earlier of one year from the termination of the initial technology license agreement , which will occur on may 5 , 2016 , or when micron certifies that it has transferred certain defined technology to the company . the company forevermore has the rights to use the technology obtained under these technology license agreements . in the first quarter of fiscal 2015 the company privately exchanged $ 57.5 million in aggregate principal amount of its 3.25 % convertible senior notes with a maturity date of april 1 , 2016 , for new 3.25 % convertible senior notes with an aggregate principal amount of $ 57.5 million with a maturity date of april 1 , 2019. the conversion rate of the new notes is the same as that of the exchanged notes , which were issued in march 2011 with a conversion rate of approximately 96 shares of common stock per $ 1,000 note principal , equivalent to a conversion price of $ 10.37 per share of common stock , and is subject to adjustment upon the occurrence of certain events , which are described in the indenture dated january 22 , 2015. note holders may convert each $ 1,000 principal amount of notes at any time prior to the close of business on the second scheduled trading day immediately preceding april 1 , 2019 , and the company is not required to redeem the notes prior to their maturity date . interest on the notes accrues in arrears , and is paid semiannually through the notes ' maturity date . in the second quarter of fiscal 2014 the company acquired dptt in a non-cash transaction that resulted in the company owning 50.01 % and dnp owning 49.99 % of pdmc , whose financial results are included in the company 's consolidated financial statements . pdmc has generated sufficient cash flows to fund its operating and capital requirements . see note 2 of the consolidated financial statements for more information . in the fourth quarter of fiscal 2014 the company amended its credit facility . the credit facility , which expires in december 2018 , has a $ 50 million limit with an expansion capacity to $ 75 million , and is secured by substantially all of the company 's assets located in the united states and common stock the company owns in certain of its foreign subsidiaries . the credit facility is subject to a minimum interest coverage ratio , total leverage ratio and minimum unrestricted cash balance financial covenants , all of which the company was in compliance with at november 1 , 2015. the company had no outstanding borrowings against the credit facility at november 1 , 2015 , and $ 50 million was available for borrowing . the interest rate on the credit facility ( 1.44 % at november 1 , 2015 ) is based on the company 's total leverage ratio at libor plus a spread , as defined in the credit facility . in the fourth quarter of fiscal 2013 a $ 26.4 million principal amount , five year capital lease commenced to fund the purchase of a high-end lithography tool . payments under the lease , which bears interest at 2.77 % are $ 0.5 million per month through july 2018. under the terms of the lease agreement , the company must maintain the equipment in good working order , and is subject to a cross default with a cross acceleration provision related to certain nonfinancial covenants incorporated in its credit facility . as of november 1 , 2015 , the total amount payable through the end of the lease term was $ 16.0 million , of which $ 15.3 million represents principal and $ 0.7 million represents interest . in the third quarter of fiscal 2013 the company completed a tender offer for shares of psmc . story_separator_special_tag a total of 50.3 million shares were tendered at the offering price of 16.30 ntd ( equivalent to a total of $ 27.4 million ) , which increased the company 's ownership interest in psmc from 75.11 % to 98.13 % . in the fourth quarter of fiscal 2013 the company further increased its ownership interest in psmc to 98.63 % with the purchase of an additional 1.1 million shares of psmc for $ 0.7 million , and in the first quarter of fiscal 2014 the company acquired all of the 3.0 million shares that were then held by noncontrolling interests at a cost of $ 1.7 million . in april 2014 psmc merged with dptt to form pdmc . 19 in the first quarter of fiscal 2013 psmc completed a stock repurchase plan that had been authorized by its board of directors in fiscal 2012. the completion of this repurchase plan resulted in the company acquiring an additional 9.2 million shares at a cost $ 4.2 million , and increasing its ownership percentage in psmc from 72.09 % at october 28 , 2012 to 75.11 % as of january 27 , 2013. story_separator_special_tag > the company considers all available evidence when evaluating the potential future realization of its deferred tax assets and when , based on the weight of all available evidence , it determines that it is more likely than not that some portion or all of its deferred tax assets will not be realized , it reduces its deferred tax assets by a valuation allowance . as a result of these considerations , including any changes in its deferred tax liability , the valuation allowance was increased ( decreased ) by ( $ 10.8 million ) , ( $ 7.1 million ) and $ 1.1 million as of the end of the fiscal years 2015 , 2014 and 2013 , respectively . during fiscal year 2015 , the company determined that sufficient positive evidence existed in two foreign jurisdictions that it was more likely than not that additional deferred taxes of $ 2.4 million were realizable and , accordingly , reduced their related valuation allowances . the company also regularly assesses the potential outcomes of ongoing and future tax examinations and , accordingly , has recorded accruals for such contingencies . pklt , the company 's fpd manufacturing facility in taiwan , has been accorded a tax holiday which commenced in 2012 and expires in 2017. the availability of this tax holiday did not have a significant impact on the company 's decision to increase its asian presence , which was in response to fundamental changes that took place in the semiconductor industry that the company serves . this tax holiday had no dollar or per share effect on the 2015 , 2014 and 2013 fiscal years . pdmc acquired an ic manufacturing facility in taiwan as a result of the dptt acquisition that has been accorded a tax holiday , which commenced in 2015 and expires in 2019. the availability of this tax holiday did not have a significant impact on the company 's decision to enter into the dptt acquisition and increase its asian presence . the company realized a $ 0.2 million tax benefit from the pdmc tax holiday in 2015. the tax holiday had no per share effect in 2015. net income attributable to noncontrolling interests net income attributable to noncontrolling interests increased $ 6.2 million to $ 12.2 million in 2015 , as compared with $ 6.0 million in 2014 , and increased $ 4.4 million to $ 6.0 million in 2014 , as compared with $ 1.6 million in 2013 , primarily as a result of changes in the ownership structure of the company 's ic manufacturing facility located in taiwan and increased net income at that facility . during 2014 , the company exchanged a 49.99 % noncontrolling interest in this subsidiary in return for the net assets of an acquiree . see notes 2 and 13 of the consolidated financial statements for further information . liquidity and capital resources replace_table_token_10_th as of november 1 , 2015 , the company had cash and cash equivalents of $ 205.9 million compared with $ 192.9 million as of november 2 , 2014. the company 's working capital decreased $ 26.0 million to $ 171.4 million at november 1 , 2015 , as compared with $ 197.4 million at november 2 , 2014. the increase in cash in 2015 was primarily related to increased cash generated from operating activities , while the decrease in working capital was the result of $ 57.5 million 3.25 % convertible senior notes due in april 2016 classified as a current liability at november 1 , 2015 , and as a long-term liability at november 2 , 2014. the company may use its cash available on hand for operations , capital expenditures , debt repayments , strategic opportunities , stock repurchases or other corporate uses , any of which may be material . as of november 2 , 2014 , the company had cash and cash equivalents of $ 192.9 million compared with $ 215.6 million as of november 3 , 2013. the company 's working capital decreased $ 16.5 million to $ 197.4 million at november 2 , 2014 , as compared with $ 213.9 million at november 3 , 2013. the decrease in cash and working capital in 2014 was primarily related to the repayment of a term loan outstanding balance of $ 21.3 million in december 2013 . 23 as of november 1 , 2015 and november 2 , 2014 , the company 's total cash and cash equivalents include $ 102.9 million and $ 105.9 million , respectively , held by its foreign subsidiaries . the majority of earnings of the company 's foreign subsidiaries are considered to be indefinitely reinvested . the repatriation of these funds to the u.s. may subject these funds to u.s. federal income taxes and local country withholding tax in certain jurisdictions .
| high-end ic sales increased $ 24.1 million to $ 104 million , principally related to increased units from asian foundry business in taiwan and korea . total ic sales increased by $ 32.1 million or 10.0 % in 2014 as compared with 2013 , primarily due to the increased sales in taiwan . total fpd sales increased by $ 1.2 million or 1.2 % in 2014 as compared with 2013 , primarily due to increased sales of mature units . by geographic area , net sales in 2014 as compared with 2013 increased ( decreased ) by $ 6.1 million or 4.5 % in korea , by $ ( 20.3 ) million or ( 16.0 ) % in the united states , by $ 49.7 million or 42.4 % in taiwan , by $ ( 2.4 ) million or ( 5.8 ) % in europe and by $ 0.2 million at other international locations . as a percent of total sales in 2014 , sales were 31 % in korea , 23 % in the united states , 37 % in taiwan , 8 % in europe , and 1 % at other international locations . gross margin replace_table_token_5_th gross profit and gross margin increased in 2015 compared with 2014 , primarily due to increased high-end ic sales and reduced manufacturing costs . gross margin decreased in 2014 compared with 2013 primarily due to increased equipment costs , including depreciation expense associated with additional high-end equipment . the company operates in a high fixed cost environment and , to the extent that the company 's revenues and utilization increase or decrease , gross margin will generally be positively or negatively impacted . selling , general and administrative expenses replace_table_token_6_th selling , general and administrative expenses decreased by $ 0.6 million in 2015 , as compared with 2014 , primarily due to expenses incurred in 2014 related to the acquisition of dptt , offset in part by increased compensation and benefits expenses . selling , general and administrative expenses increased by $ 1.4 million in 2014 , as compared with 2013 , primarily as a result of increased expenses related to the acquisition of dptt . 21 research and
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at the same time , we intend to continue to focus on executing our business plan , including building scale in our new pollo tropical markets to reach media efficiency as quickly as possible , thereby driving brand awareness and higher sales volumes , and beginning to accelerate new restaurant development at taco cabana . over time , we intend to develop more detailed plans for a proposed separation transaction . the separation plan , including transaction structure , timing , composition of senior management , capital structure and other matters will all be subject to approval by our board of directors and regulatory and other approvals , among other things . further details will be disclosed at a later date as our plans evolve . story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > in 2015 from $ 49.4 million in 2014 , but as a percentage of total revenues , decreased to 7.9 % compared to 8.1 % in 2014 . the impact of higher sales on fixed costs was partially offset by additional costs for brand and corporate personnel and training to support the ongoing pollo tropical expansion into new markets and the impact of legal settlements and related costs . general and administrative expenses in 2015 include a charge for estimated costs related to a class action lawsuit settlement plus legal and other fees incurred in defending the action totaling $ 1.6 million . general and administrative expenses in 2014 included the benefit of a $ 0.5 million payment received as a settlement of a litigation matter . general and administrative expenses increased to $ 49.4 million in 2014 from $ 48.5 million in 2013 , but as a percentage of total revenues , decreased to 8.1 % compared to 8.8 % in 2013. the decrease was due primarily to the impact of higher sales on fixed costs . general and administrative expenses also include the benefit of a $ 0.5 million payment received in 2014 as a settlement of a litigation matter . adjusted ebitda . adjusted ebitda , which is one of the measures of segment profit or loss used by our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance , is defined as earnings attributable to the applicable segment before interest , loss on extinguishment of debt , income taxes , depreciation and amortization , impairment and other lease charges , stock-based compensation expense and other income and expense . adjusted ebitda may not be necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation . adjusted ebitda for each of our segments includes an allocation of general and administrative expenses associated with administrative support for executive management , information systems and certain accounting , legal , supply chain , human resources , development and other administrative functions . adjusted ebitda is a non-gaap financial measure of performance . for a discussion of our use of adjusted ebitda and a reconciliation of adjusted ebitda to net income , see the heading entitled `` management 's use of non-gaap financial measures '' . adjusted ebitda for our pollo tropical restaurants increased to $ 59.3 million in 2015 from $ 52.7 million in 2014 due primarily to the net impact of the increase in revenues , partially offset by legal settlements and related costs and an increase in pre-opening costs . adjusted ebitda for our taco cabana restaurants increased to $ 39.7 million in 2015 from $ 33.0 million in 2014 also primarily due to the net impact of the increase in revenues . adjusted ebitda for our pollo tropical restaurants increased to $ 52.7 million in 2014 from $ 43.7 million in 2013 due primarily to the net impact of the increase in revenues , partially offset by an increase in advertising expense , repairs and maintenance costs and pre-opening costs . adjusted ebitda for our taco cabana restaurants increased to $ 33.0 million in 2014 from $ 26.1 million in 2013 also primarily due to the net impact of the increase in revenues , partially offset by an increase in repairs and maintenance costs . depreciation and amortization . depreciation and amortization expense increased to $ 30.6 million in 2015 from $ 23.0 million in 2014 due primarily to increased depreciation relating to new company-owned restaurant openings . depreciation and amortization expense increased to $ 23.0 million in 2014 from $ 20.4 million in 2013 also primarily due to increased depreciation relating to new company-owned restaurant openings , partially offset by the impact of new sale-leaseback transactions . impairment and other lease charges . impairment and other lease charges were $ 2.4 million in 2015 and consisted primarily of impairment charges totaling $ 1.7 million and a $ 0.2 million lease charge related to the suspension of our cabana grill concept at the end of fiscal 2015 , a $ 0.3 million lease charge related to the closure of a pollo tropical restaurant that was relocated prior to the end of its lease term to a superior site in the same trade area and lease charges , net of recoveries , totaling $ 0.2 million related to previously closed pollo tropical restaurants . the cabana grill concept was an elevated , non-24 hour format for taco cabana that we were testing outside of texas . we converted one cabana grill restaurant to a pollo tropical restaurant and closed the second cabana grill restaurant . impairment and other lease charges were $ 0.4 million in 2014 and consisted primarily of a $ 0.3 million impairment charge representing the write-down of the carrying value to fair value of certain assets related to the pollo tropical restaurant that closed in 2015 and $ 0.1 million in impairment charges for additional assets acquired at previously impaired taco cabana restaurants . impairment and other lease charges were $ 0.2 million in 2013 and consisted of a $ 0.4 million impairment charge for a taco cabana restaurant and recoveries , net of other lease charges related to previously closed restaurants of $ 0.2 story_separator_special_tag million . each quarter we assess the potential impairment of any long-lived assets that have experienced a triggering event , including restaurants for which the related cash flows are below a certain threshold . after reviewing the specific cash flows and management 's plans related to the restaurants for which an impairment review was performed , we determined that no impairment was currently necessary . however , for three pollo tropical restaurants and one taco cabana restaurant , the projected cash flows were not substantially in excess of their carrying values . if the performance of these restaurants does not improve as projected , an impairment charge could be recognized in future periods , and such charge could be material . 34 other ( income ) expense . other income in 2015 consisted primarily of a previously deferred gain from a sale-leaseback transaction that was recognized upon termination of the lease as a result of an eminent domain proceeding and expected business interruption insurance proceeds for a pollo tropical restaurant that was temporarily closed due to a fire . other income in 2014 consisted primarily of a gain from a condemnation award resulting from an eminent domain proceeding related to a location that closed in 2014. other income for 2013 consisted primarily of a gain from the sale of a nonoperating pollo tropical restaurant . loss on extinguishment of debt . in 2013 , we commenced a tender offer and consent solicitation for all of our outstanding $ 200.0 million aggregate principal amount of 8.875 % senior secured second lien notes due 2016 ( the `` notes '' ) and irrevocably called for redemption the notes that were not validly tendered and accepted for payment in the tender offer . we recognized a loss on extinguishment of debt of $ 16.4 million in 2013 related to the repurchase and redemption of the notes . the loss on extinguishment of debt included the write-off of $ 3.9 million in deferred financing costs related to the notes and $ 12.5 million of debt redemption premiums , consent payments , additional interest and other fees related to the redemption of the notes . interest expense . interest expense decreased $ 0.3 million to $ 1.9 million in 2015 from 2014 due primarily to lower borrowing rates and higher capitalized interest in 2015. interest expense decreased $ 15.8 million to $ 2.2 million in 2014 from 2013 due primarily to the refinancing transactions , which included the repurchase and redemption of our notes and entering into our senior credit facility with revolving credit borrowings at lower interest rates than the notes . provision for income taxes . the effective tax rate for 2015 of 36.4 % decreased as compared to an effective tax rate for 2014 of 36.7 % , due primarily to lower state taxes and various other changes in tax credits and permanent items . the effective tax rate for 2014 of 36.7 % increased as compared to an effective tax rate for 2013 of 29.1 % , primarily due to the retroactive effect of renewing the work opportunity tax credit in 2013 and the impact of higher income before taxes on non-deductible expenses and credits . net income . as a result of the foregoing , we had net income of $ 38.5 million in 2015 compared to net income of $ 36.2 million in 2014 , and $ 9.3 million in 2013 . liquidity and capital resources we do not have significant receivables or inventory and receive trade credit based upon negotiated terms in purchasing food products and other supplies . we are able to operate with a substantial working capital deficit because : restaurant operations are primarily conducted on a cash basis ; rapid turnover results in a limited investment in inventories ; and cash from sales is usually received before related liabilities for food , supplies and payroll become due . capital expenditures and payments related to our lease obligations represent significant liquidity requirements for us . we believe cash generated from our operations , availability of borrowings under our senior credit facility and proceeds from any sale-leaseback transactions which we may choose to do will provide sufficient cash availability to cover our anticipated working capital needs , capital expenditures and debt service requirements for the next twelve months . operating activities . net cash provided by operating activities for 2015 , 2014 and 2013 was $ 81.4 million , $ 64.1 million and $ 36.2 million , respectively . the $ 17.2 million increase in net cash provided by operating activities in 2015 compared to 2014 was driven primarily by the increase in adjusted ebitda and the decrease in deferred income taxes . the $ 27.9 million increase in net cash provided by operating activities in 2014 compared to 2013 was driven primarily by the increase in net income before the loss on extinguishment of debt and the change in operating assets and liabilities which includes a reduction in interest expense payments as a result of the refinancing transactions , including the repurchase and redemption of our notes and entering into our senior credit facility with revolving borrowings at lower interest rates than the notes . investing activities . net cash used for investing activities in 2015 , 2014 and 2013 was $ 87.7 million , $ 66.7 million and $ 34.1 million , respectively . capital expenditures are the largest component of our investing activities and include : ( 1 ) new restaurant development , which may include the purchase of real estate ; ( 2 ) restaurant remodeling/reimaging , which includes the renovation or rebuilding of the interior and exterior of our existing restaurants ; ( 3 ) other restaurant capital expenditures , which include capital maintenance expenditures for the ongoing reinvestment and enhancement of our restaurants ; and ( 4 ) corporate and restaurant information systems .
| for comparative purposes , the calculation of the changes in comparable restaurant sales is based on a 52-week fiscal year . restaurant sales for the extra week in the fiscal year ended january 3 , 2016 have been excluded for purposes of calculating the change in comparable company-owned restaurant sales . increases in comparable restaurant sales result primarily from an increase in guest traffic and an increase in average check . the increase in average check is primarily driven by menu price increases . for pollo tropical , menu price increases drove an increase in restaurant sales of 4.7 % in 2015 as compared to 2014 , partially offset by a decrease in average check due to sales mix and higher discounting , and 2.3 % in 2014 as compared to 2013 . for taco cabana , menu price increases drove an increase in restaurant sales of 3.0 % in 2015 as compared to 2014 , and the remaining increase in average check was primarily driven by a positive change in sales mix due to the implementation of new menu boards during the first quarter of 2015. for taco cabana , menu price increases drove an increase in restaurant sales of 1.4 % in 2014 as compared to 2013 and the remaining increase was primarily driven by a positive change in sales mix due to the implementation of new menu boards during the first quarter of 2014. restaurants in newer markets that have n't reached media efficiency generally have lower sales than restaurants in mature , media-efficient markets . as a result , pollo tropical revenues are growing at a slower rate than the average number of restaurants . franchise revenues increased $ 0.2 million to $ 2.8 million in 2015 . franchise revenues were $ 2.6 million in 2014 and $ 2.4 million in 2013. operating costs and expenses . operating costs and expenses include cost of sales , restaurant wages and related expenses , other restaurant expenses and advertising expenses .
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gross margins our gross margins for services are affected by the utilization rates of our professionals ( defined as the percentage of our professionals ' time billed to clients divided by the total available hours in the respective period ) , the salaries we pay our professionals , and the average billing rate we receive from our clients . if a project ends earlier than scheduled , we retain professionals in advance of receiving project assignments , or if demand for our services declines , our utilization rate will decline and adversely affect our gross margins . gross margin percentages of third-party software and hardware sales are typically lower than gross margin percentages for services , and the mix of services and software and hardware for a particular period can significantly impact our total combined gross margin percentage for such period . in addition , gross margin for software and hardware sales can fluctuate due to pricing and other competitive pressures . 16 selling , general , and administrative expenses selling , general , and administrative expenses ( “ sg & a ” ) are primarily composed of sales-related costs , general and administrative salaries , stock compensation expense , recruiting expense , office costs , bad debts , variable compensation cost , and other miscellaneous expenses . we work to minimize selling costs by focusing on repeat business with existing clients and by accessing sales leads generated by our software vendors , most notably ibm , oracle , and microsoft , whose products we use to design and implement solutions for our clients . these relationships enable us to reduce our selling costs and sales cycle times and increase win rates through leveraging our partners ' marketing efforts and endorsements . plans for growth and acquisitions our goal is to continue to build one of the leading independent information technology consulting firms by expanding our relationships with existing and new clients and through the continuation of our disciplined acquisition strategy . our future growth plan includes expanding our business with a primary focus on customers in the united states , both organically and through acquisitions . given the economic conditions during 2008 and 2009 we suspended acquisition activity pending improved visibility into the health of the economy . with the return to growth in 2010 we have resumed our disciplined acquisition strategy as evidenced by our acquisition of kerdock consulting , llc ( “ kerdock ” ) in march 2010 , speaktech in december 2010 , exervio consulting , inc. ( “ exervio ” ) in april 2011 , jcb partners , llc ( “ jcb ” ) in july 2011 and pointbridge solutions , llc in february 2012. we also intend to further leverage our existing offshore capabilities to support our future growth and provide our clients flexible options for project delivery . results of operations the following table summarizes our results of operations as a percentage of total revenues : replace_table_token_4_th 17 year ended december 31 , 2011 compared to year ended december 31 , 2010 revenues . total revenues increased 22 % to $ 262.4 million for the year ended december 31 , 2011 from $ 215.0 million for the year ended december 31 , 2010. financial results explanation for increases over prior year period ( in thousands ) ( in thousands ) for the year ended december 31 , 2011 for the year ended december 31 , 2010 total increase/ ( decrease ) over prior year period increase attributable to acquired companies * increase/ ( decrease ) attributable to base business * * services revenues $ 233,166 $ 185,173 $ 47,993 $ 38,014 $ 9,979 software and hardware revenues 15,624 20,556 ( 4,932 ) 26 ( 4,958 ) reimbursable expenses 13,649 9,223 4,426 931 3,495 total revenues $ 262,439 $ 214,952 $ 47,487 $ 38,971 $ 8,516 * defined as revenues generated by professionals from companies acquired during 2010 and 2011 . * * defined as businesses owned as of january 1 , 2010. services revenues increased 26 % to $ 233.2 million for the year ended december 31 , 2011 from $ 185.2 million for the year ended december 31 , 2010. the increase in services revenues is primarily due to acquisitions during 2010 and 2011. services revenues attributable to our base business increased $ 10.0 million while services revenues attributable to acquired companies increased $ 38.0 million , resulting in a total increase of $ 48.0 million . software and hardware revenues decreased 24 % to $ 15.6 million for the year ended december 31 , 2011 from $ 20.6 million for the year ended december 31 , 2010 due to the decrease in the volume and magnitude of software renewals as compared to 2010. reimbursable expenses increased 48 % to $ 13.6 million for the year ended december 31 , 2011 from $ 9.2 million for the year ended december 31 , 2010 primarily as a result of the increase in services revenue . we did not realize any profit on reimbursable expenses . cost of revenues . cost of revenues increased 19 % to $ 181.3 million for the year ended december 31 , 2011 from $ 152.2 million for the year ended december 31 , 2010. the increase in cost of revenues was directly related to the increase in revenues , specifically the increase in headcount to support the company 's ongoing revenue-producing projects . the average number of colleagues performing services , including subcontractors , increased to 1,317 for the year ended december 31 , 2011 from 1,065 for the year ended december 31 , 2010. gross margin . gross margin increased 29 % to $ 81.1 million for the year ended december 31 , 2011 from $ 62.8 million for the year ended december 31 , 2010. gross margin as a percentage of revenues increased to 30.9 % for the year ended december 31 , 2011 from 29.2 % for the year ended december 31 , 2010 , primarily due to an increase in services gross margin . story_separator_special_tag services gross margin , excluding reimbursable expenses , increased to 33.9 % or $ 79.0 million for the year ended december 31 , 2011 from 32.6 % or $ 60.3 million for the year ended december 31 , 2010. the increase in services gross margin was primarily a result of a higher average bill rate . the average bill rate for our professionals , excluding subcontractors , increased to $ 116 per hour for the year ended december 31 , 2011 from $ 106 per hour for the year ended december 31 , 2010 , primarily due to the improved pricing opportunities as the market for our services continues to improve . the average bill rate for the year ended december 31 , 2011 , excluding china , was $ 125 per hour compared to $ 119 per hour for the year ended december 31 , 2010. selling , general and administrative . sg & a expenses increased 14 % to $ 51.7 million for the year ended december 31 , 2011 from $ 45.5 million for the year ended december 31 , 2010 due primarily to fluctuations in expenses as detailed in the following table : replace_table_token_5_th 18 sg & a expenses , as a percentage of revenues , decreased slightly to 19.7 % for the year ended december 31 , 2011 from 21.2 % for the year ended december 31 , 2010. bonus expense decreased as a percentage of revenues compared to the prior year period as a result of more aggressive bonus targets in 2011. stock compensation expense decreased as a percentage of revenues due to less expense recorded in 2011 as a result of the separation of our former chairman of the board of directors in the fourth quarter 2010. these decreases were offset by an increase in recruiting and bad debt expense as a percentage of revenues , which were directly related to the increase in headcount and sales , respectively . depreciation . depreciation expense increased 111 % to $ 1.8 million for the year ended december 31 , 2011 from $ 0.8 million for the year ended december 31 , 2010. the increase in depreciation expense was mainly attributable to increased capital expenditures during 2010 and 2011 and the increase in leasehold improvements related to the expansion of our facility in china . depreciation expense as a percentage of services revenue , excluding reimbursable expenses , was 0.8 % and 0.4 % for the year ended december 31 , 2011 and 2010 , respectively . amortization . amortization expense increased 60 % to $ 6.3 million for the year ended december 31 , 2011 from $ 4.0 million for the year ended december 31 , 2010. the increase in amortization expense was due to the addition of intangible assets acquired as a result of the company 's acquisition activity during 2010 and 2011. acquisition costs . acquisition-related costs of $ 1.2 million were incurred during 2011 related to the acquisition of exervio and jcb compared to $ 1.0 million during 2010 related to the acquisition of kerdock and speaktech . acquisition-related costs were incurred for legal , accounting and valuation services performed by third parties . adjustment to fair value of contingent consideration . an adjustment of $ 1.6 million was made during the year ended december 31 , 2011 for the accretion of the fair value estimate for the earnings-based contingent consideration related to the speaktech and exervio acquisitions . provision for income taxes . we provide for federal , state , and foreign income taxes at the applicable statutory rates adjusted for non-deductible expenses . our effective tax rate decreased to 42.4 % for the year ended december 31 , 2011 from 44.8 % for the year ended december 31 , 2010. the decrease in the effective rate was due primarily to the effect of state taxes and permanent items over a larger income base and lower non-deductible stock compensation . year ended december 31 , 2010 compared to year ended december 31 , 2009 revenues . total revenues increased 14 % to $ 215.0 million for the year ended december 31 , 2010 from $ 188.2 million for the year ended december 31 , 2009. story_separator_special_tag margin-right : 0pt '' > depreciation . depreciation expense decreased 44 % to $ 0.8 million for the year ended december 31 , 2010 from $ 1.5 million for the year ended december 31 , 2009. the decrease in depreciation expense was mainly attributable to various assets becoming fully depreciated and the modification of the estimated useful life of computer hardware from two to three years in first quarter of 2010. depreciation expense as a percentage of services revenue , excluding reimbursable expenses , was 0.4 % and 0.9 % for the year ended december 31 , 2010 and 2009 , respectively . amortization . amortization expense decreased 7 % to $ 4.0 million for the year ended december 31 , 2010 from $ 4.3 million for the year ended december 31 , 2009 due to the completion of amortization of certain acquired intangible assets during 2009 and 2010 , partially offset by the addition of amortization related to acquired intangible assets . acquisition costs . acquisition-related costs of $ 1.0 million were incurred during 2010 related to the acquisition of kerdock and speaktech . acquisition-related costs were incurred for legal , accounting , and valuation services performed by third parties . net interest income . we had interest income of $ 163,000 , net of interest expense , for the year ended december 31 , 2010 , compared to interest income of $ 209,000 , net of interest expense , for the year ended december 31 , 2009. net interest income in 2009 included interest received on the outstanding balance of a client note receivable . net other income or expense .
| the increase in cost of revenues was directly related to the increase in revenues , specifically the increase in services revenues . the average number of colleagues performing services , including subcontractors , increased to 1,065 for the year ended december 31 , 2010 from 1,028 for the year ended december 31 , 2009. management will continue to manage the cost structure to match demand . gross margin . gross margin increased 30 % to $ 62.8 million for the year ended december 31 , 2010 from $ 48.3 million for the year ended december 31 , 2009. gross margin as a percentage of revenues increased to 29.2 % for the year ended december 31 , 2010 from 25.7 % for the year ended december 31 , 2009 primarily due to an increase in services gross margin . services gross margin , excluding reimbursable expenses , increased to 32.6 % or $ 60.3 million for the year ended december 31 , 2010 from 28.2 % or $ 47.0 million for the year ended december 31 , 2009. the increase in services gross margin was primarily a result of higher utilization and management 's continued efforts to manage the cost structure . the average utilization rate of our colleagues , excluding subcontractors , increased to 81 % for the year ended december 31 , 2010 compared to 75 % for the year ended december 31 , 2009. the average bill rate for our colleagues , excluding subcontractors , remained flat at $ 106 per hour for the year ended december 31 , 2010 compared to the year ended december 31 , 2009. the average bill rate for our colleagues , excluding subcontractors and offshore employees , increased to $ 119 for the year ended december 31 , 2010 from $ 114 for the year ended december 31 , 2009. software and hardware gross margin increased to 11.9 % or $ 2.4 million for the year ended december 31 , 2010 from 10.2 % or $ 1.3 million for the
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2018 compared to 2017 a loan and lease loss provision of $ 4.0 million was recorded for the year ended december 31 , 2018 , compared with a loan and lease loss provision of $ 831,000 for the year ended december 31 , 2017. the charge to other noninterest expense for losses on off-balance sheet items was $ 143,000 in 2018 compared to a credit of $ 112,000 for the same period in 2017 . 33 net loan and lease charge-offs were $ 3.1 million , or 0.07 percent of average loans and leases , for the year ended december 31 , 2018 compared with net loan and lease charge-offs of $ 2.2 million , or 0.05 percent of average loans and leases , for the year ended december 31 , 2017. classified loans and leases decreased by $ 1.7 million , or 5.3 percent , to $ 29.5 million for the year ended december 31 , 2018 from $ 31.2 million for the year ended december 31 , 2017. see “ nonperforming assets ” and “ allowance for loan and lease losses and allowance for off-balance sheet items ” for further details . noninterest income the following table sets forth the various components of noninterest income for the years indicated : replace_table_token_6_th 2019 compared to 2018 for the year ended december 31 , 2019 noninterest income was $ 27.6 million , an increase of $ 3.0 million , or 12.4 percent , compared with $ 24.5 million in 2018. the increase was primarily attributable to increases in gain on sale of securities and gain on sale of bank premises . sales of sba loans resulted in a net gain of $ 5.3 million for the year ended december 31 , 2019 compared with $ 5.0 million in 2018. sale of securities resulted in a net gain of $ 1.3 million for the year ended december 31 , 2019 compared to a net loss of $ 341,000 in 2018 . 2018 compared to 2017 for the year ended december 31 , 2018 noninterest income was $ 24.5 million , a decrease of $ 8.9 million , or 26.6 percent , compared with $ 33.4 million in 2017. the decrease was primarily attributable to decreases in gain on sale of sba loans , disposition gains on pci loans and gain on sale of securities . sales of sba loans resulted in a net gain of $ 5.0 million for the year ended december 31 , 2018 compared with $ 8.7 million in 2017. securities resulted in a net loss of $ 341,000 for the year ended december 31 , 2018 compared to gains of $ 1.7 million in 2017 . 34 noninterest expense the following table sets forth various components of noninterest expense for the years indicated : replace_table_token_7_th 2019 compared to 2018 for the year ended december 31 , 2019 , noninterest expense was $ 125.9 million , an increase of $ 8.3 million , or 7.1 percent , compared with $ 117.6 million in 2018. the increase was due primarily to increases in occupancy and equipment , data processing , professional fees , other operating expenses and an impairment loss on bank premises , offset by decreases in salaries and employee benefits and merger and integration costs . 2018 compared to 2017 for the year ended december 31 , 2018 , noninterest expense was $ 117.6 million , an increase of $ 3.5 million , or 3.0 percent , compared with $ 114.1 million in 2017. the increase was due primarily to increases in salaries and employee benefits , merger and integration costs and other operating expenses , offset by a decrease in oreo expense . income tax expense for the years ended december 31 , 2019 , 2018 and 2017 , income tax expense was $ 14.6 million , $ 26.1 million and $ 40.6 million , respectively . the effective tax rate for the years ended december 31 , 2019 , 2018 and 2017 was 30.8 percent , 31.1 percent and 42.6 percent , respectively . the lower effective tax rate in 2019 and 2018 compared to 2017 was due mainly to the decreased federal statutory income tax rate to 21 percent from 35 percent . the higher effective tax rate in 2017 also included a $ 3.9 million charge arising from a one-time revaluation adjustment to reduce the company 's deferred tax asset due to a change in the federal corporate tax in connection with the passage of the tax cuts and jobs act on december 22 , 2017. income taxes are discussed in more detail in “ notes to consolidated financial statements , note 1 — summary of significant accounting policies ” and “ note 11 — income taxes ” presented elsewhere herein . financial condition securities portfolio securities are classified as held to maturity , available for sale , or trading in accordance with gaap . those securities that we have the ability and the intent to hold to maturity are classified as “ held to maturity. ” all other securities are classified either as “ available for sale ” or “ trading. ” there were no held to maturity or trading securities as of december 31 , 2019 and 2018. securities classified as held to maturity are stated at cost , adjusted for amortization of premiums and accretion of discounts , and available for sale and trading securities are stated at fair value . the composition of our securities portfolio reflects our investment strategy of providing a relatively stable source of interest income while maintaining an appropriate level of liquidity . our securities portfolio also provides a source of liquidity by pledging as collateral or through repurchase agreement and collateral for certain public funds deposits . 35 as of december 31 , 201 9 , our securities portfolio was primarily composed of mortgage-backed securities and collateralized mortgage obligations issued by u.s. government agencies and sponsored agencies . most of the securities carried fixed interest rates . story_separator_special_tag other than holdings of u.s. government and agency securities , there were no securities of any one issuer exceeding 10 percent of stockholders ' equity as of december 31 , 201 9 , 201 8 or 201 7 . the following table summarizes the amortized cost , fair value and distribution of securities as of the dates indicated : replace_table_token_8_th as of december 31 , 2019 , securities available for sale increased 10.4 percent to $ 634.5 million from $ 574.9 million as of december 31 , 2018. the increase was mainly due to purchases of mortgage-backed securities and collateralized mortgage obligations . the following table summarizes the contractual maturity schedule for securities , at amortized cost , and their weighted-average yield as of december 31 , 2019 : replace_table_token_9_th loan and lease portfolio real estate loans are secured by commercial or residential properties for the purpose of financing a purchase , refinancing debt , or making building improvements . these loans are either owner-occupied or non-owner occupied . the bank originates these loans using underwriting guidelines , which include minimum debt service ability , maximum loan to value ratios , and analyzing the borrower 's future capacity to repay the loan . commercial and industrial loans are extended to businesses on a term or line of credit basis . the bank provides commercial term loans for the purposes of purchasing business , equipment , leasehold improvements or working capital , with maturities ranging from three to seven years . the bank also provides commercial lines of credit for the purposes of short-term working capital , financing trading assets , or import and export financing . these lines of credit usually have maturities of one year . 36 leases receivable include equipment finance agre ements with terms ranging from one to seven years . equipment leases are similar to commercial business loans in that the leases are typically made on the basis of the borrower 's ability to make repayment from the cash flow of the borrower 's business . the following sets forth the amount of total loans and leases outstanding in each category as of the dates indicated , excluding loans held for sale : replace_table_token_10_th ( 1 ) includes , among other property types , mixed-use , gas station , apartment , office , industrial , faith-based facilities , land , medical and warehouse ; the remaining real estate categories individually represent less than one percent of the company 's total loans and leases . ( 2 ) consumer loans include home equity lines of credit . as of december 31 , 2019 , 2018 and 2017 , loans and leases receivable ( excluding loans held for sale ) , net of deferred loan costs , discounts and allowance for loan and lease losses , were $ 4.55 billion , $ 4.57 billion and $ 4.27 billion , respectively , representing a decrease of $ 19.8 million or 0.4 percent in 2019 , and an increase of $ 295.2 million , or 6.9 percent in 2018. the $ 19.8 million decrease in loans and leases in 2019 was attributable primarily to an increase in the allowance for loan and lease losses . during the year ended december 31 , 2019 , total loan and lease disbursements consisted of $ 415.1 million in commercial real estate loans , $ 265.4 million in leases receivable , $ 228.5 million in commercial and industrial loans , $ 117.7 million in sba loans and $ 4.2 million in consumer loans , offset by $ 1.02 billion in pay-offs and other net reductions . 37 the following table sets forth the percentage distribution of loans and leases in each category as of the dates indicated : replace_table_token_11_th the table below shows the maturity distribution of outstanding loans and leases as of december 31 , 2019. in addition , the table shows the distribution of such loans and leases between those with floating or variable interest rates and those with fixed or predetermined interest rates . replace_table_token_12_th 38 as of december 31 , 201 9 , the loan and leases portfolio included the following concentrations of loans to one type of industry that were greater than 10 percent of loans and leases receivable : percentage of loans and balance as of leases december 31 , 2019 outstanding ( in thousands ) lessor of nonresidential buildings $ 1,332,766 28.9 % hospitality $ 942,622 20.4 % 39 loan and lease quality indicators as of december 31 , 2019 and 2018 , pass/pass-watch , special mention and classified loan and leases , disaggregated by loan class , were as follows : replace_table_token_13_th classified loans and leases increased by $ 64.5 million , or 218.3 percent , to $ 94.0 million at december 31 , 2019 , from $ 29.5 million at december 31 , 2018 , principally due to the $ 39.7 million troubled loan relationship placed on nonaccrual status during the three months ended june 30 , 2019. at december 31 , 2019 , the $ 76.5 million of construction loans included four land loans totaling $ 37.4 million ( $ 27.2 million classified and $ 10.2 million pass/watch ) , one completed construction loan for $ 20.9 million ( pass ) , and seven active construction loans totaling $ 18.2 million ( one for $ 1.6 million categorized as 40 special mention , one for $ 10 . 7 million categorized as classified and five totaling $ 5.9 million categorized as pass ) with project completion ranging from 9 percent to 99 percent . in addition , two construction loans with outstanding commitments aggregating $ 1 . 7 million had no advances outstanding at december 31 , 2019. nonperforming assets nonperforming loans and leases consist of loans and leases on nonaccrual status and loans and leases 90 days or more past due and still accruing interest . nonperforming assets consist of nonperforming loans and leases and oreo . loans and leases are placed on nonaccrual status when , in the opinion of management , the full timely collection of principal or interest is in doubt .
| ( 4 ) represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities . ( 5 ) represents net interest income as a percentage of average interest-earning assets . the table below shows changes in interest income and interest expense and the amounts attributable to variations in interest rates and volumes for the periods indicated . the variances attributable to simultaneous volume and rate changes have been allocated to the change due to volume and the change due to rate categories in proportion to the relationship of the absolute dollar amount attributable solely to the change in volume and to the change in rate . replace_table_token_5_th ( 1 ) loans and leases include loans held for sale and exclude the allowance for loan and lease losses . nonaccrual loans and leases are included in the average loan and lease balance . ( 2 ) amounts calculated on a fully equivalent basis using the current statutory federal tax rate . 2019 compared to 2018 interest income , on a taxable equivalent basis , increased $ 11.8 million , or 5.0 percent , to $ 246.9 million for the year ended december 31 , 2019 from $ 235.1 million for the year ended december 31 , 2018. interest expense increased $ 17.5 million or 32.8 percent , to $ 70.9 million in 2019 from $ 53.4 million in 2018. net interest income , on a taxable equivalent basis , was $ 176.0 million and $ 181.7 million in 2019 and 2018 , respectively . the decrease in net interest income was primarily due to the increase in interest expense on interest-bearing liabilities outpacing the increase in interest income on interest-earning assets . average loans and leases were 86.4 percent of average interest earning assets for 2019 , down from 87.5 percent for 2018. the net interest spread and net interest margin , on a taxable equivalent basis , for the year ended december 31 , 2019 were 2.74 percent and 3.37 percent , respectively , compared with 3.07 percent and 3.57 percent , respectively ,
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these qualitative risk factors include : lending policies and procedures , including underwriting standards and collection , charge-off , and recovery practices ; national , regional , and local economic and business conditions as well as the condition of various market segments , including the value of underlying collateral for collateral dependent loans ; nature and volume of the portfolio and terms of loans ; volume and severity of past due , classified and nonaccrual loans as well as and other loan modifications ; existence and effect of any concentrations of credit and changes in the level of such concentrations ; and effect of external factors , such as competition and legal and regulatory requirements . although we believe that we use the best information available to establish the allowance for loan losses , future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation . in addition , the fdic and the pennsylvania department of banking , as an integral part of their examination process , periodically review our allowance for loan losses . these agencies may require us to recognize adjustments to the allowance based on judgments about information available to them at the time of their examination . a large loss could deplete the allowance and require increased provisions to replenish the allowance , which would adversely affect earnings . see note 1 of the notes to the audited consolidated financial statements of the company included in this annual report . deferred tax assets . we make estimates and judgments to calculate some of our tax liabilities and determine the recoverability of some of our deferred tax assets , which arise from temporary differences between the tax and financial statement recognition of revenue and expenses . we also estimate a reserve for deferred tax assets if , based on the available evidence , it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods . these estimates and judgments are inherently subjective . historically , our estimates and judgments to calculate our deferred tax accounts have not required significant revision . at june 30 , 2019 and 2018 , no valuation allowance related to deferred tax assets were recorded . in evaluating our ability to recover deferred tax assets , we consider all available positive and negative evidence , including our past operating results and our forecast of future taxable income . in determining future taxable income , we make assumptions for the amount of taxable income , the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies , these assumptions require us to make judgments about future taxable income and are consistent with the plans and estimates we use to manage our business . any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets . an increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings . realization of a deferred tax asset requires us to exercise significant judgment and is inherently uncertain because it requires the prediction of future occurrences . valuation allowances are provided to reduce deferred tax assets to an amount that is more likely than not to be realized . in evaluating the need for a valuation allowance , we must estimate our taxable income in future years and the impact of tax planning strategies . if we were to determine that we would not be able to realize a portion of our net deferred tax asset in the future for which there is no valuation allowance , an adjustment to the net deferred tax asset would be charged to earnings in the period such determination was made . conversely , if we were to make a determination that it is more likely than not that the deferred tax assets for which we had established a valuation allowance would be realized , the related valuation allowance would be reduced and a benefit to earnings would be recorded . investment securities . securities are evaluated on a quarterly basis , and more frequently when market conditions warrant such an evaluation , to determine whether declines in their value are other-than-temporary . to determine whether a loss in value is other-than-temporary , management utilizes criteria such as reasons underlying the decline , the magnitude and duration of the decline and whether or 40 not management intends to sell or expects that it is more likely than not it will be required to sell t he security prior to an anticipated recovery of fair value . the term “ other-than-temporary ” is not intended to indicate that the decline is permanent , but indicates that the prospects for a near-term recovery of value is not necessarily favorable , or that there is lack of evidence to support a realizable value equal to or greater than the carrying value of the investment . once a decline in value for a debt security is determined to be other-than-temporary , the other-than-temporary impairment is separated in to ( a ) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security ( the credit losses ) and ( b ) the amount of the total other-than-temporary impairment related to other factors . the amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings . the amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income ( loss ) . fair value measurements . fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability ( an exit price ) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date . story_separator_special_tag the fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value . a more detailed description of the fair values measured at each level of the fair value hierarchy and our methodology can be found in note 14 of the audited consolidated financial statements of the company included in this annual report . d e r i v a ti v e instruments and h ed g i ng a c ti v i t i es . we u s e d e ri v a ti v e i n s tr u m en t s as p a r t of our o v e r a l l s t r a t e g y t o m ana g e our e x po s u r e t o m a r k et r is k s p ri m a r i l y a ss oc i a t ed w it h f l u c t u a ti o n s i n i n t e r e s t r a t e s . a s a m a tt er of p o l i c y , we do not u s e de ri v a t i v es f or speculative pu r p o s e s . a l l of our de ri v a t i v e i n s t r u m en t s t ha t a r e m ea s u r e d at f a i r v a l ue on a r e c u r ri ng ba s i s and a r e i n c l uded i n t he consolidated st a t e m en t s o f f i na n c i a l cond i t i on as mortgage banking derivatives and other liabilities . t h e fai r v al u e o f our d er i v ati v e i n str u m e n ts , o t h e r t h a n interest rate lock commitments ( “ ir l c ” ) i s d e t e r m i ned by u t i li z i ng quo t ed p r i c es f r o m d ea l er s i n s u c h s ec u riti e s o r t h i r d - p ar t y m od el s u ti li z i n g observable m a r k e t i n pu t s . the fair value of the company 's irlc instruments are based upon the underlying mortgage loan adjusted for the probability of such commitments being exercised and estimated costs to complete and originate the loan . the ch a n g es i n t he f a i r v a l ue of d e r i v a t i v e i n s t r u m en t s a r e i n c l ud ed i n non-interest income i n t he consolidated s t a t e m en t s of income . to be annou n c ed s e c u r i t i es ( “ t ba s ” ) a r e “ forward d e l i v e r y ” s ecu r i t i es con s i d e r ed de ri v a t i v e i n s t r u m en t s u n d er de ri v a t i v es and hed g i ng accoun t i ng g u i dance , ( f a sb a sc 815 ) . we u t i li z e t ba s t o p r o t e c t a g a i n s t t he p r i ce r is k i n h e r e nt i n d e r i v a t i v e l o a n co m m it m en ts . t ba s a r e v a l ued b a s ed on f o r w a r d de a l e r m a r k s fr om our a p p r o v ed c ou n t e r p a r t i e s . we u tili z e a t h ird - pa rt y m a r k et p r i c i ng s e r v i c e , w h i ch co m p il es cu r r e n t p ri c es f or i n s t r u m en t s f r om m a r k et s ou r c e s and t h o s e pr i c es r e p r e s e n t t h e c u r r ent e xecu t ab l e p ri c e. t ba s a r e r ec o r d e d at f a i r v a l ue on t h e consolidated s t a t e m en t s of f i na n c i a l con d i ti on i n mortgage derivatives a nd o t h e r li a b i l i ti e s w it h c h an g es i n f a i r v a l ue r ec o r ded
| our primary sources of funds are deposits , federal home loan bank advances and principal and interest payments on loans and securities . our results of operations depend primarily on our net interest income which is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities . our results of operations also are affected by our provision for loan losses , non-interest income and non-interest expense . non-interest income currently consists primarily of gains recognized from the sale of residential mortgage loans in the secondary market , fees for customer services , gain ( loss ) from derivative instruments and sales of securities . non-interest expense currently consists primarily of expenses related to salaries and employee benefits , occupancy , data processing related operations , professional fees and other expenses . our results of operations also may be affected significantly by general and local economic and competitive conditions , changes in market interest rates , governmental policies and actions of regulatory authorities . business strategy we intend to operate as a well-capitalized and profitable community bank dedicated to providing exceptional personal service to our consumer and business customers . we believe that we have a competitive advantage in the markets we serve because of our knowledge of the local marketplace and our long-standing history of providing superior , relationship-based customer service . our core business strategies are to : continue to originate and sell certain residential real estate loans . residential mortgage lending has historically been a significant part of our business , and we recognize that originating one- to four-family residential real estate loans is essential to our status as a community-oriented bank . during the year ended june 30 , 2019 , we originated $ 157.1 million in one- to four-family residential real estate loans held for sale , selling $ 140.1 million in one- to four-family residential real estate loans held for sale for gains on sale of $ 2.8
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