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through march 31 , 2018 , the company is on target for its consolidated anticipated savings goals ; however , the nature of those savings has shifted over time to be more weighted toward our supply chain optimization and operational efficiencies than previously anticipated , offset by reduced expectations associated with the facility consolidations and headcount reductions . we are currently performing work on several new programs , which are in various stages of development . several of the these programs have entered flight testing , including the bombardier global 7000/8000 ( `` global 7000/8000 '' ) and embraer second generation e-jet ( `` e2-jets '' ) and we expect to deliver revenue generating production units for these programs in calendar year 2018. historically , low-rate production commences during flight testing , followed by an increase to full-rate production , assuming that successful testing and certification are achieved . accordingly , we anticipate that each of these programs will begin generating full-rate production level revenues between fiscal 2019 and fiscal 2021. we are still in the early development stages for the gulfstream g500/g600 programs , as these aircraft are not expected to enter service until fiscal 2019. transition of each of these programs from development to recurring production levels is dependent upon the success of each program at achieving flight testing and certification , as well as the ability of the oem to generate acceptable levels of aircraft sales . while work progressed on these development programs , we have experienced difficulties in achieving estimated cost targets particularly in the areas of engineering and estimated recurring costs . in the fourth quarter of fiscal 2016 , we recorded a $ 399.8 million forward loss on our global 7000/8000 wing contract . the global 7000/8000 contract provides for fixed pricing and requires us to fund certain up-front development expenses , with certain milestone payments made by bombardier . the provision for forward losses on the global 7000/8000 program resulted in the impairment of previously capitalized pre-production costs due to the combination of cost recovery uncertainty , higher than anticipated nonrecurring costs and increased forecasted costs on recurring production . the increases in costs were driven by several factors , including : changing technical requirements , increased spending on the design and engineering phase of the program and uncertainty regarding cost reduction and cost recovery initiatives with our customer and suppliers . the program has continued to incur costs since march 2016 in support of development and transition to production . on december 22 , 2016 , triumph aerostructures , llc , the wholly owned subsidiary of the company that is party to the global 7000/8000 contract with bombardier ( “ triumph aerostructures ” ) , initiated litigation against bombardier in the quebec superior court , district of montreal . the lawsuit related to bombardier 's failure to pay to triumph aerostructures certain non-recurring expenses incurred by triumph aerostructures during the development phase of a program pursuant to which triumph aerostructures agreed to design , manufacture , and supply the wing and related components for bombardier 's global 7000 business aircraft . in may 2017 , triumph aerostructures and bombardier entered into a comprehensive settlement agreement that resolved all outstanding commercial disputes between them , including all pending litigation , related to the design , manufacture and supply of wing components for bombardier 's global 7000 business aircraft . the settlement reset the commercial relationship between the companies and allowed each company to better achieve its business objectives going forward . 24 further cost increases or an inability to meet revised recurring cost forecasts on the global 7000/8000 program may result in additional forward loss reserves in future periods , while improvements in future costs compared to current estimates or additional cost recovery may result in favorable adjustments if forward loss reserves are no longer required . under our contract with embraer , we have the exclusive right to design , develop and manufacture the center fuselage section iii , rear fuselage section and various tail section components ( rudder and elevator ) for the e2-jets over the initial 600 ship sets . the contract provides for funding on a fixed amount of nonrecurring costs , which will be paid over a specified number of production units . higher than expected spending on the e2-jets program has resulted in a near breakeven estimated profit margin percentage , with additional potential future cost pressures as well as opportunities for improved performance . risks related to additional engineering as well as the recurring cost profile remain as this program completes flight testing . during the fiscal year ended march 31 , 2018 , the company reached an agreement with aerospace technologies of korea inc. ( astk ) to optimize the supply chain under our portion of the e2 program . under this agreement , astk will build and transport fuselage shipsets to embraer and establish a facility in brazil to manage stock and repairs locally . the company maintains its role as the supply chain integrator on the program . we seek additional consideration for customer work statement changes throughout the development process as a standard course of business . the ability to recover or negotiate additional consideration is not certain and varies by contract . varying market conditions for these products may also impact future profitability . although none of these new programs individually are expected to have a material impact on our net revenues , they do have the potential , either individually or in the aggregate , to materially and negatively impact our consolidated results of operations if future changes in estimates result in the need for a forward loss provision . absent any such loss provisions , we do not anticipate that any of these new programs will significantly dilute our future consolidated margins . in march 2017 , the company settled several outstanding change orders and open pricing on a number of its programs with boeing . the agreement included pricing settlements , advanced payments , delivery schedule adjustments and the opportunity to extend the mutual relationship on future programs . story_separator_special_tag the agreement also provides for continued build ahead on the 747-8 program through the end of the existing contract , resulting in a reduction to the previously recognized forward losses on the 747-8 program . as disclosed during fiscal 2016 , boeing announced a rate reduction to the 747-8 program , which lowered production to one plane every two months , the impact of the rate reduction resulted in an additional $ 161.4 million forward loss during the fiscal year ended march 31 , 2016. subsequent to march 31 , 2018 , the company reached an agreement with gulfstream to optimize the supply chain on the company 's g650 work scope . the g650 wing box and wing completion work , which are now co-produced across three facilities at both companies , are planned for consolidation into gulfstream 's structures center of excellence in savannah . the company will maintain its role as the supply chain integrator on the program . consistent with the company 's policy described in note 2 , the company performs an annual assessment in its fiscal fourth quarter and on an interim basis upon the occurrence of events or substantive changes in circumstances that indicate a reporting unit 's carrying value may be less than its fair value . the company performed an interim assessment of the fair value of its goodwill due to the company 's decision to combine the aerospace structures and precision components reporting segments into one reporting segment as noted above . in accordance with asc 350-20-35-3c , there are several potential events and circumstances that could be indicators of goodwill impairment . a change in a company 's reporting unit structure is one of these events , and when this does occur , a company must perform a `` before and after '' test of the reporting units ( see note 1 ) . additionally , the company 's enhanced visibility into its future cash flows based on its annual planning process was also an indicator . consistent with the company 's policy , it performed the goodwill impairment test which includes using a combination of both the market and income approaches to estimate the fair value of each reporting unit . after performing the `` before '' portion of the test of the reporting units the company concluded that the former precision components ' reporting unit had a fair value that was lower than its carrying value by an amount of $ 190.2 million . accordingly , the company recorded a non-cash impairment charge during the fiscal quarter ended december 31 , 2017 , of $ 190.2 million , which is presented on the accompanying consolidated statements of operations as `` impairment of intangible assets ” . the decline in fair value is the result of declining revenues from production rate reductions on sun-setting programs and the slower than previously projected ramp in our development programs and the timing of associated earnings and cash flows . 25 the company then performed the `` after '' portion of the test of the reporting units and concluded that the new reporting unit of aerospace structures ' goodwill had a fair value that was lower than its carrying value by an amount that exceeded the remaining goodwill for the reporting unit . following the applicable accounting guidance , this impairment charge is deemed to have occurred during the company 's fiscal fourth quarter . therefore , the company recorded a non-cash impairment charge during the fiscal quarter ended march 31 , 2018 , of $ 345.0 million , which is presented on the consolidated statements of operations as `` impairment of intangible assets ” for the fiscal year ended march 31 , 2018. the decline in fair value is the result of declining revenues from production rate reductions on sun-setting programs and the slower than previously projected ramp in our development programs and the timing of associated earnings and cash flows ( see note 2 for definition of fair value levels ) . in the fourth quarter of the fiscal year ended march 31 , 2017 , we concluded that the goodwill related to the aerospace structures reporting unit was impaired as of the annual testing date . we recorded a non-cash impairment charge during the fourth quarter of the fiscal year ending march 31 , 2017 , of $ 266.3 million , which is presented on the accompanying consolidated statements of operations as `` impairment of intangible assets. ” in the fourth quarter of the fiscal year ended march 31 , 2016 , we concluded that the goodwill of our aerospace structures reporting unit was impaired as of the annual testing date . we concluded that the goodwill had an implied fair value of $ 822.8 million ( level 3 ) compared to a carrying value of $ 1.42 billion . we recorded a non-cash impairment charge during the fourth quarter of fiscal 2016 of $ 597.6 million , which is presented on the accompanying consolidated statements of operations as `` impairment of intangible assets . '' during the third quarter of the fiscal year ended march 31 , 2016 , we performed an interim assessment of fair value on our indefinite-lived intangible assets due to potential indicators of impairment related to the continued decline in our stock price during the fiscal third quarter . we estimated the fair value of the tradenames using the relief-from-royalty method , which uses several significant assumptions , including revenue projections that consider historical and estimated future results , general economic and market conditions , as well as the impact of planned business and operational strategies . the following estimates and assumptions were also used in the relief-from-royalty method : royalty rates between 2 % and 4 % based on market observed royalty rates and profit split analysis ; and discount rates between 12 % and 13 % based on the required rate of return for the tradename assets .
| the favorable cumulative catch-up adjustments to operating income included gross favorable adjustments of $ 85.8 million and gross unfavorable adjustments of $ 66.2 million . gross margins for fiscal 2017 included net favorable cumulative catch-up adjustments of $ 57.2 million , of which $ 131.4 million was related to the reduction of the previously recorded forward losses on the 747-8 program , partially offset by the correction of an immaterial error of $ 12.7 million . segment operating income decreased by $ 426.2 million , or 255.8 % , to an operating loss of $ 259.6 million for the fiscal year ended march 31 , 2018 , from $ 166.6 million of operating income for the fiscal year ended march 31 , 2017 . organic operating income decreased $ 409.4 million or 275.5 % . the divestitures of tas-newport news and engines and apu contributed $ 16.7 million to the operating income decrease compared to the prior fiscal year . organic operating income decreased for the fiscal year ended march 31 , 2018 , due to the decline in organic gross margin noted above and the previously mentioned goodwill impairment charge of $ 535.2 million . corporate operations incurred expenses of $ 102.9 million for the fiscal year ended march 31 , 2018 , as compared to $ 109.7 million for the fiscal year ended march 31 , 2017 . the corporate expenses included decreased consulting expense of $ 5.2 million , it services of $ 3.1 million , restructuring of $ 3.0 million , offset by increased loss on divestitures of $ 11.6 million . interest expense and other increased by $ 18.9 million , or 23.5 % , to $ 99.4 million for the fiscal year ended march 31 , 2018 , compared to $ 80.5 million , due to higher interest rates , the impairment of deferred financing fees due to the amendment to the credit facility and the extinguishment of the term loan of approximately $ 5.2 million and the unfavorable net change
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as a result , we updated the development period over which the revenues were recognized and deemed it to have concluded in june 2018 in line with when the development of ezutromid was discontinued . this resulted in all revenues relating to the sarepta agreement that were previously deferred in the balance sheet being recognized in full . we continued to receive cost share income for wind-down activities in relation to phaseout dmd and our earlier-stage utrophin modulation development activities up until the agreement was terminated in august 2019. other operating income other operating income includes income received and recognized from grants and clinical trial support from government entities , philanthropic , non-government and not for profit organizations and patient advocacy groups . specifically , the barda contract provides for a cost-sharing arrangement under which barda funds a specified portion of estimated costs for specified activities related to the continued clinical and regulatory development of ridinilazole for the treatment of cdi . we also have received grant income from a funding arrangement with carb-x for our gonorrhea program , however , work on this program has since ceased as the series of antibiotics was determined not to have suitable qualities for further development . other operating income also includes benefit from two u.k. research and development tax credit cash rebate regimes : small and medium enterprise , or sme , program and the research and development expenditure credit , or rdec , program . qualifying expenditures largely comprise employment costs for research staff , consumables , a proportion of relevant , permitted sub-contract costs and certain internal overhead costs incurred as part of research projects for which we do not receive commercial or other funding income . under both schemes , the company receives cash rebate payments ranging from 9.7 % to 33.4 % of eligible research and development expenditure , these payments are not dependent on the company 's pre-tax net income levels . operating expenses the majority of our operating expenses since inception have consisted of research and development activities and general and administrative costs . research and development expenses research and development expenses consist of all costs associated with our research and development activities . these include : costs incurred in conducting our preclinical studies and clinical trials through contract research organizations , including preclinical toxicology , pharmacology , formulation and manufacturing work ; laboratory and vendor expenses incurred in relation to our preclinical and non-clinical studies ; costs incurred in supply chain development and scale up activities to support product registration ; employee related expenses , which include salary , benefits and stock-based compensation , for our research and development staff ; and facilities , depreciation and other expenses , which include direct and allocated expenses for rent and maintenance of facilities , insurance and other supplies . 77 we utilize our employee and infrastructure resources across multiple research projects . we track expenses related to our clinical programs and certain preclinical programs on a per project basis . we expect our research and development expenses to continue to increase as compared to prior periods as we continue to enroll our phase 3 clinical trials of ridinilazole for the treatment of cdi , continue our early-stage research programs for the treatment of enterobacteriaceae infections , and continue our activities and initiate preclinical programs for future product candidates , including under our discuva platform . the timing and amount of these expenses will depend upon the outcome of our clinical trials and the associated costs . the timing and amount of these expenses will also depend on the costs associated with potential future clinical trials of our product candidates and the related expansion of our research and development organization , regulatory requirements , advancement of our preclinical programs and product candidate manufacturing costs . the table below summarizes our research and development expenses by category . our cdi program expenses , antibiotic pipeline development activities and dmd program expenses include costs paid to contract research organizations , manufacturing costs for our clinical trials and laboratory testing costs and research related expenses . other research and development costs include staff and travel costs ( including those of our internal cdi , antibiotic development and dmd teams ) , research and development related legal costs , patent registration fees , an allocation of facility-related costs and other non-core program related expenses . replace_table_token_2_th from inception to december 31 , 2020 , our total cdi program expenses were $ 118.5 million , our total antibiotic pipeline research and development expenses were $ 7.5 million and our total dmd program expenses were $ 69.8 million . we no longer expect to incur future costs related to the dmd program with the close-out activities related to ezutromid complete and the research collaboration with the university of oxford terminated . the successful development and commercialization of our product candidates is highly uncertain . at this time , we can not reasonably estimate or know the nature , timing and estimated costs of the efforts that will be necessary to complete the remainder of the development of ridinilazole or any of our future product candidates . this is due to the numerous risks and uncertainties associated with product development and commercialization , including the uncertainty of : the progress , costs and results of clinical trials of ridinilazole for cdi ; the scope , rate of progress , costs and results of preclinical development , laboratory testing and clinical trials for our future product candidates ; the costs , timing and outcome of regulatory review of our product candidates ; the efficacy and potential advantages of our product candidates compared to alternative treatments , including any standard of care , and our ability to achieve market acceptance for any of our product candidates that receive marketing approval ; the costs and timing of commercialization activities , including product sales , marketing , distribution and manufacturing , for any of our product candidates that receive marketing approval and the rate we expand our physical presence ; and the costs and timing of preparing , filing story_separator_special_tag and prosecuting patent applications , maintaining , enforcing and protecting our intellectual property rights and defending against any intellectual property-related claims . a change in the outcome of any of these variables with respect to the development of ridinilazole or any other product candidate that we may develop could result in a significant change in the costs and timing associated with the development of that product candidate . for example , if the u.s. food and drug administration , or the fda , the european medicines agency , or ema , or another regulatory authority were to require us to conduct clinical trials or other testing beyond those that we currently contemplate for the completion of clinical development of ridinilazole or any other product candidate , or if we 78 experience significant delays in enrollment in any of our clinical trials , we could be required to expend significant additional resources and time on the completion of clinical development of that product candidate . general and administrative expenses general and administrative expenses consist primarily of salaries and benefits related to our executive , finance , business development , human resources and other support functions . other general and administrative expenses include stock-based compensation expenses , market research costs , facility-related costs , consulting costs and expenses associated with the requirements of being a publicly traded company in the united states , including insurance , legal , audit and taxation services fees . we anticipate that our general and administrative expenses will continue to increase in the future as we increase our headcount to support our continued research and development and potential commercialization of our product candidates . we also anticipate continued accounting , audit , regulatory , compliance , insurance and investor and public relations expenses associated with being a publicly traded company in the united states . prior to the redomiciliation transaction , our american depositary shares , or adss , had traded on the nasdaq global market and , until we canceled the admission on february 24 , 2020 , our ordinary shares had traded on aim in the united kingdom . our common stock is currently traded on the nasdaq global market , and therefore , we only anticipate incurring future expenses associated with being a listed public company in the united states . taxation as a u.s. tax resident trading entity we are subject to u.s. corporate taxation . prior to the redomiciliation transaction we were a u.k. resident trading entity and were subject to u.k. corporate taxation on group-wide taxable income . our u.k. resident trading subsidiaries are still individually subject to u.k. corporate taxation . due to the nature of our business , we have generated losses since inception . we have recorded a full valuation allowance against the deferred tax assets with respect to these tax losses in excess of our deferred tax liabilities because we do not consider it probable that there will be suitable taxable profits in the foreseeable future based on the evidence available against which to offset these losses . jumpstart our business startups act of 2012 as of january 1 , 2021 , we are no longer an “ emerging growth company ” as defined in the jumpstart our business startups act of 2012 , or the jobs act . formerly , as an emerging growth company , we were able to take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies . these provisions include : an exemption from compliance with the auditor attestation requirement on the effectiveness of our internal controls over financial reporting ; an exemption from compliance with any requirement that the public company accounting oversight board may adopt regarding mandatory audit firm rotation or a supplement to the auditor 's report providing additional information about the audit and the financial statements ; reduced disclosure about our executive compensation arrangements ; and exemptions from the requirements to obtain a non-binding advisory vote on executive compensation or a shareholder approval of any golden parachute arrangements . the last day of the fiscal year following the fifth anniversary of our initial public offering in march 2015 was december 31 , 2020 , hence we have ceased to be an emerging growth company . accordingly , from january 1 , 2021 , we will no longer benefit from the above provisions . in addition , the jobs act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards . this provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies . we had irrevocably elected not to avail ourselves of delayed adoption of new or revised accounting standards and , therefore , we will continue to be subject to the same requirements to adopt new or revised accounting standards as other public companies that are not emerging growth companies . business impact of covid-19 pandemic 79 in december 2019 , an outbreak of respiratory illness caused by a novel coronavirus , commonly referred to as covid-19 , began in wuhan , china and has now spread worldwide . on march 11 , 2020 , the world health organization declared the outbreak a global pandemic and public health emergency , and on march 13 , 2020 , the president of the united states declared the virus as a national emergency . in addition to those who have been directly affected , millions more have been affected by government efforts in the united states , the united kingdom , the european union and around the world to slow the spread of the pandemic through quarantines , travel restrictions , heightened border scrutiny and other measures .
| specifically , the company recognized other operating income of $ 9.5 million during the year ended december 31 , 2020 , as compared to $ 16.6 million during the eleven months ended december 31 , 2019 , from the barda contract . this decrease of $ 7.1 million is due to reaching the funding limit on certain work segments of the contract . this decrease is partially offset by an increase in u.k. research and development expenditure credits as research and development expenses not funded by third parties may be eligible for these credits , see below for details . the company also recognized other operating income of $ 0.5 million during the year ended december 31 , 2020 , as compared to $ 0.8 million during the eleven months ended december 31 , 2019 , related to the company 's funding arrangements with carb-x for its gonorrhea program . with the company 's decision not to advance the dds-01 series of antibiotics and to cease work on the gonorrhea program , it is expected carb-x will cover its remaining share of the work that has been funded under the award . in addition , $ 9.4 million was recognized in respect of u.k. research and development expenditure credits for the year ended december 31 , 2020 as compared to $ 5.5 million for the eleven months ended december 31 , 2019. this increase of $ 3.9 million is due primarily to additional research and development expenses incurred during the year ended december 31 , 2020 that were not funded by third parties . operating expenses research and development expenses 81 research and development expenses increased by $ 13.5 million to $ 53.3 million for the year ended december 31 , 2020 from $ 39.8 million for the eleven months ended december 31 , 2019. there was increased expenditure related to the company 's cdi program and the research and development related staffing and facilities costs , offset by decreased expenditure related to antibiotic pipeline research and development activities and the discontinued dmd program . this net increase is also due , in part , to the comparison of a twelve month period to an eleven month
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wweshop revenues increased by $ 4.7 million in 2014 compared to 2013 , based on a 33 % increase in the volume of online merchandise sales to approximately 426,000 orders . orders increased primarily due to mobile shop optimization and a distribution strategy in the uk utilizing amazon uk . the average revenue per order decreased 1 % to $ 47.46 in the current year . wweshop oibda as a percentage of revenues increased to 17 % in 2014 as compared to 15 % in 2013 . 31 wwe studios the following table provides detailed information on our wwe studios ' segment ( dollars in millions ) : replace_table_token_11_th * production costs are presented net of the associated benefit of production incentives . during 2014 , we released one feature film via theatrical distribution , oculus , and five films direct to dvd , scooby doo ! wrestlemania mystery , leprechaun : origins , see no evil 2 , queens of the ring and jingle all the way 2. the company entered into an agreement to co-distribute the feature film road to paloma . this film was released via a limited theatrical release and on dvd in july 2014. during 2013 , we released three feature films via theatrical distribution , no one lives , dead man down and the call , two films , 12 rounds 2 : reloaded and the marine 3 : homefront direct to dvd and one made-for-television movie , christmas bounty . 32 third-party distributors control the distribution and marketing of co-distributed films , and as a result , we recognize revenue on a net basis after the third-party distributor recoups distribution fees and expenses and results are reported to us . results are typically reported to us in quarters subsequent to the initial release of these films . wwe studios revenues increased $ 0.1 million in 2014 as compared to 2013. the increase in revenue is driven by the timing of our film releases . in the current year , we recognized $ 3.8 million in revenue from our film , the call , which was released in 2013. wwe studios oibda increased $ 13.2 million in 2014 as compared to 2013 , due in part to the profitability of the call and reduced impairment charges . the company recorded $ 1.5 of impairment charges in 2014 as compared to $ 11.7 million recorded in 2013. at december 31 , 2014 , the company had $ 26.5 million ( net of accumulated amortization and impairment charges ) of feature film production assets capitalized on its consolidated balance sheet of which $ 12.1 million is for films in-release , $ 10.0 million is for films in production and the remaining $ 4.4 million is for films that are completed , pending release , or developmental projects . we review and revise estimates of ultimate revenue and participation costs at the end of each reporting quarter to reflect the most current information available . if estimates for a film 's ultimate revenue are revised and indicate a significant decline in a film 's profitability or if events or circumstances change that would indicate we should assess whether the fair value of a film is less than its unamortized film costs , we calculate the film 's estimated fair value using a discounted cash flows model . if fair value is less than unamortized cost , the film asset is written down to fair value . replace_table_token_12_th other revenues include revenues associated with talent appearances and were consistent in both periods presented . replace_table_token_13_th corporate & other expenses the following table presents the amounts and percent change of certain significant corporate and other expenses ( dollars in millions ) : replace_table_token_14_th corporate and other expenses primarily include corporate overhead and certain expenses related to our sales and marketing , including our international offices , and talent development functions , including costs associated with our wwe performance center . these costs benefit the company as a whole and are therefore not allocated to individual businesses . corporate and other expenses increased by $ 24.2 million or 19 % in 2014 compared to 2013. this is primarily due to increases in professional fees of $ 6.6 million related to strategic initiatives , talent development and international expansion , management incentive compensation of $ 5.4 million reflecting amounts expected to be paid based on the company 's operating performance , and staff related expenses of $ 5.5 million primarily to support talent development and other strategic objectives . staff related expenses in the current year include $ 2.0 million in severance associated with our restructuring plan . 33 depreciation and amortization ( dollars in millions ) replace_table_token_15_th depreciation expense in the current year includes a benefit of $ 1.5 million from the recognition of an infrastructure tax credit . this credit was used to reduce the carrying value of the assets as of their in-service date and consequently the adjustment to depreciation expense reflects the revised amount incurred to date . this credit was received in the current year but related to assets placed in service in prior years . additionally , the current year balance includes an adjustment of $ 1.6 million to reduce the carrying value of our old corporate aircraft to its estimated fair value and an impairment charge of $ 1.8 million related to a change in business strategy related to our gamification platform . overall , depreciation expense in the current year was higher due to depreciation expense related to the company 's recent investment in property and equipment to support our emerging content distribution efforts , including our wwe network . investment income , interest expense and other expense , net ( dollars in millions ) replace_table_token_16_th due to a change in our ownership interest in a cost method investment , we recorded an impairment charge of $ 4.0 million in 2014 , for the excess of the carrying value over its estimated fair value . story_separator_special_tag investment income , interest and other expense , net yielded an expense of $ 3.1 million in 2014 as compared to $ 1.3 million in 2013. the increase in net expense primarily related to translation losses incurred in the current period as a result of fluctuations in foreign currency exchange rates . income taxes ( dollars in millions ) replace_table_token_17_th the company recorded a tax benefit of $ 19.2 million associated with our operating loss in 2014. the company currently believes this benefit is realizable and has not recorded a valuation allowance against the related deferred tax assets . if it becomes more likely than not that the company will not realize these benefits , a valuation allowance would be recorded with a corresponding charge to our income tax provision . 34 year ended december 31 , 2013 compared to year ended december 31 , 2012 ( dollars in millions ) summary replace_table_token_18_th the comparability of our results for 2013 was impacted by $ 11.7 million of impairment charges related to our film portfolio , including $ 4.7 million and $ 0.9 million , for dead man down and no one lives , respectively , which were 2013 releases and $ 6.1 million from previously released films and an approximate $ 3.4 million positive impact from the transition of our video game business to a new licensee . in 2012 , our results were impacted by a $ 1.2 million impairment charge related to our two feature films , bending the rules and barricade , and the recognition of a $ 4.4 million benefit due to previously unrecognized tax benefits . our media division revenues increased by 5 % primarily due to the increased revenues in television rights business . our live events segment revenues increased by 6 % reflecting increased revenues from our north america events . our consumer products division segment experienced a 2 % decline in revenues , primarily driven by a $ 2.7 million decrease in our licensing business . our wwe studios segment experienced a 37 % increase in revenues due in part to the november 2013 release of christmas bounty , a made-for-television production , and from our movie portfolio . 35 media division the following tables present the performance results for our segments within our media division ( dollars in millions , except where noted ) : replace_table_token_19_th replace_table_token_20_th network revenues , which include revenues generated by pay-per-view and video-on-demand , decreased by $ 1.4 million in 2013 period as compared 2012. pay-per-view revenues decreased by $ 1.1 million from 2012 , primarily as result of a 5 % decline in the number of pay-per-view buys in 2013. this decrease was partially offset by a 4 % increase in average revenue per buy from 2012 due , in part , to an increase in the domestic retail price charged for viewing wrestlemania and higher retail prices charged for viewing our events in high definition . video-on-demand revenues decreased slightly by $ 0.3 million . network oibda as a percentage of revenues decreased to 32 % in 2013 from 47 % in 2012 due primarily to an additional $ 5.1 million in talent related expenses . television revenues , which include revenues generated from television rights fees and advertising , increased by $ 22.5 million in 2013 as compared to 2012. domestically , television rights fees increased by $ 17.0 million , primarily due to the production and licensing of new programs . during the third quarter of 2013 , we debuted a new television series , total divas , which is carried on the e ! network . in addition , 2013 includes the full year impact of programing introduced in 2012 , particularly , an additional hour of raw to the usa network , as well as rights fees for an original series , wwe main event on the ion television network . the television oibda as a percentage of revenues decreased to 34 % from 37 % in 2012 primarily due to increased production costs . home entertainment revenues decreased by $ 8.7 million , or 26 % , in 2013 as compared to 2012. domestic home entertainment revenue fell approximately $ 6.4 million , or 23 % , as a 6 % increase in shipments to 4.0 million units was more than offset by lower 36 sell-through rates and a 13 % decline in the average price per unit to $ 9.60 reflecting a shift in product mix and retail demand for lower priced product . additionally , we released 28 titles in 2013 compared to 35 titles in 2012. revenue from our international home entertainment activities declined by approximately $ 2.3 million reflecting lower sales in canada and the transition to a new licensee in the emea region . home entertainment oibda as a percentage of revenues decreased to 36 % in 2013 compared to 47 % in 2012 due to lower sell-through rates and higher talent expenses . digital media revenues , which include revenues generated from wwe.com and from our magazine publishing business , increased by $ 3.0 million in 2013 as compared to 2012. wwe.com revenues increased by $ 3.3 million in 2013 as compared to 2012 due to the incremental impact of the company 's launch of digital distribution of our pay-per-view events across several new platforms and higher sales of advertising across various digital platforms . magazine publishing revenues decreased by $ 0.3 million in 2013 as compared to 2012. net units sold decreased by 8 % driven by weaker newsstand demand and lower subscription revenue for the wwe kids magazine reflecting , in part , the continued overall decline in the magazine publishing industry . we published twelve issues of wwe magazine , ten issues of wwe kids magazine and three special issues both in 2013 and in 2012. digital media oibda as a percentage of revenues decreased to 20 % in 2013 from 34 % in 2012 due to hiring of new personnel to support digital content initiatives .
| 27 media division the following tables present the performance results for our segments within our media division ( dollars in millions , except where noted ) : replace_table_token_7_th replace_table_token_8_th ( a ) this service was discontinued in january 2014 . ( b ) this is our pricing for our domestic subscribers at december 31 , 2014. in certain international territories , subscribers can access the network by other means and or subscription pricing may vary . ( c ) average subscribers shown for 2014 represent the average level of subscribers for the year ended december 31 , 2014 although wwe network did not launch in the u.s. until february 24 , 2014 . 28 network revenues , which include revenues generated by wwe network , pay-per-view and video-on-demand , increased by $ 28.7 million in 2014 as compared to 2013. wwe network is a 24/7 streaming network that provides access to live and scheduled programming , including all 12 of wwe 's live pay-per-view events , as well as access to its comprehensive video-on-demand library . wwe network , which launched on february 24 , 2014 , accounted for $ 69.5 million in new digital subscription revenues in the current year with approximately 567,000 average paid subscribers for the year ended december 31 , 2014 . during the year ended december 31 , 2014 , wwe network had approximately 1,490,000 gross additions to its subscriber base , offset by churn of 674,000 subscribers . g ross additions include unique new subscribers and win-backs ( subscribers that previously churned out and subsequently renewed their subscription ) . the subscription pricing at december 31 , 2014 to wwe network is $ 9.99 per month with a one month commitment period . the $ 69.5 million of revenues generated by wwe network in the current year was partially offset by the decline in pay-per-view revenue of $ 37.3 million due primarily to a 40 % decline in total pay-per-view buys primarily attributable to wwe network 's launch . additionally , the average revenue per buy declined by 9 % to approximately $ 19.55 per buy due to a higher portion of pay-per-view buys coming from
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replace_table_token_9_th general net sales . net sales includes merchandise sales of comparable and non-comparable stores and revenue recognized on contracts of cdi contractors , llc ( “ cdi ” ) , the company 's general contracting construction company . comparable store sales includes sales for those stores which were in operation for a full period in both the current quarter and the corresponding quarter for the prior fiscal year . comparable store sales excludes changes in the allowance for sales returns . non-comparable store sales includes : sales in the current fiscal year from stores opened during the previous fiscal year before they are considered comparable stores ; sales from new stores opened during the current fiscal year ; sales in the previous fiscal year for stores closed during the current or previous fiscal year that are no longer considered comparable stores ; sales in clearance centers ; and changes in the allowance for sales returns . service charges and other income . service charges and other income includes income generated through the long-term private label card alliance with wells fargo bank , n.a . ( “ wells fargo alliance ” ) . other income includes rental income , shipping and handling fees , gift card breakage and lease income on leased departments . cost of sales . cost of sales includes the cost of merchandise sold ( net of purchase discounts , non-specific margin maintenance allowances and merchandise margin maintenance allowances ) , bankcard fees , freight to the distribution centers , employee and promotional discounts , shipping to customers and direct payroll for salon personnel . cost of sales also includes cdi contract costs , which comprise all direct material and labor costs , subcontract costs and those indirect costs related to contract performance , such as indirect labor , employee benefits and insurance program costs . selling , general and administrative expenses . selling , general and administrative expenses include buying , occupancy , selling , distribution , warehousing , store and corporate expenses ( including payroll and employee benefits ) , insurance , employment taxes , advertising , management information systems , legal and other corporate level expenses . buying expenses consist of payroll , employee benefits and travel for design , buying and merchandising personnel . depreciation and amortization . depreciation and amortization expenses include depreciation and amortization on property and equipment . rentals . rentals includes expenses for store leases , including contingent rent , and data processing and other equipment rentals . interest and debt expense , net . interest and debt expense includes interest , net of interest income and capitalized interest , relating to the company 's unsecured notes , subordinated debentures and borrowings under the company 's credit facility . interest and debt expense also includes gains and losses on note repurchases , if any , amortization of financing costs and interest on capital lease obligations . loss on early extinguishment of debt . loss on early extinguishment of debt includes charges related to the write-off of deferred financing fees in connection with the amendment of the company 's senior unsecured revolving credit facility . gain on disposal of assets . gain on disposal of assets includes the net gain or loss on the sale or disposal of property and equipment , as well as gains from insurance proceeds in excess of the cost basis of the insured assets . asset impairment and store closing charges . asset impairment and store closing charges consist of ( a ) write-downs to fair value of under-performing or held for sale properties and of cost method investments and ( b ) exit costs associated with the closure of certain stores . exit costs include future rent , taxes and common area maintenance expenses from the time the stores are closed . 20 income on and equity in losses of joint ventures . income on and equity in losses of joint ventures includes the company 's portion of the income or loss of the company 's unconsolidated joint ventures as well as the distribution of excess cash ( excluding returns of investments ) from a mall joint venture . 21 critical accounting policies and estimates the company 's significant accounting policies are also described in note 1 in the `` notes to consolidated financial statements '' in item 8 hereof . as disclosed in that note , 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 consolidated financial statements and accompanying notes . the company evaluates its estimates and judgments on an ongoing basis and predicates those estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances . since future events and their effects can not be determined with absolute certainty , actual results could differ from those estimates . management of the company believes the following critical accounting policies , among others , affect its more significant judgments and estimates used in preparation of the company 's consolidated financial statements . merchandise inventory . all of the company 's inventories are valued at the lower of cost or market using the last-in , first-out ( “ lifo ” ) inventory method . approximately 97 % of the company 's inventories are valued using the lifo retail inventory method . under the retail inventory method , the valuation of inventories at cost and the resulting gross margins are calculated by applying a calculated cost to retail ratio to the retail value of inventories . the retail inventory method is an averaging method that is widely used in the retail industry due to its practicality . inherent in the retail inventory method calculation are certain significant management judgments including , among others , merchandise markon , markups , and markdowns , which significantly impact the ending inventory valuation at cost as well as the resulting gross margins . story_separator_special_tag during periods of deflation , inventory values on the first-in , first-out ( `` fifo '' ) retail inventory method may be lower than the lifo retail inventory method . additionally , inventory values at lifo cost may be in excess of net realizable value . at february 3 , 2018 and january 28 , 2017 , merchandise inventories valued at lifo , including adjustments as necessary to record inventory at the lower of cost or market , approximated the cost of such inventories using the fifo retail inventory method . the application of the lifo retail inventory method did not result in the recognition of any lifo charges or credits affecting cost of sales for fiscal 2017 , 2016 or 2015. a 1 % change in the dollar amount of markdowns would have impacted net income by approximately $ 11 million for fiscal 2017. the company regularly records a provision for estimated shrinkage , thereby reducing the carrying value of merchandise inventory . complete physical inventories of the company 's stores and warehouses are performed no less frequently than annually , with the recorded amount of merchandise inventory being adjusted to coincide with these physical counts . the differences between the estimated amounts of shrinkage and the actual amounts realized during the past three years have not been material . revenue recognition . the company 's retail operations segment recognizes revenue upon the sale of merchandise to its customers , net of anticipated returns of merchandise . the provision for sales returns is based on historical evidence of our return rate . we recorded an allowance for sales returns of $ 4.8 million and $ 5.1 million as of february 3 , 2018 and january 28 , 2017 , respectively . adjustments to earnings resulting from revisions to estimates on our sales return provision were not material for fiscal years 2017 , 2016 or 2015. the company 's share of income earned under the wells fargo alliance and former synchrony alliance involving the dillard 's branded private label credit cards is included as a component of service charges and other income . the company received income of approximately $ 101 million , $ 104 million and $ 105 million from the alliances in fiscal 2017 , 2016 and 2015 , respectively . the company participates in the marketing of the private label credit cards and accepts payments on the private label credit cards in its stores as a convenience to customers who prefer to pay in person rather than by paying online or mailing their payments to wells fargo . revenues from cdi construction contracts are generally recognized by applying percentages of completion for each period to the total estimated revenue for the respective contracts . the length of each contract varies but is typically nine to eighteen months . the percentages of completion are determined by relating the actual costs of work performed to date to the current estimated total costs of the respective contracts . any anticipated losses on completed contracts are recognized as soon as they are determined . vendor allowances . the company receives concessions from vendors through a variety of programs and arrangements , including co-operative advertising , payroll reimbursements and margin maintenance programs . cooperative advertising allowances are reported as a reduction of advertising expense in the period in which the advertising occurred . if vendor advertising allowances were substantially reduced or eliminated , the company would likely consider other methods of advertising as well as the volume and frequency of our product advertising , which could increase or decrease our expenditures . similarly , we are not able to assess the impact of vendor advertising allowances on creating additional revenues , as such allowances do not directly generate revenues for our stores . 22 payroll reimbursements are reported as a reduction of payroll expense in the period in which the reimbursement occurred . amounts of margin maintenance allowances are recorded only when an agreement has been reached with the vendor and the collection of the concession is deemed probable . all such merchandise margin maintenance allowances are recognized as a reduction of cost purchases . under the retail inventory method , a portion of these allowances reduces cost of goods sold and a portion reduces the carrying value of merchandise inventory . insurance accruals . the company 's consolidated balance sheets include liabilities with respect to claims for self-insured workers ' compensation ( with a self-insured retention of $ 4 million per claim ) and general liability ( with a self-insured retention of $ 1 million per claim and a one-time $ 1 million corridor ) . the company 's retentions are insured through a wholly-owned captive insurance subsidiary . the company estimates the required liability of such claims , utilizing an actuarial method , based upon various assumptions , which include , but are not limited to , our historical loss experience , projected loss development factors , actual payroll and other data . the required liability is also subject to adjustment in the future based upon the changes in claims experience , including changes in the number of incidents ( frequency ) and changes in the ultimate cost per incident ( severity ) . as of february 3 , 2018 and january 28 , 2017 , insurance accruals of $ 40.4 million and $ 43.1 million , respectively , were recorded in trade accounts payable and accrued expenses and other liabilities . adjustments resulting from changes in historical loss trends have helped control expenses during fiscal 2017 and 2016 , partially due to company programs that have helped decrease both the number and cost of claims . further , we do not anticipate any significant change in loss trends , settlements or other costs that would cause a significant change in our earnings . a 10 % change in our self-insurance reserve would have affected net income by $ 3.0 million for fiscal 2017. long-lived assets . the company 's judgment regarding the existence of impairment indicators is based on market and operational performance .
| during fiscal 2016 , sales of ladies ' apparel and men 's apparel and accessories decreased moderately from the prior year . sales of ladies ' accessories and lingerie , shoes , juniors ' and children 's apparel , cosmetics and home and furniture decreased significantly from the prior year . the number of sales transactions during fiscal 2016 decreased 7 % over fiscal 2015 while the average dollars per sales transaction increased 2 % . net sales from the construction segment decreased $ 21.3 million or 10.3 % during fiscal 2016 as compared to fiscal 2015 due to a decrease in construction projects . the backlog of awarded construction contracts at january 28 , 2017 totaled $ 235.8 million , increasing approximately 41 % from january 30 , 2016 . 25 exclusive brand merchandise sales penetration of exclusive brand merchandise for fiscal years 2017 , 2016 and 2015 was 21.4 % , 21.7 % and 21.7 % of total net sales , respectively . service charges and other income replace_table_token_13_th 2017 compared to 2016 service charges and other income is composed primarily of income from the wells fargo alliance and former synchrony alliance . income from the alliances decreased $ 2.3 million in fiscal 2017 compared to fiscal 2016 primarily due to a decrease in finance charge income and an increase in funding costs , partially offset by a sales tax settlement from the former synchrony alliance . leased department income is primarily earned from an upscale women 's apparel vendor in certain stores . during fiscal 2017 , the vendor filed for bankruptcy ; however , the vendor was subsequently acquired , and the operations of the business remained intact . 2016 compared to 2015 service charges and other income is composed primarily of income from the wells fargo alliance and former synchrony alliance . income from the alliances decreased $ 1.8 million in fiscal 2016 compared to fiscal 2015 primarily due to a decrease in income from the former synchrony alliance . gross profit replace_table_token_14_th 26 2017 compared to 2016 gross profit as a percentage of net sales declined 48
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a phase 1 trial of the iv formulation , which leverages the optimized physicochemical properties of mrt1419 , is expected to commence in the first half of 2021 in patients with solid tumors . we were incorporated in february 2016 under the laws of the state of delaware . since inception , we have devoted substantially all of our resources to developing product and technology rights , conducting research and development , organizing and staffing our company , business planning and raising capital . we have incurred recurring losses , the majority of which are attributable to research and development activities , and negative cash flows from operations . we have funded our operations primarily through the sale of convertible preferred stock and common stock . our net loss was $ 56.9 million and $ 27.6 million for the years ended december 31 , 2020 and 2019 , respectively . as of december 31 , 2020 , we had an accumulated deficit of $ 107.4 million . our primary use of cash is to fund operating expenses , which consist primarily of research and development expenditures , and to a lesser extent , general and administrative expenditures . our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our current or future product candidates . we expect to continue to incur significant expenses and operating losses for the foreseeable future as we advance our product candidates through all stages of development and clinical trials and , ultimately , seek regulatory approval . in addition , if we obtain marketing approval for any of our product candidates , we expect to incur significant commercialization expenses related to product manufacturing , marketing , sales and distribution . furthermore , we expect to incur additional costs associated with operating as a public company , including significant legal , accounting , investor relations and other expenses that we did not incur as a private company . our net losses may fluctuate significantly from quarter-to-quarter and year-to-year , depending on the timing of our clinical trials and our expenditures on other research and development activities . we will need to raise substantial additional capital to support our continuing operations and pursue our growth strategy . until such time as we can generate significant revenue from product sales , if ever , we plan to finance our operations through the sale of equity , debt financings or other capital sources , which may include collaborations with other companies or other strategic transactions . there are no assurances that we will be successful in obtaining an adequate level of financing as and when needed to finance our operations on terms acceptable to us or at all . any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies . if we are unable to secure adequate additional funding , we may have to significantly delay , scale back or discontinue the development and commercialization of one or more product candidates or delay our pursuit of potential in-licenses or acquisitions . as of december 31 , 2020 , we had $ 218.3 million in cash and cash equivalents . we expect our existing cash and cash equivalents , together with the net proceeds of $ 161.4 million from the sale of our common stock in january 2021 , will enable us to fund our operating expense and capital expenditures into 2023. covid-19 impact we are continuing to proactively monitor and assess the current coronavirus disease 2019 , or covid-19 , global pandemic . since march 2020 we have been monitoring the potential impact on our business that may result from this rapidly evolving crisis and to avoid any unnecessary potential delays to our programs . at this time , our lead programs and research activities remain on track . the safety and well-being of employees , patients and partners is our highest priority . components of results of operations revenue to date , we have not recognized any revenue from any sources , including from product sales , and we do not expect to generate any revenue from the sale of products in the foreseeable future . if our development efforts for our product candidates are successful and result in regulatory approval , or license agreements with third parties , we may generate revenue in the future from product sales . however , there can be no assurance as to when we will generate such revenue , if at all . 114 operating expenses research and development expenses research and development expenses consist primarily of costs incurred in connection with the discovery and development of our product candidates . we expense research and development costs as incurred , including : expenses incurred to conduct the necessary discovery-stage laboratory work , preclinical studies and clinical trials required to obtain regulatory approval ; personnel expenses , including salaries , benefits and stock-based compensation expense for our employees engaged in research and development functions ; costs of funding research performed by third parties , including pursuant to agreements with clinical research organizations , or cros , that conduct our clinical trials , as well as investigative sites , consultants and cros that conduct our preclinical and nonclinical studies ; expenses incurred under agreements with contract manufacturing organizations , or cmos , including manufacturing scale-up expenses and the cost of acquiring and manufacturing preclinical study and clinical trial materials ; fees paid to consultants who assist with research and development activities ; expenses related to regulatory activities , including filing fees paid to regulatory agencies ; and allocated expenses for facility costs , including rent , utilities , depreciation and maintenance . we track outsourced development costs and other external research and development costs to specific product candidates on a program-by-program basis , fees paid to cros , cmos and research laboratories in connection with our preclinical development , process development , manufacturing and clinical development activities . story_separator_special_tag however , we do not track our internal research and development expenses on a program-by-program basis as they primarily relate to compensation , early research and other costs which are deployed across multiple projects under development . research and development activities are central to our business model . product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development , primarily due to the increased size and duration of later-stage clinical trials . we expect our research and development expenses to increase significantly over the next several years as we increase personnel costs , including stock-based compensation , conduct our clinical trials , including later-stage clinical trials , for current and future product candidates and prepare regulatory filings for our product candidates . general and administrative expenses general and administrative expenses consist primarily of personnel expenses , including salaries , benefits and stock-based compensation expense , for employees and consultants in executive , finance and accounting , legal , operations support , information technology and human resource functions . general and administrative expense also includes corporate facility costs not otherwise included in research and development expense , including rent , utilities , depreciation and maintenance , as well as legal fees related to intellectual property and corporate matters and fees for accounting and consulting services . we expect that our general and administrative expense will increase in the future to support our continued research and development activities , potential commercialization efforts and increased costs of operating as a public company . these increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants , legal support and accountants , among other expenses . additionally , we anticipate increased costs associated with being a public company , including expenses related to services associated with maintaining compliance with the requirements of nasdaq and the securities and exchange commission , or sec , insurance and investor relations costs . if any of our current or future product candidates obtains u.s. regulatory approval , we expect that we would incur significantly increased expenses associated with building a sales and marketing team . other income , net other income , net consists primarily of interest earned on our cash equivalents and grant income received from the state of delaware . we anticipate re-applying for the grant from the state of delaware from time to time as long as we 115 maintain qualifying headcount levels in the state of delaware . we expect our interest income , net to increase due to our investment of cash received from the sale of common stock . income taxes since our inception , we have not recorded any income tax benefits for the net operating losses , or nols , we have incurred or for our research and development tax credits , as we believe , based upon the weight of available evidence , that it is more likely than not that all of our nols and tax credits will not be realized . story_separator_special_tag the costs of manufacturing our product candidates for clinical trials and in preparation for marketing approval and commercialization ; the extent to which we enter into collaborations or other arrangements with additional third parties in order to further develop our product candidates ; the costs of preparing , filing and prosecuting patent applications , maintaining and enforcing our intellectual property rights and defending intellectual property-related claims ; the costs and fees associated with the discovery , acquisition or in-license of additional product candidates or technologies ; expenses needed to attract and retain skilled personnel ; costs associated with being a public company ; the costs required to scale up our clinical , regulatory and manufacturing capabilities ; the costs of future commercialization activities , if any , including establishing sales , marketing , manufacturing and distribution capabilities , for any of our product candidates for which we receive marketing approval ; and revenue , if any , received from commercial sales of our product candidates , should any of our product candidates receive marketing approval . we will need additional funds to meet operational needs and capital requirements for clinical trials , other research and development expenditures , and business development activities . we currently have no credit facility or committed sources of capital . because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates , we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical studies . 117 until such time , if ever , as we can generate substantial product revenue , we expect to finance our operations through a combination of equity offerings , debt financings , collaborations , strategic alliances and marketing , distribution or licensing arrangements . to the extent that we raise additional capital through the sale of equity or convertible debt securities , ownership interests will be diluted , and the terms of these securities may include liquidation or other preferences that adversely affect the rights of common stockholders . debt financing and preferred equity financing , if available , may involve agreements that include covenants limiting or restricting our ability to take specific actions , such as incurring additional debt , making acquisitions or capital expenditures or declaring dividends . if we raise additional funds through collaborations , strategic alliances or marketing , distribution or licensing arrangements with third parties , we may have to relinquish valuable rights to our technologies , future revenue streams , research programs or product candidates , or grant licenses on terms that may not be favorable to us . if we are unable to raise additional funds through equity or debt financings or other arrangements when needed , we may be required to delay , limit , reduce or terminate our research , product development or future commercialization efforts , or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves .
| 116 other income , net other income , net increased by $ 1.3 million to $ 1.8 million for the year ended december 31 , 2020 from $ 0.5 million for the year ended december 31 , 2019 , primarily due to the receipt and recognition of a research and development tax credit from the state of delaware in the third quarter of 2020 as well as additional interest earned on the investment of our cash proceeds . liquidity and capital resources overview since our inception , we have not recognized any revenue and have incurred operating losses and negative cash flows from our operations . we have not yet commercialized any product and we do not expect to generate revenue from sales of any products for several years , if at all . since our inception , we have funded our operations through the sale of convertible preferred stock and common stock . as of december 31 , 2020 , we had $ 218.3 million in cash and cash equivalents and had an accumulated deficit of $ 107.4 million . we expect our existing cash and cash equivalents , together with the net proceeds of $ 161.4 million from the sale of our common stock in january 2021 , will enable us to fund our operating expense and capital expenditures into 2023. we have based these estimates on assumptions that may prove to be imprecise , and we could utilize our available capital resources sooner than we expect . funding requirements our primary use of cash is to fund operating expenses , primarily research and development expenditures . cash used to fund operating expenses is impacted by the timing of when we pay these expenses , as reflected in the change in our outstanding accounts payable , accrued expenses and prepaid expenses . because of the numerous risks and uncertainties associated with research , development and commercialization of pharmaceutical products , we are unable to estimate the exact amount of our operating capital requirements . our future funding requirements will depend
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other events sprint territory expansion : parkersburg - on april 6 , 2017 , we completed the expansion of our affiliate service territory , under our agreements with sprint , to include certain areas in north carolina , kentucky , maryland , ohio and west virginia effectively adding approximately 500 thousand pops in the parkersburg , wv and cumberland , md areas . the expanded territory includes the parkersburg , wv , huntington , wv , and cumberland , md , basic trading areas , ( the `` parkersburg expansion area '' ) . acquisition of ntelos and exchange with sprint : on may 6 , 2016 , we completed the acquisition of ntelos holdings corp. ( “ ntelos ” ) for $ 667.8 million , net of cash acquired . the purchase price was financed by a credit facility arranged by cobank , acb . we have included the operations of ntelos for financial reporting purposes for periods subsequent to the acquisition . for additional information regarding the acquisition of ntelos , please refer to note 3 , business combinations and acquisitions , included with the consolidated financial statements . 37 acquisition , integration and migration expenses update : since the acquisition of ntelos occurred , the company incurred a total of approximately $ 75.7 million of acquisition , integration and migration expenses associated with this transaction , excluding approximately $ 23.0 million of debt issuance costs . such costs included support of back-office staff and support functions required while the ntelos legacy customers were migrated to the sprint billing platform ; cost of the handsets that were provided to ntelos legacy customers as they migrated to the sprint billing platform ; severance costs for back-office and other former ntelos employees who were not retained permanently ; and transaction related fees . we incurred $ 17.5 million of these costs during the year ended december 31 , 2017. these costs include $ 1.8 million reflected in cost of goods and services and $ 4.7 million reflected in selling , general and administrative costs in the year ended december 31 , 2017. results of operations in addition to the description of the components of our operations provided below please refer to the descriptions of our critical accounting policies , included within this section , and to note 2 , summary of significant accounting policies , included within the notes to our consolidated financial statements , for additional information . revenue we earn revenue primarily through the sale of our wireless network telecommunications services , cable and wireline services that include video , internet , voice , and data services . we also lease space on our cell site towers and our fiber network . our revenue is primarily driven by the number of sprint subscribers that utilize our wireless network as well as the number of our customers that subscribe to our cable and wireline services , our ability to retain our customers and the contractually negotiated price of such services . operating expenses our operating expenses consist primarily of cost of goods and services , selling , general and administrative , acquisition , integration and migration expense related to the ntelos acquisition , and depreciation and amortization expenses , described as follows : cost of goods and services - cost of goods and services consists primarily of network-related costs attributable to the operation of our wireless , cable and wireline networks , including network costs , site costs for telecommunications equipment , and maintenance expenses , the cost of handsets for our wireless subscribers , programming costs for our cable operations , and expenses for employees who provide direct contractual services to our clients , including salaries , benefits , discretionary incentive compensation , employment taxes , and equity compensation costs . our cost of goods and services also included certain network and network maintenance related expenses incurred to integrate the acquired ntelos network . cost of goods and services does not include allocated amounts for occupancy expense and depreciation and amortization . overall , we expect cost of goods and services to grow as we expand our network to capitalize on expansion opportunities in our market , which will require us to add additional staff , enter into additional tower and ground leases , and incur additional backhaul and electric network expenses . selling , general and administrative - our selling , general and administrative expense consists primarily of employee-related expenses , including salaries , benefits , commissions , discretionary incentive compensation , employment taxes , and equity compensation costs for our employees engaged in the administration of sales , sales support , business development , marketing , management information systems , administration , human resources , finance , legal , and executive management . selling , general and administrative expense also includes occupancy expenses including rent , utilities , communications , and facilities maintenance , professional fees , consulting fees , insurance , travel , and other expenses . our selling , general and administrative expense also included certain general expenses , such as severance , incurred to integrate the acquisition of ntelos with our infrastructure . our sales and marketing expense excludes any allocation of depreciation and amortization . we expect our selling , general and administrative expenses to increase , including the hiring of additional sales and sales support personnel as we strategically invest to expand our business , both organically and in our newly-acquired sprint expansion areas . acquisition , integration and migration - our acquisition , integration and migration expense consisted primarily of costs required to migrate subscribers acquired in the may 2016 acquisition of ntelos to the sprint billing and network systems , costs required to integrate the acquired ntelos administrative and operational support functions , severance costs for former ntelos employees who were not retained , transaction related fees ; and gains or losses associated with the disposal of certain property . we completed the migration of ntelos subscribers to the sprint network during 2017 and have incurred additional expenses related to integration activities . story_separator_special_tag 38 depreciation and amortization expense - our depreciation and amortization expense consists primarily of depreciation of fixed assets , and amortization of acquisition-related intangible assets . we expect our depreciation and amortization expense to increase as we expand our networks organically and through acquisitions . other income ( expense ) our other income ( expense ) consists primarily of interest expense , net gain ( loss ) on investments , and net non-operating income ( loss ) , described as follows : interest expense - interest expense represents interest incurred on our credit facilities ( as defined below , under the heading financial condition , liquidity and capital resources-debt , and in note 13 , long-term debt ) . we expect our interest expense to fluctuate in proportion to the outstanding principal balance of the credit facilities and the prevailing libor interest rate . gain ( loss ) on investments , net - net gain ( loss ) on investments , consists of gains and losses realized as changes occur in the value of the assets and obligation underlying company 's supplemental executive retirement plan ( `` serp '' ) retirement plan occur . we expect our net gain ( loss ) on investments , to fluctuate in proportion to the prevailing market conditions as they relate to our serp assets and obligations . non-operating income ( loss ) , net - net non-operating income ( loss ) , primarily represents interest and dividends earned from our investments , including our patronage arrangement that is connected to our credit facility . we expect our interest income to fluctuate in proportion to the amount of funds we invest and the continuation of the patronage arrangement . income tax expense ( benefit ) our provision for income taxes consists of federal and state income taxes in the united states , and the provisional effect of the 2017 tax act , including deferred income taxes reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes , and excess tax benefits or deficiencies derived from exercises of stock options and vesting of restricted stock . we expect that in the near-term our effective tax rate may fluctuate due to the effect of the 2017 tax act and the recognition of excess tax benefits and tax deficiencies associated with the exercise of stock options or the vesting of restricted stock . excluding discrete items impacting the effective tax rate , we are expecting our long-term tax rate to more closely reflect the applicable federal and statutory rates . refer to note 15 , income taxes , included with the notes to our consolidated financial statements for additional information concerning income taxes and the effects of the 2017 tax act . 39 story_separator_special_tag _ 1 ) represents sprint 's subscribers , including prepaid lifeline , as of the acquisition date in the acquired territory . 2 ) as of december 31 , 2017 we have shut down 107 overlap sites associated with the ntelos area . 3 ) acquired on april 6 , 2017 . 4 ) acquired on may 6 , 2016. wireless operating income replace_table_token_9_th 42 wireless service revenues replace_table_token_10_th 1 ) postpaid net billings are defined under the terms of the affiliate contract with sprint to be the gross billings to customers within our wireless network coverage area less billing credits and adjustments and allocated write-offs of uncollectible accounts . 2 ) the company is no longer including lifeline subscribers to be consistent with sprint . the above table reflects the reclassification of the related assurance wireless prepaid revenue from prepaid gross billings to travel and other revenues for both years shown . operating revenues wireless service revenue increased approximately $ 71.4 million , or 19.9 % , in 2017 compared with 2016 , primarily due subscriber growth related to the expansion of our wireless network coverage area that was driven by our 2016 acquisition of ntelos and was offset by a decline in revenue per subscriber as a higher percentage of sprint 's postpaid customer base moved from higher revenue subsidized phone price plans to lower phone price plans associated with leased and installment sales . postpaid net billings increased approximately $ 57.7 million , or 18.3 % , as postpaid retail pcs subscribers increased 1.9 % primarily due to new subscribers from ntelos . prepaid net billings increased $ 23.1 million , or 28.9 % , due to 9.3 % growth in prepaid retail pcs subscribers and higher average revenue per subscriber due to improvements in product mix . travel and other revenues increased $ 4.0 million due to a full year of travel revenue in the former ntelos service area compared to eight months in 2016. equipment revenue decreased approximately $ 1.2 million or 11.3 % , driven by a decline in handset sales as more subscribers are leasing their handsets directly from sprint and as of august 2017 the company is no longer being compensated for accessory sales through sprint 's national retailer channel . other revenue decreased $ 4.2 million , or 59.8 % , in 2017 compared with the same period in 2016 primarily due to the migration of the ntelos subscribers to the sprint billing platform and corresponding reduction in regulatory recovery revenues that we billed the subscribers from the former ntelos platform prior to their migration . operating expenses cost of goods and services increased approximately $ 19.2 million , or 14.4 % , in 2017 compared with 2016 due to the expansion of our network as a result of our 2016 acquisition of ntelos . network costs increased $ 22.7 million , while maintenance costs increased $ 2.8 million and are both primarily attributable to a full year of ntelos and the expansion of our network and wireless network coverage area . handset costs decreased approximately $ 7.0 million due to the completion of the migration of ntelos subscribers to the sprint platform .
| other income ( expense ) other income ( expense ) increased approximately $ 12.7 million or 61.6 % in 2017 compared with 2016 , primarily due to an increase in interest expense due to borrowings , related to our acquisition of ntelos , under our credit facility that were outstanding for the full year 2017. income tax expense ( benefit ) the company 's effective tax rate decreased from an expense of 146.0 % in 2016 to a benefit of 400.8 % in 2017 . the decrease is primarily attributable to the changes in federal tax regulations related to the 2017 tax act that was enacted during december 2017 and non-deductible transactions costs incurred in 2016. we are expecting our long-term tax rate to more closely reflect the applicable federal and statutory rates offset for any excess tax benefits or shortfalls related to vesting or exercise of equity awards . we recognized an income tax benefit of approximately $ 53.1 million for the year ended december 31 , 2017. this includes a one-time non-cash decrease of approximately $ 53.4 million in our net deferred tax liabilities as a result of the remeasurement of our deferred tax assets and liabilities as of december 31 , 2017 to reflect the reduction in the u.s. corporate income tax rate from 35 percent to 21 percent . the 2017 tax act also provides immediate expensing for certain qualified assets acquired and placed into service after september 27 , 2017 as well as prospective changes beginning in 2018 , including acceleration of tax revenue recognition , additional limitations on deductibility executive compensation and limitations on the deductibility of interest . refer to note 15 , income taxes , included with the notes to our consolidated financial statements for additional information concerning income taxes . 40 wireless wireless earns postpaid and prepaid revenues from sprint for their subscribers that use our wireless network service in our wireless network coverage area net of both
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the decrease of 9.3 % in gross margin from the prior period was principally due to a reduction in the absorption of fixed production costs and an increase in net sales which carries a lower gross margins . gross margins are generally influenced by fluctuations in production volume , fixed production costs and related overhead absorption , raw ingredient costs , inventory mark to market write-downs and the timing of shipments to customers which are factors of the seasonality of our sales activities and products . sales and marketing expense for fiscal 2016 increased $ 1.4 to $ 1.7 million as compared to $ 303,000 for fiscal 2015. the increase in sales and marketing expense for fiscal 2016 as compared to fiscal 2015 was principally due to an increase in advertising expenditures as we managed the scope and timing of our media and product promotion advertising campaigns from period to period . administration expense increased $ 466,000 for fiscal 2016 to $ 2.7 million as compared to $ 2.3 million in fiscal 2015. the increase in administration expense for fiscal 2016 as compared to fiscal 2015 was principally due to an increase in professional and legal fees related to litigation matters and in corporate personnel expenses . research and development costs for fiscal 2016 and 2015 were $ 358,000 and $ 340,000 , respectively . the increase of $ 18,000 in research and development costs for fiscal 2016 as compared to fiscal 2015 was principally due to an increase in the scope , timing , cost and amount of research and development activity from period to period . interest income and expense for fiscal 2016 was $ 1,000 and $ 213,000 , respectively , as compared to $ 2,000 and $ 18,000 , respectively for fiscal 2015. the decline in interest income in fiscal 2016 as compared to fiscal 2015 was due principally to lower invested cash balances from period to period . the increase in interest expense for fiscal 2016 as compared to fiscal 2015 was due principally to the interest expense incurred pursuant to the issuance of the secured promissory notes in december 2015. as noted above , we have net operating loss carry-forwards for both federal and certain states . as a consequence of these loss carry-forwards , we did not incur income tax expense for fiscal 2016 or fiscal 2015. as a result of the effects of the above , the net loss from continuing operations for fiscal 2016 was $ 4.0 million , or ( $ 0.24 ) per share , as compared to a net loss of $ 2.1 million , or ( $ 0.13 ) per share , for fiscal 2015. net income from discontinued operations for fiscal 2016 was $ 1.1 million , or $ 0.07 per share , as compared to net loss of $ 1.5 million , or ( $ 0.09 ) per share , for fiscal 2015. net loss for fiscal 2016 was $ 2.9 million , or ( $ 0.17 ) per share , as compared to a net loss of $ 3.6 million , or ( $ 0.22 ) per share , for fiscal 2015. liquidity and capital resources our aggregate cash and cash equivalents and marketable securities as of december 31 , 2017 were $ 21.9 million as compared to $ 441,000 at december 31 , 2016. our working capital was $ 27.8 million and $ 2.8 million as of december 31 , 2017 and 2016 , respectively . the increase of $ 21.5 million in our cash and cash equivalents and marketable securities balance for the 12 months ended december 31 , 2017 was principally due to the net effect of ( i ) the net proceeds of $ 40.8 million , excluding the $ 5.0 million escrow receivable , derived from the sale of the cold-eeze ® business , and ( ii ) proceeds from the exercise of stock options and warrants of $ 1.5 million , offset by ( iii ) payments of $ 1.5 million to retire the secured promissory notes ( see note 5 of our consolidated financial statements in item 8 of this annual report ) , ( iv ) payments of $ 16.3 million for the repurchase of our common stock pursuant to the terms of the two tender offers and certain stock purchase agreements ( described below ) , ( v ) cash used in operations of $ 2.8 million and ( vi ) capital expenditures of $ 208,000. as a consequence of the seasonality of our business , we realize variations in operating results and demand for working capital from quarter to quarter . 22 treasury stock – tender offers in fiscal 2017 , we completed two discrete tender offers to purchase shares of our common stock in each of august 2017 and november 2017. the august 2017 tender offer expired on september 25 , 2017. subject to the terms of the august 2017 tender offer , we accepted for purchase 4,323,335 shares of our common stock , including all “ odd lots ” validly tendered , at a purchase price of $ 2.30 per share , for an aggregate purchase price of approximately $ 9.9 million . the november 2017 tender offer expired on december 18 , 2017. subject to the terms of the november 2017 tender offer , we accepted for purchase 1,948,569 shares of our common stock , including all “ odd lots ” validly tendered , at a purchase price of $ 2.30 per share , for an aggregate purchase price of approximately $ 4.5 million . story_separator_special_tag stock option exercise subsequent to the completion of the november 2017 tender offer , mr. karkus exercised 600,000 outstanding options for net proceeds of $ 600,000. stock purchase agreements on june 12 , 2017 we entered into a stock purchase agreement with each of mark s. leventhal , a former director of the company , and certain other persons and entities associated and or affiliated with mr. leventhal ( the “ leventhal holders ” ) , pursuant to which we purchased all 1,061,980 shares of our common stock then held by the leventhal holders , representing an approximate 6.2 % aggregate ownership interest ( based on 17.2 million shares of common stock outstanding as of june 12 , 2017 ) . pursuant to the terms of the stock purchase agreements , the total consideration paid by us to the leventhal holders for their shares was $ 1,858,465 , which amount was equal to the product of ( i ) $ 1.75 multiplied by ( ii ) the number of shares purchased . equity line of credit we have an equity line with dutchess ( the “ 2015 equity line ” ) , pursuant to which dutchess is committed to purchase , subject to certain restrictions and conditions , up to 3,200,000 shares of our common stock , over a period of 36 months from the effectiveness of the registration statement registering the resale of shares purchased by dutchess pursuant to the investment agreement . at december 31 , 2017 , we had 2,450,000 shares of our common stock available for sale , at our discretion , under the terms of the 2015 equity line and covered pursuant to an effective registration statement . the 2015 equity line is scheduled to expire in july 2018. under the terms of the 2015 equity line , we may , at our discretion , draw on the facility from time to time , as and when we determine appropriate in accordance with the terms and conditions of the investment agreement with dutchess . the maximum number of shares that we are entitled to put to dutchess in any one draw down notice may not exceed 500,000 shares with a purchase price calculated in accordance with the 2015 equity line . we may deliver a notice for a subsequent put from time to time , following the one day pricing period for the prior put . the purchase price for any shares sold to dutchess under the agreement will be set at ninety-five percent ( 95 % ) of the volume weighted average price ( vwap ) of the common stock during the one trading day immediately following our put notice . we have the right to withdraw all or any portion of any put , except that portion of the put that has already been sold to a third party , including any portion of a put that is below the minimum acceptable price set forth on the put notice , before the closing . in the event dutchess receives more than a five percent ( 5 % ) return on the net sales for a specific put , dutchess must remit such excess proceeds to us ; however , in the event dutchess receives less than a five percent ( 5 % ) return on the net sales for a specific put , dutchess will have the right to deduct from the proceeds of the put amount on the applicable closing date so dutchess 's return will equal five percent ( 5 % ) . there are put restrictions applied on days between the draw down notice date and the closing date with respect to that particular put . in addition , dutchess will not be obligated to purchase shares if dutchess ' total number of shares beneficially held at that time would exceed 4.99 % of the number of shares of common stock as determined in accordance with rule 13d-1 ( j ) of the exchange act . in addition , we are not permitted to draw on the facility unless there is an effective registration statement to cover the resale of the shares . 23 amended and restated employment agreement with ted karkus on february 16 , 2018 , our board of directors approved the amended and restated 2015 executive employment agreement with ted karkus , our chief executive officer ( the “ amended employment agreement ” ) , which became effective february 23 , 2018 , subject to stockholder approval at a special meeting of stockholder to be held april 12 , 2018. pursuant to the terms of the amended employment agreement , mr. karkus has voluntarily agreed to reduce his base salary from the rate set forth in his previous employment agreement ( the “ prior employment agreement ” ) ( i.e. , not less than $ 675,000 per annum ) to a base salary of $ 125,000 per annum ( the “ term base salary ” ) through february 22 , 2021. unless otherwise determined by the mutual agreement of the company and mr. karkus , on february 22 , 2021 and thereafter , mr. karkus ' salary will increase from the term base salary to not less than $ 675,000 per annum . in consideration of mr. karkus ' voluntary reduction in salary , our board of directors granted mr. karkus a stock option to purchase 2,300,000 shares of our common stock at an exercise price of $ 3.00 per share on february 23 , 2018 ( the “ executive stock option ” ) . the executive stock option will vest and be exercisable in 35 equal monthly installments of 63,888 shares and one monthly installment of 63,290 shares , subject to his continued employment , and subject to accelerated vesting in the event mr. karkus 's employment is terminated for any reason other than by us for cause or by mr. karkus without good reason ( as such terms are defined in the amended employment agreement ) . the executive stock option will be exercisable for a five year term commencing on the date of grant .
| administrative expense increased $ 2.1 million for fiscal 2017 to $ 4.8 million as compared to $ 2.7 million in fiscal 2016. the increase in administrative expense for fiscal 2017 as compared to fiscal 2016 was principally due to an increase in professional and legal fees from the two discrete tender offers to purchase our common stock in each of the august 2017 and november 2017 and a lower allocation of administrative expense to discontinued operations in fiscal 2017 as compared to fiscal 2016. research and development costs for fiscal 2017 and 2016 were $ 431,000 and $ 358,000 , respectively . the increase of $ 73,000 in research and development costs for fiscal 2017 as compared to fiscal 2016 was principally due to an increase in the amount and timing of research and development expenditures . interest income and interest expense for fiscal 2017 was $ 231,000 and $ 54,000 , respectively , as compared to $ 1,000 and $ 213,000 , respectively , for fiscal 2016. the increase in interest income in fiscal 2017 as compared to fiscal 2016 is principally due to interest earned on our investment account . the decrease in interest expense is principally due to the retirement of the 12 % secured promissory notes . ( see note 5 of our consolidated financial statements in item 8 of this annual report ) . the other income for fiscal 2017 was $ 150,000 as compared to zero for fiscal 2016. the increase in other income is principally due to the transition service fees earned pursuant to the terms of the transition services agreement with mylan . for fiscal 2017 , we charged $ 18.8 million to discontinued operations for estimated federal and state income taxes arising from the sale of the cold-eeze ® business and we have realized an income tax benefit from continuing operations of $ 18.0 million as a consequence of the utilization of the federal and state net operating
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- 30 - · our gross profit margin was 31.1 % in 2014 , compared to 28.8 % in 2013 and 25.5 % in 2012. our gross profit margin increased in 2014 due primarily to lower gold prices , improved product mix , copper wire conversion and cost reduction efforts . future gross profit margins will depend primarily on market prices , our product mix , manufacturing cost savings , and the demand for our products . · for 2014 , the percentage of our net sales derived from our asian subsidiaries was 80 % , compared to 82 % in 2013 and 79 % in 2012. europe accounted for approximately 10 % , 9 % and 11 % of our net sales in 2014 , 2013 and 2012 , respectively . in addition , north america accounted for approximately 10 % , 9 % and 10 % of our net sales in 2014 , 2013 and 2012 , respectively . · for 2014 , our capital expenditures were approximately 7 % of net sales , which is lower than our previous 10 % to 12 % of net sales model . for 2015 , capital expenditures may be on the higher end of our reduced 5 % to 9 % of net sales model due to the delay of the receipt of some assembly and test equipment into 2015 . · during 2014 , we invested approximately $ 46 million in our manufacturing and wafer fabrication facilities in china , and we expect to continue to invest in our facilities , although the amount to be invested will depend on product demand and new product developments . · our investment in research and development for 2014 increased to approximately $ 52 million , or 5.9 % of net sales , compared to $ 48 million , or 5.8 % of net sales , in 2013. we expect research and development costs to continue to increase as we look to invest in developing new products . description of sales and expenses net sales the principal factors that have affected or could affect our net sales from period to period are : · the condition of the economy in general and of the semiconductor industry in particular , · our customers ' adjustments in their order levels , · changes in our pricing policies or the pricing policies of our competitors or suppliers , · the addition or termination of key supplier relationships , · the rate of introduction and acceptance by our customers of new products , · our ability to compete effectively with our current and future competitors , · our ability to enter into and renew key corporate and strategic relationships with our customers , vendors and strategic alliances , · changes in foreign currency exchange rates , · a major disruption of our information technology infrastructure , · unforeseen catastrophic events , such as armed conflict , terrorism , fires , typhoons and earthquakes , and · any other disruptions , such as labor shortages , unplanned maintenance or other manufacturing problems . cost of goods sold cost of goods sold includes manufacturing costs for our semiconductors and our wafers . these costs include raw materials used in our manufacturing processes as well as labor costs and overhead expenses . cost of goods sold is also impacted by yield improvements , capacity utilization and manufacturing efficiencies . in addition , cost of goods sold includes the cost of products that we purchase from other manufacturers and sell to our customers . cost of goods sold is also affected by inventory obsolescence if our inventory management is not efficient . selling , general and administrative expenses selling , general and administrative expenses relate primarily to compensation and associated expenses for personnel in general management , sales and marketing , information technology , engineering , human resources , procurement , planning and finance , and sales commissions , as well as outside legal , investor relations , accounting , consulting and other operating expenses . research and development expenses research and development expenses consist of compensation and associated costs of employees engaged in research and development projects , as well as materials and equipment used for these projects . research and development expenses are primarily associated with our wafer facilities in china , kansas city , missouri and manchester , united kingdom ( “ u.k. ” ) and our manufacturing facilities in china , as well as with our engineers in the u.s. and taiwan . all research and development expenses are expensed as incurred . - 31 - amortization of acquisition-related intangible assets amortization of acquisition-related intangible assets consists of assets such as developed technologies and customer relationships . impairment of goodwill impairment of goodwill consists of the impairment amount recognized as a result of a reporting unit 's goodwill exceeding its implied fair value . restructuring restructuring consists of charges to reduce our cost structure to enhance operating effectiveness and improve profitability . gain on sale of assets gain on sale of assets consists of the sale of certain assets such as intangibles or buildings . interest income / expense interest income consists of interest earned on our cash and investment balances . interest expense consists of interest payable on our outstanding credit facilities and other debt instruments . gain ( loss ) on securities carried at fair value from time to time we may hold investments in the form of common stock or some other similar equivalent and have elected fair value accounting treatment . income tax provision our global presence requires us to pay income taxes in a number of jurisdictions . see note11 of “ notes to consolidated financial statements ” for additional information . net income attributable to noncontrolling interest this represents the minority investors ' share of our subsidiaries ' earnings . net income attributable to common stockholders net income attributable to common stockholders is net income less net income attributable to noncontrolling interest . story_separator_special_tag - 32 - story_separator_special_tag roman ; font-weight : normal ; font-style : normal ; text-transform : none ; font-variant : normal ; '' > 2013 impairment of goodwill $ - $ 5,318 goodwill impairment for 2013 was approximately $ 5 million which was related to eris . there was no goodwill impairment for 2014 . 2014 2013 restructuring $ - $ 1,535 there were no restructuring related costs for 2014 , compared to restructuring related costs of approximately $ 2 million for 2013 related to termination and severance costs of our u.k. development team and the closure of our new york sales office . 2014 2013 loss ( gain ) on sale of assets $ ( 983 ) $ 216 we recorded a $ 1 million gain on sale of assets for 2014 , due to the sale of a building in taiwan . 2014 2013 interest income $ 1,470 $ 1,274 interest income for both 2014 and 2013 was approximately $ 1 million from interest earned on bank deposits and short-term investments . 2014 2013 interest expense $ 4,332 $ 5,580 interest expense for 2014 was approximately $ 4 million , compared to $ 5 million for 2013 , due primarily to the repayment of $ 40 million on our revolving senior credit facility . 2014 2013 gain on securities carried at fair value $ 1,364 $ 601 gain on securities carried at fair value was approximately $ 1 million for both 2014 and 2013 , due primarily to unrealized and realized gains on trading securities . 2014 2013 other income ( expense ) $ 2,979 $ 9 - 34 - other income for 2014 was approximately $ 3 million , and included approximately $ 2 million in currency gains . other income for 2013 was negligible , compared to other expense of $ 1 million for 2012. included in other income for 2013 were foreign currency gains and miscellaneous income . 2014 2013 income tax provision $ 20,359 $ 14,481 we recognized income tax expense of approximately $ 20 million for 2014 , resulting in an effective tax rate of approximately 24 % , as compared to 38 % for 2013. income tax expense for 2013 includes approximately $ 5 million of additional tax expense related to a tax audit by the china tax authorities . the increase in tax expense from 2013 to 2014 is due primarily to the increase in pretax earnings during the same period . 2014 2013 net ( income ) loss attributable to noncontrolling interest $ ( 1,955 ) $ 2,428 net ( income ) loss attributable to noncontrolling interest primarily represents the minority investors ' share of the earnings of certain china subsidiaries and eris . the noncontrolling interest in the subsidiaries and their equity balances are reported separately in the consolidation of our financial statements . the loss attributable to noncontrolling interest for 2013 was due primarily to the goodwill impairment attributable to eris , of which 49 % was recognized in noncontrolling interest . 2014 2013 net income attributable to common stockholders $ 63,678 $ 26,532 net income attributable to common stockholders increased 140 % to approximately $ 64 million ( or $ 1.35 basic earnings per share and $ 1.31 diluted earnings per share ) for 2014 , compared to $ 27 million ( or $ 0.57 basic earnings per share and $ 0.56 diluted earnings per share ) for 2013. the 140 % increase in net income attributable to common stockholders for 2014 was due primarily to an 8 % increase in net sales , a 230 basis point increase in gross margin , a 100 basis point improvement in total operating expenses as a percentage of net sales , and a 138 basis point reduction in our effective tax rate . year 2013 compared to year 2012 2013 2012 net sales $ 826,846 $ 633,806 net sales for 2013 increased approximately $ 193 million to $ 827 million from $ 634 million for 2012. the 31 % increase in net sales represented an approximately 25 % increase in units sold and a 5 % increase in asp . the net sales increase for 2013 was primarily attributable to our past design win momentum and new product initiatives , combined with the inclusion of ten months of bcd net sales . replace_table_token_8_th cost of goods sold increased approximately $ 117 million , or 25 % , for 2013 to $ 589 million , compared to $ 472 million for 2012. as a percent of sales , cost of goods sold decreased from 74.5 % for 2012 to 71.2 % for 2013. our average unit cost was relatively flat . gross profit for 2013 increased approximately 47 % to $ 238 million from $ 162 million for 2012. gross profit as a percentage of net sales was 28.8 % for 2013 , compared to 25.5 % for 2012. the increase in gross margin was due primarily to lower gold prices , improved product mix , stable pricing , copper wire conversion and cost reduction efforts . 2013 2012 selling , general and administrative ( `` sg & a '' ) $ 132,106 $ 101,363 - 35 - sg & a for 2013 increased approximately $ 31 million , or 30 % , to $ 132 million , compared to $ 101 million for 2012. sg & a , as a percentage of net sales , was approximately 16 % in 2013 and 2012. the dollar amount increase in sg & a included increases in wages , including bcd retention costs , freight and professional fees , which was due primarily to the acquisition of bcd . 2013 2012 research and development ( `` r & d '' ) $ 48,302 $ 33,761 r & d for 2013 increased approximately $ 15 million to $ 48 million , or 6 % of net sales , compared to $ 34 million , or 5 % of net sales , for 2012. the increase in r & d included increases in wages , including bcd retention costs related to the acquisition of bcd .
| the increase in gross margin was primarily due to lower gold prices , improved product mix , copper wire conversion and cost reduction efforts . 2014 2012 selling , general and administrative ( `` sg & a '' ) $ 133,701 $ 132,106 - 33 - sg & a for 2014 increased approximately $ 2 million , or 1.2 % , to $ 134 million , compared to $ 132 million for 2013 , due primarily to increased selling expenses , partly offset by reduced retention bonus related to the bcd acquisition . sg & a , as a percentage of net sales , improved to 15.0 % in 2014 , from 16.0 % in 2013 . 2014 2013 research and development ( `` r & d '' ) $ 52,136 $ 48,302 r & d for 2014 increased approximately $ 4 million , or 8 % , to $ 52 million , compared to $ 48 million for 2013 , due primarily to an increase in employee related costs . r & d , as a percentage of net sales , was 6 % for both 2014 and 2013 . 2014 2013 amortization of acquisition-related intangible assets $ 7,914 $ 8,078 amortization of acquisition-related intangibles was approximately $ 8 million for both 2014 and 2013 , which was due primarily to the amortization expense on the acquired intangibles of bcd . 2014 < p style= '' margin-bottom:0pt ; margin-top:0pt ; margin-left:0pt ; ; text-indent:0pt ; ; color : # ; font-size:9pt ; font-family : times new
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we also assumed or issued $ 124.4 million in mortgages during 2012 , to finance our new properties or re-finance existing properties . in addition , we issued 129,278 of common shares for gross proceeds of $ 2.4 million , and net proceeds of $ 2.3 million , from the issuance of equity in january 2013 under our atm program . recent developments 2012 investment activities ashburn , virginia : on january 25 , 2012 , we acquired a 52,130 square foot office building located in ashburn , virginia for $ 10.8 million , excluding related acquisition expenses of $ 0.1 million . we funded this acquisition using borrowings from our line of credit . independent project analysis , inc. , an energy consultant , is the tenant in this building and has leased the property for 15 years and has 2 options to renew the lease for additional periods of 5 years each . the lease provides for prescribed rent escalations over the life of the lease , with annualized straight line rents of $ 1.0 million . ottumwa , iowa : on may 30 , 2012 , we acquired a 352,860 square foot bottling plant located in ottumwa , iowa for $ 7.1 million , excluding related acquisition expenses of $ 0.1 million . we funded this acquisition through a combination of cash on hand and the issuance of $ 5.0 million of mortgage debt on the property . the american bottling company , the largest operating subsidiary of dr. pepper snapple group , inc. , is the tenant in this building and has leased the property for 12 years and has 3 options to renew the lease for additional periods of 5 years each . the lease provides for prescribed rent escalations over the life of the lease , with annualized straight line rents of $ 0.68 million . new albany , ohio : on june 5 , 2012 , we acquired an 89,000 square foot office building located in new albany , ohio for $ 13.3 million , excluding related acquisition expenses of $ 0.2 million . we funded this acquisition with existing cash on hand . commercial vehicle group , inc. , a global supplier of fully integrated interiors system solutions for the global commercial vehicle market , is the tenant in this building and has leased the property for 10.5 years and has 2 options to renew the lease for additional periods of 5 years each . the lease provides for prescribed rent escalations over the life of the lease , with annualized straight line rents of $ 1.36 million . columbus , georgia : on june 21 , 2012 , we acquired a 32,000 square foot office and classroom facility located in columbus , georgia for $ 7.3 million , excluding related acquisition expenses of $ 0.1 million . we funded this acquisition through a combination of cash on hand and the issuance of $ 4.8 million of mortgage debt on the property . university of phoenix , a private education provider , which has been in the education business for more than 35 years , is the tenant in this building and has leased the property for 11.5 years and has 2 options to renew the lease for additional periods of 5 years each . the lease provides for prescribed rent escalations over the life of the lease , with annualized straight line rents of $ 0.66 million . columbus , ohio : on june 28 , 2012 , we acquired a 31,293 square foot office building located in columbus , ohio for $ 4.0 million , excluding related acquisition expenses of $ 0.1 million . we funded this acquisition with existing cash on hand . nationwide children 's hospital , one of the largest children 's hospital systems in the u.s. , is the tenant in this building and has leased the property for 10 years . the lease provides for prescribed rent escalations over the life of the lease , with annualized straight line rents of $ 0.34 million . 42 jupiter , florida : on september 26 , 2012 , we acquired a 60,000 square foot office building located in jupiter , florida for $ 15.5 million , excluding related acquisition expenses of $ 0.1 million . we funded this acquisition with existing cash on hand and the assumption of $ 10.8 million of mortgage debt on the property . g4s secure solutions usa , inc. , one of the largest operating subsidiaries of g4s and the world 's largest provider of security solutions , with operations in 125 countries , is the tenant in this building and has leased the property for 10.5 years and has 2 options to renew the lease for additional periods of 5 years each . the lease provides for prescribed rent escalations over the life of the lease , with annualized straight line rents of $ 1.37 million . fort worth , texas : on november 8 , 2012 , we acquired a 208,234 square foot office building located in fort worth , texas for $ 20.0 million , excluding related acquisition expenses of $ 0.1 million . we funded this acquisition with a combination of borrowings from our line of credit and the assumption of $ 14.2 million of mortgage debt on the property . the national archives and records administration southwest region records center is the tenant in this building and has leased the property for 14 years . the lease provides for prescribed rent escalations over the life of the lease , with annualized straight line rents of $ 1.63 million . columbia , south carolina : on november 21 , 2012 , we acquired a 146,483 square foot office building located in columbia , south carolina for $ 29.2 million , excluding related acquisition expenses of $ 0.1 million . we funded this acquisition through a combination of cash on hand and the issuance of $ 19.0 million of mortgage debt on the property . story_separator_special_tag verizon wireless is the tenant in this building and has leased the property for 10 years and has 3 options to renew the lease for additional periods of 5 years each . the lease provides for prescribed rent escalations over the life of the lease , with annualized straight line rents of $ 2.61 million . 2012 financing activities line of credit expansion on january 31 , 2012 , we amended our line of credit to increase the current maximum availability of credit thereunder from $ 50.0 million to $ 75.0 million . the line of credit was arranged by capital one , n.a . as administrative agent , and branch banking and trust company as an additional lender . citizens bank of pennsylvania also joined the line of credit as an additional lender . all other terms of the agreement remained the same . fixed-rate long-term notes payable keybank : on april 5 , 2012 , through wholly-owned subsidiaries , we borrowed $ 19.0 million pursuant to a long-term note payable from keybank national association , which is collateralized by security interests in four of our properties . the note accrues interest at a fixed rate of 6.1 % per year and we may not repay this note prior to the last three months of the term , or we would be subject to a substantial prepayment penalty . the note has a maturity date of may 1 , 2022. we used the proceeds from this note for future acquisitions and working capital . city national bank : on may 16 , 2012 , through a wholly-owned subsidiary , we borrowed $ 2.94 million pursuant to a long-term note payable from city national bank , which is collateralized by a security interest in one of our properties . the note accrues interest at a fixed rate of 4.3 % per year for the first five years , and resets at five year intervals thereafter . we may repay this note after five years and would not be subject to any prepayment penalty . the note has a maturity date of december 31 , 2026. we used the proceeds from this note for future acquisitions and working capital . modern woodmen of america : on may 30 , 2012 , through a wholly-owned subsidiary , we borrowed $ 5.0 million pursuant to a long-term note payable from modern woodmen of america , which is collateralized by a security interest in one of our properties . the note accrues interest at a fixed rate of 6.5 % per year and we may not repay this note prior to the last nine months of the term , or we would be subject to a substantial prepayment penalty . the note has a maturity date of may 10 , 2027. we used the proceeds from this note for future acquisitions and working capital . 43 citigroup : on june 21 , 2012 , through a wholly-owned subsidiary , we borrowed $ 4.75 million pursuant to a long-term note payable from citigroup , which is collateralized by a security interest in one of our properties . the note accrues interest at a rate of fixed 5.05 % per year and we may not repay this note prior to the last two months of the term , or we would be subject to a substantial prepayment penalty . the note has a maturity date of july 6 , 2022. we used the proceeds from this note to purchase the property located in columbus , georgia discussed above . american equity investment life insurance company : on june 27 , 2012 , through a wholly-owned subsidiary , we borrowed $ 2.0 million pursuant to a long-term note payable from american equity investment life insurance company , which is collateralized by a security interest in one of our properties . the note accrues interest at a fixed rate of 5.1 % per year and we may not repay this note prior to the last five years of the term , or we would be subject to a substantial prepayment penalty . the note has a maturity date of july 1 , 2029. we used the proceeds from this note for future acquisitions and working capital . american national insurance company : on july 24 , 2012 , through a wholly-owned subsidiary , we borrowed $ 9.8 million pursuant to a long-term note payable from american national insurance company , which is collateralized by a security interest in one of our properties . the note accrues interest at a fixed rate of 5.6 % per year and we may not repay this note during the first five years of the term ; however , we may repay the note during the last five years of the term although we would be subject to a prepayment penalty . the note has a maturity date of august 1 , 2022. we used the proceeds from this note for both a future acquisition and working capital . farmers citizens bank : on august 3 , 2012 , through a wholly-owned subsidiary , we borrowed $ 3.0 million pursuant to a long-term note payable from farmers citizens bank , which is collateralized by a security interest in one of our properties . the note accrues interest at a fixed rate of 5.0 % per year and we may repay this note during the first five years of the term although we would be subject to a prepayment penalty ; however , we may repay the note during the last five years of the term without penalty . the note has a maturity date of july 31 , 2022. we used the proceeds from this note for working capital . midland national life insurance company : on september 26 , 2012 , through a wholly-owned subsidiary , we assumed $ 10.8 million pursuant to a long-term note payable from midland national life insurance company , in connection with the acquisition of our property in jupiter , florida on the same date .
| due diligence expense primarily consists of legal fees and fees incurred for third-party reports prepared in connection with potential acquisitions and our due diligence analyses related thereto . due diligence expense increased for the year ended december 31 , 2012 , as compared to the year ended december 31 , 2011 , as a result of costs incurred related to the eight properties acquired during 2012 coupled with costs incurred for other potential acquisitions , partially offset by an out of period adjustment of $ 250,000 recorded during the year ended december 31 , 2011 , related to the acquisition of the property in orange city , iowa in december 2010. the base management fee decreased for the year ended december 31 , 2012 , as compared to the year ended december 31 , 2011 , due to a decrease in total common stockholders ' equity , the main component of the calculation . the calculation of the base management fee is described in detail above under advisory and administration agreements. the incentive fee increased for the year ended december 31 , 2012 , as compared to the year ended december 31 , 2011 , because of an increase in pre-incentive fee ffo . the increase in pre-incentive fee ffo was due to an increase in rental revenues from the eight acquisitions made in 2012 , which was partially offset by an increase in property operating , due diligence and interest expenses during the year ended december 31 , 2012 , as compared to the year ended december 31 , 2011. the incentive fee credit increased slightly for the year ended december 31 , 2012 , as compared to the year ended december 31 , 2011 , because of the increase in the amount of common dividends paid for 2012 , which resulted in a larger portion of the incentive fee which was credited . the calculation of the incentive fee is described in detail above within advisory and administration agreements. the administration fee increased for the
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in addition to traditional medicines and vaccines , we develop products across additional categories to address the needs of veterinarians and producers to predict , prevent , detect and treat conditions in both companion animals and livestock , including products in diagnostics , genetics , precision livestock farming and digital and data analytics . perceptions of product quality , safety and reliability we believe that animal health customers value high-quality manufacturing and reliability of supply . the importance of quality and safety concerns to pet owners , veterinarians and livestock producers also contributes to animal health brand loyalty , which often continues after the loss of patent-based and regulatory exclusivity . we depend on positive perceptions of the safety and quality of our products by our customers , veterinarians and end-users . in addition , negative beliefs about animal health products generally could impact demand for our products . for example , the issue of the potential transfer of increased antibacterial resistance in bacteria from food-producing animals to human pathogens , and the causality of that transfer , continue to be the subject of global scientific and regulatory discussion . antibacterials refer to small molecules that can be used to treat or prevent bacterial infections and are a sub-categorization of the products that make up our anti-infectives and medicated feed additives portfolios . in some countries , this issue has led to government restrictions and bans on the use of specific antibacterials in some food-producing animals , regardless of the route of administration ( in feed or injectable ) . these restrictions are more prevalent in countries where animal protein is plentiful and governments are willing to take action even when there is scientific uncertainty . in addition , consumer preferences in some markets have impacted the use of antibacterials in food producing animals . such restrictions and consumer preferences in some cases may negatively impact sales of our antibacterial products , but in other instances may increase sales of our products that can be used as antibacterial alternatives . our total revenue attributable to antibacterials for livestock was approximately $ 1.1 billion for the year ended december 31 , 2020. similarly , concerns regarding greenhouse gas emissions and other potential environmental impacts of livestock production have led to some consumers opting to limit or avoid consuming animal products . however , we believe the impact of this trend is limited as the livestock industry is still expected to continue to grow in order to feed a growing global population . changing distribution channels for companion animal products in most markets , companion animal owners typically purchase their animal health products directly from veterinarians . however , in the u.s. and certain other markets , companion animal owners increasingly have the option to purchase animal health products from sources other than veterinarians , such as internet-based retailers , “ big-box ” retail stores or other over-the-counter distribution channels . this trend has been demonstrated by the shift away from the veterinarian distribution channel in the sale of flea and tick products in recent years and has been accelerated by the increase in e-commerce during the covid-19 pandemic . we believe the ability of pet owners to purchase our products online and from retail stores may increase pet owner compliance and result in increased sales , particularly in the near term . however , over time , we may be unable to sustain our current margins due to the increased purchasing power of such retailers as compared to traditional veterinary practices . in addition , this trend could negatively impact the sales of products we primarily sell through the veterinarian distribution channel , as any decrease in visits to veterinarians by companion animal owners could reduce our market share and sales of such products . a reduction in the number of pet owners who purchase our products directly from their veterinarian could also lead to increased use of generic alternatives to our products or the increased substitution of our products with other animal health products or human health products if such other products are deemed to be lower-cost alternatives . the overall economic environment in addition to industry-specific factors , we , like other businesses , face challenges related to global economic conditions . growth in both the livestock and companion animal sectors is driven by overall economic development and related growth , particularly in many emerging markets . in the past , certain of our customers and suppliers have been affected directly by economic downturns , which decreased the demand for our products and , in some cases , hindered our ability to collect amounts due from customers . the cost of medicines and vaccines to our livestock producer customers is small relative to other production costs , including feed , and the use of these products is intended to improve livestock producers ' economic outcomes . as a result , demand for our products has historically been more stable than demand for other production inputs . similarly , industry sources have reported that pet owners indicated a preference for reducing spending on other aspects of their lifestyle , including entertainment , clothing and household goods , before reducing spending on pet care . while these factors have mitigated the impact of prior downturns in the global economy , future economic challenges could increase cost sensitivity among our 40 | customers , which may result in reduced demand for our products , which could have a material adverse effect on our operating results and financial condition . competition the animal health industry is highly competitive . although our business is the largest by revenue in the animal health medicines , vaccines and diagnostics industry , we face competition in the regions in which we operate . principal methods of competition vary depending on the particular region , species , product category or individual product . some of these methods include new product development , quality , price , service and promotion to veterinary professionals , pet owners and livestock producers . story_separator_special_tag our competitors include standalone animal health businesses and the animal health businesses of large pharmaceutical companies . in recent years , there has been an increase in consolidation in the animal health industry . there are also several start-up companies working in the animal health area . in addition to competition from established market participants , there could be new entrants to the animal health medicines , vaccines and diagnostics industry in the future . we also compete with companies that produce generic products , following our products ' loss of exclusivity in a given market . for example , draxxin currently competes with generic products in key markets including europe , canada , mexico and australia and we expect generic competition in the u.s. in 2021. for more information regarding the generic competition we currently have and expect to encounter as patents on certain of our key products expire , see item 1. business – intellectual property . weather conditions , climate change and the availability of natural resources the animal health industry and demand for many of our animal health products in a particular region are affected by weather conditions , as usage of our products follows varying weather patterns and weather-related pressures from pests , such as ticks . as a result , we may experience regional and seasonal fluctuations in our results of operations . in addition , veterinary hospitals and practitioners depend on visits from and access to the animals under their care . veterinarians ' patient volume and ability to operate could be adversely affected if they experience prolonged snow , ice or other severe weather conditions , particularly in regions not accustomed to sustained inclement weather . furthermore , weather conditions , including excessive cold or heat , natural disasters and other events , could negatively impact our livestock customers by impairing the health or growth of their animals or the production or availability of feed , as well as disrupting their normal operations . for example , livestock producers depend on the availability of natural resources , including large supplies of fresh water . their animals ' health and their ability to operate could be adversely affected if they experience a shortage of fresh water due to human population growth , climate change or floods , droughts or other weather conditions . in the event of adverse weather conditions , climate-change related impacts or a shortage of fresh water , veterinarians and livestock producers may purchase less of our products . for example , drought conditions could negatively impact , among other things , the supply of corn and the availability of grazing pastures . a decrease in harvested corn results in higher corn prices , which could negatively impact the profitability of livestock producers of cattle , pork and poultry . higher corn prices and reduced availability of grazing pastures contribute to reductions in herd or flock sizes that in turn result in less spending on animal health products . as such , a prolonged drought could have a material adverse impact on our operating results and financial condition . adverse weather conditions , natural disasters and climate change may also impact the aquaculture business . changes in water temperatures could affect the timing of reproduction and growth of various fish species , as well as trigger the outbreak of certain water borne diseases . uncertainty relating to covid-19 we continue to closely monitor the impact of the coronavirus ( covid-19 ) pandemic and the resulting global recession on all aspects of our business across geographies , including how it has and may continue to impact our customers , workforce , suppliers and vendors . we are currently designated an essential business globally and have continued physical operations with respect to research and development , manufacturing and our supply chain . as the pandemic continues to progress , the severity of the impact across markets remains uncertain as the number of cases rises and falls in various jurisdictions leading to changes in the imposition of restrictive measures intended to contain the virus . due to numerous uncertainties regarding the continuing covid-19 pandemic , we are unable to fully predict the impact that it will ultimately have on our future financial position and operating results . these uncertainties include the severity of the virus , the duration of the outbreak and number of recurrences , the effectiveness of measures to contain and treat the virus , including the timing of widespread vaccinations , governmental , business or other actions in response to the pandemic ( which could include actions that result in limitations on , or disruptions to , our manufacturing , transportation and other operations , or mandates to provide products or services ) , impacts on our supply chain , the effect on customer demand , or changes to our operations . we can not predict the impact that the covid-19 pandemic will have on our customers , vendors and suppliers ; however , any material effect on these parties could adversely impact us . in particular , our livestock customers have been , and may continue to be , negatively impacted by facility closures , reduced packing plant capacity , quarantines , travel bans and labor shortages , and the shift in protein production from foodservice to grocery , among other impacts . in addition , our companion animal customers have been , and may in the future be , negatively impacted by lack of demand for veterinary services in areas where lockdown and stay-at-home orders are in place . the impact of covid-19 on our customers has reduced and could continue to reduce the demand for our products , which could continue to adversely impact our revenue . the health of our workforce , and our ability to meet staffing needs in our manufacturing operations and other critical functions also can not be predicted and is vital to our operations .
| livestock revenue decreased due to disruptions in the food supply chain attributable to the negative impact of covid-19 , including reduced producer processing capacity and continued channel migration from dining out to at-home consumption that impacted producer profitability . the negative impact resulted in a decline across each of the cattle , swine and poultry portfolios . the decline in the cattle portfolio was also the result of continued unfavorable market conditions in beef and dairy , while swine was also impacted by export restrictions on the use of certain products in our portfolio that limited our customers ' access to global markets . u.s. segment earnings increased by $ 234 million , or 12 % , in 2020 compared with 2019 , primarily due to revenue and gross margin growth , partially offset by higher operating expenses for investments to support revenue growth . international operating segment international segment revenue increased by $ 63 million , or 2 % , in 2020 compared with 2019. operational revenue increased $ 194 million , or 7 % , reflecting growth of $ 134 million in companion animal products and $ 60 million in livestock products . companion animal operational revenue growth resulted primarily from increased sales of our parasiticide products including the simparica franchise with the launch of simparica trio in the eu , canada and australia , as well as the revolution/revolution plus/stronghold franchise . key dermatology products also contributed to growth with increased sales of apoquel and cytopoint . livestock operational revenue growth was driven by increased sales in swine and fish while cattle and poultry declined . sales of swine products grew as a result of expanding herd production and increased biosecurity measures in the wake of african swine fever in china . alpha flux , a recently launched parasiticide that controls sea lice in salmon , increased market share and the recent acquisition of fish vet group were the primary drivers of growth in fish . sales of cattle products declined due to decreased demand attributable to the impact of covid-19 in certain markets as well as the discontinuation of non-core products in brazil . poultry declined due to the negative impacts of covid-19 on
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we sell our products through three distribution channels : career agents , independent producers ( some of whom sell one or more of our product lines exclusively ) and direct marketing . the company manages its business through the following operating segments : bankers life , washington national and colonial penn , which are defined on the basis of product distribution ; other cno business , comprised primarily of products we no longer sell actively ; and corporate operations , comprised of holding company activities and certain noninsurance company businesses . the company 's segments are described below : bankers life , which markets and distributes medicare supplement insurance , interest-sensitive life insurance , traditional life insurance , fixed annuities and long-term care insurance products to the middle-income senior market through a dedicated field force of career agents and sales managers supported by a network of community-based sales offices . the bankers life segment includes primarily the business of bankers life and casualty company . bankers life also markets and distributes medicare advantage plans primarily through distribution arrangements with humana 49 and united healthcare and medicare part d prescription drug plans through a distribution and reinsurance arrangement with coventry . washington national , which markets and distributes supplemental health ( including specified disease , accident and hospital indemnity insurance products ) and life insurance to middle-income consumers at home and at the worksite . these products are marketed through pma and through independent marketing organizations and insurance agencies including worksite marketing . the products being marketed are underwritten by washington national . colonial penn , which markets primarily graded benefit and simplified issue life insurance directly to customers in the senior middle-income market through television advertising , direct mail , the internet and telemarketing . the colonial penn segment includes primarily the business of colonial penn life insurance company . other cno business , which consists of blocks of interest-sensitive life insurance , traditional life insurance , annuities , long-term care insurance and other supplemental health products . these blocks of business are not actively marketed and were primarily issued or acquired by conseco life and washington national . 50 the following summarizes our earnings for the three years ending december 31 , 2012 ( dollars in millions , except per share data ) : replace_table_token_9_th ( a ) management believes that an analysis of ebit provides a clearer comparison of the operating results of the company from period to period because it excludes : ( i ) corporate interest expense ; ( ii ) loss on extinguishment of debt ; ( iii ) net realized investment gains ; and ( iv ) fair value changes in embedded derivative liabilities that are unrelated to the company 's underlying fundamentals . the table above reconciles the non-gaap measure to the corresponding gaap measure . 51 our major goals for 2013 include : increasing operating earnings per share . profitably increasing sales at bankers life , washington national and colonial penn . maximizing our investment income in a low interest rate environment while remaining within acceptable risk tolerance levels . enhancing the customer experience . continuing to execute on initiatives to achieve operational efficiencies and cost savings . continuing to actively manage the profitability of our long-term care business . improving profitability of existing lines of business or disposing of underperforming blocks of business . continuing to invest in and develop our talent . continuing to work to improve the financial strength and senior debt ratings from the major rating agencies . effectively deploying excess capital . critical accounting policies the preparation of financial statements in accordance with gaap requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period . management has made estimates in the past that we believed to be appropriate but were subsequently revised to reflect actual experience . if our future experience differs materially from these estimates and assumptions , our results of operations and financial condition could be materially affected . we base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances . we continually evaluate the information used to make these estimates as our business and the economic environment change . the use of estimates is pervasive throughout our financial statements . the accounting policies and estimates we consider most critical are summarized below . additional information on our accounting policies is included in the note to our consolidated financial statements entitled `` summary of significant accounting policies '' . investments at december 31 , 2012 , the carrying value of our investment portfolio was $ 28.0 billion . we defer any fees received or costs incurred when we originate investments . we amortize fees , costs , discounts and premiums as yield adjustments over the contractual lives of the investments . we consider anticipated prepayments on structured securities when we estimate yields on such securities . when actual prepayments differ from our estimates , the adjustment to yield is recognized as investment income ( loss ) . our evaluation of investments for impairment requires significant judgments , including : ( i ) the identification of potentially impaired securities ; ( ii ) the determination of their estimated fair value ; and ( iii ) the assessment of whether any decline in estimated fair value is other than temporary . we regularly evaluate all of our investments with unrealized losses for possible impairment . our assessment of whether unrealized losses are `` other than temporary '' requires significant judgment . story_separator_special_tag factors considered include : ( i ) the extent to which fair value is less than the cost basis ; ( ii ) the length of time that the fair value has been less than cost ; ( iii ) whether the unrealized loss is event driven , credit-driven or a result of changes in market interest rates or risk premium ; ( iv ) the near-term prospects for specific events , developments or circumstances likely to affect the value of the investment ; ( v ) the investment 's rating and whether the investment is investment-grade and or has been downgraded since its purchase ; ( vi ) whether the issuer is current on all payments in accordance with the contractual terms of the investment and is expected to meet all of its obligations under the terms of the investment ; ( vii ) whether we intend to sell the investment or it is more likely than not that circumstances will 52 require us to sell the investment before recovery occurs ; ( viii ) the underlying current and prospective asset and enterprise values of the issuer and the extent to which the recoverability of the carrying value of our investment may be affected by changes in such values ; ( ix ) projections of , and unfavorable changes in , cash flows on structured securities including mortgage-backed and asset-backed securities ; ( x ) our best estimate of the value of any collateral ; and ( xi ) other objective and subjective factors . future events may occur , or additional information may become available , which may necessitate future realized losses in our portfolio . significant losses could have a material adverse effect on our consolidated financial statements in future periods . impairment losses on equity securities are recognized in net income . the manner in which impairment losses on fixed maturity securities , available for sale , are recognized in the financial statements is dependent on the facts and circumstances related to the specific security . if we intend to sell a security or it is more likely than not that we would be required to sell a security before the recovery of its amortized cost , the security is other-than-temporarily impaired and the full amount of the impairment is recognized as a loss through earnings . if we do not expect to recover the amortized cost basis , we do not plan to sell the security , and if it is not more likely than not that we would be required to sell a security before the recovery of its amortized cost , less any current period credit loss , the recognition of the other-than-temporary impairment is bifurcated . we recognize the credit loss portion in net income and the noncredit loss portion in accumulated other comprehensive income . we estimate the amount of the credit loss component of a fixed maturity security impairment as the difference between amortized cost and the present value of the expected cash flows of the security . the present value is determined using the best estimate of future cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset-backed or floating rate security . the methodology and assumptions for establishing the best estimate of future cash flows vary depending on the type of security . for most structured securities , cash flow estimates are based on bond specific facts and circumstances that may include collateral characteristics , expectations of delinquency and default rates , loss severity , prepayment speeds and structural support , including excess spread , subordination and guarantees . for corporate bonds , cash flow estimates are derived from scenario-based outcomes of expected corporate restructurings or the disposition of assets using bond specific facts and circumstances including timing , secured interest and loss severity . the previous amortized cost basis less the impairment recognized in net income becomes the security 's new cost basis . we accrete the new cost basis to the estimated future cash flows over the expected remaining life of the security . the remaining non-credit impairment , which is recorded in accumulated other comprehensive income ( loss ) , is the difference between the security 's estimated fair value and our best estimate of future cash flows discounted at the effective interest rate prior to impairment . the remaining non-credit impairment typically represents changes in the market interest rates , current market liquidity and risk premiums . as of december 31 , 2012 , other-than-temporary impairments included in accumulated other comprehensive income of $ 6.0 million ( before taxes and related amortization ) related to structured securities . fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and , therefore , represents an exit price , not an entry price . we carry certain assets and liabilities at fair value on a recurring basis , including fixed maturities , equity securities , trading securities , investments held by vies , derivatives , cash and cash equivalents , separate account assets and embedded derivatives . we carry our company-owned life insurance policy , which is backed by a series of mutual funds , at its cash surrender value and our hedge fund investments at their net asset values ; in both cases , we believe these values approximate their fair values . in addition , we disclose fair value for certain financial instruments , including mortgage loans and policy loans , insurance liabilities for interest-sensitive products , investment borrowings , notes payable and borrowings related to vies . the degree of judgment utilized in measuring the fair value of financial instruments is largely dependent on the level to which pricing is based on observable inputs . observable inputs reflect market data obtained from independent sources , while unobservable inputs reflect our view of market assumptions in the absence of observable market information .
| our primary investment focus is on investment income to support our liabilities for insurance products as opposed to the generation of realized investment gains ( losses ) , and a long-term focus is necessary to maintain profitability over the life of the business . realized investment gains ( losses ) and fair value of embedded derivative liabilities depend on market conditions and do not necessarily relate to decisions regarding the underlying business of our segments . however , `` income ( loss ) before net realized investment gains ( losses ) and fair value of embedded derivative liabilities , net of related amortization , and before income taxes '' does not replace `` income ( loss ) before income taxes '' as a measure of overall profitability . we may experience realized investment gains ( losses ) , which will affect future earnings levels since our underlying business is long-term in nature and we need to earn the assumed interest rates on the investments backing our liabilities for insurance products to maintain the profitability of our business . in addition , management uses this non-gaap financial measure in its budgeting process , financial analysis of segment performance and in assessing the allocation of resources . we believe these non-gaap financial measures enhance an investor 's understanding of our financial performance and allows them to make more informed judgments about the company as a whole . these measures also highlight operating trends that might not otherwise be transparent . the table above reconciles the non-gaap measure to the corresponding gaap measure . general : cno is the top tier holding company for a group of insurance companies operating throughout the united states that develop , market and administer health insurance , annuity , individual life insurance and other insurance products . we distribute these products through our bankers life segment , which utilizes a career agency force , through our colonial penn segment , which utilizes direct response marketing , and through our washington national segment , which utilizes independent producers . 65 bankers life ( dollars in millions ) replace_table_token_17_th 66 replace_table_token_18_th ( a ) we calculate benefit ratios by dividing the related product 's
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a valuation allowance is recorded to reduce deferred income tax assets to an amount that is more likely than not to be realized . the tax act was signed into law in december 2017 and legislation represents a fundamental and dramatic shift in u.s. taxation , with many provisions of the act differing significantly from previous u.s. tax law . with enactment occurring late in 2017 , companies with calendar reporting years have not had extensive time to analyze the impacts of the legislation . applying the effects of a lower corporate tax rate to deferred tax assets and liabilities , evaluating the one-time transition tax on undistributed earnings of foreign operations , examining the implications of changes to net operating loss and other credit carryforwards and considering other provisions of the act in a relatively compressed time frame necessitates significant estimation and judgment . following the guidance of the u.s. securities and exchange commission 's staff accounting bulletin no . 118 , we have made reasonable estimates of the act 's provisions and have recorded a non-cash charge to fourth quarter tax expense of $ 1,245,000 to reflect these effects . this provisional estimate could be affected based on further analysis of the act 's requirements . given the act 's broad and complex changes , further clarification , interpretation and regulatory guidance could affect the assumptions we used in making our reasonable estimate . as we continue to assess the act 's provisions , any adjustments to our provisional estimate will be reported as a component of income tax expense in 2018 and disclosed in the period when any such adjustments have been determined . intangible assets and goodwill . intangible assets with finite useful lives are recorded at cost upon acquisition and amortized over the term of the related contract , if any , or useful life , as applicable . intangible assets held by the company with finite useful lives include patents and trademarks . the weighted average amortization period for intangible assets at december 31 , 2017 was 10 years . the company periodically reviews the values recorded for intangible assets and goodwill to assess recoverability from future operations whenever events or changes in circumstances indicate that its carrying amount may not be recoverable . at december 31 , 2017 and 2016 , the company assessed the recoverability of its long-lived assets and goodwill and believed that there were no events or circumstances present that would that would require a test of recoverability on those assets . as a result , there was no impairment of the carrying amounts of such assets and no reduction in their estimated useful lives . the net book value of the company 's intangible assets was $ 17,882,005 as of december 31 , 2017 , compared to $ 13,988,186 as of december 31 , 2016 , and the net book value of the company 's goodwill was approximately $ 4,696,000 at december 31 , 2017 compared to $ 3,948,000 at december 31 , 2016. pension obligation . the pension benefit obligation is based on various assumptions used by third-party actuaries in calculating this amount . these assumptions include discount rates , expected return on plan assets , mortality rates and other factors . revisions in assumptions and actual results that differ from the assumptions affect future expenses , cash funding requirements and obligations . our funding policy is to fund the plan in accordance with applicable requirements of the internal revenue code and regulations . these assumptions are reviewed annually and updated as required . the company has a frozen defined benefit pension plan . two assumptions , the discount rate and the expected return on plan assets , are important elements of expense and liability measurement . we determine the discount rate used to measure plan liabilities as of the december 31 measurement date . the discount rate reflects the current rate at which the associated liabilities could be effectively settled at the end of the year . in estimating this rate , we look at rates of return on fixed-income investments of similar duration to the liabilities in the plan that receive high , investment grade ratings by recognized ratings agencies . using these methodologies , we determined a discount rate of 3.14 % to be appropriate as of december 31 , 2017 , which is a decrease of 0.26 percentage point from the rate used as of december 31 , 2016 . 18 the expected long-term rate of return on assets considers the company 's historical results and projected returns for similar allocations among asset classes . in accordance with generally accepted accounting principles , actual results that differ from the company 's assumptions are accumulated and amortized over future periods and , therefore , affect expense and obligation in future periods . for the u.s. pension plan , our assumption for the expected return on plan assets was 6.0 % for 2017. for more information concerning these costs and obligations , see the discussion in note 6 – pension and profit sharing , in the notes to the company 's consolidated financial statements in this report . accounting for stock-based compensation . stock based compensation cost is measured at the grant date fair value of the award and is recognized as expense over the requisite service period . the company uses the black-scholes option - pricing model to determine fair value of the awards , which involves certain subjective assumptions . these assumptions include estimating the length of time employees will retain their vested stock options before exercising them ( “ expected term ” ) , the estimated volatility of the company 's common stock price over the expected term ( “ volatility ” ) and the number of options for which vesting requirements will not be completed ( “ forfeitures ” ) . changes in the subjective assumptions can materially affect estimates of fair value stock-based compensation , and the related amount recognized on the consolidated statements of operations . story_separator_special_tag refer to note 11 - stock option plans - in the notes to consolidated financial statements in this report for a more detailed discussion . story_separator_special_tag the u.s. , provisions of this tax reform were required to be recognized in 2017. the most significant 2017 impact on the company of this legislation was the imposition of a transition tax on undistributed earnings of foreign operations in the amount of $ 1,170,000. the other impact of the legislation was an adjustment to deferred tax assets . as a result of the reduction of the corporate tax rate from 34 % to 21 % , we have taken a charge of $ 75,000 to reduce the value of these assets . the total impact of the tax reform resulted in a non-cash in 2017 income tax expense of $ 1,245,000. without this special charge , income tax expense was $ 1,196,000 or an effective tax rate of 18 % compared to 22 % in 2016. in 2017 , the company recorded approximately $ 350,000 in excess tax benefits resulting from the adoption of asu 2016-09 in 2017. excluding the impact of the tax benefit , the effective tax rate would have been 24 % for 2017. excluding the impact of a charitable product donation in 2016 , the effective tax rate would have been 25 % . off-balance sheet transactions the company did not engage in any off-balance sheet transactions during 2017. liquidity and capital resources during 2017 , working capital increased by approximately $ 8.9 million compared to december 31 , 2016. inventory increased by approximately $ 2.8 million , or 7 % , which corresponds mostly to the increase in sales . the company expects that changes in inventory levels will continue to be consistent with changes in sales , including the seasonal impact on the company 's revenue stream . inventory turnover , calculated using a twelve month average inventory balance , increased to 2.2 from 2.1 at december 31 , 2016. the reserve for slow moving and obsolete inventory was $ 654,855 at december 31 , 2017 compared to $ 677,253 at december 31 , 2016. we do not anticipate significant increases in the allowance for slow moving and obsolete inventory in the ordinary course of business during 2018 . 20 receivables increased by approximately $ 6.0 million at december 31 , 2017 compared to december 31 , 2016. the average number of days sales outstanding in accounts receivable was 65 days in 2017 compared to 64 days in 2016. accounts payable and other current liabilities increased by approximately $ 4.0 million . at december 31 , 2017 , total debt outstanding under the company 's revolving credit facility increased by approximately $ 10.5 million compared to total debt at december 31 , 2016. the change in debt was primarily due to borrowings to fund the acquisition of assets of spill magic on february 1 , 2017. as of december 31 , 2017 , $ 43,450,000 was outstanding and $ 6,550,000 was available for borrowing under the company 's revolving credit facility . on may 6 , 2016 , the company amended its revolving credit loan agreement with hsbc bank , n.a . the amended facility provides for borrowings of up to an aggregate of $ 50 million at an interest rate of libor plus 2.0 % . on january 27 , 2017 , the company amended its revolving credit loan agreement with hsbc bank , n.a . on a temporary basis in order to provide for the funding of the company 's acquisition of the assets of spill magic , inc. as described in note 17. the amended facility provided for an increase in borrowings from $ 50 million to $ 55 million for the period commencing april 1 , 2017 and ending on september 30 , 2017. commencing october 1 , 2017 , the maximum amount outstanding at any time under the facility returned to $ 50 million . the interest rate on borrowings remained unchanged at a rate of libor plus 2.0 % . under the revolving credit loan agreement , the company must pay a facility fee , payable quarterly , in an amount equal to two tenths of one percent ( .20 % ) per annum of the average daily unused portion of the revolving credit line . all principal amounts outstanding under the agreement are required to be repaid in a single amount on may 6 , 2019 , the date the agreement expires ; interest is payable monthly . funds borrowed under the agreement may be used for working capital , acquisitions , general operating expenses , share repurchases and certain other purposes . under the revolving loan agreement , the company is required to maintain specific amounts of tangible net worth , a specified total liabilities to net worth ratio , and a fixed charge coverage ratio , and must have annual net income greater than $ 0 , measured as of the end of each fiscal year . specifically , under the loan agreement , the company was required to maintain a ratio of total liabilities to tangible net worth of not more than 2.25 to 1 , calculated as at december 31 , 2017. however , at december 31 , 2017 , the company 's ratio was 2.37 to 1 , or 5 % higher than the maximum permitted ratio . the company was not in compliance with the covenant at that date due solely to the impact on the company of the tax cuts and jobs act which was enacted into law in december 2017 , as a result of which the company incurred a one-time , non-cash charge of $ 1,170,000 in the fourth quarter of 2017 relating to taxation of the company 's foreign earnings . the company and hsbc bank , n.a . subsequently agreed to amend the loan agreement to increase the permitted ratio of total liabilities to tangible net worth from 2.25 to 1 to 2.50 to 1 , effective for the quarter ended december 31 , 2017. all other covenants remain unchanged .
| net sales in 2017 , sales increased by $ 5,976,000 , or 4.8 % , to $ 130,550,000 compared to $ 124,574,000 in 2016. the u.s. segment sales increased by $ 4,614,000 , or 4 % , in 2017 compared to 2016. our acquisition of spill magic assets in february 2017 contributed $ 6.5 million to sales in 2017. excluding spill magic , net sales in the u.s. segment declined $ 1.9 million , or 2 % . sales of first aid products were strong , but due to a large back-to-school promotion that did not repeat this year , westcott school and office product sales were slightly lower than 2016. sales in canada increased 2 % in u.s. dollars and were constant in local currency in 2017 compared to 2016. european sales increased by $ 1,251,000 , or 18 % , in u.s. dollars and 16 % in local currency in 2017 compared to 2016. the increase in sales in europe in 2017 was primarily due to increased market share in the office products channel and higher sales of dmt products . gross profit gross profit was 36.7 % of net sales in 2017 compared to 36.6 % in 2016 . 19 selling , general and administrative selling , general and administrative expenses were $ 40,103,000 in 2017 compared with $ 37,113,000 in 2016 , an increase of $ 2,990,000 , or 8 % . sg & a expenses were 30.7 % of net sales in 2017 compared to 29.8 % in 2016. the increase in sg & a expenses was primarily the result of increases in delivery costs and sales commissions which resulted from higher sales , incremental fixed costs resulting from the acquisition of spill magic assets , and higher headcount , which include compensation and recruiting costs . operating income operating income was $ 7,796,000 in 2017 , compared with $ 8,442,000 in 2016. operating income in the u.s. decreased by approximately $ 1,068,000 primarily as a result of lower profit margins due to customer/product mix and higher fixed selling , general and administrative costs . operating income in canada increased by approximately $ 207,000 principally due to a better product mix and higher sales . operating income in the
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we timely requested a hearing and presented our plan to evidence future compliance with the bid price rule before the panel on may 2 , 2019. the panel granted our request for continued listing of our common stock on the nasdaq capital market pursuant to an extension through september 16 , 2019 , subject to the condition that we regain compliance with the bid price rule by such date . we completed a 1-for-15 reverse stock split effective august 30 , 2019 , thus regaining compliance with the bid price rule and resulting in full compliance with all applicable nasdaq listing rules . throughout our history , we have not generated significant revenue . we have never been profitable , and from inception through december 31 , 2019 , our losses from operations have aggregated $ 100.2 million . our net loss was approximately $ 7.1 million and $ 10.8 million for the twelve months ended december 31 , 2019 and 2018 , respectively . we expect to incur significant expenses and increasing operating losses for the foreseeable future as we continue the development and clinical trials of and seek regulatory approval for our eyegate obg , our lead product candidate for corneal epithelial defects , and any other product candidates we advance to clinical development . if we obtain regulatory approval for eyegate obg , we expect to incur significant expenses in order to create an infrastructure to support the commercialization of eyegate obg including sales , marketing and distribution functions . we will need additional financing to support our continuing operations . we will seek to fund our operations through public or private equity , debt financings , license and development agreements , or other sources , which may include collaborations with third parties . adequate additional financing may not be available to us on acceptable terms , or at all . our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy . these conditions raise substantial doubt about our ability to continue as a going concern . we will need to generate significant revenue to achieve profitability , and we may never do so . eyegate pharmaceuticals , inc. was formed in delaware on december 26 , 2004. we were originally incorporated in 1998 under the name of optis france s.a. in paris , france . at that time , the name of the french corporation was changed to eyegate pharma s.a.s . and became a subsidiary of eyegate pharmaceuticals , inc. jade was formed in delaware on december 31 , 2012. eyegate pharma s.a.s . and jade are wholly-owned subsidiaries of eyegate pharmaceuticals , inc. 56 financial overview revenues to date , we have recognized collaboration revenue from several u.s. government grants made to jade for ocular therapeutic research ( collectively , the “ u.s . government grants ” ) , as well as from bhc as performance obligations toward milestones were met . see note 2 to our financial statements , “ summary of significant accounting policies ” . we expect to continue to incur significant operating losses as we fund research and clinical trial activities relating to our ocular therapeutic assets , consisting of our cmha-s-based products , or any other product candidate that we may develop . there can be no guarantee that the losses incurred to fund these activities will succeed in generating revenue . research and development expenses we expense all research and development expenses as they are incurred . research and development expenses primarily include : · non-clinical development , preclinical research , and clinical trial and regulatory-related costs ; · expenses incurred under agreements with sites and consultants that conduct our clinical trials ; · expenses related to generating , filing , and maintaining intellectual property ; and · employee-related expenses , including salaries , bonuses , benefits , travel and stock-based compensation expense . substantially all of our research and development expenses to date have been incurred in connection with our eyegate obg and egp-437 combination product . we expect our research and development expenses to increase for the near future as we advance eyegate obg and any other product candidate through clinical development , including the conduct of our planned clinical trials . the process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming . we are unable to estimate with any certainty the costs we will incur in the continued development of our eyegate obg and any other product candidate that we may develop . clinical development timelines , the probability of success and development costs can differ materially from expectations . we may never succeed in achieving marketing approval for our product candidate . the costs of clinical trials may vary significantly over the life of a project owing to , but not limited to , the following : · per patient trial costs ; · the number of sites included in the trials ; · the countries in which the trials are conducted ; · the length of time required to enroll eligible patients ; · the number of patients that participate in the trials ; · the number of doses that patients receive ; · the cost of comparative agents used in trials ; · the drop-out or discontinuation rates of patients ; · potential additional safety monitoring or other studies requested by regulatory agencies ; · the duration of patient follow-up ; and · the efficacy and safety profile of the product candidate . we do not expect our product candidates to be commercially available , if at all , for the next several years . 57 general and administrative expenses general and administrative expenses consist primarily of salaries and related benefits , including stock-based compensation . our general and administrative expenses consisted primarily of payroll expenses for our full-time employees . other general and administrative expenses include professional fees for auditing , tax , patent costs and legal services . story_separator_special_tag we expect that general and administrative expenses will remain consistent for the near future until commercialization of our cmha-s based products , which could lead to an increase in these expenses . total other income ( expense ) total other income ( expense ) consists primarily of interest income we earn on interest-bearing accounts , and interest expense incurred on our outstanding financing arrangements . critical accounting policies and significant judgments and estimates our management 's discussion and analysis of our financial condition and results of operations is based on our financial statements , which we have prepared in accordance with accounting principles generally accepted in the united states , or u.s. gaap . the preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements , as well as the expenses during the reporting periods . we evaluate these estimates and judgments on an ongoing basis . we base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances , the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources . our actual results may differ materially from these estimates under different assumptions or conditions . while our significant accounting policies are more fully described in note 2 to our financial statements appearing elsewhere in this annual report on form 10-k , we believe that the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations . accrued research and development expenses as part of the process of preparing financial statements , we are required to estimate and accrue research and development expenses . this process involves the following : · communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost ; · estimating and accruing expenses in our financial statements as of each balance sheet date based on facts and circumstances known to us at the time ; and · periodically confirming the accuracy of our estimates with selected service providers and making adjustments , if necessary . examples of estimated research and development expenses that we accrue include : · fees paid to contract research organizations and investigative sites in connection with clinical studies ; · fees paid to contract manufacturing organizations in connection with non-clinical development , preclinical research , and the production of clinical study materials ; and 58 · professional service fees for consulting and related services . we base our expense accruals related to non-clinical development , preclinical studies , and clinical trials on our estimates of the services received and efforts expended pursuant to contracts with organizations/consultants that conduct and manage clinical studies on our behalf . the financial terms of these agreements vary from contract to contract and may result in uneven payment flows . payments under some of these contracts may depend on many factors , such as the successful enrollment of patients , site initiation and the completion of clinical study milestones . our service providers invoice us as milestones are achieved and monthly in arrears for services performed . in accruing service fees , we estimate the time period over which services will be performed and the level of effort to be expended in each period . if we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services , our actual expenses could differ from our estimates . to date , we have not experienced significant changes in our estimates of accrued research and development expenses after a reporting period . however , due to the nature of estimates , we can not assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical studies and other research activities . stock-based compensation we have issued options to purchase our common stock and restricted stock . stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service/vesting period . determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the use of highly subjective assumptions , including the expected life of the stock-based payment awards and stock price volatility . we estimate the grant date fair value of stock options and the related compensation expense , using the black-scholes option valuation model . this option valuation model requires the input of subjective assumptions including : ( 1 ) expected life ( estimated period of time outstanding ) of the options granted , ( 2 ) volatility , ( 3 ) risk-free rate and ( 4 ) dividends . in general , the assumptions used in calculating the fair value of stock-based payment awards represent management 's best estimates , but the estimates involve inherent uncertainties and the application of management judgment . as a result , if factors change and we use different assumptions , our stock-based compensation expense could be materially different in the future . revenue recognition our revenues are generated primarily through arrangements which generally contain multiple elements , or deliverables , including licenses and r & d activities to be performed by us on behalf of the licensor or grantor .
| factors and probability of fda approval . this increase of $ 0.500 million was recorded to contingent consideration on the consolidated balance sheets and research and development expense on the consolidated statement of operations and comprehensive loss . general and administrative expenses . general and administrative expenses were $ 4.406 million for the year ended december 31 , 2019 , compared to $ 4.441 million for the year ended december 31 , 2018. the decrease of $ 0.036 million was mainly due to decreases in professional fees and office costs , partially offset by an increase in personnel-related costs and other corporate expenses . other income , net . other income , net was $ 0.108 million for the year ended december 31 , 2019 , compared to $ 0.119 million for the year ended december 31 , 2018 due to less interest earned on our cash balances . income tax expense . income tax expense was $ 0.095 million for the year ended december 31 , 2019 , compared to $ 0.086 million for the year ended december 31 , 2018. the 2019 tax expense was a result of an increase in the state blended tax rate , which was applied to the deferred tax liability balance . the 2018 tax expense was a result of the 2017 partial release of valuation allowance against our previously recorded deferred tax assets as a result of the impact of legislation commonly known as tcja where future reversals of deductible temporary differences , such as those from our indefinite-lived in-process research and development , can offset taxable temporary differences from future net operating loss carryforwards due to their indefinite carryforward period under the new tax law . 62 liquidity and capital resources since becoming a public company in 2015 , we have financed our operations from several registered offerings and private placements of our securities and payments from our bhc license agreements and the u.s. government grants . from
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as a result of reaching a settlement on a property damage claim we filed in 2010 , we recorded an insurance recovery gain of $ 1.0 million in 2011. loss on early extinguishment of debt in 2006 , core laboratories lp , an entity 100 % indirectly owned by core laboratories n.v. , issued $ 300 million aggregate principal amount of senior exchangeable notes ( the `` exchangeable notes '' ) which were fully and unconditionally guaranteed by core laboratories n.v. and matured on october 31 , 2011. during 2011 , 156,301 exchangeable notes were extinguished resulting in a loss of $ 1.0 million . during 2010 , 82,251 exchangeable notes were extinguished resulting in a loss of $ 1.9 million . interest expense interest expense decreased by $ 2.1 million in 2012 compared to 2011 . our exchangeable notes were fully repaid during the fourth quarter of 2011 and have been replaced by our $ 150 million senior notes ( the `` senior notes '' ) which carry a lower interest expense . in 2011 , we entered into a $ 100 million interest rate hedge that resulted in a loss of $ 1.3 million which was recorded to interest expense . income tax expense 19 income tax expense increased $ 17.7 million in 2012 compared to 2011 due primarily to the reversal in 2011 of $ 10.4 million in tax liabilities provided over the period 2007-2010 as a result of concluded audits of prior year returns , differences between recently filed tax returns and the estimates included in our tax provisions and an increase in taxable income in 2012. income tax expense decreased $ 9.5 million in 2011 compared to 2010 primarily due to the aforementioned benefit in 2011 of concluded audits . the effective tax rate was 24.9 % for 2012 , 22.7 % for 2011 and 30.5 % for 2010 . the lower tax rate for 2011 was due primarily to the reversal of the tax liabilities noted above and was partially offset by changes in our estimate of unrecognized tax benefits in certain jurisdictions . segment analysis the following charts and tables summarize the operating results for our three complementary business segments . segment revenue replace_table_token_6_th segment operating income for the years ended december 31 , ( dollars in thousands ) 2012 % change 2011 % change 2010 reservoir description $ 144,502 24.3 % $ 116,244 9.5 % $ 106,179 production enhancement 128,602 14.2 % 112,576 11.2 % 101,241 reservoir management 26,428 20.7 % 21,887 10.8 % 19,759 corporate and other ( 1 ) ( 2,252 ) nm ( 2 ) 47 nm ( 2 ) ( 253 ) operating income $ 297,280 18.6 % $ 250,754 10.5 % $ 226,926 ( 1 ) “ corporate and other '' represents those items that are not directly relating to a particular segment . ( 2 ) `` nm '' means not meaningful . segment operating income margins ( 1 ) 20 for the years ended december 31 , 2012 2011 2010 margin margin margin reservoir description 29.2 % 24.7 % 24.9 % production enhancement 31.8 % 30.3 % 32.2 % reservoir management 32.3 % 33.0 % 36.0 % total company 30.3 % 27.6 % 28.6 % ( 1 ) calculated by dividing `` operating income '' by `` revenue . '' reservoir description revenue for our reservoir description segment increased by 5.5 % in 2012 compared to 2011 , after increasing 10.3 % in 2011 compared to 2010 . during 2012 , this segment 's operations , which focus on international crude-oil related products , continued to benefit from large-scale core analyses and reservoir fluids characterization studies in the asia-pacific areas , offshore west and east africa , the eastern mediterranean region and the middle east , including iraq , kuwait and the united arab emirates . during 2011 , this segment 's increased revenue was primarily due to the continued expansion of worldwide development projects particularly in west africa , asia pacific , and the north sea , as well as the north american oil- and gas-shale and liquid-rich plays in the bakken , eagle ford , marcellus , muskwa and other active fields . operating income and operating margin both increased in 2012 from 2011 . these increases are a result of higher sales , including a better mix of projects aimed at more complex reservoirs , over the fixed cost structure . this segment emphasizes technologically demanding services on internationally-based development and production-related crude oil projects over the more cyclical exploration-related projects . operating income increased in 2011 compared to 2010 while operating margin fell slightly as a result of increased revenue driven by increased activity , offset by higher costs in certain operating areas due to charges in the second quarter of 2011 for restructuring and other personnel costs . production enhancement revenue for our production enhancement segment increased by $ 32.3 million , or 8.7 % in 2012 compared to 2011 , primarily due to demand for our stimulation diagnostic services both for fracture diagnostics in north america and field flood diagnostics internationally . revenue for our production enhancement segment increased 18.3 % in 2011 compared to 2010 , primarily due to an increased market share of our perforating charges and gun systems particularly in the north american markets relating to horizontal well developments of oil- and gas-shale reservoirs and for high margin completion and recompletion technologies used in the reworking of major , giant , and super-giant fields . operating income for this segment increased to $ 128.6 million in 2012 from $ 112.6 million in 2011 , an increase of 14.2 % . the increase in operating income in 2012 was primarily driven by increased demand for the company 's proprietary and patented hydraulic fracture and field flood diagnostic technologies such as spectrachem ® plus , zero wash ® and spectraflood tracers in north america and internationally . operating income for this segment increased to $ 112.6 million in 2011 from $ 101.2 million in 2010 , an increase of 11.2 % . story_separator_special_tag the increase in operating income in 2011 was primarily driven by increased revenue from services related to our proprietary and patented diagnostic technologies , such as spectrachem ® plus , spectrascan ® , zero wash ® , and our hero ® line of perforating charges and gun systems and our htd blast perforating system which is used for the perforation of extended-reach horizontal wells in unconventional reservoirs . reservoir management revenue for our reservoir management segment increased 23.1 % to $ 81.8 million in 2012 from $ 66.4 million in 2011 and $ 54.9 million in 2010 . the increase in revenue in 2012 was due to ongoing interest in several of our existing multi-client reservoir studies such as the duvernay shale projec t in canada and the tight oil reservoirs of the midland basin study as well as our new industry project to evaluate the potential of the pearsall shale , which underlies the shallow portions of the eagle ford in south texas . the increase in revenue in 2011 was due to studies initiated in 2011 including the avalon shale study and the midland basin project . operating income for this segment increased to $ 26.4 million in 2012 compared to $ 21.9 million in 2011 and $ 19.8 million in 2010 . the increase in operating income in 2012 as compared to 2011 was primarily a result of additional participants in our joint industry projects , including the utica , duvernay , and mississippi lime studies , and in the marcellus , niobrara , wolfcamp and eagle ford plays . the increase in operating income in 2011 from 2010 was primarily related to increased interest in our 21 consortium projects such as the global gas shale project , the marcellus shale evaluation study and the eagle ford shale study along with the continued participation in our north american gas shale study and our new worldwide oil and natural gas shale reservoir study . liquidity and capital resources general we have historically financed our activities through cash on hand , cash flows from operations , bank credit facilities , equity financing and the issuance of debt . cash flows from operating activities provides the primary source of funds to finance operating needs , capital expenditures and our dividend and share repurchase programs . if necessary , we supplement this cash flow with borrowings under bank credit facilities to finance some capital expenditures and business acquisitions . as we are a netherlands holding company , we conduct substantially all of our operations through subsidiaries . our cash availability is largely dependent upon the ability of our subsidiaries to pay cash dividends or otherwise distribute or advance funds to us . we utilize the non-gaap financial measure of free cash flow to evaluate our cash flows and results of operations . free cash flow is defined as net cash provided by operating activities ( which is the most directly comparable gaap measure ) less cash paid for capital expenditures . management believes that free cash flow provides useful information to investors regarding the cash that was available in the period that was in excess of our needs to fund our capital expenditures and operating activities . free cash flow is not a measure of operating performance under gaap , and should not be considered in isolation nor construed as an alternative to operating profit , net income ( loss ) or cash flows from operating , investing or financing activities , each as determined in accordance with gaap . free cash flow does not represent residual cash available for distribution because we may have other non-discretionary expenditures that are not deducted from the measure . moreover , since free cash flow is not a measure determined in accordance with gaap and thus is susceptible to varying interpretations and calculations , free cash flow , as presented , may not be comparable to similarly titled measures presented by other companies . the following table reconciles this non-gaap financial measure to the most directly comparable measure calculated and presented in accordance with u.s. gaap for the years ended december 31 , 2012 , 2011 and 2010 ( in thousands ) : replace_table_token_7_th the increase in free cash flow in 2012 compared to 2011 was primarily due to the increase in cash from operations . the decrease in free cash flow in 2011 compared to 2010 was primarily due to an increase in inventory in preparation for an anticipated shortage of steel required for our products at the end of 2011 and to stock three new warehouses opened in 2011. working capital was $ 156.4 million and $ 143.4 million at december 31 , 2012 and 2011 , respectively . cash flows the following table summarizes cash flows for the years ended december 31 , 2012 , 2011 and 2010 ( in thousands ) : replace_table_token_8_th the increase in cash flow from operating activities in 2012 compared to 2011 was primarily attributable to increased net income . the decrease in cash flow from operating activities in 2011 compared to 2010 was primarily the result of an increase in 22 inventory in preparation for an anticipated shortage of steel required for our products at the end of 2011 and to stock three new warehouses opened in 2011 , partially off set by an increase in net income . cash flow used in investing activities decreased $ 18.0 million in 2012 over 2011 . cash flow used in investing activities increased $ 13.3 million in 2011 over 2010 . the primary reason is the $ 18.8 million spent for an acquisition in 2011. cash flow used in financing activities in 2012 decreased $ 43.4 million compared to 2011 . cash flow used in financing activities in 2011 increased $ 42.4 million compared to 2010 .
| the increase in revenue from 2010 to 2011 was driven by increased demand for our specialized completion and recompletion technology products utilized in high-end multi-stage well completion and stimulation programs in areas such as the oil- and natural gas-shale plays in north america and in the major , giant , and super-giant fields in southern iraq . cost of services , excluding depreciation cost of services increased to $ 413.1 million for 2012 from $ 395.3 million for 2011 and $ 356.6 million for 2010 . as a percentage of services revenue , cost of services decreased to 59.5 % in 2012 from 63.6 % in 2011 and 62.8 % in 2010 . the margin improvement is a result of higher sales , including a better mix of projects aimed at more complex reservoirs , over the fixed cost structure . cost of product sales , excluding depreciation cost of product sales increased to $ 208.7 million for 2012 from $ 198.1 million for 2011 and $ 157.2 million for 2010 . as a percentage of product sales revenue , cost of sales increased to 72.7 % for 2012 compared to 69.3 % for 2011 and 69.4 % for 2010 . the cost of raw materials , especially specialty steel , increased substantially in the second half of 2011 which increased our cost of product sales in 2012 as these raw materials were converted to finished goods and sold . the decrease in cost of sales as a percentage of product sales revenue in 2011 , as compared to 2010 , was primarily due to the growing demand for our new technologies which led to an overall increase in sales , which improved absorption of our fixed cost structure . 18 general and administrative expense general and administrative expenses include corporate management and centralized administrative services that benefit our operations . general and administrative expenses were $ 43.2 million for 2012 , which represents 4.4 % of revenue , a slight decrease compared to
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the lower provision for loan losses in 2019 primarily reflected lower originations . in first quarter 2019 , salisbury transferred the remaining unearned credit-related discount on loans acquired in its 2014 acquisition of riverside bank to the allowance for loan loss reserves . as a result of this transfer , which is reflected in the table below as the “ acquisition discount transfer ” , gross loans receivable and the allowance for loan losses increased by $ 0.7 million . the balance of net loans receivable did not change as a result of this transfer . the following table sets forth changes in the allowance for loan losses and other statistical data : replace_table_token_4_th the reserve coverage at december 31 , 2019 , as measured by the ratio of allowance for loan losses to gross loans , was 0.95 % , as compared with 0.85 % at december 31 , 2018. non-performing loans ( non-accrual loans and accruing loans past-due 90 days or more ) decreased $ 2.9 million to $ 3.6 million , or 0.39 % of gross loans receivable , at december 31 , 2019 , down from $ 6.5 million or 0.71 % of gross loans receivable at december 31 , 2018. the decline in non-performing loans from the prior year end primarily reflected pay-offs of $ 1.6 million , upgrades to performing status of $ 0.9 million and write-downs of $ 0.4 million . accruing loans past due 30-89 days decreased $ 0.1 million to $ 2.1 million , or 0.22 % of gross loans receivable at december 31 , 2019. see “ overview – loan credit quality ” below for further discussion and analysis . 21 non-interest income the following table details the principal categories of non-interest income . replace_table_token_5_th non-interest income increased $ 305 thousand , or 3.4 % , in 2019 versus 2018. trust and wealth advisory revenues increased $ 295 thousand primarily due to increased market values and a higher volume of assets under management . service charges and fees increased $ 310 thousand from 2018 on higher interchange and wire fees as well as higher loan prepayment penalties . gains on sales of mortgage loans increased $ 27 thousand on higher sales volume . mortgage loans sales totaled $ 6.4 million in 2019 versus $ 4.6 million in 2018. loans serviced under the fhlbb mortgage partnership finance program totaled $ 106.3 million and $ 111.4 million at december 31 , 2019 and 2018 , respectively . in 2018 , the bank recorded a non-taxable gain of $ 341 thousand related to proceeds received from a boli policy due to the death of a covered former employee . non-interest expense the following table details the principal categories of non-interest expense . replace_table_token_6_th non-interest expenses decreased $ 923 thousand , or 3.1 % , in 2019 versus 2018. salaries expense increased $ 45 thousand due to higher base salaries , merit increases , and short-term incentive accruals partly offset by lower production accruals due to lower loan volume . employee benefits expense for 2019 included a non-recurring reduction of $ 328 thousand , which reflected changes to the calculation of death benefits for bank-owned life insurance policies . this credit , as well as lower 401k and esop accruals , was mostly offset by higher medical insurance costs and higher deferred compensation accruals . premises and equipment expense decreased $ 519 thousand from 2018 as the prior year included a charge of $ 171 thousand to write-off the remainder of the lease and fixed assets related to the bank 's previously occupied fishkill , new york branch location as well as a charge of $ 95 thousand to write-off the remaining term of a third-party software contract . software maintenance costs and depreciation costs were also lower . data processing expense increased $ 82 thousand mainly as a result of higher core data processing costs . the decrease of $ 23 thousand in professional fees reflected lower consulting and internal audit costs partly offset by higher external audit and regulatory exam costs , as well as higher investment management expenses . oreo losses and write-downs increased $ 133 thousand from 2018. collections , oreo and appraisal expenses decreased $ 142 thousand primarily due to lower appraisal fees , lower carrying costs and lower taxes . the $ 318 thousand decrease in fdic insurance reflected $ 240 thousand in non-recurring assessment credits received by the bank in 2019. marketing and community support decreased $ 196 thousand due to costs incurred in the prior year for the fishkill , new york branch relocation , the timing of contributions and lower overall marketing spend . amortization of intangibles and all other operating expenses collectively decreased $ 89 thousand from 2018. income taxes the effective income tax rates for 2019 and 2018 were 17.5 % and 16.2 % , respectively . salisbury 's effective tax rate was less than the 21 % federal statutory rate due to tax-exempt income , primarily from municipal bonds , tax advantaged loans and bank-owned life insurance . fluctuations in the effective tax rate generally result from changes in the mix of taxable and tax-exempt income . for further information on income taxes , see note 13 of notes to consolidated financial statements . salisbury did not incur connecticut income tax in 2019 , 2018 or 2017 , other than minimum state income tax , as a result of a connecticut law that permits banks to shelter certain mortgage income from the connecticut corporation business tax through the use of a special purpose entity called a passive investment company or pic . salisbury avails itself of this benefit through its pic , sbt mortgage service corporation . salisbury 's income tax provision reflects the full impact of the connecticut legislation . salisbury does not expect to pay other than minimum connecticut state income tax in the foreseeable future unless there is a change in connecticut tax law . story_separator_special_tag 22 comparison of the years ended december 31 , 2018 and 2017 net interest and dividend income net interest and dividend income represents the difference between interest and dividends earned on loans and securities and interest expense incurred on deposits and borrowings . the level of net interest income is a function of volume , rates and mix of both earning assets and interest-bearing liabilities . net interest income can be affected by changes in interest rate levels , changes in the volume of assets and liabilities that are subject to re-pricing within different future time periods , and in the level of non-performing assets . interest and dividend income tax equivalent interest and dividend income increased $ 4.4 million , or 12.1 % , to $ 40.8 million in 2018. loan income increased $ 3.7 million , or 10.9 % , to $ 37.5 million in 2018. the increase was primarily due to a $ 90.6 million , or 11.6 % , increase in average loans , partially offset by a 3 basis point decrease in average yield . interest income for 2018 and 2017 reflects purchase accounting adjustments consisting of net accretion related to the fair value adjustments of loans acquired in the riverside bank acquisition in the amount of $ 0.8 million and $ 1.2 million , respectively . tax equivalent interest and dividend income from securities increased $ 276 thousand , or 13.0 % , to $ 2.4 million in 2018 , as a result of a $ 8.1 million , or 10.2 % , increase in average security balances , and a 7 basis point increase in average yield . interest from short term funds increased $ 352 thousand in 2018 as a result of a 74 basis point increase in average yield and $ 5.0 million , or 13.7 % , increase in average short term balances . interest expense interest expense increased $ 3.0 million , or 70.4 % , to $ 7.2 million in 2018. interest expense on interest bearing deposit accounts increased $ 2.2 million , or 87.6 % , to $ 4.7 million in 2018 , as a result of a $ 59.7 million , or 10.1 % , increase in average interest-bearing deposits and a 30 basis point increase in the average rate to 0.72 % . the increase in the certificate of deposit balance from 2017 included $ 20 million of brokered certificates of deposits and $ 19.4 million of one-way buys executed through the certificate of deposit account registry service ( “ cdars ” ) . cdars is a product offered by promontory interfinancial network that enables participating financial institutions to buy or sell excess funds to other members to fund operations and to manage liquidity . interest expense on fhlbb advances increased $ 722 thousand , or 71.3 % , due to a $ 28.9 million , or 82.0 % , increase in average advances , partially offset by a 17 basis point decrease in the average borrowing rate to 2.70 % . in december 2015 , salisbury issued $ 10 million of subordinated debentures . the proceeds of such issuance , along with cash-on-hand , were used by salisbury to fully redeem $ 16 million of its outstanding series b preferred stock , which was issued pursuant to the participation in the u.s. treasury 's sblf program . interest expense on the subordinated debt for 2018 and 2017 was $ 624 thousand and $ 624 thousand , respectively . provision and allowance for loan losses the provision for loan losses was $ 1.7 million for 2018 , compared with $ 1.0 million for 2017. net loan charge-offs were $ 0.7 million and $ 0.4 million , for the respective years . the higher provision for loan losses in 2018 reflected lower recoveries partly offset by lower charge-offs . the reserve coverage at december 31 , 2018 , as measured by the ratio of allowance for loan losses to gross loans , was 0.85 % , as compared with 0.84 % at december 31 , 2017. non-performing loans ( non-accrual loans and accruing loans past-due 90 days or more ) decreased $ 0.1 million to $ 6.5 million , or 0.71 % of gross loans receivable , at december 31 , 2018 , down from 0.82 % at december 31 , 2017. accruing loans past due 30-89 days decreased $ 1.4 million to $ 2.2 million , or 0.24 % of gross loans receivable at december 31 , 2018. see “ overview – loan credit quality ” below for further discussion and analysis . non-interest income non-interest income increased $ 709 thousand , or 8.6 % , in 2018 versus 2017. trust and wealth advisory revenues increased $ 223 thousand primarily due to increased market values and a higher volume of assets under management , as well as higher estate planning fees . service charges and fees were unchanged from 2017 as higher interchange fees were offset by lower deposit fees . gains on sales of mortgage loans decreased $ 36 thousand on lower sales volume . mortgage loans sales totaled $ 4.6 million in 2018 versus $ 5.4 million in 2017. income from servicing of mortgage loans increased $ 53 thousand due primarily to a reduction in the amortization of mortgage servicing rights . loans serviced under the fhlbb mortgage partnership finance program totaled $ 111.4 million and $ 117.5 million at december 31 , 2018 and 2017 , respectively . gains on the sale of securities increased $ 140 thousand in 2018 versus 2017. in 2018 , the bank recorded a non-taxable gain of $ 341 thousand related to proceeds receivable from a boli policy due to the death of a covered former employee , and combined with $ 337 thousand in income on boli resulted in a $ 335 thousand increase over 2017. non-interest expense non-interest expenses of $ 29.8 million for 2018 included charges of $ 275 thousand related to the write down of oreo properties compared with oreo charges of $ 1.7 million in 2017. excluding oreo related charges , non-interest expenses increased $ 1.9
| replace_table_token_3_th net interest and dividend income represents the difference between interest and dividends earned on loans and securities and interest expense incurred on deposits and borrowings . the level of net interest income is a function of volume , rates and mix of both earning assets and interest-bearing liabilities . net interest income can be affected by changes in interest rate levels , changes in the volume of assets and liabilities that are subject to re-pricing within different future time periods , and in the level of non-performing assets . interest and dividend income tax equivalent interest and dividend income increased $ 3.2 million , or 7.8 % , to $ 44.0 million in 2019. loan income increased $ 2.7 million , or 7.1 % , to $ 40.2 million in 2019. the increase was primarily due to a $ 51.3 million , or 5.9 % , increase in average loans , and a 5 basis point increase in average yield . interest income for 2019 and 2018 reflects purchase accounting adjustments consisting of net accretion related to the fair value adjustments of loans acquired in the riverside bank acquisition in the amount of $ 0 million and $ 0.8 million , respectively . tax equivalent interest and dividend income from securities increased $ 0.5 million , or 22.2 % , to $ 2.9 million in 2019 , as a result of a $ 8.3 million , or 9.4 % , increase in average security balances , and a 32-basis point increase in average yield . interest from short term funds decreased $ 20 thousand in 2019 as a result of a 19 basis point increase in average yield , partially offset by a $ 5.2 million , or 12.7 % , decrease in average short term balances . interest expense interest expense increased $ 2.1 million , or 28.8 % , to $ 9.3 million in 2019. interest expense on interest bearing deposit accounts increased $ 2.7 million , or 57.2 % , to $ 7.3 million in 2019 , as a result of a $ 63.2 million , or 9.7 % , increase in average
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our customers medication control systems are mission critical to their success and our customers require 38 these systems to be functional at all times . to help assure the maximum availability of our systems , our customers purchase maintenance and support contracts in one , two or five year increments . our long-term liabilities , which were $ 20.3 million as of december 31 , 2011 and $ 19.8 million as of december 31 , 2010 , are principally composed of long-term deferred service revenue , which was $ 19.0 million as of december 31 , 2011 , and $ 19.2 million as of december 31 , 2010. our deferred service revenue will be amortized to service revenue as the service contracts are executed . in 2011 , we generated positive overall cash flow of $ 16.1 million . this was primarily due to our $ 10.4 million of net income , adjusted for non-cash expenses associated with depreciation and amortization of $ 8.0 million , share-based compensation of $ 9.5 million and $ 6.8 million of proceeds from the issuance of common stock under our employee stock purchase and stock option plans . additional factors were strong cash collections , reducing accounts receivable at year end by $ 5.9 million as compared to 2010 and increases of $ 3.6 million of deferred service revenue and $ 2.5 million of deferred gross profit . these increases to cash were offset by a $ 9.4 million increase in inventory , primarily related to the g4 launch , $ 13.1 million for the acquisition and development of productive long-lived assets and $ 12.6 million in stock repurchases . in 2010 , we generated positive overall cash flow of $ 6.4 million , primarily due to improved net income , adjusted for non-cash expenses associated with depreciation , amortization and share-based compensation , and proceeds from the issuance of common stock under our employee stock purchase and stock option plans . the increases to cash were offset by $ 23.0 million in investing cash outflows for purchases of short-term investments , the acquisition of pandora , and the acquisition and development of productive long-lived assets . for the year ended december 31 , 2011 , net cash provided by operations continued to be positive at $ 31.2 million , and our cash and cash equivalents balance plus short-term investments as of december 31 , 2011 was $ 199.9 million as compared to $ 183.7 million at december 31 , 2010. we expect cash provided by operations to remain positive in 2012. our full-time headcount of 773 on december 31 , 2011 increased by 20 net positions from our full-time headcount on december 31 , 2010. the net increase included rebalancing of the functional mix , with the majority of the net increase in sales and marketing . we record compensation expense from our share-based awards , options and our employee stock purchase plan in accordance with account standards codification , or asc , 718 , stock compensation . total share-based compensation expense for the year ended december 31 , 2011 was $ 9.5 million , compared to $ 9.0 million in 2010. our gross profit increased 15.2 % for the year ended december 31 , 2011 as compared to the year ended december 31 , 2010 , with gross margins increasing by 2.3 percentage points to 55.3 % . the increases in gross profits and related margins were driven primarily by a shift in product mix to higher margin products including a significant volume of lease renewal activity , overall manufacturing efficiencies and higher service revenues without a proportional increase in costs . we expect revenues to increase modestly in 2012 and we do not anticipate any major fluctuations in our gross margin beyond normal fluctuations caused by changes in product mix . revenues and gross margins may be adversely affected , however , as a result of unforeseen market price reductions and additional costs to expand our business . net income increased to $ 10.4 million in 2011 compared to $ 4.9 million in 2010 due to an increase in gross profit of $ 17.9 million , which included an $ 11.6 million increase in gross profit from product revenues and $ 6.3 million from service revenues . this increase was partially offset by an $ 11.2 million increase in operating expenses primarily due to an increase in selling , general and administrative of $ 11.3 million and an increase in research and development activities of $ 1.0 million . partially offsetting these increases in 2011 was the absence of pretax restructuring charges compared to $ 1.2 million in 2010 for facilities consolidation . 39 we operate in one business segment , the design , manufacturing , selling and servicing of medication and supply dispensing systems . our chief operating decision maker , who is our chief executive officer , along with our management team evaluates our profit performance based on company-wide , consolidated results . the september 2010 acquisition of pandora resulted in neither the creation of a new reporting unit nor a new operating segment . critical accounting policies and estimates our 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 united states generally accepted accounting principles , or gaap . the preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities , disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods . we regularly review our estimates and assumptions , which are based on historical experience and various other factors that are believed to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of certain assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates and assumptions . story_separator_special_tag we believe the following critical accounting policies are affected by significant judgments and estimates used in the preparation of our consolidated financial statements : revenue recognition . we earn revenues from sales of our medication and supply dispensing systems , with related services , sold in our principal market the healthcare industry . our market is primarily located in the united states . our customer arrangements typically include one or more of the following deliverables : products software-enabled equipment that manages and regulates the storage and dispensing of pharmaceuticals and other medical supplies . software additional software applications that enable incremental functionality of our equipment . installation installation of equipment as integrated systems at customers ' sites . post-installation technical support phone support , on-site service , parts and access to unspecified software upgrades and enhancements , if and when available . professional services other customer services , such as training and consulting . we recognize revenue when the earnings process is complete , based upon our evaluation of whether the following four criteria have been met : persuasive evidence of an arrangement exists . we use signed customer contracts and signed customer purchase orders as evidence of an arrangement for leases and sales . for service engagements , we use a signed services agreement and a statement of work to evidence an arrangement . delivery has occurred . equipment and software product delivery is deemed to occur upon successful installation and receipt of a signed and dated customer confirmation of installation letter , providing evidence that we have delivered what the customer ordered . in instances of a customer self-installation , product delivery is deemed to have occurred upon receipt of a signed and dated customer confirmation letter . if a sale does not require installation , we recognize revenue on delivery of products to the customer , including transfer of title and risk of loss assuming all other revenue criteria are met . we recognize revenue from sales of products to distributors upon delivery assuming all other revenue criteria are met since we do not allow for rights of return or refund . assuming all other revenue criteria are met , we recognize revenue for 40 support services ratably over the related support services contract period . we recognize revenue on training and professional services as they are performed . fee is fixed or determinable . we assess whether a fee is fixed or determinable at the outset of the arrangement based on the payment terms associated with the transaction . we have established a history of collecting under the original contract without providing concessions on payments , products or services . collection is probable . we assess the probability of collecting from each customer at the outset of the arrangement based on a number of factors , including the customer 's payment history and its current creditworthiness . if , in our judgment , collection of a fee is not probable , we defer the revenue until the uncertainty is removed , which generally means revenue is recognized upon our receipt of cash payment assuming all other revenue criteria are met . our historical experience has been that collection from our customers is generally probable . in arrangements with multiple deliverables , assuming all other revenue criteria are met , we recognize revenue for individual delivered items if they have value to the customer on a standalone basis . effective for new or modified arrangements entered into beginning on january 1 , 2011 , we allocate arrangement consideration at the inception of the arrangement to all deliverables using the relative selling price method . we adopted the new revenue recognition guidance for arrangements with multiple deliverables on a prospective basis as of january 1 , 2011.this method requires us to determine the selling price at which each deliverable could be sold if it were sold regularly on a standalone basis . when available , we use vendor-specific objective evidence , or vsoe of fair value as the selling price . vsoe represents the price charged for a deliverable when it is sold separately or for a deliverable not yet being sold separately , the price established by management with the relevant authority . we consider vsoe to exist when approximately 80 % or more of our standalone sales of an item are priced within a reasonably narrow pricing range ( plus or minus 15 % of the median rates ) . we have established vsoe of fair value for our post-installation technical support services and professional services . when vsoe of fair value is not available , third-party evidence , or tpe , of fair value for similar products and services is acceptable ; however , our offerings and market strategy differ from those of our competitors , such that we can not obtain sufficient comparable information about third parties ' prices . if neither vsoe nor tpe are available , we use our best estimates of selling prices , or besp . we determine besp considering factors such as market conditions , sales channels , internal costs and product margin objectives and pricing practices . we regularly review and update our vsoe , tpe and besp information and obtain formal approval by appropriate levels of management . the relative selling price method allocates total arrangement consideration proportionally to each deliverable on the basis of its estimated selling price . in addition , the amount recognized for any delivered items can not exceed that which is not contingent upon delivery of any remaining items in the arrangement . we also use the residual method of allocating the arrangement consideration in certain circumstances . we use the residual method to allocate total arrangement consideration between delivered and undelivered items for any arrangements entered into prior to january 1 , 2011 and not subsequently materially modified . the use of the residual method is required by software revenue recognition rules that applied to sales of most of our products and services until the adoption of the new revenue recognition guidance .
| additionally , during the year we incurred higher product costs related to the manufacturing cost of the new g4 cabinet console platform , released on may 2 , 2011. the early production units of the g4 cabinet console were at a higher product cost than our previous generation product . this was due to initial production line ramp up and longer production cycles to validate the manufacturability and quality of the new console . the majority of the higher production line cost was absorbed in the three months ended september 30 , 2011 and december 31 , 2011. the future cost of product revenues are expected to be more reflective of the previous generation product , net of any product mix effects . gross profit on product revenue increased by $ 11.6 million , or 12.2 % , in 2011 as compared to 2010 and gross profit as a percentage of product revenues increased to 57.2 % in 2011 as compared to 55.4 % in 2010. the increase was the result of the previously discussed increase in revenue by 8.6 % over the prior year with lower than proportionate increases in related costs by 4.2 % over the prior year primarily as a result of lower material costs due to product mix and from our cost reduction efforts . for 2012 , we do not anticipate any significant fluctuations in our gross margin beyond normal fluctuations caused by changes in product mix . 2010 compared to 2009 product revenues remained nearly flat in 2010 as compared to 2009. cost of product revenues decreased by $ 3.6 million , or 4.6 % , in 2010 as compared to 2009. the decrease was primarily due to a $ 1.0 million charge to record an inventory reserve in the first quarter of 2009 which did not recur in 2010 , a $ 0.4 million favorable timing effect on expenses due to a reduction in accrued vacation in the second quarter of 2010 , the overall favorable shift in product mix to products with lower associated costs along with the favorable results of outsourcing initiatives , ongoing cost reduction programs and general
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25 acquisitions and the divestiture during the most recent three fiscal years are more fully described in note 2 , “ acquisitions and divestitures , ” in the notes to the consolidated financial statements included herein . critical accounting policies our consolidated financial statements have been prepared in conformity with gaap , which often requires the judgment of management in the selection and application of certain accounting principles and methods . management believes that the quality and reasonableness of our most critical policies enable the fair presentation of our financial position and results of operations . however , investors are cautioned that the sensitivity of financial statements to these methods , assumptions and estimates could create materially different results under different conditions or using different assumptions . below are those policies applied in preparing our financial statements that management believes are the most dependent on the application of estimates and assumptions . for additional accounting policies , see note 3 , “ summary of significant accounting policies , ” in the notes to the consolidated financial statements included herein . revenue recognition and related allowances : revenue is recognized from the sale of products when title and risk of loss passes to the customer , which is generally at the time of shipment . substantially all product sales are made pursuant to firm , fixed-price purchase orders received from customers . collectibility of amounts recorded as revenue is reasonably assured at the time of sale . provisions for returns , uncollectible accounts and the cost of repairs under contract warranty provisions are provided for in the same period as the related revenues are recorded and are principally based on historical results modified , as appropriate , by the most current information available . we have a history of making reasonably dependable estimates of such allowances ; however , due to uncertainties inherent in the estimation process , it is possible that actual results may vary from the estimates and the differences could be material . allowance for uncollectible accounts : management estimates the allowance for uncollectible accounts based on the aging of the accounts receivable and customer creditworthiness . the allowance also incorporates a provision for the estimated impact of disputes with customers . management 's estimate of the allowance amounts that are necessary includes amounts for specifically identified credit losses and estimated credit losses based on historical information . the determination of the amount of the allowance for uncollectible accounts is subject to significant levels of judgment and estimation by management . depending on the resolution of potential credit and other collection issues , or if the financial condition of any of the company 's customers were to deteriorate and their ability to make required payments were to become impaired , increases in these allowances may be required . historically , changes in estimates in the allowance for uncollectible accounts have not been significant . inventories : inventories are stated at the lower of cost or net realizable value . cost of inventories is generally determined by the average cost and the first-in , first-out ( fifo ) methods and includes material , labor and overhead related to the manufacturing process . because the company sells products that are installed on airframes that can be in-service for 25 or more years , it must keep a supply of such products on hand while the airframes are in use . where management estimated that the net realizable value was below cost or determined that future demand was lower than current inventory levels , based on historical experience , current and projected market demand , current and projected volume trends and other relevant current and projected factors associated with the current economic conditions , a reduction in inventory cost to estimated net realizable value was made by recording a provision included in cost of sales . although management believes that the company 's estimates of excess and obsolete inventory are reasonable , actual results may differ materially from the estimates and additional provisions may be required in the future . in addition , in accordance with industry practice , all inventories are classified as current assets as all inventories are available and necessary to support current sales , even though a portion of the inventories may not be sold within one year . historically , changes in estimates in the net realizable value of inventories have not been significant . goodwill and other intangible assets : in accordance with asc 805 , “ business combinations , ” the company uses the acquisition method of accounting to allocate costs of acquired businesses to the assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition . the excess costs of acquired businesses over the fair values of the assets acquired and liabilities assumed were recognized as goodwill . the valuations of the acquired assets and liabilities will impact the determination of future operating results . in addition to using management estimates and negotiated amounts , the company used a variety of information sources to determine the estimated fair values of acquired assets and liabilities including third-party appraisals for the estimated value and lives of identifiable intangible assets . fair value adjustments to the company 's assets and liabilities are recognized and the results of operations of the acquired business are included in our consolidated financial statements from the effective date of the merger or acquisition . intangible assets other than goodwill are recognized if the benefit of the intangible asset is obtained through contractual or other legal rights , or if the intangible asset can be sold , transferred , licensed or exchanged , regardless of the company 's intent to do so . goodwill and identifiable intangible assets are recorded at their estimated fair value on the date of acquisition and are reviewed at least annually for impairment based on cash flow projections and fair value estimates . gaap requires that the annual , and any interim , impairment assessment be performed at the reporting unit level . story_separator_special_tag the reporting unit level is one level below an operating segment . substantially all goodwill was determined and recognized for each reporting 26 unit pursuant to the accounting for the merger or acquisition as of the date of each transaction . with respect to acquisitions integrated into an existing reporting unit , any acquired goodwill is combined with the goodwill of the reporting unit . at the time of goodwill impairment testing , the company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount , and whether it is necessary to perform the quantitative goodwill impairment test . the quantitative test is required only if the company concludes that it is more likely than not that a reporting unit 's fair value is less than its carrying amount , or if the company elects not to perform a qualitative assessment of a reporting unit . for the quantitative test , management determines the estimated fair value through the use of a discounted cash flow valuation model incorporating discount rates commensurate with the risks involved for each reporting unit . if the calculated estimated fair value is less than the current carrying value , impairment of goodwill of the reporting unit may exist . the use of a discounted cash flow valuation model to determine estimated fair value is common practice in impairment testing . the key assumptions used in the discounted cash flow valuation model for impairment testing includes discount rates , growth rates , cash flow projections and terminal value rates . discount rates are set by using the weighted average cost of capital ( “ wacc ” ) methodology . the wacc methodology considers market and industry data as well as company specific risk factors for each reporting unit in determining the appropriate discount rates to be used . the discount rate utilized for each reporting unit is indicative of the return an investor would expect to receive for investing in such a business . management , considering industry and company-specific historical and projected data , develops growth rates , sales projections and cash flow projections for each reporting unit . terminal value rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant wacc and low long-term growth rates . as an indicator that each reporting unit has been valued appropriately through the use of the discounted cash flow valuation model , the aggregate of all reporting unit 's estimated fair value is reconciled to the total market capitalization of the company . the company had 35 reporting units with goodwill as of the first day of the fourth quarter of fiscal 2018 , the date of the last annual impairment test . the estimated fair values of each of the reporting units was substantially in excess of their respective carrying values , and therefore , no goodwill impairment was recorded . the company performed a sensitivity analysis on the discount rate , which is a significant assumption in the calculation of fair values . with a one percentage point increase in the discount rate , nearly all of the reporting units would continue to have fair values substantially in excess of their respective carrying values . management tests indefinite-lived intangible assets for impairment at the asset level , as determined by appropriate asset valuation at the time of acquisition . the impairment test for indefinite-lived intangible assets consists of a comparison between the estimated fair values and carrying values . if the carrying amounts of intangible assets that have indefinite useful lives exceed their estimated fair values , an impairment loss will be recognized in an amount equal to the difference . management utilizes the royalty savings valuation method to determine the estimated fair value for each indefinite-lived intangible asset . in this method , management estimates the royalty savings arising from the ownership of the intangible asset . the key assumptions used in estimating the royalty savings for impairment testing include discount rates , royalty rates , growth rates , sales projections and terminal value rates . discount rates used are similar to the rates developed by the wacc methodology considering any differences in company-specific risk factors between reporting units and the indefinite-lived intangible assets . royalty rates are established by management with the advice of valuation experts and periodically substantiated by valuation experts . management , considering industry and company-specific historical and projected data , develops growth rates and sales projections for each significant intangible asset . terminal value rate determination follows common methodology of capturing the present value of perpetual sales estimates beyond the last projected period assuming a constant wacc and low long-term growth rates . the discounted cash flow and royalty savings valuation methodologies require management to make certain assumptions based upon information available at the time the valuations are performed . actual results could differ from these assumptions . management believes the assumptions used are reflective of what a market participant would have used in calculating fair value considering the current economic conditions . stock-based compensation : the cost of the company 's stock-based compensation is recorded in accordance with asc 718 , “ stock compensation. ” the company uses a black-scholes-merton option pricing model to estimate the grant-date fair value of the stock options awarded . the black-scholes-merton model requires assumptions regarding the expected volatility of the company 's common shares , the risk-free interest rate , the expected life of the stock options award and the company 's dividend yield . the company utilizes historical data in determining these assumptions . an increase or decrease in the assumptions or economic events outside of management 's control could have an impact on the black-scholes-merton model . income taxes : the company estimates income taxes in each jurisdiction in which it operates .
| cost of sales and the related percentage of total sales for the fiscal years ended september 30 , 2018 and 2017 were as follows ( amounts in millions ) : replace_table_token_11_th the net increase in the dollar amount of cost of sales during the fiscal year ended september 30 , 2018 was primarily due to increased volume associated with the sales from acquisitions and organic sales growth offset by a reduction in purchase accounting adjustments on inventory and a benefit from foreign exchange rate fluctuations . gross profit as a percentage of sales increased by 0.5 percentage points to 57.1 % for the fiscal year ended september 30 , 2018 from 56.6 % for the fiscal year ended september 30 , 2017 . the dollar amount of gross profit increased by $ 192.9 million , or 9.7 % , for the fiscal year ended september 30 , 2018 compared to the comparable period last year due to the following items : gross profit on the sales from the acquisitions indicated above ( excluding acquisition-related costs ) was approximately $ 49.3 million for the fiscal year ended september 30 , 2018 , which represented gross profit of approximately 42.8 % of the acquisition sales . the lower gross profit margin on the acquisition sales decreased gross profit as a percentage of consolidated sales by approximately 0.5 percentage points . organic sales growth described above , application of our three core value-driven operating strategies ( obtaining profitable new business , continually improving our cost structure , and providing highly engineered value-added products to customers ) , and positive leverage on our fixed overhead costs spread over a higher production volume , resulted in a net increase in gross profit of approximately $ 133.2 million for the fiscal year ended september 30 , 2018 . also contributing to the increase in gross profit were lower inventory purchase accounting adjustments of $ 13.5 million and $ 8.0 million in favorable foreign currency movement , particularly related to the u.s. dollar against the euro over the course of fiscal 2018 compared to fiscal 2017. partially offsetting these increases in gross profit is an increase in acquisition integration costs of $ 9.8 million and an increase in stock compensation expense of $ 1.3 million for the fiscal year ended september 30 , 2018 . 29 selling and administrative expenses . selling and administrative expenses increased by $
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the success of our business depends on , among other factors , the strength of the global economy and the stability of the financial markets , our customers ' demand for our products , the ability of our customers to meet their payment obligations , the likelihood of customers not canceling or deferring existing orders , and the strength of consumers ' demand for items containing our products in the end-markets we serve . we believe the long-term outlook for our business remains generally favorable despite the uncertainties in the global economy as we continue to execute on the strategy that has proven - 33 - successful for us over the years . see “ risk factors – the success of our business depends on the strength of the global economy and the stability of the financial markets , and any weaknesses in these areas may have a m aterial adverse effect on our net sales , operating results and financial condition. ” in part i , item 1a of this annual report for additional information . factors relevant to our results of operations in 2016 , the following factors affected , and , we believe , will continue to affect , our results of operations : we continue to experience pressure from our customers to reduce the selling price for our products , and we expect future improvements in net income to result primarily from increases in sales volume and improvements in product mix , as well as manufacturing cost reductions in order to offset any reduction in average selling prices of our products ; our 2016 results included 12 months of pericom operations , and the results from pericom led to higher revenue and higher margins ; in terms of our end markets , our automotive business reached 7 percent of revenue ; during 2016 , we invested approximately $ 40.7 million in our manufacturing and wafer fabrication facilities in china , and we expect to continue to invest in our facilities , although the amount to be invested will depend on product demand and new product developments ; we have had higher borrowing levels for the full year of 2016 compared to 2015 , leading to higher interest expense , than in previous periods reflecting the debt incurred to acquire pericom in the fourth quarter of 2015 ; we suffered fire damage at kfab leading to lower output and lower revenue and higher repair expenses related to the fire . during 2017 we will close kfab and move operations to other diodes wafer fabrication facilities or external foundries . description of sales and expenses net sales the principal factors that have affected or could affect our net sales from period to period are : the condition of the economy in general and of the semiconductor industry in particular . our customers ' adjustments in their order levels . changes in our pricing policies or the pricing policies of our competitors or suppliers . the addition or termination of key supplier relationships . the rate of introduction and acceptance by our customers of new products . our ability to compete effectively with our current and future competitors . our ability to enter into and renew key corporate and strategic relationships with our customers , vendors and strategic alliances , changes in foreign currency exchange rates . a major disruption of our information technology infrastructure . unforeseen catastrophic events , such as armed conflict , terrorism , fires , typhoons and earthquakes , and any other disruptions , such as change in the political or governmental environments , labor shortages , unplanned maintenance or other manufacturing problems . cost of goods sold cost of goods sold includes manufacturing costs for our semiconductors and our wafers . these costs include raw materials used in our manufacturing processes as well as labor costs and overhead expenses . cost of goods sold is also impacted by yield improvements , capacity utilization and manufacturing efficiencies . in addition , cost of goods sold includes the cost of products that we purchase from other manufacturers and sell to our customers . cost of goods sold is also affected by inventory obsolescence if our inventory management is not efficient . selling , general and administrative expenses selling , general and administrative expenses relate primarily to compensation and associated expenses for personnel in general management , sales and marketing , information technology , engineering , human resources , procurement , planning and finance , and sales commissions , as well as outside legal , investor relations , accounting , consulting and other operating expenses . also included in selling , general and administrative expenses are acquisition costs from business combinations . - 34 - research and development expenses research and development expenses consist of compensation and associated costs of employees engaged in research and development projects , as well as materials and equipment used for these projects . research and development expenses are primarily associated with our wafer facilities in china , lee 's summit , missouri and oldham , u.k. and our manufacturing facilities in taiwan and china , as well as with our engineers in the u.s. and taiwan . all research and development expenses are expensed as incurred . amortization of acquisition-related intangible assets amortization of acquisition-related intangible assets consists of assets such as developed technologies and customer relationships . impairment of goodwill impairment of goodwill consists of the impairment amount recognized as a result of a reporting unit 's goodwill exceeding its implied fair value . gain on sale of assets gain on sale of assets consists of the sale of certain assets such as intangibles or buildings . interest income / expense interest income consists of interest earned on our cash and investment balances . interest expense consists of interest payable on our outstanding credit facilities and other debt instruments . gain ( loss ) on securities carried at fair value from time to time we may hold investments in the form of common stock or some other similar equivalent and have elected fair value accounting treatment . story_separator_special_tag income tax provision our global presence requires us to pay income taxes in a number of jurisdictions . see note 11 of “ notes to consolidated financial statements ” for additional information . net income attributable to noncontrolling interest this represents the minority investors ' share of our subsidiaries ' earnings . net income attributable to common stockholders net income attributable to common stockholders is net income less net income attributable to noncontrolling interest . - 35 - story_separator_special_tag the - 37 - decline in total revenue , the lower average selling prices , and the reduction in factory utilization . cost of sales included $ 10.7 million from pericom operations . additionally there was approximately $ 1 m illion of expense for restricted stock awards and change-in-control agreements for pericom employees . operating expenses total operating expenses for 2015 increased approximately $ 13.7 million , or 7.1 % when compared to 2014. included in operating expenses for 2015 are approximately $ 5.0 million from pericom operations and additional expenses of approximately $ 7.0 million for pericom employees for restricted stock awards and change-in-control agreements . of the components within operating expenses , r & d , as a percentage of sales , increased slightly to 6.7 % for 2015 , compared to 5.9 % in the same period last year . r & d expense increased primarily due $ 1.0 million of expense for restricted stock grants and change-in-control agreements for pericom employees , packaging related development activity and increased investment associated with the pericom acquisition in november 2015 , amortization of acquisition-related intangible assets increased reflecting the pericom acquisition , and the loss on sale of assets reflects the impairment of old assets during 2015 in our bcd wafer fab that are not able to convert from six inch to eight inch wafer diameter production , and the gain realized on the sale of fixed assets in 2014 that did not repeat in 2015. sg & a , as a percentage of sales , increased slightly to 16.4 % of sales for 2015 , compared to 15.0 % in the same period last year . included in sg & a expense for 2015 was approximately $ 6.0 million for pericom employees related to restricted stock grants and change-in-control agreements . other ( expense ) /income interest income and gains on securities carried at fair value decreased as we held lower investable balances during the year . our investment balance increased at year end due to the investments acquired in the pericom acquisition . other income ( expense ) decreased due to a higher level of currency gains on taiwan currency recorded in 2014 when compared to 2015. income tax provision we recognized income tax expense of approximately $ 14.1 million for 2015 , resulting in an effective tax rate of approximately 35 % , as compared to 24 % for 2014. the decrease in tax expense from 2014 to 2015 was due primarily to the decrease in pretax earnings during the same period . the increase in the effective tax rate from 2014 to 2015 was due primarily to an increase in earnings in higher tax jurisdictions , relative to earnings in lower tax jurisdictions , and to the decrease in overall pretax earnings during the same period . financial condition liquidity and capital resources our primary sources of liquidity are cash and cash equivalents , funds from operations and , if necessary , borrowings under our credit facilities . on october 26 , 2016 , the company and diodes international b.v. ( the “ foreign borrower ” and , collectively with the company , the “ borrowers ” ) , and certain subsidiaries of the company as guarantors , entered into an amended and restated credit agreement ( the “ credit agreement ” ) with bank of america , as administrative agent , swing line lender and l/c issuer , and the lenders named therein , that amends and restates that certain credit agreement dated as of january 8 , 2013 , as previously amended ( the “ prior credit agreement ” ) . certain capitalized terms used in this description of the credit agreement have the meanings given to them in the credit agreement . the credit agreement rebalances the company 's senior credit facilities under the prior credit agreement from a $ 400,000,000 revolving senior credit facility and a $ 100,000,000 term loan to a $ 250,000,000 revolving senior credit facility ( the “ revolver ” ) , which includes a $ 10,000,000 swing line sublimit , a $ 10,000,000 letter of credit sublimit , and a $ 20,000,000 alternative currency sublimit , and a $ 250,000,000 term loan ( the “ term loan ” ) . the borrowers may from time to time request increases in the aggregate commitments under the credit agreement of up to a total of increase of $ 200,000,000 , subject to the lenders electing to increase their commitments or by means of the addition of new lenders , and subject to at least half of each increase in aggregate commitments being in the form of term loans , with the remaining amount of each increase being an increase in the amount of the revolver . the revolver and the term loan mature on october 26 , 2021 ( the “ maturity date ” ) . the company used the proceeds of the term loan and a portion of the proceeds available under the revolver and the term loan to refinance certain existing indebtedness of the borrowers and their subsidiaries under the prior credit agreement and has used and plans to use proceeds available under the revolver for working capital , capital expenditures , and other lawful corporate purposes , including , without limitation , financing permitted acquisitions . on february 13 , 2017 , the company , the foreign borrower and certain subsidiaries of the company as guarantors , entered into an amendment no . 1 to amended and restated credit agreement and limited waiver ( the “ amendment ” ) with bank of america , n.a.
| including pericom , average unit cost increased 6.6 % for the twelve months ended december 31 , 2016 , compared to the same period last year . for the twelve months ended december 31 , 2016 , gross profit incr eased approximately 15.4 % when compared to the same period last year . gross profit margin for the twelve months ended december 31 , 2016 and 2015 was 30.5 % and 29.3 % , respectively . operating expenses operating expenses for the twelve months ended december 31 , 2016 increased approximately $ 42.4 million , or 20.5 % , compared to the same period last year . the increase in operating expense reflects approximately $ 56.7 million of incremental operating expenses from pericom . sg & a increased approximately $ 19.0 million due primarily to an increase of $ 26.5 million of incremental pericom sg & a recognized in 2016 partially offset by lower stock compensation and change in control expense . r & d increased approximately $ 12.9 million due to an increase in pericom r & d expense of $ 18.0 million recognized in 2016. the increase in r & d expense of $ 12.9 million was partially offset by reversals of previously recorded liability reserves resulting from prior acquisitions . amortization of acquisition- related intangibles increased approximately $ 11.9 million reflecting the amortization of the intangible assets acquired in the pericom acquisition . sg & a , as a percentage of sales , was 16.8 % and 16.4 % for the twelve months ended december 31 , 2016 and 2015 , respectively . r & d , as a percentage of sales , was 7.4 % and 6.7 % for the twelve months ended september 30 , 2016 and 2015 , respectively . other ( expense ) /income interest income increased for the twelve months ended december 31 , 2016 due to a higher amount of invested funds , reflecting the investments acquired in the pericom acquisition . the increase in interest expense for the twelve months ended december 31 , 2016 is due to higher levels of borrowing to effect the pericom acquisition .
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in 2019 , the company 's net income attributable to amphenol corporation was impacted by ( a ) excess tax benefits related to stock-based compensation of $ 38.1 resulting from stock option exercises , partially offset by ( b ) acquisition-related expenses of $ 25.4 ( $ 21.0 after-tax ) primarily from the amortization related to the value associated with acquired backlog as well as external transaction costs and ( c ) refinancing-related costs associated with the early extinguishment of debt of $ 14.3 ( $ 12.5 after-tax ) , comprised primarily of the premiums and other fees incurred from the early extinguishment of redeemed amounts of our 3.125 % senior notes and 4.00 % senior notes resulting from the tender offers in september 2019 described herein under “ liquidity and capital resources – financing activities ” . excluding the effects of these items , adjusted operating income and adjusted net income attributable to amphenol corporation , as defined in the “ non-gaap financial measures ” section below and reconciled in part ii , item 7 herein , was unchanged in 2020 compared to 2019. sales and profitability trends are discussed in detail in “ results of operations ” below . in addition , a strength of the company has been its ability to consistently generate cash from operations ( “ operating cash flow ” ) . the company uses operating cash flow to fund capital expenditures and acquisitions , repurchase shares of its common stock , pay dividends and reduce indebtedness . in 2020 , the company generated operating cash flow of $ 1,592.0 and free cash flow of $ 1,327.9. free cash flow , a non-gaap financial measure , is defined in the “ non-gaap financial measures ” section below and reconciled within this part ii , item 7 herein . impact of coronavirus ( “ covid-19 ” ) on our operations , financial condition , liquidity and results of operations the covid-19 pandemic has caused widespread disruptions to our company during 2020 , particularly during the first half of the year . during the first quarter , these disruptions were primarily limited to our operations in china , which were closed for three weeks during january and february due to government mandates . as the virus spread to the rest of the world beginning in march and continuing throughout the remainder of 2020 , most of our other operations outside of china were also impacted . as of december 31 , 2020 , we continue to experience some disruptions , and at a minimum , we expect those disruptions to continue through the first half of 2021 and they could , potentially , extend for the full year and beyond . these disruptions have included and may continue to include , depending on the specific location , government regulations that limit our ability to operate certain of our facilities at full capacity and to adjust certain costs , travel restrictions , “ work-from-home ” orders , supplier constraints , supply-chain interruptions , logistics challenges and limitations , and reduced demand from certain customers . during the fourth quarter of 2020 and into 2021 , in several regions around the world , including the united states and europe , there has been a resurgence in covid-19 cases . the extent to which the covid-19 pandemic will continue to impact our business and financial results going forward will be dependent on future developments such as the length and severity of the crisis , future government regulations and actions in response to the crisis , the timing , availability and effectiveness of vaccines , some of which have recently been approved and distributed for use , and the overall impact of the covid-19 pandemic on the global economy and capital markets , among many other factors , all of which remain highly uncertain and unpredictable . in addition , the covid-19 pandemic could impact the health of our management team and other employees . the company continues taking actions to mitigate , as best we can , the impact of the covid-19 pandemic on the health and well-being of our employees , the communities in which we operate and our partners , as well as the impact on our operations and business as a whole . however , there can be no assurance that the covid-19 pandemic will not have a material and adverse impact on our operations , financial condition , liquidity and results of operations . for further discussion on the risks and uncertainties associated with the covid-19 pandemic , refer to part i , item 1a . risk factors . 26 results of operations the following table sets forth the components of net income attributable to amphenol corporation as a percentage of net sales for the years indicated . replace_table_token_5_th 2020 compared to 2019 net sales were $ 8,598.9 for the year ended december 31 , 2020 compared to $ 8,225.4 for the year ended december 31 , 2019 , which was an increase of 5 % in u.s. dollars , 4 % in constant currencies , and 2 % organically ( excluding both currency and acquisition impacts ) , over the prior year . the increase in net sales in 2020 was driven by strong growth in several markets , which was partially offset by the sudden and severe slowdown in certain of our markets resulting from the global outbreak of the covid-19 pandemic , which also caused production disruptions in many parts of the world during much of the first half of 2020 . net sales in the interconnect products and assemblies segment ( approximately 96 % of net sales ) increased 5 % in u.s. dollars , 4 % in constant currencies , and 2 % organically , in 2020 compared to 2019. the sales growth was driven by strong growth in the industrial , information technology and data communications , and mobile devices markets , along with moderate growth in the military market , and contributions from the company 's acquisition program . story_separator_special_tag this sales growth was partially offset by declines in the commercial aerospace , mobile networks and automotive markets , all of which were negatively impacted by the covid-19 pandemic . net sales to the industrial market increased ( approximately $ 246.4 ) , primarily driven by strength in battery and electric vehicle , industrial instrumentation , heavy equipment , alternative energy and medical applications , along with contributions from acquisitions . net sales to the information technology and data communications market increased ( approximately $ 234.0 ) , driven primarily by strong sales growth to data center customers and market demand for storage and networking related products as customers worked to support higher demand for increased bandwidth to support work , school and entertainment activities during the pandemic , along with contributions from acquisitions . net sales to the mobile devices market increased ( approximately $ 179.9 ) , driven by strength in products incorporated into laptops , tablets , wearable devices , and accessories along with production-related products , which was partially offset by a slight moderation of sales into smartphones . net sales to the military market increased ( approximately $ 32.2 ) , driven by strength across multiple segments of the military market , offset in part by the impact of pandemic-related production disruptions experienced during the first half of the year . net sales to the commercial aerospace market decreased significantly ( approximately $ 135.3 ) primarily due to the significant impact of the covid-19 pandemic on travel and aircraft production . net sales to the mobile networks market decreased ( approximately $ 98.5 ) , which reflected the impact of the 2019 u.s. government restrictions on certain chinese customers as well as reduced demand from both mobile networks equipment manufacturers and mobile operators , partially as a result of the negative impact of the covid-19 pandemic , offset in part by contributions from acquisitions . net sales to the automotive market decreased ( approximately $ 86.0 ) , due to a significant reduction in demand resulting from customer factory shutdowns together with production disruptions in the first half of 2020 resulting from the covid-19 pandemic , which was partially offset by a strong recovery of demand during the second half of the year . net sales in the cable products and solutions segment ( approximately 4 % of net sales ) , which primarily serves the broadband communications market , decreased 4 % in u.s. dollars , 1 % in constant currencies and 1 % organically in 2020 , compared to 2019. the decrease in net sales in the cable products and solutions segment was largely driven by the 27 negative impact of the covid-19 pandemic primarily during the first half of 2020 , as well as an overall weakness in market demand . the table below reconciles constant currency net sales growth and organic net sales growth to the most directly comparable u.s. gaap financial measures , by segment and consolidated , for the year ended december 31 , 2020 compared to the year ended december 31 , 2019 : replace_table_token_6_th ( 1 ) net sales growth in u.s. dollars is calculated based on net sales as reported in the consolidated statements of income and note 13 of the accompanying financial statements . while the term “ net sales growth in u.s. dollars ” is not considered a u.s. gaap financial measure , for purposes of this table , we derive the reported ( gaap ) measure based on gaap results , which serves as the basis for the reconciliation to its comparable non-gaap financial measures . ( 2 ) foreign currency translation impact , a non-gaap measure , represents the impact on net sales resulting from foreign currency exchange rate changes in the current year compared to the prior year . such amount is calculated by subtracting current year net sales translated at average foreign currency exchange rates for the respective prior year from current year reported net sales , taken as a percentage of the respective prior year 's net sales . ( 3 ) constant currency net sales growth and organic net sales growth are non-gaap financial measures as defined in the “ non-gaap financial measures ” section . ( 4 ) acquisition impact , a non-gaap measure , represents the impact on net sales resulting from acquisitions closed since the beginning of the prior calendar year , which were not included in the company 's results as of the comparable prior year and which do not reflect the underlying growth of the company on a comparative basis . geographically , net sales in the united states in 2020 decreased approximately 1 % in u.s. dollars ( $ 2,494.0 in 2020 versus $ 2,524.7 in 2019 ) and 5 % organically , compared to 2019. foreign sales in 2020 increased approximately 7 % in u.s. dollars ( $ 6,104.9 in 2020 versus $ 5,700.7 in 2019 ) , 7 % in constant currencies and 5 % organically , compared to 2019 , driven by strong growth in asia . the comparatively weaker u.s. dollar in 2020 had an insignificant effect on net sales compared to 2019 . selling , general and administrative expenses were $ 1,014.2 or 11.8 % of net sales for 2020 , compared to $ 971.4 or 11.8 % of net sales for 2019. administrative expenses increased approximately $ 27.5 in 2020 , and represented approximately 4.8 % of net sales in 2020 and 4.7 % of net sales in 2019. research and development expenses increased approximately $ 26.5 in 2020 primarily related to increases in expenses for new product development , and represented approximately 3.0 % of net sales in 2020 and 2.8 % of net sales in 2019. selling and marketing expenses decreased approximately $ 11.2 in 2020 compared to 2019 , and represented approximately 4.0 % of net sales in 2020 and 4.3 % of net sales in 2019 .
| in 2020 , the components of working capital as presented on the accompanying consolidated statements of cash flow increased $ 38.9 , excluding the impact of acquisitions and foreign currency translation , due to increases in accounts receivable , inventories , and prepaid expenses and other current assets of $ 146.3 , $ 102.0 and $ 88.6 , respectively , partially offset by increases in accounts payable of $ 204.3 and accrued liabilities , including income taxes , of $ 93.7. in 2019 , the components of working capital as presented on the accompanying consolidated statements of cash flow increased $ 81.6 , excluding the impact of acquisitions and foreign currency translation , primarily due to decreases in accrued liabilities , including income taxes , of $ 129.3 and accounts payable of $ 60.2 , partially offset by a decrease in accounts receivable of $ 117.3. in 2018 , the components of working capital as presented on the accompanying consolidated statements of cash flow increased $ 362.4 , excluding the impact of acquisitions and foreign currency translation , primarily due to increases in accounts receivable , inventories , and prepaid expenses and other current assets of $ 237.9 , 33 $ 173.3 and $ 47.7 , respectively , partially offset by increases in accounts payable and accrued liabilities , including income taxes , of $ 48.8 and $ 47.7 , respectively . the following describes the significant changes in the amounts as presented on the accompanying consolidated balance sheets at december 31 , 2020 compared to december 31 , 2019. accounts receivable increased $ 215.2 to $ 1,951.6 primarily due to higher sales in the fourth quarter of 2020 relative to the fourth quarter of 2019 , along with the effect of translation from exchange rate changes at december 31 , 2020 compared to december 31 , 2019 ( “ translation ” ) . days sales outstanding at december 31 , 2020 and 2019 were 72 days and 73 days , respectively . inventories increased $ 152.1 to $ 1,462.2 , primarily to support higher sales levels , along with the effect of translation . inventory days at december 31 , 2020 and 2019 were 79 days and 80 days , respectively . prepaid expenses and other current assets increased $ 82.8 to $ 338.9 , primarily due to increases in certain prepaid expenses and other current receivables . property , plant and equipment , net , increased $ 55.6 to $ 1,054.6 , primarily due to capital expenditures of $ 276.8 and translation , partially offset by depreciation of $ 252.7 and disposals . goodwill increased $ 165.0 to $ 5,032.1 , primarily as a result of translation , as well as
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in addition , we may receive ( 1 ) an additional potential milestone payment totaling up to $ 7.5 million related to the achievement of certain gross profit milestones and ( 2 ) up to $ 2.0 million related to collection of certain accounts receivable after the closing . as a result of the sale of our hyperimmune business , we anticipate that our future product revenue will decline and that we may experience a reduction in expenses and overhead . highlights for year ended december 31 , 2017 commercial portfolio : reinitiated new patient acquisition efforts for ixinity following the introduction of new ixinity supply in may 2017 grew ixinity revenue 12 % year-over-year despite the supply interruption and temporary suspension of new patient acquisition activities presented new clinical data evaluating the safety and efficacy of ixinity in children with hemophilia b , showing that ixinity appears to be safe and well tolerated in this subject population pipeline : announced plans to commence a phase 2 clinical study of otlertuzumab in a new indication – peripheral t-cell lymphoma ( ptcl ) , which will enroll up to 24 patients with relapsed or refractory ptcl in an open-label , proof-of-concept phase 2 clinical study evaluating the safety and efficacy of otlertuzumab in combination with bendamustine continued to advance apvo414 in a dose escalation phase 1 study and presented preliminary data from the continuous infusion dose cohorts expanded aptevo 's adaptir portfolio and announced the selection of an additional adaptir bispecific antibody candidate , apvo436 – an optimized , next-generation adaptir bispecific molecule targeting the cell-surface receptor cd123 and cd3 , which is highly expressed in multiple hematological malignancies , including acute myeloid leukemia ( aml ) presented new preclinical data on apvo436 at the american association for cancer research annual meeting demonstrating potent immune activation , traditional antibody-like manufacturing characteristics , and an extended half-life in mice of up to 12.5 days presented additional preclinical data on apvo436 at the american society of hematology 59 th annual meeting showing broad immunotherapeutic activity against primary human aml cells in vitro , illustrating its utility as a potent and selective immunotherapeutic candidate in the treatment of aml demonstrated the versatility of the adaptir platform with the development of alg.apv-527 , ( partnered with alligator bioscience ) which targets a co-stimulatory receptor found on activated t cells , illustrating the capability of the adaptir platform to generate immunotherapeutic antibodies with different mechanisms of immune system engagement , in this case targeting 4-1bb and the tumor antigen , 5t4 , which is found on various different types of cancer cells 48 initiated cmc and ind-enabling activities for apvo436 , apvo210 , and alg.apv-527 , and announced plans to file 2 investigational new drug ( ind ) applications in 2018 for apvo436 , being developed for the treatment of aml , and , apvo210 , being developed for the treatment of autoimmune and inflammatory diseases corporate : monetized aptevo 's non-core commercial assets and completed the sale of three hyperimmune products , ( winrho ® sdf , hepagam b ® , and varizig ® ) to saol therapeutics for total consideration of up to $ 74.5 million , raising significant non-dilutive funding to support aptevo 's ongoing commercial and r & d efforts signed a collaboration agreement with alligator bioscience to jointly develop and advance a lead bispecific antibody candidate , alg.apv-527 amended the terms of a credit agreement with midcap financial allowing aptevo to retain a $ 20 million credit facility with midcap story_separator_special_tag reduced personnel costs associated with the sale of the hyperimmune business . impairment of goodwill and intangible asset in 2016 we recorded impairments of approximately $ 71.0 million of long-term assets , which consisted of $ 41.8 million of intangible assets and $ 29.2 million of goodwill . no such impairments were recorded during 2017. impaired assets consisted of certain of our indefinite-lived in-process research and development ( ipr & d ) and goodwill . other income ( expense ) other expense , consists primarily of interest on debt financing . this increase in expense of $ 1.1 million in 2017 compared to 2016 was due to the interest on the loan entered into with midcap financial trust in the last half of 2016. discontinued operations on september 28 , 2017 , we sold our hyperimmune business to saol international limited ( saol ) . as a result of this sale , our hyperimmune business activity has been excluded from continuing operations for all periods herein and reported as discontinued operations . in 2017 , we recorded a gain of $ 52.7 million . see note 2 – sale of hyperimmune business in the accompanying financial statements for further information on the divestiture . income taxes during the periods prior to spin-off , the company did not file separate tax returns as it was included in the tax returns of emergent entities within the respective tax jurisdictions . 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 . 51 the following table provides information regarding our income tax for both continuing and discon tinued operations for the periods ended december 31 , 2017 and 2016 : replace_table_token_4_th off-balance sheet arrangements we did not have any off-balance sheet arrangements at december 31 , 2017. liquidity and capital resources sources of liquidity as of december 31 , 2017 , we had cash , cash equivalents and short-term investments in the amount of $ 91.2 million , of which $ 10.4 million is restricted . story_separator_special_tag for the year ended december 31 , 2017 , we reported net income of $ 7.0 million and we had an accumulated deficit of $ 73.7 million as of december 31 , 2017. for the twelve months ended december 31 , 2017 , net cash used in our operating activities was $ 41.6 million . although we expect our existing cash and cash equivalents will be sufficient to fund our operations for at least fifteen months from the date of this filing , if we are unable to obtain additional financing when needed , we may have to delay , reduce the scope of , suspend or eliminate one or more of our research and development programs . following the sale of the hyperimmune business , our sole marketed product is ixinity ® , and therefore ixinity will be our only source of product revenue . as such , our results of operations will be highly dependent on ixinity sales unless or until we develop or partner any of our development stage product candidates . we will not generate revenues from our development stage product candidates unless and until we or our collaborators successfully complete development and obtain regulatory approval for such product candidates , which we expect will take a number of years and is subject to significant uncertainty . if we obtain regulatory approval for one of our development stage product candidates , we expect to incur significant commercialization expenses related to sales , marketing , manufacturing and distribution , to the extent that such costs are not paid by collaborators . we do not have sufficient cash to complete the clinical development of any of our development stage product candidates and will require additional funding in order to complete the development activities required for regulatory approval of such product candidates . on august 1 , 2016 , in connection with our spin-off from emergent , we issued 20.2 million shares of our common stock to emergent stockholders and recorded a contribution from emergent of $ 71.2 million . the transactions recorded in 2016 included a one-time payment of $ 45.0 million , and a working capital reimbursement for outstanding payments of $ 1.4 million , a noncash transfer of an intangible asset of $ 0.7 million , and a net transfer of cash from emergent of $ 24.2 million . in addition , in the first quarter of 2017 we received $ 20.0 million as payment for a promissory note issued at the time of the spin-off . 52 in addition , on august 4 , 2016 , we entered into a $ 35.0 million credit and security agreement ( credit agreement ) , with midcap financial trust . the original credit agreement provided us with up to $ 35.0 million of available borrowing capacity composed of two tranches of $ 20.0 million and $ 15 .0 million . the first tranche of $ 20.0 million was made available to us , and drawn , on the closing date of the credit agreement and the second tranche of $ 15.0 million to become available ( subject to certain conditions ) following the date we : ( 1 ) achieve n et commercial product revenue of $ 40.0 million on a trailing twelve-month basis , and ( 2 ) receive payment of the additional $ 20.0 million in cash committed by emergent . emergent 's promise to pay such $ 20.0 million in cash was evidenced by a non-negotiable , unsecured promissory note issued to us and was paid in the first quarter of 2017. once drawn , interest would be paid monthly while principal would have been paid on a monthly basis commencing in august 2018. the credit agreement will mature on february 1 , 2021. amounts drawn under the credit agreement accrue interest at a rate of libor plus 7.60 % per annum . the credit agreement covenants require us and our subsidiaries to maintain increasing minimum net commercial product revenue for each twelve-month period ending on the last day of each calendar quarter . an event of default could result in the acceleration of the amounts owed under the credit agreement , and we may not have sufficient funds or be able to obtain additional financing to make any accelerated payments . under these circumstances , our lenders could seek to enforce security interests in our assets securing our indebtedness . on may 11 , 2017 , we and midcap financial trust entered into an amendment to the credit agreement to , among other things , waive the existing event of default and revise the financial covenants pertaining to the minimum required commercial product revenue . the amendment revises the following covenants of the credit agreement to : ( 1 ) extend the time period through which we can draw the second tranche from august 2017 to march 2018 , ( 2 ) increase the exit fee of 5.75 % of the aggregate principal amount under the credit agreement for repayment or prepayment other than scheduled amortization payments and the final payment of principal to 6.75 % and ( 3 ) permit midcap financial trust to obtain an affirmative lien on our intellectual property , upon the earlier of ( i ) our draw down of the second tranche or ( ii ) our cash balance descending below a minimum cash threshold of $ 25 million . on september 28 , 2017 , we and midcap financial trust entered into a second amendment to the credit agreement in order to permit the sale under the llc purchase agreement , and to reflect changes in the remaining business as a result of such sale . pursuant to the second amendment , the agent and the lenders consented to the llc purchase agreement and the consummation of the sale transaction , released the agent 's liens on the assets transferred to one of our subsidiaries prior to the sale , and agreed that no prepayment of the term loans under the credit agreement would be required as a result the sale .
| the following table provides information regarding our cost of products sales , including gross margin for the years ended december 31 , 2017 and 2016 : replace_table_token_2_th 49 cost of product sales decreased by $ 7.5 million , or 60 % , to $ 5.0 million for the year ended december 31 , 2017 from $ 12.5 million for the year ended december 31 , 2016. this decrease was primarily due to a write off of approximately $ 7.1 million in unsalable ixinity inventory in 2016. gross profit increased due to a one-time $ 3.0 million benefit in the first six months of 2017 related to a settlement dispute between aptevo and agc in regards to certain ixinity batches from 2015 that did not meet manufacturing specifications . research and development expenses we expense research and development costs as incurred . these expenses consist primarily of the costs associated with our research and discovery 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 primarily consist of : 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 ( cro 's ) and investigative sites ; manufacturing material expense for third-party manufacturing ; and overhead costs such as rent , utilities and depreciation . we expect our research and development spending will 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
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ffo , reflecting the assumption that real estate values rise or fall with market conditions , principally adjusts for the effects of gaap depreciation/amortization of real estate assets . in addition , noi and ffo are commonly used in various ratios , pricing multiples/yields and returns and valuation calculations used to measure financial position , performance and value . noi is derived from revenues minus property operating expenses and real estate taxes . noi is a non-gaap financial measure that we believe is helpful to investors as a supplemental measure of operating performance because it is an indicator of the return on property investment and provides a method of comparing property performance over time . we use noi as a key measure when evaluating performance and growth of particular properties and or groups of properties . the principal limitation of noi is that it excludes depreciation , amortization , interest expense and non-property specific expenses such as general and administrative expenses , all of which are significant costs . therefore , noi is a measure of the operating performance of our properties rather than of the company overall . we believe that gaap net income ( loss ) is the most directly comparable measure to noi . noi should not be considered to be an alternative to gaap net income ( loss ) as an indication of our financial performance or gaap cash flow from operating activities as a measure of our liquidity ; nor is it indicative of funds available for our cash needs , including our ability to make cash distributions . because of the inclusion of items such as interest , depreciation , and amortization , the use of gaap net income ( loss ) as a performance measure is limited as these items may not accurately reflect the actual change in market value of a property , in the case of depreciation and in the case of interest , may not necessarily be linked to the operating performance of a real estate asset , as it is often incurred at a parent company level and not at a property level . ffo is defined by the national association of real estate investment trusts ( “ nareit ” ) as gaap net income ( loss ) , excluding gains ( or losses ) from sales of depreciable operating property , plus real estate-related depreciation and amortization , and after adjustments for unconsolidated partnerships and joint ventures . ffo is a non-gaap financial measure that management believes is a useful supplemental measure of our operating performance . by excluding gains and losses related to sales of previously depreciated operating real estate assets , impairment and excluding real estate asset depreciation and amortization ( which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates ) , ffo provides a performance measure that , when compared period-over-period , reflects the impact to operations from trends in occupancy rates , rental rates , and operating costs , providing perspective not readily apparent from gaap net income ( loss ) . management believes the use of ffo has been beneficial in improving the understanding of operating results of reits among the investing public and making comparisons of reit operating results more meaningful . we also use ffo excluding certain gain and loss items that management considers unrelated to the operational and financial performance of our core business ( “ core ffo ” ) . we believe that core ffo provides enhanced comparability for investor evaluations of period-over-period results . we believe that gaap net income ( loss ) is the most directly comparable measure to ffo . the principal limitation of ffo is that it does not replace gaap net income ( loss ) as a performance measure or gaap cash flow from operations as a liquidity measure . because ffo excludes significant economic components of gaap net income ( loss ) including depreciation and amortization , ffo should be used as a supplement to gaap net income ( loss ) and not as an alternative to it . further , ffo is not intended as a measure of a reit 's ability to meet debt principal repayments and other cash requirements , nor as a measure of working capital . ffo is calculated in accordance with our interpretation of standards established by nareit , which may not be comparable to ffo reported by other reits that interpret the nareit definition differently . 39 sun communities , inc. results of operations we report operating results under two segments : real property operations and home sales and rentals . the real property operations segment owns , operates , develops , or has an interest in , a portfolio of mh and rv communities throughout the u.s. and in canada , and is in the business of acquiring , operating , and expanding mh and rv communities . the home sales and rentals segment offers mh and rv park model sales and leasing services to tenants and prospective tenants of our communities . we evaluate segment operating performance based on noi and gross profit . refer to note 12 , “ segment reporting , ” in our accompanying consolidated financial statements for additional information . summary statements of operations the following tables reconcile the net income attributable to sun communities , inc. common stockholders to noi and summarize our consolidated financial results for the years ended december 31 , 2019 , 2018 , and 2017 ( in thousands ) : replace_table_token_19_th replace_table_token_20_th ( 1 ) the renter 's monthly payment includes the site rent and an amount attributable to the home lease . the site rent is reflected in real property operations ' segment revenue . for purposes of management analysis , site rent is included in rental program revenue to evaluate the incremental revenue gains associated with the implementation of the rental program , and to assess the overall growth and performance of the rental program and financial impact on the company 's operations . story_separator_special_tag 40 sun communities , inc. comparison of the years ended december 31 , 2019 , 2018 and 2017 real property operations - total portfolio the following tables reflect certain financial and other information for our total portfolio as of and for the years ended december 31 , 2019 , 2018 and 2017 : replace_table_token_21_th replace_table_token_22_th ( 1 ) overall occupancy percentage includes mh and annual rv sites and excludes transient rv sites . ( 2 ) monthly base rent pertains to annual rv sites and excludes transient rv sites . ( 3 ) canadian currency figures included within the year ended december 31 , 2018 and 2017 have been translated at 2019 and 2018 average exchange rates , respectively . the $ 64.1 million increase in real property noi from 2018 to 2019 consists of $ 38.0 million from same communities as detailed below and $ 26.1 million from recently acquired properties in the year ended december 31 , 2019 as compared to 2018 . the $ 53.7 million increase in real property noi from 2017 to 2018 consists of $ 35.6 million from same communities as detailed below and $ 18.1 million from recently acquired properties in the years ended december 31 , 2018 as compared to 2017 . 41 sun communities , inc. real property operations - same communities a key management tool used when evaluating performance and growth of our properties is a comparison of same communities . the same community data may change from time-to-time depending on acquisitions , dispositions , management discretion , significant transactions , or unique situations . in order to evaluate the growth of the same communities , management has classified certain items differently than our gaap statements . the reclassification difference between our gaap statements and our same community portfolio is the reclassification of water and sewer revenues from income from real property to utilities . a significant portion of our utility charges are re-billed to our residents . replace_table_token_23_th replace_table_token_24_th ( 1 ) the company adopted asc 842 , the new lease accounting standard , as of january 1 , 2019 which required the reclassification of bad debt expense from property operating expense to income from real property . to assist with comparability within same community results , bad debt expense has been reclassified to be shown as a reduction of income from real property for all periods presented . ( 2 ) for the comparative periods december 31 , 2019 and 2018 , the year ended 2018 excludes $ 0.7 million of expenses incurred for recently acquired properties to bring the properties up to our operating standards . for the comparative periods december 31 , 2018 and 2017 , the year ended 2017 excludes $ 2.6 million of expenses incurred for recently acquired properties to bring the properties up to our operating standards . these costs did not meet the company 's capitalization policy . ( 3 ) the occupancy percentages include mh and annual rv sites and exclude recently completed but vacant expansion sites and transient rv sites . ( 4 ) the occupancy percentages for 2018 and 2017 have been adjusted to reflect incremental growth period-over-period from filled mh expansion sites and the conversion of transient rv sites to annual rv sites . ( 5 ) monthly base rent pertains to annual rv sites and excludes transient rv sites . 42 sun communities , inc. year ended december 31 , 2019 and 2018 the same community data includes all properties which we have owned and operated continuously since january 1 , 2018 , exclusive of properties under construction . the amounts in the table above reflect constant currency for comparative purposes . canadian currency figures included within the year ended december 31 , 2018 have been translated at 2019 average exchange rates . we have reclassified $ 34.7 million and $ 32.7 million for the years ended december 31 , 2019 and 2018 , respectively , to reflect the utility expenses associated with our same community portfolio net of recovery . the 7.3 percent growth in noi is primarily due to increased income from real property of $ 47.1 million , or 6.2 percent . the 6.2 percent increase is primarily attributable to a 2.2 percent increase in mh & rv blended occupancy and a 4.5 percent increase in total monthly base rent per site when compared to 2018 . the increase in income from real property was partially offset by a $ 9.2 million , or 3.8 percent , increase in property operating expenses , primarily attributable to increases in payroll and benefits , supplies and repairs and real estate taxes . year ended december 31 , 2018 and 2017 the same community data includes all properties which we have owned and operated continuously since january 1 , 2017 , exclusive of properties under construction . the amounts in the table above reflect constant currency for comparative purposes . canadian currency figures included within the year ended december 31 , 2017 have been translated at 2018 average exchange rates . we have reclassified $ 32.2 million and $ 30.6 million for the years ended december 31 , 2018 and 2017 , respectively , to reflect the utility expenses associated with our same community portfolio net of recovery . the 7.1 percent growth in noi is primarily due to a 6.4 percent increase in income from real property . the 6.4 percent increase in income from real property is primarily due to a 2.2 percent increase in mh & rv blended occupancy and a 4.1 percent increase in total monthly base rent per site . the increase in income from real property was partially offset by a 4.8 percent increase in property operating expenses compared to 2017 , which was primarily due to higher utilities , real estate taxes , and legal , taxes , and insurance in 2018 .
| compared to 2017 . 45 sun communities , inc. other items - statements of operations ( 1 ) the following table summarizes other income and expenses for the years ended december 31 , 2019 , 2018 and 2017 ( amounts in thousands ) : replace_table_token_27_th ( 1 ) only items judgmentally determined by management to be material are explained . ( 2 ) includes interest expense and interest on mandatorily redeemable preferred op units / equity . ancillary revenues , net - for the year ended december 31 , 2019 , increased primarily due to increases in golf course , restaurant , and resort activity revenues as compared to 2018 . for the year ended december 31 , 2018 , the increase is primarily due to rv vacation home rental income as a result of acquisition activities , in addition to an increase in golf course , restaurant , and resort activity net profit as compared to 2017. interest income - for the year ended december 31 , 2019 , decreased primarily due to lower balances on our notes receivable and derecognition of collateralized notes receivable in 2019 as we satisfied the criteria of paragraph asc 860-10-40-5 to be accounted for as a sale . refer to note 4 , “ collateralized receivables and transfers of financial assets , ” in our accompanying consolidated financial statements for additional information . brokerage commissions and other revenues , net - for the year ended december 31 , 2019 , increased primarily due to a $ 3.1 million increase in brokerage commissions , and a $ 1.8 million increase in dividend income from our investment in marketable securities , as compared to 2018 . for the year ended december 31 , 2018 , the increase is primarily due to a higher number of broker homes sold during the year as compared to 2017 , in addition to a $ 1.9 million insurance proceeds from business interruption related to hurricane irma . home selling expenses - for the year ended december 31 , 2018 ,
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should we not be successful in obtaining the necessary financing , or generate sufficient revenue to fund our operations , we would need to curtail certain of our operational activities . impact of inflation we believe that our business has not been affected to a significant degree by inflationary trends during the past three years . however , inflation is still a factor in the worldwide economy and may increase the cost of purchasing products from our contract manufacturers in asia , as well as the cost of certain raw materials , component parts and labor used in the production of our products . it also may increase our operating expenses , manufacturing overhead expenses and the cost to acquire or replace fixed assets . we have generally been able to maintain or improve our profit margins through productivity and efficiency improvements , cost reduction programs and to a lesser extent , price increases , and we expect to be able to do the same during 2018. as such , we do not believe that inflation will have a significant impact on our business during 2018 . 28 financings march 2016 promissory note on march 11 , 2016 , the company issued a promissory note with a principal amount of $ 400,000 to an accredited purchaser ( the “ march promissory note ” ) . the march promissory note was converted into the series a preferred stock offering in april 2016. april 2016 offering on april 11 , 2016 , the company closed a registered offering ( the “ april 2016 offering ” ) of shares of its series a convertible preferred stock , par value $ 0.0001 per share ( the “ series a preferred stock ” ) . the company sold 2,500,000 shares of series a pref erred stock at a price of $ 1.00 per share , and received gross proceeds from the offering , before deducting placement agent fees and other offering expenses payable by the company , of approximately $ 2,500,000. holders of the series a preferred stock shall be entitled to receive from the first date of issuance of the series a preferred stock cumulative dividends at a rate of 25 % per annum on a compounded basis , which dividend amount shall be guaranteed . accrued and unpaid dividends shall be at the company 's option , in cash , shares of common stock , or additional share of series a preferred stock . interest purchase agreement on may 17 , 2016 , the company entered into an interest purchase agreement ( the “ interest purchase agreement ” ) with logicmark , llc ( “ logicmark ” ) and the holders of all of the membership interests ( the “ interests ” ) of logicmark ( the “ sellers ” ) , pursuant to which the company acquired all of the interests from the sellers ( the “ transaction ” ) . the company issued the equivalent of $ 300,000 in shares of common stock to the sellers of logicmark to extend the exclusivity period to june 30 , 2016. additionally , upon signing the interest purchase agreement the company issued warrants ( the “ warrants ” ) to the sellers to acquire an aggregate of up to $ 600,000 of shares ( 157,480 shares ) of the company 's common stock for no additional consideration . the warrants were originally only exercisable if the transaction did not close by june 30 , 2016. pursuant to an amendment entered into as of july 7 , 2016 , the warrants were exercisable as of july 22 , 2016. on july 25 , 2016 , the issuances of common stock and warrants to the sellers of logicmark totaling $ 900,000 became part of the overall consideration paid to the sellers to acquire logicmark . july 2016 offering on july 25 , 2016 , the company closed a private placement ( the “ july 2016 offering ” ) of shares of its series b convertible preferred stock , par value $ 0.0001 per share ( the “ series b preferred stock ” ) and warrants ( the “ july 2016 warrants ” ) to purchase 562,500 shares of the company 's common stock . the company sold 4,500,000 shares of series b pref erred stock at a price of $ 1.00 per share , and received gross proceeds from the offering , before deducting placement agent fees and other offering expenses payable by the company , of approximately $ 4,500,000. the conversion price of the series b preferred stock is $ 4.00. the july 2016 warrants will be exercisable beginning on january 25 , 2017 , and are exercisable for a period of five ( 5 ) years . the exercise price with respect to the july 2016 warrants is $ 7.50 per share . holders of the series b preferred stock shall be entitled to receive from the first date of issuance of the series b preferred stock cumulative dividends at a rate of 25 % per annum on a compounded basis , which dividend amount shall be guaranteed . accrued and unpaid dividends shall be at the company 's option , in cash , shares of common stock , or additional share of series b preferred stock . november 2016 exchange on november 29 , 2016 , the company entered into a securities exchange agreement ( the “ exchange agreement ” ) with certain holders of a portion of the original logicmark notes ( the “ holders ” ) pursuant to which the company exchanged with the holders of $ 1,500,000 of original notes held by the holders in exchange for : ( i ) an aggregate principal amount of $ 1,500,000 of new secured subordinated promissory notes ( the “ exchange notes ” ) and ( ii ) warrants ( the “ warrants ” , and together with the exchange notes , the “ exchange securities ” ) convertible into 500,000 shares of common stock of the company , par value $ 0.0001 ( story_separator_special_tag the “ common stock ” ) . the holders purchased the $ 1,500,000 of original notes from the logicmark sellers prior to this transaction . the exchange notes will mature on november 29 , 2017 and accrue interest at a rate of 15.0 % per annum . the exchange notes are convertible at any time , in whole or in part , at the option of the investors into shares of common stock at a conversion price of $ 3.00 per share ( the “ conversion price ” ) . the conversion price is subject to adjustment for stock dividends , stock splits , combinations or similar events . the conversion option embedded in the convertible exchange notes was determined to contain beneficial conversion features , resulting in the bifurcation of those features as an equity instrument ( resulting in a debt discount ) at issuance . after allocation of the gross proceeds to the warrants and beneficial conversion feature , the total debt discount recognized was equal to the face of the convertible exchange notes , the debt discount was amortized over the term of the debt and the company amortized $ 1,366,667 and $ 133,333 of the debt discount for the years ended december 31 , 2017 and 2016 , respectively . 29 the company may prepay , in whole but not in part , without premium or penalty , the outstanding principal , together with accrued but unpaid interest on the outstanding principal , if any . the warrants will be exercisable beginning on november 29 , 2016 , and will be exercisable for a period of five years . the exercise price with respect to the warrants is $ 3.00 per share ( the “ exercise price ” ) . the exercise price and the amount of shares of common stock issuable upon exercise of the warrants are subject to adjustment upon certain events , such as stock splits , combinations , dividends , distributions , reclassifications , mergers or other corporate change and dilutive issuances . july 2017 offerings on july 13 , 2017 , the company closed a registered direct offering of an aggregate of 2,170,000 shares of the company 's common stock , and pre-funded warrants to purchase 230,000 shares of common stock . the company sold the shares at a price of $ 1.43 per share and received $ 1.42 per pre-funded warrant . the company received gross proceeds from the offering , before deducting placement agent fees and other estimated offering expenses payable by the company , of approximately $ 3,429,700. the pre-funded warrants were converted into shares of common stock on september 23 , 2017 and as a result were included in the common stock outstanding balance for purposes of computing earnings per share . on july 13 , 2017 , the company also closed on a concurrent private placement with the same investors for no additional consideration , of warrants to purchase 1,800,000 shares of common stock . the warrants will be exercisable beginning on the six ( 6 ) month anniversary of the date of issuance , at an exercise price of $ 2.00 per share and will expire on the fifth anniversary of the initial exercise date . november 2017 offerings on november 13 , 2017 , the company closed a registered direct offering of an aggregate of 2,941,177 shares ( the “ november shares ” ) of common stock . the company sold the november shares at a price of $ 1.36 per share . the company received gross proceeds from the offering , before deducting placement agent fees and other estimated offering expenses payable by us , of approximately $ 4 million . aegis capital corp. acted as the placement agent for the offering . on november 13 , 2017 , the company also closed a previously announced concurrent private placement for no additional consideration , of the november investor warrants to purchase 2,500,000 shares of common stock . on december 19 , 2017 , and effective as of november 29 , 2017 , we entered into an agreement ( the “ amendment agreement ” ) with the holders of the convertible notes and common stock purchase warrants issued pursuant to that certain exchange agreement , dated november 29 , 2016 , by and among the company and such holders . pursuant to the amendment agreement , the parties agreed to ( i ) amend the maturity dates of the convertible notes by one ( 1 ) year , or november 29 , 2018 , and ( ii ) that the holders would forbear the exercise of any remedies due to the passing of the original maturity date . in consideration thereof , the company issued to the holders an aggregate of 370,000 shares of restricted common stock . december 2017 offering on december 26 , 2017 , we closed a registered direct offering of an aggregate of 1,750,000 shares ( the “ december shares ” ) of common stock . we sold the december shares at a price of $ 4.00 per share . we received gross proceeds from the offering , before deducting placement agent fees and other estimated offering expenses payable by us , of approximately $ 7 million . aegis capital corp. acted as the lead placement agent for the offering and maxim group llc acted as a co-placement agent for the offering . 30 off balance sheet arrangements we do not have any relationships with unconsolidated entities or financial partnerships , such as entities often referred to as structured finance or special purpose entities , which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes . in addition , we do not have any undisclosed borrowings or debt , and we have not entered into any synthetic leases . we are , therefore , not materially exposed to any financing , liquidity , market or credit risk that could arise if we had engaged in such relationships .
| operating expenses for the year ended december 31 , 2017 totaled $ 15,270,469 and consisted of research and development expenses of $ 1,667,850 , selling and marketing expenses of $ 4,899,126 and general and administrative expenses of $ 8,703,493. for the year ended december 31 , 2017 , the research and development expenses related primarily to salaries and consulting services of $ 1,328,087. selling and marketing expenses consisted primarily of salaries and consulting services of $ 1,616,597 , amortization of intangibles of $ 1,089,961 , freight charges of $ 541,364 , allowance for bad debts of $ 402,383 , and sales commissions of $ 290,838. general and administrative expenses for the year ended december 31 , 2017 consisted of salaries and consulting services of $ 2,129,096 , accrued management and employee incentives of $ 950,000 , legal , audit and accounting fees of $ 708,075 and fees incurred of $ 642,549 related to the acquisition of logicmark . also included is $ 2,072,256 in non-cash stock compensation to vendors , employees and board members . operating expenses for the year ended december 31 , 2016 totaled $ 10,011,540 and consisted of research and development expenses of $ 888,187 , selling and marketing expenses of $ 2,881,668 and general and administrative expenses of $ 6,241,685. the research and development expenses related primarily to salaries and consulting services of $ 392,991 , as well as expenses of $ 226,293 primarily related to the design and development of the smart card for wvh and manufacturing of the wocket® . selling and marketing expenses consisted primarily of salaries of $ 1,326,220 , that were paid in both cash and stock , and advertising and promotional expenses , including trade shows of $ 519,397. general and administrative expenses for the year ended december 31 , 2016 consisted of salaries and consulting services of $ 1,113,574 , accrued management and employee incentives of $ 600,000 , legal , audit and accounting fees of $ 1,602,083 and fees incurred of $ 605,228 related to the acquisition of logicmark . also included is $ 352,020 in non-cash stock compensation to vendors and board members . our operating expenses for the year ended december 31 , 2017 were approximately $ 5,260,000 higher as compared to operating
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in total , we deferred approximately $ 5.0 million of 2020 payments to 2021 and 2022. it is difficult to predict the future impact covid-19 may have on our business , results of operations , financial position , or cash flows . the extent to which we may be impacted will depend largely on future and rapidly evolving developments , including new information on the severity of new strains , the roll-out and long-term efficacy of vaccines , and actions by various government authorities to contain the pandemic and mitigate its impact . we intend to closely monitor the impact of covid-19 on our business and will respond as we believe is appropriate . key factors that affect our business and our results our operating results and financial performance are influenced by a variety of internal and external trends and other factors . some of the more important factors are discussed briefly below . 51 acquisitions we have been , and expect to continue to be , an acquisitive company . acquisitions have expanded our environmental service capabilities across all three segments , our access to technology , as well as our geographic reach in the united states , canada and australia . see item 1 . “ business—strategic acquisitions. ” the table below sets forth the number of acquisitions completed in each of the last three fiscal years , fiscal year revenues generated by and the percentage of total annual revenues attributable to those acquisitions : replace_table_token_3_th revenues from acquired companies exclude intercompany revenues from revenue synergies realized between business lines within operating segments , as these are eliminated at the consolidated segment and company level . we expect our revenue growth to continue to be driven in significant part by acquisitions , in particular , by our recent acquisition of cteh . see note 7 to our audited consolidated financial statements included in item 8 . “ financial statements and supplementary data. ” as a result of our acquisitions , goodwill and other intangible assets represent a significant proportion of our total assets , and amortization of intangible assets has historically been a significant expense . our historical financial statements also include other acquisition-related costs , including costs relating to external legal support , diligence and valuation services and other transaction and integration-related matters . in addition , in any year gains and losses from changes in the fair value of earn-out related contingent consideration related to acquisitions could be significant . the amount of each for the last three fiscal years is : replace_table_token_4_th we expect that amortization of identifiable intangible assets and other acquisition-related costs , assuming we continue to acquire , will continue to be significant . additionally , we expect to make a $ 50.0 million earnout payment in 2021 ( a portion of which we expect to pay in the form of shares of our common stock . see “ —liquidity and capital resources ” ) and may be required to pay up to $ 30.0 million in earn-out payments in 2022 in connection with our cteh acquisition . in connection with our most recent acquisition , mse group , or mse , we may be required to make up to $ 5.0 million in aggregate earn-out payments in 2022 and 2023. see note 24 to our audited consolidated financial statements included in item 8 . “ financial statements and supplementary data. ” organic growth we have grown organically and expect to continue to do so . we define organic growth as the change in revenues excluding revenues from acquisitions for the first twelve months following the date of acquisition and excluding revenues from businesses disposed of or discontinued . as a result of the significance of the cteh acquisition to montrose , and the potential annual volatility in cteh 's revenues , we also disclose organic growth combined with the annual organic revenue growth of cteh , but excluding cteh 's revenues from projects contributing more than $ 4 million of revenue . we expect to continue to disclose organic revenue growth with and without cteh . management uses organic growth as one of the means by which it assesses our results of operations . organic growth is not , however , a measure of revenue growth calculated in accordance with u.s. generally accepted 52 accounting principles , or gaap , and should be considered in conjunction with revenue growth calculated in accordance with gaap . discontinued service lines periodically , or when circumstances warrant , we evaluate the performance of our business services to ensure that performance and outlook are consistent with expectations . during the first quarter of 2020 , as part of this evaluation , we determined to scale back operations of our environmental lab in berkeley , california , and to exit our non-specialized municipal water engineering service line and our food-waste biogas engineering service line , collectively , the discontinued service lines . the factors underlying these decisions were accelerated and amplified by the covid-19 pandemic , which for example , has made the collection of commercial food waste used in biodigesters less consistent and delayed the approval or initiation of certain projects dependent on municipal or state funding . as a part of discontinuing these service lines , a process which was completed in the second quarter of 2020 , we eliminated select personnel and , in the first quarter of 2020 , booked an additional bad debt reserve related to the increased uncertainty around the ability to collect on receivables related to these service lines . revenue from our non-specialized municipal water engineering service line and our food-waste biogas engineering , which are included in the results of our remediation and reuse segment , were $ 1.4 million , $ 10.9 million and $ 12.3 million in the years ended december 31 , 2020 , 2019 , and 2018 , respectively . story_separator_special_tag revenues from our berkeley lab , which are included in the results of our measurement and analysis segment , were $ 2.4 million , $ 7.5 million and $ 7.5 million for the years ended december 31 , 2020 , 2019 , and 2018 , respectively . we no longer generate any revenues from the discontinued service lines . revenue mix our segments generate different levels of profitability and , accordingly , shifts in the mix of revenues between segments can impact our consolidated reported net income , operating margin , adjusted ebitda and adjusted ebitda margin from year to year . see “ —non-gaap financial information ” for a discussion of non-gaap measures and a reconciliation thereof to the most directly comparable gaap measure . inter-company revenues between business lines within segments have been eliminated . financing costs financing costs , relating primarily to interest expense on our debt , continue to be a significant component of our results of operations . for the year ended december 31 , 2020 , we incurred interest expense of $ 13.8 million and debt extinguishment costs of $ 1.4 million . for the year ended december 31 , 2019 , we incurred $ 6.8 million of interest expense and for the year ended december 31 , 2018 , we incurred $ 11.1 million of interest expense and $ 0.4 million in debt extinguishment costs . on april 13 , 2020 , we entered into the unitranche credit agreement providing for a new $ 225.0 million credit facility comprised of a $ 175.0 million term loan and a $ 50.0 million revolving credit facility and used the proceeds therefrom to repay in full all amounts outstanding under our prior senior secured credit facility . we incurred debt extinguishment costs of $ 1.4 million in connection with this refinancing transaction . effective october 6 , 2020 , the company amended its unitrache credit agreement to provide for a reduction on the applicable interest rate on the term loan from libor plus 5.0 % with a 1.0 % libor floor to libor plus 4.5 % with a 1.0 % libor floor . the revolver interest rate remained unchanged . corporate and operational infrastructure investments our historical operating results reflect the impact of our ongoing investments in our corporate infrastructure to support our growth . we have made and expect to continue to make investments in our business platform that we believe have laid the foundation for continued growth . investments in logistics , quality , risk management , sales and marketing , safety , human resources , research and development , finance and information technology and other areas enable us to support continued growth . these investments have allowed us to improve our operating margins . 53 seasonality because demand for environmental services is not driven by specific or predictable patterns in one or more fiscal quarters , our business is better assessed based on yearly results . in addition , our operating results experience some quarterly variability . excluding the impact of revenues and earnings from new acquisitions , and excluding the impact of covid-19 , we typically generate slightly lower revenues and lower earnings in the first and fourth quarters and higher overall revenues and earnings in the second and third quarters . historically , quarterly variability has been driven by weather patterns , which generally impact our field-based teams ' ability to operate in the winter months . as we continue to grow and expand into new geographies and service lines , quarterly variability may deviate from historical trends . earnings volatility we expect to experience increased annual and quarterly revenue and earnings volatility as a result of the timing of large contract wins in our remediation and reuse segment . in addition , the acquisition of cteh exposes us to potentially significant revenue and earnings fluctuations tied to the timing of large environmental emergency response projects following an incident or natural disaster . for example , the cteh business has generated significant revenues from covid-19 response related projects that may not be repeated in future periods . as a result , we may experience revenues and earnings in a quarter or year that are not indicative of future results . 54 results of operations year ended december 31 , 2020 compared to the year ended december 31 , 2019 replace_table_token_5_th ( 1 ) operating margin represents loss from operations as a percentage of revenues . ( 2 ) non-gaap measure . see “ —non-gaap financial information ” for a discussion of non-gaap measures and a reconciliation thereof to the most directly comparable gaap measure . 55 revenues for the year ended december 31 , 2020 , we had revenues of $ 328.2 million , an increase of $ 94.3 million or 40.4 % over the year ended december 31 , 2019. excluding revenues from discontinued service lines of $ 3.8 million and $ 18.4 million in the years ended december 31 , 2020 and december 31 , 2019 , respectively , revenues increased $ 108.9 million or 50.5 % . the $ 108.9 million increase in revenues was driven by acquisitions , which contributed $ 97.3 million , and organic growth . all segments were impacted by covid-19 , primarily in the form of delays in project start dates , beginning in march 2020 , partially offset by covid-19 related project work in our assessment , permitting and response segment from the cteh acquisition . revenue by segment and as a percentage of total revenues was as follows : replace_table_token_6_th see “ —segment results of operations ” below . cost of revenues cost of revenues consists of all direct costs required to provide services , including fixed and variable direct labor costs , equipment rental and other outside services , field and lab supplies , vehicle costs and travel- related expenses . variable costs of revenues generally follow the same seasonality trends as revenue , while fixed costs tend to change primarily as a result of acquisitions .
| excluding revenues from the discontinued service lines , revenues increased $ 21.2 million or 16.6 % primarily driven by organic growth . remediation and reuse segment revenues for the year ended december 31 , 2020 were $ 78.2 million , an increase of $ 0.9 million or 1.2 % compared to revenues for the year ended december 31 , 2019 of $ 77.3 million . revenues from discontinued service lines were $ 1.4 million and $ 10.9 million for the year ended december 31 , 2020 and december 31 , 2019 , respectively . excluding revenues from discontinued service lines , revenues increased $ 10.4 million or 15.7 % . this $ 10.4 million increase was primarily driven by organic growth and $ 3.8 million from acquisitions . remediation and reuse revenues were adversely impacted by covid-19 , which led to contract delays and project postponements . segment adjusted ebitda assessment , permitting and response segment adjusted ebitda was $ 24.2 million for the year ended december 31 , 2020 , compared to $ 7.6 million for the year ended december 31 , 2019. for the years ended december 31 , 2020 and december 31 , 2019 , segment adjusted ebitda margin was 24.6 % and 35.9 % , respectively . the increase in segment adjusted ebitda and decline in adjusted ebitda margin was primarily a result of the acquisition of cteh in the second quarter of 2020. cteh typically operates at lower ebitda margins than our legacy assessment , permitting and response business lines . 61 measurement and analysis segment adjusted ebitda for the year ended december 31 , 2020 was $ 39 . 4 million , an increase of $ 11 . 6 million compared to segment adjusted ebitda for the year ended december 31 , 2019 of $ 27.8 million . for the year ended december 31 , 2020 segment adjusted ebitda margin was 2 6 . 0 % compared to 20.5 % in the prior year . the improvement in segment adjusted ebitda and segment adjusted
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inventories we record inventories at the lower of cost or net realizable value , with expense estimates made for obsolescence or unsaleable inventory equal to the difference between the recorded cost of inventories and their estimated market value based upon assumptions about future demand and market conditions . on an on-going basis , we monitor these estimates and record adjustments for differences between estimates and actual experience . historically , actual results have not significantly deviated from those determined using these estimates . financial investments we follow accounting guidance that defines fair value , establishes a framework for measuring fair value and expands disclosures about fair value measurements for our financial investments and liabilities . this guidance defines fair value as `` the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date . '' further , it defines a fair value hierarchy , as follows : level 1 inputs as quoted prices in active markets for identical assets or liabilities ; level 2 inputs as observable inputs other than level 1 prices , such as quoted market prices for similar assets or liabilities or other inputs that are observable or can be corroborated by market data ; and level 3 inputs as unobservable inputs that are supported by little or no market activity and that are financial instruments whose value is determined using pricing models or instruments for which the determination of fair value requires significant management judgment or estimation . 19 if applicable , we record investments in available-for-sale securities at fair value , and unrealized gains or losses ( that are deemed to be temporary ) are recognized , net of tax effect , through shareholders ' equity , as a component of other comprehensive income in our consolidated balance sheet . in the past , we have invested excess cash in auction rate securities . auction rate securities are investment securities that have interest rates which are reset every 7 , 28 or 35 days . at december 31 , 2013 , our investment in auction rate securities was $ 22 million ; we have not increased our investment in auction rate securities since 2007. the fair value of auction rate securities is estimated , on a recurring basis , using a discounted cash flow model ( level 3 input ) . if we changed the discount rate used in the fair value estimate by 75 basis points , the value of the auction rate securities would change by approximately $ 1 million . we have maintained investments in a number of private equity funds , which aggregated $ 63 million at december 31 , 2013. we carry our investments in private equity funds and other private investments at cost . it is not practicable for us to estimate a fair value for private equity funds and other private investments because there are no quoted market prices , and sufficient information is not readily available for us to utilize a valuation model to determine the fair value for each fund . these investments are evaluated , on a non-recurring basis , for potential other-than-temporary impairment when impairment indicators are present , or when an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment . due to the significant unobservable inputs , the fair value measurements used to evaluate impairment are a level 3 input . impairment indicators we consider include the following : whether there has been a significant deterioration in earnings performance , asset quality or business prospects ; a significant adverse change in the regulatory , economic or technological environment ; a significant adverse change in the general market condition or geographic area in which the investment operates ; industry and sector performance ; current equity and credit market conditions ; and any bona fide offers to purchase the investment for less than the carrying value . we also consider specific adverse conditions related to the financial health of and business outlook for the fund , including industry and sector performance . the significant assumptions utilized in analyzing a fund for potential other-than-temporary impairment include current economic conditions , market analysis for specific funds and performance indicators in the applicable sectors . we have and will continue to reduce our investments in long-term financial assets . at december 31 , 2013 , we have investments in 14 venture capital funds , with an aggregate carrying value of $ 15 million . the venture capital funds have invested in start-up or smaller , early-stage established businesses , principally in the information technology , bio-technology and health care sectors . at december 31 , 2013 , we also have investments in 15 buyout funds , with an aggregate carrying value of $ 48 million . the buyout funds have invested in later-stage , established businesses and no buyout fund has a concentration in a particular sector . since there is no active trading market for these investments , they are for the most part illiquid . these investments , by their nature , can also have a relatively higher degree of business risk , including financial leverage , than other financial investments . the timing of distributions from the funds , which depends on particular events related to the underlying investments , as well as the funds ' schedules for making distributions and their needs for cash , can be difficult to predict . as a result , the amount of income we record from these investments can vary substantially from quarter to quarter . future changes in market conditions , the future performance of the underlying investments or new information provided by private equity fund managers could affect the recorded values of these investments and the amounts realized upon liquidation . we record an impairment charge to earnings when an investment has experienced a decline in fair value that is deemed to be other-than-temporary . story_separator_special_tag 20 goodwill and other intangible assets we record the excess of purchase cost over the fair value of net tangible assets of acquired companies as goodwill or other identifiable intangible assets . in the fourth quarter of each year , or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount , we complete the impairment testing of goodwill utilizing a discounted cash flow method . we selected the discounted cash flow methodology because we believe that it is comparable to what would be used by other market participants . we have defined our reporting units and completed the impairment testing of goodwill at the operating segment level , as defined by accounting guidance . our operating segments are reporting units that engage in business activities for which discrete financial information , including five-year forecasts , is available . determining market values using a discounted cash flow method requires us to make significant estimates and assumptions , including long-term projections of cash flows , market conditions and appropriate discount rates . our judgments are based upon historical experience , current market trends , consultations with external valuation specialists and other information . while we believe that the estimates and assumptions underlying the valuation methodology are reasonable , different estimates and assumptions could result in different outcomes . in estimating future cash flows , we rely on internally generated five-year forecasts for sales and operating profits , including capital expenditures , and generally a one to three percent long-term assumed annual growth rate of cash flows for periods after the five-year forecast . we generally develop these forecasts based upon , among other things , recent sales data for existing products , planned timing of new product launches , estimated housing starts and estimated repair and remodel activity . in 2013 , we utilized estimated housing starts , from independent industry sources , growing from current levels to 1.5 million units in 2018 ( terminal growth year ) and operating profit margins improving to approximate historical levels for those business units by 2018 ( terminal growth year ) . we utilize our weighted average cost of capital of approximately 10 percent as the basis to determine the discount rate to apply to the estimated future cash flows . our weighted average cost of capital increased in 2013 due to improving market conditions and an increased stock price . in 2013 , due to improving market conditions and based upon our assessment of the risks impacting each of our businesses , we applied a risk premium to increase the discount rate to a range of 11.5 percent to 13.5 percent for most of our reporting units . in the fourth quarter of 2013 , we estimated that future discounted cash flows projected for all of our reporting units were greater than the carrying values . any increases in estimated discounted cash flows would have no effect on the reported value of goodwill . if the carrying amount of a reporting unit exceeds its fair value , we measure the possible goodwill impairment based upon an allocation of the estimate of fair value of the reporting unit to all of the underlying assets and liabilities of the reporting unit , including any previously unrecognized intangible assets ( step two analysis ) . the excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill . an impairment loss is recognized to the extent that a reporting unit 's recorded goodwill exceeds the implied fair value of goodwill . in 2013 , we did not recognize any impairment charges for goodwill . a 10 percent decrease in the estimated fair value of our reporting units at december 31 , 2013 would not have resulted in any additional analysis of goodwill impairment for any additional business unit . we review our other indefinite-lived intangible assets for impairment annually , in the fourth quarter , or as events occur or circumstances change that indicate the assets may be impaired without regard to the reporting unit . we consider the implications of both external ( e.g. , market growth , competition and local economic conditions ) and internal ( e.g. , product sales and expected product growth ) factors and their potential impact on cash flows related to the intangible asset in both the near- and long-term . in 2013 , we did not recognize any impairment charges for other indefinite-lived intangible assets . 21 intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives . we evaluate the remaining useful lives of amortizable identifiable intangible assets at each reporting period to determine whether events and circumstances warrant a revision to the remaining periods of amortization . stock-based compensation our 2005 plan provides for the issuance of stock-based incentives in various forms to employees and non-employee directors . at december 31 , 2013 , outstanding stock-based incentives were in the form of long-term stock awards , stock options , phantom stock awards and stock appreciation rights . long-term stock awards we grant long-term stock awards to key employees and non-employee directors and do not cause net share dilution inasmuch as we generally continue the practice of repurchasing and retiring an equal number of shares on the open market . we measure compensation expense for stock awards at the market price of our common stock at the grant date . there was $ 69 million ( 8 million common shares ) of total unrecognized compensation expense related to unvested stock awards at december 31 , 2013 , which was included as a reduction of common stock and paid-in capital . we recognize this expense ratably over the shorter of the vesting period of the stock awards , typically five to ten years , or the length of time until the grantee becomes retirement-eligible at age 65. pre-tax compensation expense for the annual vesting of long-term stock awards was $ 34 million for 2013.
| net sales for 2012 were negatively affected by the planned exit of certain cabinet and window product lines in certain geographic areas . a stronger u.s. dollar decreased sales by one percent compared to 2011. our gross profit margins were 27.6 percent , 26.1 percent and 24.9 percent in 2013 , 2012 and 2011 , respectively . the 2013 gross profit margin reflects a more favorable relationship between selling prices and commodity costs as well as increased sales volume . the 2012 gross profit margin reflects a more favorable relationship between selling prices and commodity costs as well as increased sales volume . both 2013 and 2012 reflect the benefits associated with business rationalizations and other cost savings initiatives . selling , general and administrative expenses as a percent of sales were 19.4 percent in 2013 compared with 20.5 percent in 2012 and 21.5 percent in 2011. selling , general and administrative expenses as a percent of sales in 2013 and 2012 reflect increased sales volume and lower business rationalization costs . both 2013 and 2012 also reflect the benefits associated with our business rationalizations and other cost savings initiatives . operating profit ( loss ) in 2013 , 2012 and 2011 includes $ 48 million , $ 75 million and $ 111 million , respectively , of costs and charges related to business rationalizations and other cost savings initiatives . operating profit ( loss ) in 2012 and 2011 includes $ 42 million and $ 450 million , respectively , of impairment charges for goodwill and other intangible assets . operating profit ( loss ) in 2012 and 2011 includes $ 77 million and $ 9 million , respectively , of net charges for litigation settlements . operating profit ( loss ) in 2012 includes $ 8 million of net gains related to fixed asset sales . operating profit ( loss ) margins , as reported , were 8.2 percent , 4.0 percent and ( 3.0 ) percent in 2013 , 2012 and 2011 , respectively . operating profit margins , excluding the items above , were
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typically , we include the total value of an epc service contract in project backlog when we receive a corresponding notice to proceed from the project owner . however , we may include the value of an epc services contract prior to the receipt of a notice to proceed if we believe that it is probable that the project will commence within a reasonable timeframe , among other factors . during fiscal 2019 , gps entered into three epc services contracts to construct state-of-the-art natural gas-fired power plants , having an aggregate power output of approximately 4.0 gigawatts . in addition to the reidsville energy center and the guernsey power station , which are included in the table presented above and reflected in our project backlog as of january 31 , 2019 , gps has entered into an epc services contract to construct the chickahominy power station , a 1,600 mw natural gas-fired power plant , in charles city county , virginia . even though we are providing financial and technical support to the project development effort through a consolidated vie , we have not included the value of this contract in our project backlog . in addition , gps has been selected by project owners to provide epc services in connection with the construction of several other power plant projects with projected start dates in fiscal 2020. however , gps has not completed contract negotiations nor received a full notice to proceed on any of these epc projects , and there is always a possibility that one or more of these projects will not be built . over the last few years , our ability to run our business in a manner that provides consistent financial results has been unfavorably impacted by the lengthening time between the conception of a power plant project and the commencement of construction activities . we believe that the resulting delays in new business awards to gps relates , in part , to the soft demand for electricity , especially in the northeast and mid-atlantic regions of the us . in addition , as explained below , there is uncertainty surrounding the level of regulatory support for coal as part of the energy mix , an increase in the amount of power generating capacity provided by renewable energy assets and increasing interest in renewable energy storage solutions . together with the difficulties experienced by project developers in obtaining project financing , these factors may be impacting the planning and initiation phases for the construction of new natural gas-fired power plants which continue to be deferred by project owners . in august 2018 , the administration of president trump moved to formally replace the clean power plan , an environmental regulation intended by the prior administration to be the single-most important step america has ever taken to fight climate change . the new proposal , called the affordable clean energy rule , would be more favorable to the coal industry by allowing individual states greater authority to make their own plans for regulating greenhouse gas emissions from coal-fired power plants . however , even without the regulation , the us has seen a decline in carbon dioxide emissions from power plants as the supply of inexpensive natural gas and the growth in renewable energy have moved more energy providers away from coal . in addition , the coal-fired power plant fleet is generally old . it is expensive to keep the coal plants running , and they are not competitive in the market . nevertheless , in some cases , the new plan may encourage the continued operation of old coal plants that might otherwise be retired without any government intervention . other unfavorable factors include challenging energy capacity auctions for new power generating assets , the impacts of environmental activism and california 's resolve to move towards 100 % renewable energy . the growth of vocal support for 100 % renewable energy and the support of numerous environmental groups provided motivation for the release of the green new deal resolution by progressive members of the us congress . the fostered increase in the number of protests against a variety of fossil-fuel related energy projects continue to garner media attention and public skepticism about new fossil-fuel energy projects , particularly oil and natural gas pipelines , resulting in project delays due to onsite protest demonstrations , indecision by local officials and lawsuits . pipeline approval delays may jeopardize projects that are needed to bring supplies of natural gas to potentially new gas-fired power plant sites , thereby increasing the risk of power plant project delays or cancellations . research and development credits during fiscal 2019 , we completed a detailed review of the activities performed by our engineering staff on major epc services projects in order to identify and quantify the amounts of research and development credits that may be available to reduce prior year income taxes . this study focused on project costs incurred during the three-year period ended january 31 , 2018. based on the results of the study , we identified and estimated significant amounts of income tax benefits that have not previously been recognized in our financial results for any prior year reporting period . 28 income tax positions must meet a more-likely-than-not recognition threshold to be recognized . income tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met . we consider fiscal 2019 as the initial reporting period in which we had sufficient data on which to make an evaluation and reach a conclusion on the amount of income tax credit benefits related to prior year project costs that , more likely than not , qualified as research and development costs under the rules and regulations of the irs and certain states . story_separator_special_tag accordingly , the income tax benefits associated with research and development activities conducted in prior years in the total amount of $ 16.6 million have been recognized in income taxes for fiscal 2019. the favorable effect of this amount on diluted earnings per share was $ 1.06 for the year . goodwill impairment as required by current accounting requirements , we performed a goodwill impairment assessment for trc as of november 1 , 2018 , using the assistance of a professional business valuation firm . although it was determined that the fair value of trc was approximately the same value as determined as of november 1 , 2017 , the current year amount was less than the corresponding carrying value and we recorded a goodwill impairment loss of approximately $ 1.5 million that is included in the consolidated statement of earnings for fiscal 2019. last year , a smaller goodwill impairment loss in the amount of $ 0.6 million was recorded . the remaining balance of goodwill for trc that is reflected in the consolidated balance sheet as of january 31 , 2019 , after reduction for impairment losses , was $ 12.3 million . market outlook the total annual amount of electricity generated by utility-scale facilities in the us in 2018 was the highest amount generated since 2007. in its latest base-case outlook , the us energy information administration ( the eia ) forecasts steady growth in net electricity generation through 2050 with average annual increases of approximately 1.0 % per year . the growth rate is tempered by new electricity-efficient devices and production processes replacing older , less-efficient appliances , heating , cooling and ventilation systems and capital equipment . nonetheless , the eia forecasts continued growth for natural gas-fired electricity generation through 2050 with average annual increases of 1.2 % per year . eia expects the share of total utility-scale electricity generation from natural gas-fired power plants in the us to rise from approximately 34 % in 2018 to 37 % in 2022 and to 39 % by 2050. on the other hand , the generation share from coal is forecast to fall steadily during these periods , from 28 % in 2018 to 23 % in 2022 to 17 % by 2050. as reported by eia for 2018 , net electricity generation at utility-scale facilities in the us rose by 3.6 % from the prior year level as net generation from natural gas , wind and solar sources increased by 13.2 % , 8.1 % and 25.0 % , respectively . moreover , the share of net electricity generation fueled by natural gas rose from approximately 31.7 % in 2017 to 34.4 % for 2018. the net electricity generation from coal declined by 4.9 % for the year . in summary , the share of the electrical power generation mix fueled by natural gas has continued its increase in the current year , while the share fueled by coal has continued its fall . over the next three years , eia forecasts that 72 gigawatts of new wind and photovoltaic solar capacity will be added in the us attributable to declining equipment costs and the availability of valuable tax credits . as these credits decline and then expire early in the next decade , the wind capacity additions will slow . although tax incentives related to solar power also expire , the continuing decline in the cost of solar power equipment is predicted to sustain the growth of photovoltaic solar power generation facilities . however , persistent low natural gas prices , lower power plant operating costs and higher energy generating efficiencies should sustain the demand for modern combined cycle gas-fired power plants in the future . as a result , the long-term trends in electricity generation through 2050 are dominated by natural gas-fired and solar capacity additions . eia forecasts that coal-fired generating capacity will decrease by 101 gigawatts , or 42 % of existing coal-fired capacity , by 2050 , with most of the capacity reductions occurring by 2025. in addition , another 22 gigawatts of nuclear , or 22 % of current nuclear power capacity , is expected to be retired by 2050. the retirements of coal and nuclear plants typically result in the need for new capacity . new natural gas-fired plants , which have experienced a significant increase in their ability to generate power efficiently , are relatively cheaper to build than coal , nuclear , or renewable plants , they are substantially more environmentally friendly than conventional coal-fired power plants and they represent the most economical way to meet base loads and peak demands and to maintain grid reliability . as natural gas is relatively clean burning , cost-effective and reliable , its benefits as a source of power generation are compelling . as the use of coal declines , the use of nuclear energy stalls , and the integration of increasing amounts of wind and solar power into energy grids continues ( including renewable energy storage solutions ) , power providers should continue to value gas-fired electricity generation , including when needed to support intermittent renewable energy supplies . as indicated above , the share of the mix represented by wind farms 29 and solar fields is predicted to grow with accelerated pace in the near term boosted by extended tax credits . nonetheless , as the demand for electrical power grows , natural gas is predicted to be a strong choice for new electricity generation plants in the future primarily due to favorable economics and the scheduled expiration of renewable energy tax credits . as a result , we continue to believe that the future prospects for natural gas-fired power plant construction are favorable as natural gas has become the primary source for power generation in our country . major advances in horizontal drilling and the practice of hydraulic fracturing have led to the boom in natural gas supply which is available at consistently low prices now and in the foreseeable future .
| we reported in previous filings that we expected the revenues of gps to decrease significantly in fiscal 2019 compared to fiscal 2018 , which they did . we anticipate adding new epc services contracts to our growing project backlog and beginning work on the new projects in the first half of the year ending january 31 , 2020 ( fiscal 2020 ) as discussed below . however , it takes time for us to ramp-up meaningful revenues associated with new epc projects due to the timing of when we receive full notices to proceed with all construction efforts and the overall project life-cycles of gas-fired power plants . therefore , we expect to continue to report reduced consolidated revenues for the first half of fiscal 2020 as we begin preliminary design and site preparation activities and prepare for the early stages of expected new projects . we are optimistic that we will see a resumption of year-to-year growth for the entire company as new epc service projects of gps mature . additional new epc service project opportunities exist and , as reported in previous filings , negotiations continue with project owners for several new projects . project backlog was approximately $ 1.1 billion as of january 31 , 2019 compared with $ 0.4 billion as of january 31 , 2018. gps and apc are completing certain projects that are confronting significant operational and contractual challenges , and our operating results for fiscal 2019 reflect unfavorable gross profit adjustments on these jobs which are both behind the schedules originally established for these jobs . these projects may continue to impact our operating results negatively until they reach completion . the favorable effects of research and development credits and the reduction in the corporate income tax rate in the us , which partially offset the 44.8 % decrease in the amount of gross profit , were the primary reasons that we experienced a limited decrease of 27.7 % in net
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40 ffelp loans segment net interest income will be the primary source of net income generated by this segment as this portfolio will have an amortization period in excess of 20 years and a 7-year remaining weighted average life . interest earned on our ffelp loans is indexed to one-month libor rates and our cost of funds is primarily indexed to three-month libor , creating the possibility of basis and repricing risk related to these assets . the ffelp loans segment 's core earnings net interest margin was 0.84 percent in 2015 compared with 0.90 percent in 2014. at december 31 , 2015 , 78 percent of our ffelp loan portfolio was funded to term with non-recourse , long-term securitization debt . as of december 31 , 2015 , we had $ 96.5 billion of ffelp loans outstanding , compared with $ 104.5 billion outstanding at december 31 , 2014 on a core earnings basis . a source of variability in net interest income could be floor income we earn on certain ffelp loans . pursuant to the terms of the ffelp , certain ffelp loans can earn interest at the stated fixed rate of interest as underlying debt interest rate expense remains variable . we refer to this additional spread income as floor income. floor income can be volatile . we frequently hedge this volatility with derivatives which lock in the value of the floor income over the term of the contract . private education loans segment net interest income will be the primary source of net income generated by this segment as this portfolio will have an amortization period in excess of 20 years and a 7-year remaining weighted average life . interest earned on our private education loans is generally indexed to prime and one-month libor rates and our cost of funds is primarily indexed to one-month and three-month libor , creating the possibility of basis and repricing risk related to these assets . the private education loans segment 's core earnings net interest margin was 3.67 percent in 2015 compared with 3.94 percent in 2014. at december 31 , 2015 , 62 percent of our private education loan portfolio was funded to term with non-recourse , long-term securitization debt . as of december 31 , 2015 , we had $ 26.4 billion of private education loans outstanding , compared with $ 29.8 billion outstanding at december 31 , 2014 on a core earnings basis . provisions for loan losses management estimates and maintains an allowance for loan losses at a level sufficient to cover charge-offs expected over the next two years , plus an additional allowance to cover life-of-loan expected losses for loans classified as a troubled debt restructuring ( tdr ) . the provision for loan losses increases the related allowance for loan losses . generally , the provision for loan losses rises when future charge-offs are expected to increase and falls when future charge-offs are expected to decline . our loss exposure and resulting provision for loan losses is small for ffelp loans because we generally bear a maximum of 3 percent loss exposure on defaults . we bear the full credit exposure on our private education loans . our core earnings provision for loan losses in our ffelp loans segment was $ 26 million in 2015 compared with $ 40 million in 2014. losses in our private education loans segment are determined by risk characteristics , such as school type , loan status ( in-school , grace , forbearance , repayment and delinquency ) , loan seasoning ( number of months a payment has been made by a customer ) , underwriting criteria ( e.g. , credit scores ) , existence of a cosigner and the current economic environment . our core earnings provision for loan losses in our private education loans segment was $ 538 million in 2015 compared with $ 539 million in 2014. charge-offs and delinquencies when we conclude a loan is uncollectible , the unrecoverable portion of the loan is charged against the allowance for loan losses in the applicable segment . charge-off data provides relevant information with respect to the performance of our loan portfolios . management focuses on delinquencies as well as the progression of loans from early to late stage delinquency . in the second quarter of 2015 , we changed our assumptions related to estimated recoveries and as a result , the portion of the private education loan amount charged off at default increased from 73 percent to 79 percent . this change resulted in a $ 330 million reduction to the balance of the 41 receivable for partially charged-off loans . excluding this amount , the private education loans segment 's core earnings charge-off rate was 2.6 percent of loans in repayment in 2015 , unchanged from 2014. delinquencies are a very important indicator of the potential future credit performance . private education loan delinquencies as a percentage of private education loans in repayment decreased from 8.1 percent at december 31 , 2014 to 7.2 percent at december 31 , 2015. the ffelp loans segment 's core earnings charge-off rate was 0.05 percent of loans in repayment in 2015 compared with 0.08 percent in 2014. servicing , asset recovery and business processing revenues we earn servicing revenues from servicing education loans which is primarily driven by the underlying volume of loans we are servicing on behalf of others . we earn asset recovery revenue primarily related to default aversion and post-default collection work we perform on education loans as well as collection work we perform on various receivables on behalf of our federal , state , court and municipal clients . the fees we recognize are primarily driven by our success in collecting or rehabilitating defaulted or delinquent loans and receivables . we also earn business processing revenue related to transaction processing we perform on behalf of our municipal , public authority and hospital clients . the fees we recognize are primarily driven by the number of transactions processed . story_separator_special_tag other income / ( loss ) in managing our loan portfolios and funding sources , we periodically engage in sales of loans and the repurchase of our outstanding debt . in each case , depending on market conditions , we may incur gains or losses from these transactions that affect our results from operations . operating expenses the operating expenses reported for our private education loans and business services segments are those that are directly attributable to the generation of revenues by those segments . the operating expenses for the ffelp loans segment primarily represent an intercompany servicing charge from the business services segment and do not reflect our actual underlying costs incurred to service the loans . we have included unallocated corporate overhead expenses and certain information technology costs ( together referred to as overhead ) as well as regulatory-related costs in our other segment rather than allocate those expenses by segment . overhead expenses include executive management , the board of directors , accounting , finance , legal , human resources , stock-based compensation expense and certain information technology and infrastructure costs . regulatory-related costs include actual settlement amounts as well as third-party professional fees we incur in connection with regulatory matters . core earnings we report financial results on a gaap basis and also present certain core earnings performance measures . our management , equity investors , credit rating agencies and debt capital providers use these core earnings measures to monitor our business performance . core earnings is the basis in which we prepare our segment disclosures as required by gaap under asc 280 , segment reporting ( see note 15 segment reporting ) . for a full explanation of the contents and limitations of core earnings , see the section titled core earnings ' definition and limitations of this item 7. story_separator_special_tag million increase in net gains on derivative and hedging activities , and a $ 21 million increase in gains on debt repurchases . the primary contributors to each of the identified drivers of changes in net income for the current year-end period compared with the year-ago period are as follows : net interest income decreased by $ 446 million , of which $ 186 million related to the deemed distribution of slm bankco on april 30 , 2014. also contributing to the decrease was a reduction in private education loan net interest income due to a decline in the loan balance and net interest margin , as well as a reduction in the net interest margin on the ffelp loans . provisions for loan losses declined $ 67 million , of which $ 49 million related to the deemed distribution of slm bankco on april 30 , 2014. servicing revenue increased $ 42 million primarily as a result of increasing our recovery expectation on previously assessed late fees , as well as a general increase in third-party servicing revenue , primarily related to servicing for ed . asset recovery and business processing revenue decreased $ 21 million primarily as a result of the bipartisan budget act ( the budget act ) enacted on december 26 , 2013 and effective on july 1 , 2014 , which reduced the amount paid to guarantor agencies for defaulted ffelp loans that are rehabilitated . this legislative reduction in fees represents $ 79 million of the decrease in asset recovery and business processing revenue . this reduction was partially offset by $ 69 million of additional revenue from gila llc , acquired in february 2015 , and xtend healthcare , acquired in october 2015. other income decreased $ 65 million due in part to a reduction in foreign currency translation gains . the foreign currency translation gains relate to a portion of our foreign currency denominated debt that does not receive hedge accounting treatment . these gains were partially offset by the gains ( losses ) on derivative and hedging activities , net line item on the income statement related to the derivatives used to economically hedge these debt instruments . losses on sales of loans and investments increased $ 9 million due to a $ 21 million loss on the sale of $ 178 million of private education loans , partially offset by $ 12 million in gains on the sale of $ 412 million of ffelp loans . there were no loan sales in the prior year . gains on debt repurchases increased $ 21 million . debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy . net gains on derivative and hedging activities increased $ 27 million . the primary factors affecting the change were interest rate and foreign currency fluctuations , which primarily affected the valuations of our floor income contracts , basis swaps and foreign currency hedges during each period . valuations of derivative instruments fluctuate based upon many factors including changes in interest rates , credit risk , foreign currency fluctuations and other market factors . as a result , net gains and losses on derivative and hedging activities may continue to vary significantly in future periods . in 2015 and 2014 , we recorded $ 19 million and $ 112 million , respectively , of regulatory-related costs . excluding these expenses , operating expenses increased $ 24 million . this increase was primarily due to operating costs related to gila llc , which was acquired in february 2015 , and to xtend healthcare , which was acquired in october 2015 , and incremental third-party servicing expenses related to an $ 8.5 45 billion loan acquisition in fourth-quarter 2014 ( including $ 11 million of one-time conversion costs to move $ 4.9 billion of ffelp loans to our servicing system ) . this was partially offset by $ 63 million related to the deemed distribution of slm bankco on april 30 , 2014. restructuring and other reorganization expenses decreased $ 81 million , from $ 113 million to $ 32 million . the year-ago period 's expenses were primarily related to third-party costs incurred in connection with the spin-off .
| during 2015 , we : acquired gila llc and xtend healthcare , both asset recovery and business processing companies ; acquired $ 3.7 billion of education loans ; issued $ 2.8 billion of ffelp abs , $ 1.7 billion of private education loan abs and $ 500 million of unsecured debt ; closed on a new $ 550 million private education loan abs repurchase facility ; repurchased $ 1.7 billion of senior unsecured debt ; repurchased 56.0 million common shares for $ 945 million on the open market ; authorized $ 700 million in december 2015 to be utilized in a new share repurchase program ; and paid $ 240 million in common dividends . results of operations we present the results of operations below first on a consolidated basis in accordance with gaap . following our discussion of consolidated earnings results on a gaap basis , we present our results on a segment basis . we have four business segments : ffelp loans , private education loans , business services and other . since these segments operate in distinct business environments and we manage and evaluate the financial performance of these segments using non-gaap financial measures , these segments are presented on a core earnings basis ( see core earnings ' definition and limitations ) . 43 gaap consolidated statements of income replace_table_token_7_th 44 consolidated earnings summary gaap basis year ended december 31 , 2015 compared with year ended december 31 , 2014 for the year ended december 31 , 2015 , net income was $ 997 million , or $ 2.61 diluted earnings per common share , compared with net income of $ 1.1 billion , or $ 2.69 diluted earnings per common share , for the year ended december 31 , 2014. the decrease in net income was primarily due to a $ 446 million decline in net interest income , a $ 65 million decrease in other income , and a $ 21 million decrease in asset recovery and business processing revenue . this was partially offset by an $ 81 million decrease in restructuring and other reorganization
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million increase in bad debt and warranty expense . consulting expenses decreased as our transitional services agreement with pfizer ended in the fourth quarter of 2018. compensation expense decreased in the current period as incentive bonuses were higher in the prior year due to company performance . legal expenses were higher in the prior year due to expenses incurred related to the contract settlement , discussed below . marketing expenses decreased in the current period as the prior period included additional expenses related to post-acquisition branding efforts . information technology expenses decreased as software maintenance costs decreased in the current period . stock based compensation decreased due to an adjustment for changes in the number of performance shares estimated to vest . depreciation expense increased due to an increase in the depreciable asset base related to the his integration . bad debt expense increased as a result of the quarterly assessment of our reserves related to our accounts receivable . consolidated sg & a expense increased in 2018 , as compared to 2017 , primarily attributable to the impact of the integration of his as we incurred duplicative costs as we added resources to stand up the business that will replace the services provided under the transitional services agreement with pfizer . compensation expense increased $ 19.5 million , information technology expense increased $ 7.7 million , marketing expenses increased $ 4.5 million , legal expenses increased $ 3.5 million , travel expenses increased $ 3.3 million and dealer fees increased $ 2.2 million . offsetting these increases was a $ 23.9 million decrease in consulting expenses and decreases in other miscellaneous expenses . compensation increased due to an increase in headcount from new employees hired to support the company post-acquisition of his . information technology expense increases were due to the his post-acquisition needs to stand up the company . marketing expenses increased primarily due to the continued integration of his and the post-acquisition operational activity . legal expenses increased due to the continued integration of his and legal services needed to support a larger business . travel expense increased as a result of the operational needs of the company . dealer fees increased due to the increase in revenue . we reclassified $ 8.1 million and $ 1.8 million of foreign exchange losses for 2018 and 2017 , respectively , from sg & a to other income ( expense ) , net to conform to our current year reporting of those gains and losses . research and development ( `` r & d '' ) expenses the following table summarizes our total r & d expenses ( in millions , except percentages ) : replace_table_token_13_th r & d expenses decreased slightly in 2019 , as compared to 2018. the current year expense is primarily related to compensation and benefit expenses incurred on our current r & d projects . in 2018 , as compared to 2017 , r & d expenses increased due to post-acquisition operational activity attributable to a larger business and 2017 includes approximately eleven months of r & d expense from the point of closing of the transaction to the end of the year . restructuring , strategic transaction and integration expenses restructuring , strategic transaction and integration expenses were $ 80.6 million , $ 105.4 million and $ 78.0 million in 2019 , 2018 and 2017 , respectively . restructuring charges in 2019 , restructuring charges were $ 8.4 million . these charges were primarily related to a one-time charge to move our u.s. pump service depot to our existing salt lake city facility and other plant restructuring . we expect to pay unpaid restructuring charges as of december 31 , 2019 , in 2020. in 2018 , restructuring charges were $ 4.5 million . these charges were related to ( i ) severance costs from the reduction in our workforce as a result of the continued integration of his . all material charges in regard to these restructuring activities have been paid as of december 31 , 2019. in 2017 , restructuring charges were $ 18.8 million . these charges were related to ( i ) severance costs from the reduction in our workforce needed to eliminate duplicative positions created as a result of the his acquisition and ( ii ) we 37 closed our dominican republic manufacturing facility and incurred expenses associated with the closure and transfer of assets and production to our costa rica and mexico manufacturing facilities . strategic transaction and integration expenses in 2019 , we incurred $ 72.2 million in strategic transaction and integration expenses primarily related to the integration of the his business . integration expenses included a one-time strategic supply chain restructuring charge of $ 22.1 million , which reduces our contracted commitments to our third party manufacturer and we incurred charges related to our final pfizer separation costs and clean-up , which included a $ 12.7 million non-cash write-off of related assets . in 2018 , we incurred $ 100.9 million in strategic transaction and integration expenses primarily related to our continued integration of the his business and it systems . in 2017 , we incurred $ 59.2 million in strategic transaction and integration expenses primarily related to our acquisition of the his business . change in fair value of contingent earn-out in 2019 , the fair value revaluation of our his contingent earn-out liability resulted in a change in value of $ 47.4 million reducing the liability balance to zero . the earn-out period ended on december 31 , 2019 and we did not meet the required performance targets in order to pay out any of the earn-out . in 2018 , the fair value revaluation of our his contingent earn-out liability resulted in a change in fair value of $ 20.4 million . in 2017 , the fair value revaluation of our his contingent earn-out liability resulted in a loss of $ 8.0 million . story_separator_special_tag contract settlement in 2019 and 2018 , we incurred a $ 5.7 million and $ 41.6 million charge , respectively , related to the resolution of a dispute with a product partner , which resulted in a redefinition of our contractual arrangement and in the rights and remedies determined under such arrangement . bargain purchase gain in 2017 , in connection with the his acquisition , we recognized a bargain purchase gain of $ 70.9 million . the bargain purchase gain represented the excess of the estimated fair market value of the identifiable tangible and intangible assets acquired and liabilities assumed , net of deferred tax liabilities over the total purchase consideration . we determined that the bargain purchase gain was primarily attributable to expected restructuring costs as well as a reduction to the initially agreed upon transaction price caused primarily by revenue shortfalls across all market segments of the his business , negative manufacturing variance due to the drop in revenue and higher operating and required stand up costs , when compared to forecasts of the his business at the time that the purchase price was agreed upon . interest expense interest expense was $ 0.5 million , $ 0.7 million and $ 2.0 million in 2019 , 2018 and 2017 , respectively . in 2019 and 2018 , the interest expense was related to amortization of the financing cost incurred in 2017 in connection with the five-year revolving credit facility ( `` credit facility '' ) and a related per annum commitment fee charged on the unused portion of the revolver under such credit facility ( see note 11 , long-term obligations in our accompanying consolidated financial statements for additional information ) . in 2017 , the interest expense was related to ( i ) the $ 75 million seller note from pfizer as part of the his business acquisition and ( ii ) the per annum commitment fee charged on the unused portion of our revolver under the five-year $ 150 million credit facility . the three-year interest only seller note bore interest based on the london interbank offered rate ( `` libor '' ) plus ( i ) 2.25 % per year for the first 12 months , and ( ii ) 2.50 % per annum thereafter . on november 8 , 2017 , we fully repaid the $ 75 million in outstanding principal under the senior note payable to pfizer . 38 the per annum commitment fee is based on consolidated total leverage ratio in effect and can range between 0.15 % to 0.30 % on the unused portion of the credit facility . other income ( expense ) , net other income ( expense ) , net was $ 7.9 million , $ ( 6.7 ) million and $ ( 4.3 ) million in 2019 , 2018 and 2017 , respectively . in 2019 , other income ( expense ) , net was primarily due to interest income of $ 6.8 million related to our banking and investment accounts . in 2018 , other income ( expense ) , net included $ 5.4 million of interest income offset by $ 3.9 million loss on disposal of or write-off of property , plant and equipment and an $ 8.1 million reclassification of foreign exchange losses , net from sg & a to conform to the current year 's presentation . in 2017 , we reclassified $ 1.8 million of foreign exchange losses to other income ( expense ) , net from sg & a . income taxes income taxes were accrued at an estimated annual effective tax rate of 12 % , ( 29 % ) and ( 34 % ) in 2019 , 2018 and 2017 , respectively . on december 22 , 2017 , the tax act was enacted into law , which includes a broad range of provisions affecting businesses . the tax act significantly revises how companies compute their u.s. corporate tax liability by , among other provisions , reducing the corporate tax rate from 35 % to 21 % for tax years beginning after december 31 , 2017. the effective tax rate in 2019 differs from the federal statutory rate of 21 % principally because of the effect of the mix of u.s. and foreign incomes , state income taxes , global intangible low-taxed income ( `` gilti '' ) and tax credits . the effective tax rate for 2019 included a tax benefit of $ 9.6 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period . the effective tax rate for 2019 was also impacted by the repatriation of certain intellectual property and assets from a liquidation of one of our foreign subsidiaries to the u.s. parent . in accordance with the changes to the accounting for income tax effects of such intra-entity transfers of assets , we recorded a net tax benefit of $ 3.8 million related to the liquidation . lastly , the effective tax rate during 2019 included a tax expense of $ 2.2 million related to return-to-provision adjustments for the year ended december 31 , 2018 primarily due to changes in estimates for our u.s. gilti inclusion . the effective tax rate in 2018 differs from the federal statutory rate of 21 % principally because of the effect of the mix of u.s. and foreign incomes , state income taxes and tax credits . the effective tax rate for 2018 included a tax benefit of $ 12.6 million related to the excess tax benefits recognized on stock option exercises and the vesting of restricted stock units during the period . the effective tax rate for 2017 differs from the federal statutory rate of 35 % because of the effect of the mix of foreign and state incomes , state taxes , tax credits , and impact of the gain on bargain purchase . the tax effect of the gain on bargain purchase is treated as a part of purchase accounting and is not a component of the income tax provision .
| product development or acquisition efforts may not succeed , and even if we do develop or acquire additional products , there is no assurance that we will achieve profitable sales of such products . increased expenditures for sales and marketing and product acquisition and development may not yield desired results when expected , or at all . while we have taken steps to control these risks , there are certain risks that may be outside of our control , and there is no assurance that steps we have taken will succeed . seasonality/quarterly results there are no significant seasonal aspects to our business . we can experience fluctuations in net sales as a result of variations in the ordering patterns of our largest customers , which may be driven more by production scheduling and their inventory levels , and less by seasonality . our expenses often do not fluctuate in the same manner as net sales , which may cause fluctuations in operating income that are disproportionate to fluctuations in our revenue . acquisitions on november 2 , 2019 , we acquired 100 % interest in pursuit for total consideration of approximately $ 75.0 million in cash and a potential contingent earn-out of up to $ 50.0 million payable in 2021. see note 2 to the consolidated financial statements in part ii , item 8 of this form 10-k for further details of our acquisitions . we present summarized income statement data in item 6. selected financial data . the following table shows , for the three most recent years , the percentages of each income statement caption in relation to total revenues . replace_table_token_6_th total revenues for 2019 , 2018 and 2017 were $ 1.3 billion , $ 1.4 billion and $ 1.3 billion , respectively . 34 infusion consumables the following table summarizes our total infusion consumables revenue ( in millions , except percentages ) : replace_table_token_7_th infusion consumables revenue decreased in 2019 , as compared to 2018. the decrease was mostly driven by foreign exchange rates . on a constant currency basis , infusion consumables revenue would have been $ 485.8 million for 2019 , an increase of
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in january 2014 , we acquired dr. pave , llc a service company offering asphalt repair and restoration utilizing the heatwurx asphalt repair technology . dr. pave , offered asphalt restoration services to municipalities and the commercial sector in southern california . effective july 22 , 2014 , we established a new entity named dr. pave worldwide llc to house our franchise program providing franchisees with the exclusive heatwurx equipment and processing . we formally launched our franchise sales program throughout the u.s. in the third quarter of 2014 ; however , to date , no franchises have been sold . the company has decided not to renew its franchise registrations throughout the u.s. do to the extensive costs . during 2015 , we began offering license agreements , which grants a license of all heatwurx equipment and supplies and the use of the heatwurx intellectual property within a specified territory . we have one licensee as of december 31 , 2015. during 2015 we are no longer receiving financial support and we do not believe we will be able to obtain financing from another source . we do not believe we are able to achieve a level of revenues adequate to support our cost structure . do to the slow growth in the service sector and the high cost of the franchise registrations , we have decided to discontinue the operations of dr. pave , llc and dr. pave worldwide llc . in addition , we have significantly scaled back operations to maintain only a minimal level of operations necessary to support our licensee , warehouse the equipment held for the licensee and look for potential merger candidates . during 2015 , the company entered into a letter of intent with the licensee to sell all remaining equipment and inventory warehoused in the gardena location . based upon the company 's current financial position , the company does not believe it will be able to satisfy the mandatory principal payments in 2016. the company will work with the lenders to explore extension or conversion options . there is no guarantee the lenders will accommodate our requests . as of december 31 , 2015 ; principal in the amount of $ 947,361 is outstanding and payable within six months under the secured notes . these notes are secured by all of the assets of the company , including intellectual property rights . we are in default in regards to interest payments on the notes , and as a result the company 's assets may be foreclosed upon . 18 the issues described above raise substantial doubt about the company 's ability to continue as a going concern . it is our intention to move forward as a public entity and to seek potential merger candidates . if the company fails to merge or be acquired by another company , we will be required to terminate all operations . section 107 of the jobs act provides that an emerging growth company can take advantage of the extended transition period provided in section 7 ( a ) ( 2 ) ( b ) of the securities act for complying with new or revised accounting standards . in other words , an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies . however , we are choosing to opt out of such extended transition period , and as a result , we will comply with new or revised standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies . section 107 of the jobs act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable . results of operations for the year ended december 31 , 2015 compared to year ended december 31 , 2014 for the year ended december 31 , 2015 , our net loss was $ 2,982,920 , compared to a net loss of $ 3,685,601 , for the year ended december 31 , 2014. further description of these losses is provided below . revenue revenue increased slightly to approximately $ 113,000 for the year ended december 31 , 2015 from approximately $ 107,000 for the year ended december 31 , 2014 as a result of increased consumables sales ; offset by equipment discounts . our consumables consist of our proprietary blend of polymer pellets used to strengthen the repair when mixed in to the recycled asphalt product ; and rxehab rejuvenation strips which is an oil-based product which creates the binding agent for the asphalt repair . cost of goods sold cost of goods sold increased to approximately $ 126,000 for the year ended december 31 , 2015 from $ 67,000 for the year ended december 31 , 2014 , due to increased consumable sales and significant sales discounts issued on our equipment ; generating a negative gross profit . selling , general and administrative selling , general and administrative expenses decreased to approximately $ 945,000 for the year ended december 31 , 2015 from approximately $ 2,020,000 for the year ended december 31 , 2014. the decrease in selling , general and administrative expenses is principally due to the significant reduction in operating activities which include a decrease in employee expenses of approximately $ 601,000 ; a decrease in travel and office expenses of approximately $ 236,000 which includes commercial insurance , rent and other expenses ; a decrease in advertising and promotion of approximately $ 205,000 ; and a decrease in legal and investor relations expenses of $ 36,000 , offset by an increase in bad debt expense of $ 5,000. impairment of assets held for sale as part of the strategy to keep operations running at minimum capacity , we have chosen to sell assets or return story_separator_special_tag collateralized assets to relieve the debt , which are not critical to the continued operations and support of our licensee . the items we consider critical will be our heatwurx branded products , the hwx-30 heater ; hwx-30s heater , hwx-ap40 processor , which are held for our licensee and included in assets held for sale . we have reclassified assets for sale from equipment or inventory and recognized an impairment loss when the carrying amount of the assets exceeds its fair value . during the year ended december 31 , 2015 we recognized an impairment on assets held for sale in the amount of $ 186,068. based on our current financial condition and the inability to obtain financing ; we are unable to pursue the necessary commercialization activities to drive us to profitability . we have therefore estimated no future cash flows related to the intangible assets and have recognized an impairment of intangible assets in the amount of $ 1,517,859 for the year ended december 31 , 2015 . 19 loss on extinguishment of debt during the year ended december 31 , 2014 the company settled notes with a net carrying value of $ 1,684,778 with the issuance of 1,100,876 common shares and granted warrants to purchase 550,438 shares of common stock . the common shares and warrants had a total fair value of $ 2,506,872. the company recognized the difference between the fair value of the common shares and warrants and the net carrying amount of the extinguished debt as a loss of $ 822,205 on the extinguishment of unsecured notes payable during the year ended december 31 , 2014. impairment of goodwill as part of the acquisition of dr. pave in 2014 , we recognized goodwill in the amount of $ 390,659 as part of the total consideration paid , which is included in discontinued operations . we determined goodwill should be immediately impaired as of the acquisition date based on the lack of service revenue for the prior year . an impairment of goodwill from the acquisition in the amount of $ 390,659 , was recorded as an operating expense from discontinued operations in the income statement , during the year ended december 31 , 2014. research and development research and development decreased to approximately $ 29,000 for the year ended december 31 , 2015 from approximately $ 178,000 for the year ended december 31 , 2014 , as a result of fewer patent applications being filed thereby reducing the legal fees associated therewith , a decrease in manufacturing research and development costs , and a decrease in consulting fees . we currently have six issued u.s. patents : five utility patents and one design patent . we have two pending u.s. patent applications and three foreign patent applications . three issued utility patents , us patent nos . 8,556,536 ; 8,562,247 and 8,714,871 were issued on oct. 15 , 2013 , oct. 24 , 2013 , and may 6 , 2014 , respectively and cover certain unique device and method of use aspects of our asphalt repair equipment . our design patent , us patent no . d700,633 , was issued on march 4 , 2014 and covers the ornamental design of our asphalt processor . u.s. patent no . 8,801,325 issued august 12 , 2014 and covers aspects of our computer-controlled asphalt heater . u.s. patent no . 9,022,686 was issued may 5 , 2015 and covers complementary features of our computer-controlled asphalt heater . we intend to protect our intellectual property rights in the united states and in a limited number of countries outside of the united states . however , we do not have any assurance that our current pending patent applications will be granted or that we will be able to develop future patentable technologies . we do not believe our ability to operate our business is dependent on the patentability of our technology . income taxes we have incurred tax losses since we began operations . a tax benefit would have been recorded for losses incurred since march 29 , 2011 ; however , due to the uncertainty of realizing these assets , a valuation allowance was recognized which fully offset the deferred tax assets . liquidity and capital resources story_separator_special_tag such as rxehab rejuvenation strips and polymer pellets , to third parties . equipment sales revenue is recognized when all of the following criteria are satisfied : ( a ) persuasive evidence of a sales arrangement exists ; ( b ) price is fixed and determinable ; ( c ) collectability is reasonably assured ; and ( d ) delivery has occurred . persuasive evidence of an arrangement and a fixed or determinable price exist once we receive an order or contract from a customer . we assess collectability at the time of the sale and if collectability is not reasonably assured , the sale is deferred and not recognized until collectability is probable or payment is received . typically , title and risk of ownership transfer when the equipment is shipped . research and development expenses research and development costs are expensed as incurred and consist of direct and overhead-related expenses . expenditures to acquire technologies , including licenses , which are utilized in research and development and that have no alternative future use are expensed when incurred . technology we develop for use in our products is expensed as incurred until technological feasibility has been established after which it is capitalized and depreciated . stock-based compensation we record equity instruments at their fair value on the measurement date by utilizing the black-scholes option-pricing model . stock compensation for all share-based payments , is recognized as an expense over the requisite service period .
| each unit consisted of one common share and one-half warrant , with each whole warrant exercisable at $ 2.00 per share . the purchase price for the units was payable in either cash , conversion of outstanding series d preferred shares or certain outstanding promissory notes . for the year ended december 31 , 2015 , we raised cash proceeds of $ 88,000 and issued 50,285 shares of common stock and warrants to purchase 25,141 shares of common stock as part of the private equity offering . on february 16 , 2015 , we entered into a senior secured loan agreement with jmw fund , richland fund , and san gabriel fund ( collectively , the lenders ) whereby the lenders agreed to loan to us up to an aggregate of $ 2,000,000. the interest rate on the notes is 12 % per annum and monthly interest payments are due the first day each month beginning march 1 , 2015. the notes mature six months from the date of issuance . if any interest payment remains unpaid in excess of 90 days , and the lender has not declared the entire principal and unpaid accrued interest due and payable , the interest rate on that amount only will be increased to 18 % per annum , until the past due interest amount is paid in full . the notes and any future notes under the loan agreement are secured by all of the assets of the company , including intellectual property rights . during the year ended december 31 , 2015 , we have issued notes with an aggregate principal amount of $ 947,361. we received $ 80,000 in short-term unsecured notes in january 2015 ; which were converted on february 23 , 2015 into senior secured notes payable under the $ 2 million loan agreement as described above , and included above in the aggregate principal amount . in addition , on february 23 , 2015 we converted the outstanding $ 20,000 short-term unsecured note , entered into during december 2014 , into a senior secured note payable under
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in its report on our financial statements for the year ended december 31 , 2014 , our independent registered public accounting firm included an explanatory paragraph expressing substantial doubt regarding our ability to continue as a going concern . technology acquisition agreement in june 2007 , we acquired all worldwide rights , data , patents and other related assets associated with evk-001 from questcor pursuant to an asset purchase agreement . we paid questcor $ 650,000 in the form of an upfront payment and $ 500,000 in may 2014 as a milestone payment based upon the initiation of the first patient dosing in our phase 3 clinical trial for evk-001 . in august 2014 , mallinckrodt acquired questcor . as a result of that acquisition , questcor transferred its rights included in the asset purchase agreement with us to mallinckrodt . in addition to the payments we made to questcor , we may also be required to make additional milestone payments totaling up to $ 51.5 million . these milestones include up to $ 4.5 million in payments if evk-001 achieves the following development targets : ● $ 1.5 million upon the fda 's acceptance for review of an nda for evk-001 ; and ● $ 3 million upon the fda 's approval of evk-001 . the remaining $ 47 million in milestone payments depend on evk-001 's commercial success and will only apply if evk-001 receives regulatory approval . in addition , we will be required to pay to mallinckrodt a low single digit royalty on net sales of evk-001 . our obligation to pay such royalties will terminate upon the expiration of the last patent right covering evk-001 , which is expected to occur in 2030. initial public offering in september 2013 , we completed our initial public offering , or ipo , whereby we issued and sold 2,100,000 shares of common stock at a public offering price of $ 12.00 per share . concurrently with the completion of the ipo , all outstanding shares of convertible preferred stock were converted into 2,439,002 shares of our common stock . in addition , warrants to purchase 84,000 shares of our common stock were issued to the representative of the underwriters of our ipo and certain of its affiliates . the warrants became exercisable at a price of $ 21.00 per share beginning on september 24 , 2014 and will expire on september 24 , 2018. finally , warrants to purchase 110,000 shares of convertible preferred stock were converted into warrants to purchase 22,000 shares of our common stock . in october 2013 , the underwriters for our ipo exercised an option to purchase 315,000 additional shares of common stock at $ 12.00 per share . total net proceeds from the ipo , after deducting underwriter discounts , commissions and other offering expenses of $ 3.9 million , were $ 25.1 million . financial operations overview research and development expenses we expense all research and development expenses as they are incurred . research and development expenses primarily include : ● clinical trial and regulatory-related costs ; ● expenses incurred under agreements with cros , investigative sites and consultants that conduct our clinical trials ; ● manufacturing and stability testing costs and related supplies and materials ; and ● employee-related expenses , including salaries , benefits , travel and stock-based compensation expense . all of our research and development expenses to date have been incurred in connection with evk-001 . we expect our research and development expenses to increase for the foreseeable future as we advance evk-001 through clinical development , including the conduct of our ongoing phase 3 clinical trial . the process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming . we are unable to estimate with any certainty the costs we will incur in the continued development of evk-001 . however , we currently estimate that the costs to complete our phase 3 clinical trial in women and our companion clinical trial in men will be approximately $ 16.5 million , of which , through december 31 , 2014 , $ 7.8 million have been incurred related to those clinical activities . clinical development timelines , the probability of success and development costs can differ materially from expectations . we may never succeed in achieving marketing approval for our product candidate . the costs of clinical trials may vary significantly over the life of a project owing to , but not limited to , the following : ● per patient trial costs ; ● the number of sites included in the trials ; ● the countries in which the trials are conducted ; 45 ● the length of time required to enroll eligible patients ; ● the number of patients that participate in the trials ; ● the number of doses that patients receive ; ● the cost of comparative agents used in trials ; ● the drop-out or discontinuation rates of patients ; ● potential additional safety monitoring or other studies requested by regulatory agencies ; ● the duration of patient follow-up ; and ● the efficacy and safety profile of the product candidate . we do not expect evk-001 to be commercially available , if at all , for the next few years . general and administrative expenses general and administrative expenses consist primarily of salaries and related benefits , including stock-based compensation . other general and administrative expenses include professional fees for accounting , tax , patent costs , legal services , insurance , facility costs and costs associated with being a publicly-traded company . we expect that general and administrative expenses will increase in the future as we expand our operating activities and incur additional costs associated with being a publicly-traded company and maintaining compliance with exchange listing and securities and exchange commission requirements . these increases will likely include higher consulting costs , legal fees , accounting fees , directors ' and officers ' liability insurance premiums and fees associated with investor relations . story_separator_special_tag total other expense total other expense consists primarily of interest income we earn on interest-bearing accounts and money market funds for cash and cash equivalents , interest expense incurred on our outstanding debt and changes in the fair value of our warrant liability . critical accounting policies and significant judgments and estimates our management 's discussion and analysis of our financial condition and results of operations is based on our financial statements , which we have prepared in accordance with generally accepted accounting principles in the united states , or gaap . the preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements , as well as the reported revenues and expenses during the reporting periods . we evaluate these estimates and judgments on an ongoing basis . we base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances , the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources . our actual results may differ materially from these estimates under different assumptions or conditions . while our significant accounting policies are more fully described in note 2 to our financial statements appearing elsewhere in this annual report on form 10-k , we believe that the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations . accrued research and development expenses as part of the process of preparing financial statements , we are required to estimate and accrue expenses , the largest of which are research and development expenses . this process involves the following : ● communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost ; ● estimating and accruing expenses in our financial statements as of each balance sheet date based on facts and circumstances known to us at the time ; and ● periodically confirming the accuracy of our estimates with selected service providers and making adjustments , if necessary . 46 examples of estimated research and development expenses that we accrue include : ● fees paid to cros in connection with toxicology studies and clinical studies ; ● fees paid to investigative sites in connection with clinical studies ; ● fees paid to cmos in connection with the production of clinical study materials ; and ● professional service fees for consulting and related services . we base our expense accruals related to clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and cros that conduct and manage clinical studies on our behalf . the financial terms of these agreements vary from contract to contract and may result in uneven payment flows . payments under some of these contracts depend on factors such as the successful enrollment of patients , site initiation and the completion of clinical study milestones . our service providers invoice us monthly in arrears for services performed . in accruing service fees , we estimate the time period over which services will be performed and the level of effort to be expended in each period . if we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services , our actual expenses could differ materially from our estimates . to date , we have not experienced significant changes in our estimates of accrued research and development expenses after a reporting period . however , due to the nature of estimates , we can not assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical studies and other research activities . stock-based compensation stock-based compensation expense is recorded at the estimated fair value of the award as of the grant date and is recognized as expense on a straight-line basis over the employee 's requisite service period , which is generally the vesting period of the award . stock-based compensation expense is based on awards ultimately expected to vest , and therefore , the recorded expense includes an estimate of future forfeitures . forfeitures are to be estimated at the time of grant and revised , if necessary , in subsequent periods if actual forfeitures differ from those estimates . prior to the ipo , we granted stock options to purchase common stock to employees with exercise prices equal to the value of the underlying stock , as determined by the board of directors on the date the equity award was granted . the board of directors determined the fair value of the underlying common stock by considering a number of factors , including historical and projected financial results , the risks we faced at the time , the preferences of our preferred stockholders and the lack of liquidity of our common stock . subsequent to the ipo , the exercise price of the stock options granted to our employees and members of our board of directors was determined by the closing market price of our stock on the date the stock options were granted . the fair value of each option award is estimated on the date of grant using the black-scholes valuation model using the appropriate risk-free interest rate , expected term and volatility assumptions . the expected life of options was calculated using the simplified method , which calculates the life as the average of the contractual term of the stock option and the vesting period of the option .
| general and administrative expenses . general and administrative expenses for the year ended december 31 , 2014 compared to the year ended december 31 , 2013 increased by approximately $ 1.5 million primarily due to general and administrative activities expanding subsequent to our ipo . costs incurred in 2014 primarily included approximately $ 1.5 million for wages , taxes and employee insurance , including $ 692,000 of stock-based compensation expense as we added general and administrative personnel subsequent to our ipo , and approximately $ 1.4 million for legal , accounting , directors and officers liability insurance and other costs associated with being a public company . for 2013 , general and administrative costs primarily consisted of approximately $ 997,000 for wages , taxes and benefits , including the payment of $ 355,000 for retention payments to the executive team , and approximately $ 445,000 for legal , accounting , directors and officers liability insurance and other costs associated with being a public company . in 48 addition , during the first quarter of 2013 , the 2012 bonus accrual was reversed due to the election by our board of directors to not pay 2012 bonuses in order to conserve cash . other income ( expense ) . other income ( expense ) for the year ended december 31 , 2014 primarily related to approximately ( $ 52,000 ) of net interest expense incurred related to our bank loans and the write-off of approximately ( $ 46,000 ) of unamortized debt discount costs upon the repayment of the loan extended to us by silicon valley bank . other income ( expense ) for the year ended december 31 , 2013 primarily consisted of approximately $ 153,000 of net interest expense related to advances under our bank loan and $ 82,000 of expenses related to the increase in the fair value of our outstanding warrant liability in effect prior to our ipo . liquidity and capital resources since our inception in 2007 , we have funded
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we generally recognize revenue at the time of shipment of our products ; however , for some of our highly engineered structural precast products , we recognize revenue on a percentage of completion method , which amounted to $ 31.8 million in 2019. most of our products are sold on a one-off basis , with volumes and prices determined frequently based on market participants ' perceptions of short-term supply and demand factors . a shortage of capacity or excess capacity in the industry , or in the regions where we have operations , or the behavior of our competitors , can each result in significant increases or decreases in market prices for these products , often within a short period of time . by contrast , our project-driven business involves highly engineered and customized products with a wide range of contract values . the products for these projects are engineered , manufactured and delivered on the basis of contracts that tend to extend over periods of several months or , in some cases , several years . the timing of the commencement of a project and the progress and completion of work under a contract , therefore , can have a significant effect on our results of operations for a particular period . 41 average selling prices the average selling prices we are able to obtain for our products affect our results of operations and our margins . our average selling price can vary by market location , particularly in our drainage pipe and products segment , product mix , factors relating to supply and demand , and the actions of our customers and competitors . cost of goods sold costs of raw material and other inputs , supplies , labor ( including contract labor ) , freight and energy constitute a large portion of our cost of goods sold , and fluctuations in the prices of these materials and inputs affect our results of operations and , in particular , our margins . our primary raw materials in our drainage pipe and products segment are cement , aggregates , and steel . we typically negotiate contracts with suppliers of these materials for one to three years , with prices subject to annual revisions . the primary input in our water business is scrap steel , which we purchase on the spot market , and its costs can vary significantly from period to period . we do not generally hedge our raw material purchases but rather utilize our product pricing strategy to manage our exposure to fluctuations in our raw material costs . seasonality and weather conditions the construction industry , and therefore demand for our products , is typically seasonal and highly dependent on weather conditions , with periods of snow or heavy rain negatively affecting construction activity . because the majority of our products are buried underground , we experience lower demand for our products in periods of cold weather , particularly during winter , and periods of excessive rain or flooding . these types of conditions or other unfavorable weather conditions generally lead to seasonal fluctuations in our quarterly financial results . historically , our net sales in the second and third quarters have been higher than in the other quarters of the year , particularly the first quarter . in addition , unfavorable weather conditions , such as hurricanes or severe storms , or public holidays during peak construction periods can result in temporary cessation of projects and a material reduction in demand for our products and consequently have an adverse effect on our net sales . results of a fiscal quarter may therefore not be a reliable basis for the expectations of a full fiscal year and may not be comparable with the results in the other fiscal quarters in the same year or prior years . our business strategy our strategy is focused on continued execution of our commercial and operational excellence programs in both our businesses aimed at expanding unit margins for our products as well as a commitment to strengthening our capital structure through a combination of working capital improvement , debt repayment and prudent investment in the business . prudent investment in the business includes growth capital expenditures in projects and smaller acquisitions . we are focused on generating cash flow in 2020 , a portion of which is expected be utilized to make voluntary repayments on our term loan . principal components of results of operations net sales net sales consist of the consideration received or receivable for the sale of products in the ordinary course of business and include the billable costs of delivery of our products to customers , net of discounts given to the customer . net sales include any outbound freight charged to the customer . revenue on certain long-term engineering and construction contracts for our structural precast and products that are designed and engineered specifically for the customer is recognized under the percentage-of completion method . see note 2 to our consolidated financial statements . 42 cost of goods sold cost of goods sold includes raw materials and other inputs ( cement , aggregates , scrap , steel and clay ) and supplies , labor ( including contract labor ) , freight ( including outbound freight for delivery of products to end users and other charges such as inbound freight ) , energy , depreciation and amortization , repairs and maintenance and other cost of goods sold . selling , general and administrative expenses selling , general and administrative expenses include expenses for sales , marketing , legal , accounting and finance services , human resources , customer support , treasury and other general corporate services . selling , general and administrative expenses also include transaction costs directly related to business combinations . story_separator_special_tag earnings from equity method investee earnings from equity method investee represents our share of the income of the cp & p joint venture we entered into with americast , inc. cp & p is engaged primarily in the manufacture , marketing , sale and distribution of concrete pipe and precast products in virginia , west virginia , maryland , north carolina , pennsylvania and south carolina with sales to contiguous states . gain on sale of property , plant and equipment , net gain on sale of property , plant and equipment , net includes the net gain or loss on the sale of assets including property , plant and equipment . other operating income the remaining categories of operating income and expenses consist of scrap income ( associated with scrap from the manufacturing process or remaining scrap after plants are closed ) , insurance gains , and rental income . interest expense interest expense represents interest on the indebtedness . income tax ( expense ) benefit income tax expense consists of federal , state , provincial , local and foreign taxes based on income in the jurisdictions in which we operate . 43 results of operations year ended december 31 , 2019 as compared to the year ended december 31 , 2018 total company the following table summarizes certain financial information relating to our operating results for the years ended december 31 , 2019 and december 31 , 2018 ( in thousands ) . replace_table_token_2_th * represents positive or negative change in excess of 100 % net sales net sales for the year ended december 31 , 2019 were $ 1,529.8 million , an increase of $ 50.1 million or 3.4 % from $ 1,479.7 million for the year ended december 31 , 2018 . the increase was primarily due to higher shipment volumes in our drainage pipe & products segment and higher average selling prices in both segments , partially offset by lower shipment volumes in our water pipe & products segment . cost of goods sold cost of goods sold for the year ended december 31 , 2019 were $ 1,233.4 million , a decrease of $ 0.7 million or 0.1 % from $ 1,234.1 million for the year ended december 31 , 2018 . lower shipment volumes and lower cost of scrap metal in our water pipe & products segment , were mostly offset by higher shipment volumes in our drainage pipe & products segment . gross profit gross profit in the year ended december 31 , 2019 was $ 296.4 million , an increase of $ 50.8 million , or 20.7 % , from $ 245.6 million in the year ended december 31 , 2018 . gross profit increased primarily due to higher shipment volumes in our drainage pipe & products segment , higher average selling prices in both segments , and lower raw material costs in our water pipe & products segment . 44 selling , general and administrative expenses selling , general and administrative expenses in the year ended december 31 , 2019 were $ 221.8 million , an increase of $ 11.9 million or 5.7 % from $ 209.9 million in the year ended december 31 , 2018 . the increase was primarily due to higher it costs as we invest in our systems and processes , increased expenses related to various disputes and claims in the ordinary course of our business , increased reserves for credit losses , as well as a $ 3.7 million executive severance charge primarily related to the change in ceo in 2019. impairment and exit charges impairment and exit charges in the year ended december 31 , 2019 were $ 3.5 million , compared to $ 4.3 million in the year ended december 31 , 2018 . the exit charges in both years primarily related to plant closings undertaken for purposes of achieving operating efficiencies . other operating income other operating income for the year ended december 31 , 2019 was $ 1.1 million , compared to $ 9.5 million in the prior year period . the income in the 2018 period primarily related to gains from the disposition of certain property , plant and equipment . interest expense interest expense in the year ended december 31 , 2019 was $ 95.0 million , an increase of $ 16.7 million , or 21.2 % , from $ 78.3 million in the year ended december 31 , 2018 . the interest expense in 2019 included $ 7.8 million resulting from the change in the classification of certain leases from operating lease to finance lease as the result of the amendment and restatement of our sale-leaseback transaction completed in june 2018. in addition , $ 7.8 million of the change related to the increase in interest expense due to the mark-to-market on the interest rate swaps year over year . the remainder of the interest expense increase was primarily due to the impact of higher average interest rates . other income , net other income , net of $ 6.0 million for the year ended december 31 , 2018 related to the gain from a divestiture transaction that was completed in february 2018 . income tax ( expense ) benefit income tax benefit in the year ended december 31 , 2019 was $ 3.3 million , a change of $ 6.4 million from an income tax expense of $ 3.1 million in the year ended december 31 , 2018 . the change is primarily due to the benefit of the favorable valuation allowance movement between the two years that was partially offset with the tax expense recorded on the greater pre-tax earnings in the year ended december 31 , 2019 compared to the prior year . 45 story_separator_special_tag style= '' font-family : helvetica , sans-serif ; font-size:10pt ; color : # 000000 ; font-style : italic ; '' > other operating income other operating income for the year ended december 31 , 2018 was $ 9.5 million , compared to $ 5.2 million in the prior year period .
| year ended december 31 , 2018 as compared to the year ended december 31 , 2017 total company the following table summarizes certain financial information relating to our operating results for the years ended december 31 , 2018 and december 31 , 2017 ( in thousands ) . replace_table_token_4_th * represents positive or negative change in excess of 100 % net sales net sales for the year ended december 31 , 2018 were $ 1,479.7 million , a decrease of $ 100.7 million or 6.4 % from $ 1,580.4 million for the year ended december 31 , 2017 . the decrease is primarily due to the divestiture of our u.s. concrete and steel pressure pipe business in july 2017 , which contributed $ 72.7 million in net sales in 2017 , and the foley transaction , which resulted in a $ 42.3 million decline in net sales . excluding the impact of these two transactions , our net sales grew approximately $ 14.3 million , or 0.9 % due primarily to higher average selling prices . cost of goods sold cost of goods sold were $ 1,234.1 million for the year ended december 31 , 2018 , a decrease of $ 93.2 million or 7.0 % from $ 1,327.3 million in the year ended december 31 , 2017 . the decrease is due to the divestiture of our u.s. concrete and steel pressure pipe business , which resulted in a $ 80.2 million decline in cost of goods sold , as well as the foley transaction , which resulted in a $ 33.2 million decline in cost of goods sold . costs of 47 goods sold in our existing businesses increased by $ 20.2 million , or 1.5 % , due to the higher cost of labor , freight , and raw materials . gross profit gross profit decreased by $ 7.5 million , or 3.0 % , to $ 245.6 million in the year ended december 31 , 2018 from $ 253.1 million in the
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the company is not currently engaged in the use of any of these arrangements . impact of inflation the company believes that inflation has not had a material effect on its manufacturing operations , because increased costs to date have been passed on to its customers . under the terms of its overnight air cargo business contracts the major cost components of its operations , consisting principally of fuel , crew and other direct operating costs , and certain maintenance costs are reimbursed by its customer . significant increases in inflation rates could , however , have a material impact on future revenue and operating income . seasonality ggs 's business has historically been seasonal . the company has continued its efforts to reduce ggs 's seasonal fluctuation in revenues and earnings by increasing military and international sales and broadening its product line to increase revenues and earnings throughout the year . in june 1999 , ggs was awarded a four-year contract to supply deicing equipment to the united states air force , and subsequently was awarded two three-year extensions on the contract , which expired in june 2009. in july 2009 , ggs was awarded a new one-year contract with the united states air force with four additional one-year extension options . although sales remain somewhat seasonal , particularly with regard to commercial deicers which typically are delivered prior to the winter season , this diversification has lessened the seasonal impacts in the past when sales under the contract with the united states air force were a significant component of the company 's revenues . if sales to the united states air force do not continue to be a significant component of ggs 's sales , seasonal patterns of revenues and earnings attributable to its commercial deicer business may resume . the overnight air cargo and ground support services segments are not susceptible to seasonal trends . critical accounting policies and estimates the company 's significant accounting policies are more fully described in note 1 of notes to the consolidated financial statements in item 8. the preparation of the company 's financial statements in conformity with accounting principles generally accepted in the united states requires the use of estimates and assumptions to determine certain assets , liabilities , revenues and expenses . management bases these estimates and assumptions upon the best information available at the time of the estimates or assumptions . the company 's estimates and assumptions could change materially as conditions within and beyond our control change . accordingly , actual results could differ materially from estimates . the company believes that the following are its most significant accounting policies : allowance for doubtful accounts . an allowance for doubtful accounts receivable is established based on management 's estimates of the collectability of accounts receivable . the required allowance is determined using information such as customer credit history , industry information , credit reports , customer financial condition and the collectability of outstanding accounts receivables . the estimates can be affected by changes in the financial strength of the aviation industry , customer credit issues or general economic conditions . inventories . the company 's parts inventories are valued at the lower of cost or market . provisions for excess and obsolete inventories are based on assessment of the marketability of slow-moving and obsolete inventories . historical parts usage , current period sales , estimated future demand and anticipated transactions between willing buyers and sellers provide the basis for estimates . estimates are subject to volatility and can be affected by reduced equipment utilization , existing supplies of used inventory available for sale , the retirement of aircraft or ground equipment and changes in the financial strength of the aviation industry . warranty reserves . the company warranties its ground equipment products for up to a three-year period from date of sale . product warranty reserves are recorded at time of sale based on the historical average warranty cost and are adjusted as actual warranty cost becomes known . income taxes . income taxes have been provided using the liability method . deferred income taxes reflect the net affects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes using enacted rates expected to be in effect during the year in which the basis differences reverse . 15 revenue recognition . cargo revenue is recognized upon completion of contract terms . maintenance and ground support services revenue is recognized when the service has been performed . revenue from product sales is recognized when contract terms are completed and ownership has passed to the customer . recent accounting pronouncements we do not believe there are any recently issued accounting standards that have not yet been adopted that will have a material impact on the company 's financial statements . forward looking statements certain statements in this report , including those contained in “ overview , ” are “ forward-looking ” statements within the meaning of the private securities litigation reform act of 1995 with respect to the company 's financial condition , results of operations , plans , objectives , future performance and business . forward-looking statements include those preceded by , followed by or that include the words “ believes ” , “ pending ” , “ future ” , “ expects , ” “ anticipates , ” “ estimates , ” “ depends ” or similar expressions . these forward-looking statements involve risks and uncertainties . actual results may differ materially from those contemplated by such forward-looking statements , because of , among other things , potential risks and uncertainties , such as : · economic conditions in the company 's markets ; · the risk that contracts with fedex could be terminated ; · the risk that the number of aircraft operated for fedex will be further reduced ; · the risk that the united states air force will continue to story_separator_special_tag the company is not currently engaged in the use of any of these arrangements . impact of inflation the company believes that inflation has not had a material effect on its manufacturing operations , because increased costs to date have been passed on to its customers . under the terms of its overnight air cargo business contracts the major cost components of its operations , consisting principally of fuel , crew and other direct operating costs , and certain maintenance costs are reimbursed by its customer . significant increases in inflation rates could , however , have a material impact on future revenue and operating income . seasonality ggs 's business has historically been seasonal . the company has continued its efforts to reduce ggs 's seasonal fluctuation in revenues and earnings by increasing military and international sales and broadening its product line to increase revenues and earnings throughout the year . in june 1999 , ggs was awarded a four-year contract to supply deicing equipment to the united states air force , and subsequently was awarded two three-year extensions on the contract , which expired in june 2009. in july 2009 , ggs was awarded a new one-year contract with the united states air force with four additional one-year extension options . although sales remain somewhat seasonal , particularly with regard to commercial deicers which typically are delivered prior to the winter season , this diversification has lessened the seasonal impacts in the past when sales under the contract with the united states air force were a significant component of the company 's revenues . if sales to the united states air force do not continue to be a significant component of ggs 's sales , seasonal patterns of revenues and earnings attributable to its commercial deicer business may resume . the overnight air cargo and ground support services segments are not susceptible to seasonal trends . critical accounting policies and estimates the company 's significant accounting policies are more fully described in note 1 of notes to the consolidated financial statements in item 8. the preparation of the company 's financial statements in conformity with accounting principles generally accepted in the united states requires the use of estimates and assumptions to determine certain assets , liabilities , revenues and expenses . management bases these estimates and assumptions upon the best information available at the time of the estimates or assumptions . the company 's estimates and assumptions could change materially as conditions within and beyond our control change . accordingly , actual results could differ materially from estimates . the company believes that the following are its most significant accounting policies : allowance for doubtful accounts . an allowance for doubtful accounts receivable is established based on management 's estimates of the collectability of accounts receivable . the required allowance is determined using information such as customer credit history , industry information , credit reports , customer financial condition and the collectability of outstanding accounts receivables . the estimates can be affected by changes in the financial strength of the aviation industry , customer credit issues or general economic conditions . inventories . the company 's parts inventories are valued at the lower of cost or market . provisions for excess and obsolete inventories are based on assessment of the marketability of slow-moving and obsolete inventories . historical parts usage , current period sales , estimated future demand and anticipated transactions between willing buyers and sellers provide the basis for estimates . estimates are subject to volatility and can be affected by reduced equipment utilization , existing supplies of used inventory available for sale , the retirement of aircraft or ground equipment and changes in the financial strength of the aviation industry . warranty reserves . the company warranties its ground equipment products for up to a three-year period from date of sale . product warranty reserves are recorded at time of sale based on the historical average warranty cost and are adjusted as actual warranty cost becomes known . income taxes . income taxes have been provided using the liability method . deferred income taxes reflect the net affects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes using enacted rates expected to be in effect during the year in which the basis differences reverse . 15 revenue recognition . cargo revenue is recognized upon completion of contract terms . maintenance and ground support services revenue is recognized when the service has been performed . revenue from product sales is recognized when contract terms are completed and ownership has passed to the customer . recent accounting pronouncements we do not believe there are any recently issued accounting standards that have not yet been adopted that will have a material impact on the company 's financial statements . forward looking statements certain statements in this report , including those contained in “ overview , ” are “ forward-looking ” statements within the meaning of the private securities litigation reform act of 1995 with respect to the company 's financial condition , results of operations , plans , objectives , future performance and business . forward-looking statements include those preceded by , followed by or that include the words “ believes ” , “ pending ” , “ future ” , “ expects , ” “ anticipates , ” “ estimates , ” “ depends ” or similar expressions . these forward-looking statements involve risks and uncertainties . actual results may differ materially from those contemplated by such forward-looking statements , because of , among other things , potential risks and uncertainties , such as : · economic conditions in the company 's markets ; · the risk that contracts with fedex could be terminated ; · the risk that the number of aircraft operated for fedex will be further reduced ; · the risk that the united states air force will continue to
| while ggs was able to renew the deicer contract with the air force in july 2010 , ggs did not deliver any orders under this contract during fiscal 2011. revenues from domestic commercial customers increased to 63 % of ggs revenues in fiscal 2011 compared to 31 % in the prior year . in november 2010 , ggs was awarded a contract to provide $ 10.5 million of deicing trucks and training simulators to the city of charlotte , north carolina , for use at the charlotte douglas international airport . as of march 31 , 2011 , ggs had delivered $ 9.3 million of units under the contract with the remainder delivered in the first quarter of fiscal 2012. and finally , revenues from international customers increased to 33 % of ggs revenues in fiscal 2011 compared to 18 % in the prior year . ggs 's gross margin percentage was dramatically affected by these changes in customer base as the commercial business , both domestically and internationally , has been a highly competitive environment . in addition , the air force work allowed us to be much more flexible in our deliveries and production , which contributed to greater efficiencies and a lower overall cost structure . during the year ended march 31 , 2011 , revenues from our gas subsidiary totaled $ 8,218,000 , representing a $ 950,000 ( 10 % ) decrease from the prior year . in july 2010 , after a highly competitive bidding process , gas was notified of changes to its contract with delta airlines , which has resulted in a significant reduction in the scope of work performed for delta , principally beginning in september 2010. the services that were reduced , which included the elimination of services at gas 's largest delta location , accounted for almost half of gas 's historical revenues and a greater proportion of its operating income . the impact of the reductions is reflected in the operating results for the second half of fiscal
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impairment is defined as the amount by which the implied fair value of the goodwill is less than the goodwill 's carrying value . impairment losses , if incurred , would be charged to operating expense . for the purposes of evaluating goodwill , the company has determined that it operates only one reporting unit . story_separator_special_tag style= '' font-size : 10pt ; margin-top : 0pt ; margin-bottom : 6pt ; width : 100 % '' > ( 2 ) accretion on acquired loan discounts of $ 464,000 , $ 980,000 and $ 1,954,000 are included in interest income in 2017 , 2016 and 2015 , respectively . ( 3 ) interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 35 % . ( 4 ) net unrealized gains of $ 755,000 , $ 6,301,000 and $ 6,679,000 are excluded from the yield calculation in 2017 , 2016 and 2015 , respectively . ( 5 ) accretion on acquired cd premiums of $ 32,000 , $ 237,000 and $ 249,000 are included in interest expense in 2017 , 2016 and 2015 , respectively . the following table reflects changes in our net interest margin as a result of changes in the volume and rate of our interest-bearing assets and liabilities . 44 for the year ended december 31 , 2017 compared to 2016 increase ( decrease ) in interest income and expense due to changes in : 2016 compared to 2015 increase ( decrease ) in interest income and expense due to changes in : volume rate total volume rate total interest-earning assets : loans , net of unearned income : taxable $ 38,976 $ 6,721 $ 45,697 $ 29,151 $ ( 276 ) $ 28,875 tax-exempt 791 17 808 430 ( 15 ) 415 total loans , net of unearned income 39,767 6,738 46,505 29,581 ( 291 ) 29,290 mortgage loans held for sale ( 35 ) ( 5 ) ( 40 ) ( 43 ) 59 16 debt securities : taxable 3,514 262 3,776 988 24 1,012 tax-exempt ( 162 ) ( 453 ) ( 615 ) ( 15 ) ( 398 ) ( 413 ) total debt securities 3,352 ( 191 ) 3,161 973 ( 374 ) 599 federal funds sold ( 112 ) 798 686 788 91 879 equity securities ( 160 ) ( 15 ) ( 175 ) 1 34 35 interest-bearing balances with banks ( 2,033 ) 1,735 ( 298 ) 1,317 724 2,041 total interest-earning assets 40,779 9,060 49,839 32,617 243 32,860 interest-bearing liabilities : interest-bearing demand deposits 470 393 863 354 516 870 savings 14 2 16 21 7 28 money market 2,815 4,132 6,947 2,671 1,406 4,077 time deposits 355 481 836 343 ( 44 ) 299 total interest-bearing deposits 3,654 5,008 8,662 3,389 1,885 5,274 federal funds purchased ( 936 ) 1,758 822 703 1,203 1,906 other borrowed funds 57 ( 13 ) 44 941 ( 19 ) 922 total interest-bearing liabilities 2,775 6,753 9,528 5,033 3,069 8,102 increase in net interest income $ 38,004 $ 2,307 $ 40,311 $ 27,584 $ ( 2,826 ) $ 24,758 in the table above , changes in net interest income are attributable to ( a ) changes in average balances ( volume variance ) , ( b ) changes in rates ( rate variance ) , or ( c ) changes in rate and average balances ( rate/volume variance ) . the volume variance is calculated as the change in average balances times the old rate . the rate variance is calculated as the change in rates times the old average balance . the rate/volume variance is calculated as the change in rates times the change in average balances . the rate/volume variance is allocated on a pro rata basis between the volume variance and the rate variance in the table above . from 2016 to 2017 , our growth in loans was again the primary driver of our volume component change and overall favorable change . the rate component was modestly net favorable as loan yields increased 15 basis points compared to a 12 basis-point increase in interest-bearing deposit cost . growth in non-interest-bearing deposits also contributed to the improvement in net interest margin in 2017. from 2015 to 2016 , we experienced an unfavorable variance relating to the interest rate component because average yields on loans decreased by one basis point , while average rates paid on interest-bearing liabilities increased by nine basis points . the two primary factors that make up the spread are the interest rates received on loans and the interest rates paid on deposits . we have been disciplined in raising interest rates on deposits only as the market demanded and thereby managing our cost of funds . also , we have not competed for new loans on interest rate alone , but rather we have relied significantly on effective marketing to business customers . our net interest spread and net interest margin were 3.47 % and 3.68 % , respectively , for the year ended december 31 , 2017 , compared to 3.25 % and 3.42 % , respectively , for the year ended december 31 , 2016. the increase in net interest spread and net interest margin in 2017 primarily resulted from growth in average interest-earning assets . our average interest-earning assets for the year ended december 31 , 2017 increased $ 706.8 million , or 12.8 % , to $ 6.23 billion from $ 5.53 billion for the year ended december 31 , 2016. this increase in our average interest-earning assets was due to continued core growth in all of our markets and increased loan production . story_separator_special_tag our average interest-bearing liabilities increased $ 507.1 million , or 12.5 % , to $ 4.56 billion for the year ended december 31 , 2017 from $ 4.05 billion for the year ended december 31 , 2016. all of our markets had an increase in total deposits during 2017. the ratio of our average interest-earning assets to average interest-bearing liabilities was 136.7 % and 136.4 % for the years ended december 31 , 2017 and 2016 , respectively , as average noninterest-bearing deposits grew by $ 160.7 million , or 13.5 % , from 2016 to 2017 . 45 our average interest-earning assets produced a taxable equivalent yield of 4.25 % for the year ended december 31 , 2017 , compared to 3.89 % for the year ended december 31 , 2016. the average rate paid on interest-bearing liabilities was 0.77 % for the year ended december 31 , 2017 , compared to 0.64 % for the year ended december 31 , 2016. our net interest spread and net interest margin were 3.25 % and 3.42 % , respectively , for the year ended december 31 , 2016 , compared to 3.60 % and 3.75 % , respectively , for the year ended december 31 , 2015. the decrease in net interest spread and net interest margin in 2016 resulted from the maintenance of higher levels of liquidity . our average interest-earning assets for the year ended december 31 , 2016 increased $ 1.1 billion , or 25.9 % , to $ 5.5 billion from $ 4.4 billion for the year ended december 31 , 2015. this increase in our average interest-earning assets was due to continued core growth in all our markets and increased loan production . our average interest-bearing liabilities increased $ 855.5 million , or 26.8 % , to $ 4.1 billion for the year ended december 31 , 2016 from $ 3.2 billion for the year ended december 31 , 2015. the ratio of our average interest-earning assets to average interest-bearing liabilities was 136.4 % and 137.3 % for the years ended december 31 , 2016 and 2015 , respectively , as average noninterest-bearing deposits grew by $ 246.4 million , or 26.1 % , from 2015 to 2016. our average interest-earning assets produced a taxable equivalent yield of 3.89 % for the year ended december 31 , 2016 , compared to 4.15 % for the year ended december 31 , 2015. the average rate paid on interest-bearing liabilities was 0.64 % for the year ended december 31 , 2016 , compared to 0.55 % for the year ended december 31 , 2015. provision for loan losses the provision for loan losses represents the amount determined by management to be necessary to maintain the alll at a level capable of absorbing inherent losses in the loan portfolio . our management reviews the adequacy of the alll on a quarterly basis . the alll calculation is segregated into various segments that include classified loans , loans with specific allocations and pass rated loans . a pass rated loan is generally characterized by a very low to average risk of default and in which management perceives there is a minimal risk of loss . loans are rated using a nine-point risk grade scale with loan officers having the primary responsibility for assigning risk grades and for the timely reporting of changes in the risk grades . based on these processes , and the assigned risk grades , the criticized and classified loans in the portfolio are segregated into the following regulatory classifications : special mention , substandard , doubtful or loss , with some general allocation of reserve based on these grades . at december 31 , 2017 , total loans rated special mention , substandard , and doubtful were $ 99.8 million , or 1.7 % of total loans , compared to $ 128.8 million , or 2.6 % of total loans , at december 31 , 2016. impaired loans are reviewed specifically and separately under fasb asc 310-30-35 , subsequent measurement of impaired loans , to determine the appropriate reserve allocation . our management compares the investment in an impaired loan with the present value of expected future cash flow discounted at the loan 's effective interest rate , the loan 's observable market price or the fair value of the collateral , if the loan is collateral-dependent , to determine the specific reserve allowance . reserve percentages assigned to non-impaired loans are based on historical charge-off experience adjusted for other risk factors . to evaluate the overall adequacy of the allowance to absorb losses inherent in our loan portfolio , our management considers historical loss experience based on volume and types of loans , trends in classifications , volume and trends in delinquencies and nonaccruals , economic conditions and other pertinent information . based on future evaluations , additional provisions for loan losses may be necessary to maintain the allowance for loan losses at an appropriate level . the provision expense for loan losses was $ 23.2 million for the year ended december 31 , 2017 , an increase of $ 9.8 million from $ 13.4 million in 2016. this increase in provision expense for loan losses for 2017 is primarily attributable to a $ 5.8 million charge-off on one commercial relationship as well as the impact of loan growth . nonperforming loans decreased to $ 10.8 million , or 0.19 % of total loans , at december 31 , 2017 from $ 16.9 million , or 0.34 % of total loans , at december 31 , 2016. during 2017 , we had net charged-off loans totaling $ 15.7 million , compared to net charged-off loans of $ 4.9 million for 2016. the ratio of net charged-off loans to average loans was 0.29 % for 2017 compared to 0.11 % for 2016. the alll totaled $ 59.4 million , or 1.02 % of loans , net of unearned income , at december 31 , 2017 , compared to $ 51.9 million , or 1.06 % of loans , net of unearned income , at december 31 , 2016. the provision expense for
| , compared to $ 1.23 and $ 1.20 , respectively , for the year ended december 31 , 2015. return on average assets was 1.42 % in 2016 , compared to 1.38 % in 2015 , and return on average stockholders ' equity was 16.64 % in 2016 , compared to 14.56 % in 2015. the following table presents some ratios of our results of operations for the years ended december 31 , 2017 , 2016 and 2015. replace_table_token_7_th the following tables present a summary of our statements of income , including the percent change in each category , for the years ended december 31 , 2017 compared to 2016 , and for the years ended december 31 , 2016 compared to 2015 , respectively . replace_table_token_8_th 42 replace_table_token_9_th net interest income net interest income is the difference between the income earned on interest-earning assets and interest paid on interest-bearing liabilities used to support such assets . the major factors which affect net interest income are changes in volumes , the yield on interest-earning assets and the cost of interest-bearing liabilities . our management 's ability to respond to changes in interest rates by effective asset-liability management techniques is critical to maintaining the stability of the net interest margin and the momentum of our primary source of earnings . net interest income increased $ 40.3 million , 21.5 % , to $ 227.4 million for the year ended december 31 , 2017 from $ 187.1 million for the year ended december 31 , 2016. this was due to an increase in total interest income of $ 49.9 million , or 23.4 % , partially offset by an increase in total interest expense of $ 9.5 million , or 36.9 % . the increase in total interest income was primarily attributable to a 19.3 % increase in average loans outstanding from 2016 to 2017 , which was the result of growth in all our markets . net interest income increased $ 24.8 million , or 15.3 % , to $ 187.1 million for the year
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the new panel demonstrated the possibility to improve specificity over that of the existing ova1 algorithm , while maintaining a high sensitivity in pre-surgical assessment of malignancy . the work will be submitted for publication in 2014. we in the process of identifying intended use ( s ) and establishing a regulatory or commercial pathway for a potential next-generation ova product utilizing this or another new panel . any actual product development will likely differ significantly depending on a number of technical and commercial factors . in december 2013 , the cms made its final determination and authorized medicare contractors to set prices for maaa test cpt codes when they determine it is payable . cms also validated that an algorithm has unique value by specifying that the gap-fill process and not cross-walk should be used by contractors to price maaa tests . we expect ova1 to be priced using the gap-fill method . we will be engaged in that process in 2014 for pricing effective january 1 , 2015. this decision also sets a precedent for recognizing the value of biomarker developed tests and recognizing tests on the value they bring to clinical decision-making and healthcare efficiencies . critical accounting policies and estimates our significant accounting policies are described in note 1 , basis for presentation and summary of significant accounting and reporting policies , of the notes to the consolidated financial statements included in this annual report on form 10-k. the consolidated financial statements are prepared in conformity with generally accepted accounting principles in the united states of 26 america . preparation of the financial statements requires us to make judgments , estimates , and assumptions that affect the amounts of assets and liabilities in the financial statements and revenues and expenses during the reporting periods ( and related disclosures ) . we believe the policies discussed below are the company 's critical accounting policies , as they include the more significant , subjective , and complex judgments and estimates made when preparing our consolidated financial statements revenue recognition product revenue . we derive our product revenues from sales of ova1 through quest diagnostics . we recognize product revenues for tests performed when the following revenue recognition criteria are met : ( 1 ) persuasive evidence that an arrangement exists ; ( 2 ) delivery has occurred or services have been rendered ; ( 3 ) the fee is fixed or determinable ; and ( 4 ) collectability is reasonably assured . license revenue . under the terms of the secured line of credit with quest diagnostics , portions of the borrowed principal amounts may be forgiven upon our achievement of certain milestones relating to the development , regulatory approval and commercialization of certain diagnostic tests . we account for forgiveness of principal debt balances as license revenues over the term of the exclusive sales period that quest diagnostics receive d upon commercialization of an approved diagnostic test as we do not have a sufficient history of product sales that provides a reasonable basis for estimating future product sales . we recognize license revenue on a straight-line basis over the original remaining period of quest diagnostics ' sales exclusivity ending in september 2015 as quest diagnostic s has disputed the termination of exclusivity in august 2013. research and development costs research and development costs are expensed as incurred . research and development costs consist primarily of payroll and related costs , materials and supplies used in the development of new products , and fees paid to third parties that conduct certain research and development activities on behalf of the company . in addition , acquisitions of assets to be consumed in research and development , with no alternative future use , are expensed as incurred as research and development costs . software development costs incurred in the research and development of new products are expensed as incurred until technological feasibility is established . patent costs costs incurred in filing , prosecuting and maintaining patents ( principally legal fees ) are expensed as incurred and recorded within selling , general and administrative expenses on the consolidated statements of operations and comprehensive loss . stock-based compensation we record the fair value of non-cash stock-based compensation costs for stock options and stock purchase rights related to our amended and restated 2010 stock incentive plan ( the “ 2010 plan ” ) . we estimate t he fair value of stock options using a black-scholes option valuation model . this model requires the input of subjective assumptions including expected stock price volatility , expected life and estimated forfeitures of each award . we use the straight-line method to amortize t he fair value over the vesting period of the award . these assumptions consist of estimates of future market conditions , which are inherently uncertain , and therefore are subject to management 's judgment . the expected life of options is based on historical data of our actual experience with the options we have granted and represents the period of time that the options granted are expected to be outstanding . this data includes employees ' expected exercise and post-vesting employment termination behaviors . the expected stock price volatility is estimated using a combination of historical and peer group volatility for a blended volatility in deriving the expected volatility assumption . we made an assessment that blended volatility is more representative of future stock price trends than just using historical or peer group volatility , which corresponds to the expected life of the options . the expected dividend yield is based on the estimated annual dividends that we expect to pay over the expected life of the options as a percentage of the market value of our common stock as of the grant date . the risk-free interest rate for the expected life of the options granted is based on the united states treasury yield curve in effect as of the grant date . contingencies we account for contingencies in accordance with asc 450 contingencies ( `` asc 450 '' ) . story_separator_special_tag asc 450 requires that an estimated loss from a loss contingency shall be accrued when information available prior to issuance of the financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and when the amount of the loss can be reasonably estimated . accounting for contingencies such as legal and contract dispute matters requires us to use our judgment . we believe that our accruals for these matters are adequate . nevertheless , the actual loss from a loss contingency might differ from our estimates . income taxes we account for income taxes using the liability method . under this method , deferred tax assets and liabilities are determined based on the difference between the financial statement and the tax bases of assets and liabilities using the current tax laws and rates . 27 a valuation allowance is established when necessary to reduce deferred tax assets to the amounts more likely than not expected to be realized . accounting standard codification topic 740-10-50 ( “ asc topic 740-10-50 ” ) , “ accounting for uncertainty in income taxes ” clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with asc topic 740 , income taxes . asc topic 740-10-50 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination , including resolutions of any related appeals or litigation processes , based on the technical merits . this interpretation also provides guidance on measurement , derecognition , classification , interest and penalties , accounting in interim periods , and disclosure . we recognize interest and penalties related to unrecognized tax benefits within the interest expense line and other expense line , respectively , in the consolidated statement of operations . accrued interest and penalties are included within the related liability lines in the consolidated balance sheet . recently adopted accounting pronouncements in february 2013 , the financial accounting standards board ( “ fasb ” ) issued accounting standards update ( “ asu ” ) number 2013-02 , other comprehensive income ( topic 220 ) : reporting of amounts reclassified out of accumulated other comprehensive income to improve the reporting of reclassifications out of accumulated other comprehensive income . asu 2013-02 requires reporting the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income . the adoption of this asu on january 1 , 2013 did not affect the accompanying consolidated financial statements , but could require additional disclosure , if applicable , in future periods . in july 2013 , the fasb issued asu number 2013-11 , income taxes ( topic 740 ) : presentation of an unrecognized tax benefit when a net operating loss carryforward , a similar tax loss , or a tax credit carryforward exists — a consensus of the fasb emerging issues task force . asu 2013-11 generally requires , with some exceptions , an entity to present its unrecognized tax benefits as it relates to its net operating loss carryforwards , similar tax losses , or tax credit carryforwards , as a reduction of deferred tax assets when settlement in this regard is available under the tax law of the applicable taxing jurisdiction as of the balance sheet reporting date . it is effective prospectively for fiscal years , and interim periods within those years , beginning after december 15 , 2013. retrospective application is permitted . we do not anticipate a material impact on our financial position , results of operations or cash flows as a result of this change . 28 results of operations – year ended december 31 , 201 3 as compared to year ended december 31 , 201 2 the selected summary financial and operating data of vermillion for the years ended december 31 , 201 3 and 201 2 were as follows : replace_table_token_2_th product revenue . product revenue was $ 2,112 ,000 for the year ended december 31 , 201 3 compared to $ 1 , 640 ,000 for the same period in 201 2 . we recognized product revenue for the year ended december 31 , 201 3 for the sale of ova1 through quest diagnostics . quest diagnostics performed approximately 17,004 ova1 tests during the year ended december 31 , 201 3 compared to approximately 16,460 tests for t he same period in 201 2 . product revenue increased $ 472 ,000 , or 29 % , for the year ended december 31 , 201 3 com pared to the same period in 201 2 due to ( 1 ) a 14 % increase in realized revenue per test , ( 2 ) a 22 % increase in the number of tests resolved and reported by quest diagnostics and ( 3 ) a 3 % increase in volume of tests performed . test volumes for territories covered by a vermillion territory development manager increased by greater than 15 % for the year ended december 31 , 2013 compared to 2012. this increase was mostly offset by decreases in territories without vermillion representation . we recognized $ 1,262 ,000 of deferred revenue in 201 3 upon receipt of an annual royalty report from quest diagnostics compared to $ 816,000 for 2012 . the 201 3 annual royalty report of $ 1,262 ,000 was based upon 16,745 ova1 tests reported by quest diagnostics as resolved in 201 3 , or an average of $ 75 per test resolved . the resolved volume includes both reimbursed and unreimbursed tests for which the payment status was considered final by quest diagnostics as of december 31 , 201 3 . tests that do not yet have a final resolution for 201 3 will be included in a future annual royalty report .
| strategy : we are focused on the execution of three core strategic business drivers in ovarian cancer diagnostics to build long-term value for our investors : · maximizing the existing ova1 opportunity in the united states ( “ us ” ) by changing our business relationship with quest diagnostics and taking the leadership role in expanding commercialization , payer coverage and medical guidelines · expanding our customer base to non-us markets by migrating ova1 to a global testing platform · building an expanded patient base by seeking fda approval and launching a next generation multi-marker ovarian cancer test to monitor patients at risk for ovarian cancer we believe that these business drivers will contribute significantly to addressing unmet medical needs for women faced with ovarian cancer and the continued development of our business . our lead product , ova1 , was cleared by the fda i n september 2009. ova1 addresses a clear clinical need , namely the pre-surgical identification of women who are at high risk of having a malignant ovarian tumor . numerous studies have documented the benefit of referral of these women to gynecologic oncologists for their initial surgery . prior to the clearance of ova1 , no blood test had been cleared by the fda for physicians to use in the pre-surgical management of ovarian adnexal masses . ova1 is a qualitative serum test that utilizes five well-established biomarkers and proprietary fda-cleared software to determine the likelihood of malignancy in women over age 18 , with a pelvic mass for whom surgery is planned . ova1 was developed through large pre-clinical studies in collaboration with numerous academic medical centers encompassing over 2,500 clinical samples . ova1 was fully validated in a prospective multi-center clinical trial encompassing 27 sites reflective of the diverse nature of the clinical centers at which ovarian adnexal masses are evaluated . in 2012 , we completed a second pivotal clinical study of ova1 , called the “ ova500 study ” and led by dr. robert e. bristow , director of gynecologic oncology services with university of california irvine healthcare . the study evaluated ova1 diagnostic performance in a population of 494 evaluable patients who underwent surgery for an adnexal mass after enrollment by a non-gynecologic oncologist . in february 2013 , the ova500 study was published in the peer-reviewed journal gynecologic oncology , which enjoys the highest impact factor rating of any journal worldwide focused on gynecologic oncology . since many professional medical societies stress
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the commission indicated that a `` critical accounting policy '' is one that is both important to the portrayal of the company 's financial condition and operating results and requires management 's most difficult , subjective or complex judgments , often as a result of the need to make estimates about the effect of matters that are inherently uncertain . our significant accounting policies are more fully described in note 2 of the company 's annual report on form 10-k for the year ended december 31 , 2003. not all significant accounting policies , however , require management to make difficult , subjective or complex judgments or estimates . we believe that our accounting policies related to revenue recognition , research and development and employee stock compensation , as described below , require `` critical accounting estimates and judgments . '' revenue recognition we recognize revenues from non-refundable license fees and milestone payments not specifically tied to a separate earning process ratably over the period during which we have substantial continuing obligations to perform services under the contract . when milestone payments are specifically tied to a separate earnings process , revenue is recognized when the specific performance obligations associated with the payment are completed . when the period of deferral can not be specifically identified from the contract , we estimate the period of deferral based upon our obligations under the contract . we continually review these estimates and , if any of these estimates change , an adjustment is recorded in the period in which they become reasonably estimable . these adjustments could have a material effect on our results of operations . in 2002 and 2003 , we have increased the estimated time period over which we will provide services under our agreement with mallinckrodt , inc. , a subsidiary of tyco international ltd. , which we refer to as tyco/mallinckrodt , from an original estimate of 89 months to a 41 current estimate of 99 months , resulting in a reduction in revenue of approximately $ 417,000 for the year ended december 31 , 2003. in 2003 , we increased the estimated time period for obtaining approval for ms-325 in japan from an original estimate of 60 months to a current estimate of 117 months , resulting in a reduction in revenue of approximately $ 102,000 for the year ended december 31 , 2003. we will continue to review these estimates and make appropriate adjustments as information becomes available . under the ms-325 program , we recognize revenue at the time we perform research and development activities for which schering ag , and other collaborators are obligated to reimburse us . product development revenues from schering ag are recorded net of the company 's portion of schering ag 's actual or most recent estimate of their ms-325 research and development costs . we recognize reimbursement from schering ag , for the ep-2104r feasibility program , as revenue proportionate to actual cost incurred relative to expected total program costs . total estimated costs of the feasibility program are based on management 's assessment of costs to complete the feasibility program , which include an evaluation of the portion of the program completed , the costs incurred to date and the expected future costs of the program . adjustments to revenue will be recorded if estimated costs to complete change . to the extent that our estimated costs change materially , our revenues recorded under this activity could materially be affected and such change could have a material adverse effect on our operations in the future periods . in december 2003 , management increased its ep-2104r estimate to complete the feasibility program , resulting in reduction in revenue of $ 819,000 in the fourth quarter of 2003. revenue under our research collaboration with schering ag to discover novel compounds for diagnosing human disease using mri is recognized as services are provided for which schering ag is obligated to reimburse us . royalty revenues are recognized based on actual revenues as reported to us by bracco s.p.a , or bracco . when actual results are not available , we estimate royalty revenues based on bracco 's estimates , historical revenues and trends . we continually review these estimates and record adjustments to the estimates when we receive actual information from bracco . these adjustments have not been significant to date , but could have a material effect on our future results of operations . research and development research and development costs , including those associated with technology , licenses and patents , are expensed as incurred . research and development costs include employee salaries and related costs , third party service costs , the costs of clinical and preclinical supplies and consulting expenses . in order to conduct research and development activities and compile regulatory submissions , we enter into contracts with vendors who render services over an extended period of time , generally one to three years . typically , we enter into two types of vendor contracts ; time based and patient based . under a time based contract , using critical factors contained within the contract , usually the stated duration of the contract and the timing of services provided , we record the contractual expense for each service provided under the contract ratably over the period during which we estimate the service will be performed . under a patient based contract , we first determine an appropriate per patient cost using critical factors contained within the contract , which include the estimated number of patients and the total dollar value of the contract . we then record expense based upon the total number of patients enrolled during the period . on a quarterly basis , we review both the timetable of services to be rendered and the timing of services actually received . based upon this review , revisions may be made to the forecasted timetable or to the extent of services performed , or both , in order to reflect our most current estimate of the contract . story_separator_special_tag adjustments are recorded in the period in which the revisions are estimable . these adjustments could have a material effect on our results of operations . 42 employee stock compensation we have elected to follow accounting principles board opinion no . 25 , `` accounting for stock issued to employees , '' or apb 25 , and related interpretations in accounting for our employee stock options rather than the alternative fair value accounting provided for under statement of financial accounting standards ( `` sfas '' ) no . 123 , `` accounting for stock-based compensation , '' as amended by sfas no . 148. under apb 25 , when the exercise price is greater than or equal to the market price of the underlying stock on the date of the grant , no compensation expense is recognized . if we are unable to or decide not to continue to account for stock options under apb 25 , our financial results would be materially adversely affected to the extent of the additional compensation expense that we would have to recognize , which could change significantly from period to period based on several factors including the number of stock options granted and fluctuations in our stock price and or interest rates . see note 2 to the financial statements . story_separator_special_tag exercise its option , whether we will exercise our option to bear a portion of the development costs in return for an increase in our royalty rate . if schering ag does not exercise its option , then we would have to bear the additional cost of a clinical program to develop ep-2104r , which may adversely affect our liquidity and capital resources . consequently , we can not predict , at this time , the amount of research and development costs that we will incur with regard to the development and commercialization of ep-2104r . in may 2003 , we also entered into an agreement with schering ag covering an exclusive research collaboration to discover novel compounds for diagnosing human disease using mri . under terms of the three-year joint research agreement , we and schering ag are exclusively combining our existing research programs in the field of mri to discover novel mri product candidates for clinical development . under the agreement , schering ag will fund a portion of our related personnel costs and third party research costs of up to $ 2.0 million per annum and will make available to us a loan facility of up to $ 15 million with principal repayment beginning in 2007. the cost to execute our mri research plan is subject to numerous uncertainties , which may adversely affect our liquidity and capital resources . the duration and cost of bringing a product to market may vary significantly over the life of a project as a result of various matters arising during and after clinical trials , including among others , the following : time needed for regulatory approval ; number of patients , costs per patient and the rate of patient recruitment in the clinical trial program ; complexity and cost of project management , data collection and data management services provided by outside vendors ; and unanticipated adverse safety and efficacy results from the pre-clinical or clinical trials . we test our potential product candidates in numerous pre-clinical studies to identify disease indications for which they may be product candidates . we may conduct multiple clinical trials to cover a variety of indications for each product candidate . as we obtain results from trials , we may elect to discontinue clinical trials for certain product candidates or for certain indications in order to focus on more promising product candidates or indications . 45 general and administrative expenses general and administrative expenses , which consist primarily of salaries , benefits , outside professional services and related costs associated with our executive , finance and accounting , business development , marketing , human resources , legal and corporate communications activities , were $ 6.6 million for the year ended december 31 , 2003 as compared to $ 6.0 million for the year ended december 31 , 2002. the increase in 2003 of $ 583,000 was primarily due to an increase in legal costs related to executing the collaboration and intellectual property agreements discussed under research and development expenses , to higher liability insurance premiums and to ms-325 marketing personnel and related costs . general and administrative expenses also included royalties payable to massachusetts general hospital , or mgh , based on sales by bracco of multihance® . royalty expenses totaled $ 103,000 and $ 74,000 for the years ended december 31 , 2003 and 2002 , respectively . interest income and interest expense interest income for the year ended december 31 , 2003 was $ 664,000 as compared to $ 1.1 million for the year ended december 31 , 2002. the decrease of approximately $ 417,000 was primarily due to lower interest rates in 2003 compared to 2002 , partly offset by higher average levels of cash , cash equivalents and marketable securities in 2003 compared to 2002. also contributing to the decrease was the net realized gains recognized on the sale of marketable securities recorded in 2002 of $ 156,000 , which were included in interest income , compared to no realized gains recognized for the year ended december 31 , 2003. interest expense for the year ended december 31 , 2003 was $ 295,000 compared to $ 362,000 for the year ended december 31 , 2002. the decrease in interest expense in 2003 resulted from the reduction in the outstanding balance of interest-bearing prepaid royalties from bracco and the payment of the promissory note to tyco/mallinckrodt in october 2002 , which was partly offset by the draw down of the loan facility of $ 7.5 million for a portion of the year , pursuant to the 2003 schering ag collaboration agreements .
| research and development expenses research and development expenses for the year ended december 31 , 2003 were $ 28.0 million as compared to $ 29.1 million for the same period in 2002. the decrease of $ 1.1 million was primarily attributable to decreased costs related to the completion of the phase iii clinical trial program for ms-325 and to lower spending on our ep-2104r program , partly offset by higher spending on our mri joint research program . we are currently performing research and development activities for three projects : ms-325 , for which we have completed phase iii clinical trials and for which we submitted an nda to the fda in december 2003 , our feasibility program for ep-2104r , which is in the preclinical stage and our mri joint research program . ms-325 is an injectable intravascular contrast agent intended to enhance the quality of mr images and provide physicians with a superior method for diagnosing diseases affecting the vasculature . we have completed our phase iii clinical trial program to test the safety and efficacy of ms-325-enhanced mra for the evaluation of non-coronary vascular disease and submitted our nda for ms-325 to the 43 fda in december 2003. in february 2004 , we were notified by the fda that the nda for ms-325 has been accepted for filing and has been designated for a standard review cycle . the target date for the first fda action in the standard review cycle is ten months from the date of submission . if approved by the fda , our partner , schering ag , will have primary responsibility for the product launch and marketing of ms-325 . in 2004 , we plan to initiate further phase ii clinical studies of ms-325 for use in cardiac imaging and phase iiib/iv clinical studies of ms-325 . we plan to initiate human clinical studies for ep-2104r in 2004. both the time-frame and costs involved in developing ms-325 or ep-2104r , gaining fda approval for ms-325 and commercializing the product may vary greatly for several reasons , including the following : we conduct our clinical trials in accordance with specific protocols , which we have filed with the fda or
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our practice is to include sales from a store in comparable store sales beginning on the first day of the 61st week following the store 's opening and to exclude sales from a closed store from comparable store sales beginning on the day of closure . we include sales from an acquired store in comparable store sales on the later of ( i ) the day of acquisition or ( ii ) the first day of the 61st week following the store 's opening . this practice may differ from the methods that other retailers use to calculate similar measures . we use pro forma comparable store sales to calculate pro forma comparable store sales growth . see unaudited supplemental fiscal 2012 pro forma information and unaudited supplemental fiscal 2011 pro forma information for a reconciliation of historical net sales to pro forma net sales . our net sales have increased substantially as a result of the transactions . net sales are also affected by store openings and closings and comparable store sales growth . factors that influence comparable store sales growth and other sales trends include : general economic conditions and trends , including levels of disposable income and consumer confidence ; consumer preferences and buying trends ; our ability to identify market trends , and to source and provide product offerings that promote customer traffic and growth in average ticket ; 46 the number of customer transactions and average ticket ; the prices of our products , including the effects of inflation and deflation ; opening new stores in the vicinity of our existing stores ; advertising , in-store merchandising and other marketing activities ; and our competition , including competitive store openings in the vicinity of our stores and competitor pricing and merchandising strategies . cost of sales , buying and occupancy and gross profit cost of sales includes the cost of inventory sold during the period , including direct costs of purchased merchandise ( net of discounts and allowances ) , distribution and supply chain costs , buying costs and supplies . merchandise incentives received from vendors are reflected in the carrying value of inventory when earned or as progress is made toward earning the rebate or allowance , and are reflected as a component of cost of sales as the inventory is sold . inflation and deflation in the prices of food and other products we sell may periodically affect our gross profit and gross margin . the short-term impact of inflation and deflation is largely dependent on whether or not we pass the effects through to our customers , which will depend upon competitive market conditions . in the first half of fiscal 2012 , we experienced produce price deflation , which contributed to higher gross margins in our business during that period and the full fiscal year . occupancy costs include store rental , property taxes , utilities , common area maintenance , amortization of favorable and unfavorable leasehold interests and property insurance . occupancy costs do not include building depreciation , which is classified as a direct store expense . our cost of sales , buying and occupancy and gross profit are correlated to sales volumes . as sales increase , gross margin is affected by the relative mix of products sold , pricing strategies , inventory shrinkage and improved leverage of fixed costs of sales , buying and occupancy . direct store expenses direct store expenses consist of store-level expenses such as salaries and benefits , related equity-based compensation , supplies , depreciation and amortization for buildings , store leasehold improvements , equipment and other store specific costs . as sales increase , direct store expenses generally decline as a percentage of sales . selling , general and administrative expenses selling , general and administrative expenses primarily consist of salaries and benefits costs , equity-based compensation , advertising , acquisition-related costs and corporate overhead . we charge third-parties to place advertisements in our in-store guide and newspaper circulars . we record consideration received from vendors in connection with cooperative advertising programs as a reduction to advertising costs when the allowance represents reimbursement of a specific and identifiable cost . advertising costs are expensed as incurred . we expect our selling , general and administrative expenses will increase in future periods as a result of incremental share-based compensation , legal , accounting and other compliance-related expenses associated with being a public company and increases resulting from growth in the number of our stores . 47 store pre-opening costs store pre-opening costs include rent expense during construction of new stores and costs related to new store openings , including costs associated with hiring and training personnel and other miscellaneous costs . store pre-opening costs are expensed as incurred . store closure and exit costs we recognize a reserve for future operating lease payments associated with facilities that are no longer being utilized in our current operations . the reserve is recorded based on the present value of the remaining non-cancelable lease payments after the cease use date less an estimate of subtenant income . if subtenant income is expected to be higher than the lease payments , no accrual is recorded . lease payments included in the closed store reserve are expected to be paid over the remaining terms of the respective leases . our assumptions about subtenant income are based on our experience and knowledge of the area in which the closed property is located , guidance received from local brokers and agent and existing economic conditions . adjustments to the closed store reserve relate primarily to changes in actual or estimated subtenant income and changes in actual lease payments from original estimates . adjustments are made for changes in estimates in the period in which the change becomes known , considering timing of new information regarding market , subleases or other lease updates . changes in reserve estimates are classified as store closure and exit costs in the consolidated statements of operations . story_separator_special_tag store closure and exit costs in fiscal 2011 and fiscal 2012 consisted primarily of reserves to close redundant store locations and facilities following the transactions . store closure and exit costs in fiscal 2012 and fiscal 2013 also include adjustments to estimates recorded in fiscal 2012 and 2011. benefit ( provision ) for income taxes prior to the henry 's transaction , henry 's was included in the consolidated federal and certain state income tax groups of its previous parent for income tax reporting purposes . henry 's was not a separate taxpaying entity before the henry 's transaction . however , for the periods presented through the henry 's transaction , the consolidated financial statements have been prepared on the basis as if henry 's prepared its tax returns and accounted for income taxes on a separate company basis . as a result of the henry 's transaction , for tax purposes , henry 's was acquired in a taxable asset acquisition . the purchase price was allocated to all identifiable assets with the residual assigned to tax deductible goodwill . the resulting basis differences between the new tax values and historical amounts resulted in a deferred tax asset of $ 47.6 million being recorded through stockholders ' equity . see note 18 to our audited consolidated financial statements included elsewhere in this annual report on form 10-k for a discussion of the tax deductibility of goodwill . since the henry 's transaction , our income tax ( provision ) benefit has been based on the new tax return filing group . although we were structured as a limited liability company , we elected to be taxed as a corporation for income tax purposes . we are subject to federal income tax as well as state income tax in various jurisdictions of the united states in which we conduct business . income taxes are accounted for under the asset and liability method . on july 29 , 2013 , sprouts farmers markets , llc , a delaware limited liability company , converted into sprouts farmers market , inc. , a delaware corporation . see factors affecting comparability of result of operationscorporate conversion. the corporate conversion has not had a material impact on our results of operations , financial position or cash flows since we were treated as a corporation for income tax purposes prior to the conversion . in september 2013 , the internal revenue service issued final regulations related to tangible property , which govern when a taxpayer must capitalize or deduct expenses for acquiring , maintaining , repairing and replacing tangible property . the regulations are effective for tax years beginning january 1 , 2014 ; however , early adoption is permitted . we have analyzed the impacts of the tangible property regulations , and have determined we are in compliance with the regulations . the adoption of the regulations will not have a significant effect on our consolidated financial statements . 48 story_separator_special_tag style= '' margin-top:24pt ; margin-bottom:0pt ; font-size:10pt ; font-family : arial '' > comparison of fiscal 2013 to fiscal 2012 net sales replace_table_token_12_th 51 net sales increased during 2013 as compared to 2012 , primarily as a result of ( i ) stores added through the sunflower transaction in fiscal 2012 , ( ii ) sales growth at stores operated prior to 2013 and ( iii ) new store openings . stores added through the sunflower transaction contributed $ 252.5 million , or 39 % , of the increase in net sales for 2013. net sales growth at stores operated prior to december 30 , 2012 contributed $ 206.4 million , or 32 % of the increase in net sales for 2013. new store openings during 2013 contributed $ 186.1 million , or 29 % , of the increase in net sales during 2013. these increases were partially offset by $ 2.0 million of net sales related to a store closed in 2012. comparing 2013 to pro forma 2012 , net sales increased primarily as a result of pro forma comparable store sales growth and new store openings . pro forma comparable store sales growth of 10.7 % during 2013 contributed $ 206.4 million , or 46 % of the increase in pro forma net sales during 2013. new store openings during 2013 contributed $ 186.1 million , or 42 % , of the increase in net sales during 2013. the remaining $ 54.4 million , or 12 % , of the increase in net sales during 2013 was attributable to new store openings during fiscal 2012 not yet reflected in pro forma comparable store sales growth . cost of sales , buying and occupancy and gross profit replace_table_token_13_th cost of sales , buying and occupancy increased during 2013 compared to 2012 , primarily due to the increase in sales following the sunflower transaction , comparable store sales growth and new store openings , as discussed above . during 2013 , gross profit increased $ 190.0 million as a result of increased sales volume and $ 5.0 million as a result of an increase in gross margin . gross margin for 2013 increased 20 basis points . this improvement was driven by leverage in occupancy , promotional and buying costs . this leverage was partially offset by lower margins in produce driven by inflation in certain commodity items when compared to the exceptional produce growing season in 2012. in addition , we experienced lower margins in the vitamin , supplement and body care departments as a result of mark downs from merchandise alignment . comparing 2013 to pro forma 2012 , cost of sales , buying and occupancy and gross margin increased primarily due to the factors noted above . 52 direct store expenses replace_table_token_14_th direct store expenses increased during 2013 compared to 2012 , primarily due to $ 89.6 million of direct store expenses associated with additional stores we operated during 2013 related to the sunflower transaction and new store openings .
| pro forma information the effects of the transactions have a material effect on the comparability of our results of operations . consequently , we have supplemented the comparative discussion of our results of operations for fiscal 2013 and fiscal 2012 and for fiscal 2011 with a comparative discussion of our historical results of operations on a pro forma basis for fiscal 2012 and fiscal 2011. in this discussion , pro forma statement of operations information for fiscal 2011 gives pro forma effect to the transactions as if they were consummated on the first day of fiscal 2011 , as set out in unaudited supplemental fiscal 2011 pro forma information below . the unaudited supplemental pro forma information for fiscal 2011 was prepared in a manner comparable to the requirements of article 11 of regulation s-x , but does not comply with article 11 in that rule 11-02 ( c ) of article 11 does not allow for the presentation of pro forma condensed statements of operations prior to the most recent year . the unaudited supplemental pro forma information for fiscal 2011 reflects the impact of the transactions using the assumptions set forth in the notes to the unaudited supplemental pro forma information for fiscal 2011. pro forma statement of operations information for fiscal 2012 gives effect to the sunflower transaction as if it was consummated on the first day of fiscal 2012 as set out under pro forma for the sunflower transaction in unaudited supplemental fiscal 2012 pro forma information. this fiscal 2012 pro forma information presented in this management 's discussion and analysis of financial condition and results of operations does not include the impact of the april 2013 refinancing , described below in - liquidity and capital resources , or the ipo . april 2013 refinancing in april 2013 , we completed a transaction in which we refinanced our debt ( the april 2013 refinancing ) and made a distribution to our equity and option holders , as further discussed in liquidity and capital resources below . the april 2013 refinancing resulted in an increase in borrowings ,
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following the receipt of the warning letter , on march 28 , 2013 cryolife received a letter from the human tissue authority ( hta ) in london , u.k. , which governs the distribution of tissues into markets in europe by the company 's subsidiary , cryolife europa , ltd. ( europa ) . the letter temporarily suspended europa 's license to import human tissue , due to concerns the hta had related to the fda warning letter , and directed europa to issue a recall for tissues previously distributed which had not been implanted . the hta subsequently issued a variance to allow europa to continue to import tissue into europe under certain circumstances for critically ill patients . subsequent to the issuance of the variance , the hta reinstated europa 's license but placed certain conditions on the processing of tissue , which would generate significant additional costs when compared to the company 's current processes . as a result , the company plans to cease shipment of tissues into europe as of march 31 , 2014. on may 23 , 2013 cryolife received a form 483 related to the company 's subsidiary cardiogenesis ( cardiogenesis form 483 ) . the cardiogenesis form 483 followed a quality system inspection of the company 's facilities by the fda in may 2013. the cardiogenesis form 483 includes observations concerning labeling , complaint handling , and field actions . the company has responded to the fda 's requests and implemented changes that it believes address the fda 's observations . subsequent to receipt of the cardiogenesis form 483 , as discussed above , cardiogenesis received premarket approval ( pma ) supplement approval from the fda for its redesigned sologrip and port enabled angina relief with laser ( pearl ) handpieces . on february 14 , 2014 cryolife received a form 483 related to the company 's subsidiary hemosphere ( hemosphere form 483 ) . the hemosphere form 483 followed a quality system inspection of the company 's facilities by the fda in february 2014. the hemosphere form 483 includes observations concerning nonconformance inspections and manufacturing , the company 's corrective and preventive action procedures , and documentation issues . the company has already had verification of its implementation of corrective action with respect to one observation and expects to respond to the remaining observations from the hemosphere form 483 within 15 business days , as required by law . the company believes that the changes that it will implement will address the fda 's observations ; however , it is possible that the company may not be able to do so in a manner satisfactory to the fda , and the fda could issue a warning letter or take other actions , including requiring a recall or manufacturing hold . the company believes that the hemosphere form 483 will not have a material effect on the company . however , it is possible that actions it may be required to take in response to the hemosphere form 483 could materially , adversely affect the company 's revenues , financial condition , profitability , or cash flows . see also part i , item 1a , risk factors. critical accounting policies a summary of the company 's significant accounting policies is included in part ii , item 8 , note 1 of the notes to consolidated financial statements. management believes that the consistent application of these policies enables the company to provide users of the financial statements with useful and reliable information about the company 's operating results and financial condition . the consolidated financial statements are prepared in accordance with accounting principles generally accepted in the u.s. which require the company to make estimates and assumptions . the following are accounting policies that management believes are most important to the portrayal of the company 's financial condition and results of operations and may involve a higher degree of judgment and complexity . fair value measurements the company records certain financial instruments at fair value , including : cash equivalents , certain marketable securities , certain restricted securities , contingent consideration , and derivative instruments . the company may make an irrevocable election to measure other financial instruments at fair value on an instrument-by-instrument basis ; although as of december 31 , 2013 the company has not chosen to make any such elections . fair value financial instruments are recorded in accordance with the fair value measurement framework . the company also measures certain non-financial assets at fair value on a non-recurring basis . these non-recurring valuations include evaluating assets such as cost method investments , long-lived assets , and non-amortizing intangible assets for impairment ; allocating value to assets in an acquired asset group ; and applying accounting for business combinations . the company uses the fair value measurement framework to value these assets and reports these fair values in the periods in which they are recorded or written down . 44 the fair value measurement framework includes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair values in their broad levels . these levels from highest to lowest priority are as follows : level 1 : quoted prices ( unadjusted ) in active markets that are accessible at the measurement date for identical assets or liabilities ; level 2 : quoted prices in active markets for similar assets or liabilities or observable prices that are based on inputs not quoted on active markets , but corroborated by market data ; and level 3 : unobservable inputs or valuation techniques that are used when little or no market data is available . the determination of fair value and the assessment of a measurement 's placement within the hierarchy requires judgment . level 3 valuations often involve a higher degree of judgment and complexity . level 3 valuations may require the use of various cost , market , or income valuation methodologies applied to unobservable management estimates and assumptions . management 's assumptions could vary depending on the asset or liability valued and the valuation method used . story_separator_special_tag such assumptions could include : estimates of prices , earnings , costs , actions of market participants , market factors , or the weighting of various valuation methods . the company may also engage external advisors to assist in determining fair value , as appropriate . although the company believes that the recorded fair value of its financial instruments is appropriate , these fair values may not be indicative of net realizable value or reflective of future fair values . deferred preservation costs by federal law , human tissues can not be bought or sold , therefore , the tissues the company preserves are not held as inventory . the costs the company incurs to procure and process cardiac and vascular tissues are instead accumulated and deferred . deferred preservation costs are stated at the lower of cost or market value on a first-in , first-out basis and are deferred until revenue is recognized . at each balance sheet date , deferred preservation costs includes costs of tissues available for shipment , tissues currently in active processing , and tissues held in quarantine pending release to implantable status . upon shipment of the tissue to an implanting facility , revenue is recognized and the related deferred preservation costs are expensed as cost of preservation services . cost of preservation services also includes , as applicable , lower of cost or market write-downs and impairments for tissues not deemed to be recoverable , and includes , as incurred , idle facility expense , excessive spoilage , extra freight , and rehandling costs . the calculation of deferred preservation costs involves judgment and complexity and uses the same principles as inventory costing . donated human tissue is procured from deceased human donors by organ and tissue procurement organizations ( otpos ) , which consign the tissue to the company for processing , preservation , and distribution . deferred preservation costs consist primarily of the procurement fees charged by the otpos , direct labor and materials ( including salary and fringe benefits , laboratory supplies and expenses , and freight-in charges ) , and indirect costs ( including allocations of costs from support departments and facility allocations ) . fixed production overhead costs are allocated based on actual tissue processing levels , to the extent that they are within the range of the facility 's normal capacity . these costs are then allocated among the tissues processed during the period based on cost drivers , such as the number of donors or number of tissues processed . the company applies a yield estimate to all tissues in process and in quarantine to estimate the portion of tissues that will ultimately become implantable . management estimates quarantine yields based on its experience and reevaluates these estimates periodically . actual yields could differ significantly from the company 's estimates , which could result in a change in tissues available for shipment , and could increase or decrease the balance of deferred preservation costs . these changes could result in additional cost of preservation services expense or could increase per tissue preservation costs , which would impact gross margins on tissue preservation services in future periods . the company regularly evaluates its deferred preservation costs to determine if the costs are appropriately recorded at the lower of cost or market value . the company also evaluates its deferred preservation costs for costs not deemed to be recoverable , including tissues not expected to ship prior to the expiration date of their packaging . lower of cost or market value write-downs are recorded if the tissue processing costs incurred exceed the estimated market value of the tissue services , based on recent average service fees at the time of the evaluation . impairment write-downs are recorded based on the book value of tissues deemed to be impaired . actual results may differ from these estimates . write-downs of deferred preservation costs are expensed as cost of preservation services , and these write-downs are permanent impairments that create a new cost basis , which can not be restored to its previous levels if the company 's estimates change . 45 the company recorded write-downs to its deferred preservation costs totaling $ 448,000 , $ 195,000 , and $ 270,000 for the years ended december 31 , 2013 , 2012 , and 2011 , respectively . deferred income taxes deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and tax return purposes . the company periodically assesses the recoverability of its deferred tax assets , as necessary , when the company experiences changes that could materially affect its determination of the recoverability of its deferred tax assets . management provides a valuation allowance against the deferred tax asset when , as a result of this analysis , management believes it is more likely than not that some portion or all of its deferred tax assets will not be realized . assessing the recoverability of deferred tax assets involves judgment and complexity . estimates and judgments used in the determination of the need for a valuation allowance and in calculating the amount of a needed valuation allowance include , but are not limited to , the following : projected future operating results , anticipated future state tax apportionment , timing and amounts of anticipated future taxable income , timing of the anticipated reversal of book/tax temporary differences , evaluation of statutory limits regarding usage of certain tax assets , and evaluation of the statutory periods over which certain tax assets can be utilized . significant changes in the factors above , or other factors , could materially , adversely affect the company 's ability to use its deferred tax assets . such changes could have a material , adverse impact on the company 's operations , financial condition , and cash flows . the company will continue to assess the recoverability of its deferred tax assets , as necessary , when the company experiences changes that could materially affect its prior determination of the recoverability of its deferred tax assets .
| bioglue and biofoam revenues from the sale of surgical sealants , consisting of bioglue and biofoam , increased 11 % for the three months ended december 31 , 2013 , as compared to the three months ended december 31 , 2012. this increase was primarily due to a 12 % increase in the volume of milliliters sold , which increased revenues by 8 % , an increase in average sales prices , which increased revenues by 2 % , and the favorable impact of foreign exchange rates , which increased revenues by 1 % . revenues from the sale of surgical sealants increased 9 % for the twelve months ended december 31 , 2013 , as compared to the twelve months ended december 31 , 2012. this increase was primarily due to a 9 % increase in the volume of milliliters sold , which increased revenues by 7 % , and by an increase in average sales prices , which increased revenues by 2 % . the increase in sales volume of surgical sealants for the three months ended december 31 , 2013 was primarily due to an increase in shipments of bioglue in certain international markets and , to a lesser extent , an increase in the company 's domestic markets . the increase in sales volume of surgical sealants for the twelve months ended december 31 , 2013 was due to an increase in shipments of bioglue in certain international markets , partially offset by a volume decrease in the company 's domestic markets . the increase in international sales of bioglue was primarily due to increased sales to japan , to direct markets in europe , including sales for neurological indications , and to latin america . the increase in average sales prices for the three and twelve months ended december 31 , 2013 was primarily due to list price increases in domestic markets and due to the routine negotiation of pricing contracts with certain customers . revenues from shipments to japan were $ 801,000 and $ 697,000 for the three months ended december 31 , 2013 and 2012 , respectively , and $ 4.8 million and $ 4.1 million for the twelve months ended december 31 , 2013 and 2012 , respectively . management is currently seeking expanded indications for bioglue in japan and regulatory approval for bioglue in china and , if successful , believes this will provide
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stock-based compensation employees and other service providers of the company may receive benefits by way of stock-based compensation settled with company options exercised for shares of our common stock . the cost of transactions with employees settled with capital instruments is measured based on the fair value of the capital instruments on the granting date . the fair value is determined using an accepted options pricing model . the model is based on share price , grant date and on assumptions regarding expected volatility , expected lifespan , expected dividend , and a no risk interest rate . the cost of the transactions settled with capital instruments is recognized in profit or loss together with a corresponding increase in the equity over the period in which the performance and or service takes place , and ending on the date on which the relevant employees are entitled to the benefits ( the “ vesting period ” ) . the aggregate expense recognized for transactions settled with capital instruments at the end of each reporting date and until the vesting period reflects the degree to which the vesting period has expired and our best estimate regarding the number of warrants that have ultimately vested . the expense or income in profit or loss reflects the change of the aggregate expense recognized as of the end of the reported period . convertible loans the company entered into a series of convertible loan agreements with certain lenders to sell convertible promissory notes containing conversion feature . the conversion feature is considered embedded derivative instruments , and is to be recorded at their fair value as its fair value can be separated from the convertible loan and its conversion is independent of the underlying note value . the company recorded finance expenses in respect of the convertible component in the convertible loan in the excess amount of the convertible component fair value over the face loan amount . the conversion liability is then marked to market each reporting period with the resulting gains or losses shown in the statements of operations . the company was using a third-party appraiser to estimate the fair value of the convertible component . 57 we selected the black-scholes-merton ( “ black-scholes ” ) , as our option pricing model to estimate the fair value of our options awards . the option-pricing model requires a number of assumptions : expected dividend yield — the expected dividend yield assumption is based on our historical experience and expectation of no future dividend payouts . we have historically not paid cash dividends and have no foreseeable plans to pay cash dividends in the future . volatility — since the company is not traded on any stock exchange market , quoted prices of our shares are unavailable . in case of insufficient historical data for a company , the expected volatility is based on similar companies ' stock volatility . risk free interest rate — the risk-free interest rate is based on the yield of governmental bonds with equivalent terms . contractual term — an option 's contractual term is the amount of time the holder has to exercise the option , per the contract . share price — the share price is determined according to the last known closing price of the share of our common stock at the grant date . liquidity and capital resources liquidity is the ability of a company to generate funds to support its current and future operations , satisfy its obligations , and otherwise operate on an ongoing basis . significant factors in the management of liquidity are funds generated by operations , levels of accounts receivable and accounts payable and capital expenditures . since our inception through december 31 , 2020 , we have funded our operations principally with approximately $ 11,867,746 ( net of issuance expenses ) from the issuance of shares of shares of our common stock , options and loans . the table below presents our cash flows for the periods indicated : replace_table_token_7_th as of december 31 , 2020 , we had cash of $ 242,900 , as compared to $ 290,815 as of december 31 , 2019. as of december 31 , 2020 , we had a negative working capital of $ 290,062 , as compared to a negative working capital of $ 199,212 as of december 31 , 2019. the decrease in our cash balance is mainly attributable to our net loss described above and payments to account payables offset by our equity financing and convertible loans . operating activities net cash used in operating activities was $ 798,740 for the year ended december 31 , 2020 , as compared to $ 1,244,772 for the year ended december 31 , 2019 . 58 investing activities net cash provided by investing activities was $ 9,065 for the year ended december 31 , 2020 , as compared to net cash used in investing activities of $ 81,655 for the year ended december 31 , 2019. the increase is mainly attributable to the decrease in short term bank deposits in banking institutions and proceeds from investment in unconsolidated entity . financing activities net cash provided by financing activities was $ 741,760 for the year ended december 31 , 2020 , as compared to $ 1,177,436 for the year ended december 31 , 2019. the decrease is mainly the result of a decrease in equity financing and proceeds from convertible loans . financial arrangements since our inception , we have financed our operation primarily through proceeds from sales of our shares of common stock , convertible loan agreements and grants from the iaa . story_separator_special_tag during december 2019 , january 2020 and march 2020 we entered into a series of convertible loan agreements ( the “ december 2019 clas , ” and each a “ december 2019 cla ” ) with third parties and certain existing shareholders ( the “ december 2019 lenders ” ) , pursuant to which the december 2019 lenders agreed to provide the company loans in the aggregate amount of $ 514,000 and in exchange the company issued to the december 2019 lenders ( i ) convertible promissory notes ( the “ december 2019 notes ” ) and ( ii ) warrants with an exercise price of $ 8.40. according to the terms of the december 2019 cla , the december 2019 notes bear interest at a rate of 5 % per annum and the loan amount represented by the december 2019 notes will be repaid to the december 2019 lenders according to the following schedule : ( i ) the principal amount represented by the december 2019 notes to be repaid in twenty four equal monthly installments , commencing on the twenty fifth month following the closing of each december 2019 cla and ( ii ) the interest accrued on the loan amount to be paid in two bi-annual installments , commencing on the first anniversary of the first payment of the principal amount . according to the terms of the december 2019 cla , the outstanding loan amount matures on the earlier of ( i ) the third anniversary of each december 2019 cla or ( ii ) a deemed liquidation event ( as defined therein ) , and the december 2019 lenders may convert all or any portion of the december 2019 notes at any time prior to the one-year anniversary of each issuance into shares of common stock at a conversion price of $ 8.40 per share . on june 24 , 2020 , we entered into a securities purchase agreement ( the “ june 2020 spa ” ) with the december 2019 lenders in connection with the sale and issuance of 67,369 units , at a purchase price of $ 7.63 per unit . each unit consists of : ( i ) one share of the company 's common stock ; and ( ii ) one warrant to purchase one share of common stock with an exercise price of $ 8.40. in connection with the june 2020 spa , the company issued to the december 2019 lenders an aggregate of 67,369 shares of common stock and warrants to purchase an aggregate of 67,369 shares of common stock . the shares of common stock were issued on july 2 , 2020. simultaneous with and conditioned upon the execution of the june 2020 spa , the company and each of the december 2019 lenders , agreed to effectively cancel the december 2019 cla and the equity securities issued thereunder . in connection therewith , each of the december 2019 lenders , voluntarily waived any right to receive interest that accrued thereupon pursuant to the december 2019 clas . on september 23 , 2020 , we entered into a securities purchase agreement ( the “ september 2020 spa ” ) with medigus ltd. ( “ medigus ” ) in connection with the sale and issuance of 13,107 units , at a purchase price of $ 7.63 per unit , and for an aggregate purchase price of $ 100,000. each unit consists of : ( i ) one share of common stock and ( ii ) one warrant to purchase one share of common stock with an exercise price of $ 1.20. in connection with the september 2020 spa , the company issued to medigus an aggregate of 13,107 shares of common stock and warrants to purchase an aggregate of 13,107 shares of common stock . furthermore , the september 2020 spa contemplates an additional investment by medigus not to exceed $ 25,000 ( the “ additional investment ” ) , which investment shall be triggered following the parties ' initiation of a proof of concept procedure to test the effectiveness of the company 's sanitizers and its residual effects against different pathogens . in consideration for the additional investment , the company has agreed to issue an additional 3,277 units at a purchase price of $ 7.63 , which units shall contain the same composition of securities as described in the aforementioned description of the september 2020 spa . 59 during september 2020 , we entered into a series of convertible loan agreements ( each a “ september 2020 cla ” ) with certain lenders ( the “ september 2020 lenders ” ) , to sell convertible promissory notes with an aggregate principal amount of $ 125,000 ( the “ september 2020 notes ” ) . the september 2020 notes will bear interest at a rate of 5 % per annum . the outstanding loan amount will mature on the earlier of ( i ) the third anniversary of each september 2020 cla or ( ii ) a deemed liquidation event ( as defined therein ) . the loan amount represented by the september 2020 notes will be repaid to the september 2020 lenders according to the following schedule : ( i ) the principal amount represented by the september 2020 notes will be repaid in four bi-annual installments , commencing on the first anniversary following the closing of each september 2020 cla , and ( ii ) the interest accrued on the loan amount will be paid in two bi-annual installments , commencing on the first anniversary of the first payment of that principal amount . the september 2020 lenders may convert all or any portion of the september 2020 notes into shares of common stock at any time prior to the closing of an underwritten public offering ( the “ mandatory conversion event ” ) , at a conversion price of $ 7.63 per share .
| gross profit gross loss for the year ended december 31 , 2020 was $ 188,869 , an increase of $ 157,594 , or 504 % , compared to gross profit of $ 31,275 for the year ended december 31 , 2019. the increase is mainly a result of the increase in revenues and the decrease in cost of revenues , as detailed above . 55 research and development expenses research and development expenses consist of salaries and related expenses , share base compensation , consulting fees , service providers ' costs , related materials and overhead expenses . research and development expenses for the year ended december 31 , 2020 were $ 417,000 , a decrease of $ 198,623 , or 32 % , compared to total research and development expenses of $ 615,623 for the year ended december 31 , 2019. the decrease is mainly attributable to : ( 1 ) the decrease in professional fees , share based compensation and in payroll ; and ( 2 ) the decrease in expenses associated with international travel and field trials which have been postponed due to covid-19 . selling and marketing expenses selling and marketing expenses consist primarily of salaries and related costs for selling and marketing personnel , travel related expenses and services providers . selling and marketing expenses for the year ended december 31 , 2020 were $ 51,105 , a decrease of $ 290,954 , or 85 % , compared to total selling and marketing expenses of $ 342,058 for the year ended december 31 , 2019. the decrease is mainly attributable to the decrease in payroll expenses and service providers used in relation to selling and marketing activities mainly associated with the termination of the employment of our former vice president of sales in february 2020. general and administrative expenses general and administrative expenses consist primarily of salaries and related expenses including share based compensation and other non-personnel related expenses such as legal expenses and directors and insurance costs . general and administrative expenses for the year ended december 31 , 2020 were $ 1,070,109 , an increase of $ 65,210 , or 6 % , compared to total general and administrative expenses of $ 1,004,899 for the year ended december 31 , 2019. the increase is mainly a result of the increase in share-based compensation to our service providers and directors offset partially
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incentive management fees are calculated as a percentage of operating profit in excess of a priority return to the company , as defined in the management agreements . the company has the option to terminate the management agreements if specified performance thresholds are not satisfied . for the years ended december 31 , 2011 , 2010 and 2009 , the company incurred approximately $ 10.6 million , $ 5.1 million and $ 2.6 million in management fees . dimension , gateway , intermountain , lba , mckibbon , raymond , stonebridge , tharaldson , vista , western and white are not affiliated with either marriott or hilton , and as a result , the hotels they manage were required to obtain separate franchise agreements with each respective franchisor . the hilton franchise agreements generally provide for an initial term of 10 to 20 years . fees associated with the agreements generally include the payment of royalty fees and program fees . the marriott franchise agreements generally provide for initial terms of 13 to 28 years . fees associated with the agreements generally include the payment of royalty fees , marketing fees , reservation fees and a communications support fee based on room revenues . for the years ended december 31 , 2011 , 2010 and 2009 , the company incurred approximately $ 12.8 million , $ 6.2 million and $ 3.4 million in franchise fees . results of operations for years 2011 and 2010 during the period from the company 's initial capitalization on november 9 , 2007 to july 30 , 2008 , the company owned no properties , had no revenue , exclusive of interest income and was primarily engaged in capital formation activities . the company began operations on july 31 , 2008 when it purchased its first hotel . as of december 31 , 2011 , the company owned 88 hotels ( of which 11 were purchased and one newly constructed hotel opened during 2011 ) with 11,252 rooms as compared to 76 hotels ( of which 43 were acquired during 2010 , including 22 acquisitions during the fourth quarter of 2010 ) , with a total of 9,695 rooms as of december 31 , 2010. as a result of the acquisition activity during 2010 and 2011 , a comparison of operations for 2011 to prior periods is not representative of the results that would have occurred if all properties had been owned for the entire periods presented . hotel performance is impacted by many factors including the economic conditions in the united states as well as each locality . during the period from the second half of 2008 through 2010 , the overall weakness in the u.s. economy had a considerable negative impact on both consumer and business travel . as a result , hotel revenue in most markets in the united states has declined from 2007 and the first half of 2008. however , economic conditions have shown evidence of improvement in 2011 as compared to 2010. although the company expects continued improvement in 2012 , it is not anticipated that revenue and operating income for comparable hotels will reach pre-recession levels . the company 's hotels in general have shown results consistent with industry and brand averages for the period of ownership . revenues the company 's principal source of revenue is hotel revenue consisting of room and other related revenue . for the years ended december 31 , 2011 and 2010 , the company had hotel revenue of $ 320.5 million and $ 160.1 million , respectively . this revenue reflects hotel operations for the 88 hotels owned as of december 31 , 2011 for their respective periods of ownership by the company . for the year ended december 31 , 2011 , the hotels achieved combined average occupancy of approximately 70 % , adr of $ 107 and revpar of $ 74. for the year ended december 31 , 2010 , the hotels achieved combined average occupancy of approximately 65 % , adr of $ 102 and revpar of $ 66. adr is calculated as room revenue divided by the number of rooms sold , and revpar is calculated as occupancy multiplied by adr . since the beginning of 2010 the company has experienced an increase in demand as demonstrated by the improvement in average occupancy for its comparable hotels of 7 % in 2011 as compared to 2010. in addition , also signifying a stabilizing economy , the company experienced an increase in adr of 3 % for comparable hotels during 2011 as compared to the prior year . with demand and room rate improvement , the company and industry are forecasting a mid single digit percentage increase in revenue for 2012 as compared to 2011 for comparable hotels . while reflecting the impact of post- recessionary levels of single-digit growth in national economic activity , the company 's hotels also continue to be leaders in their respective markets . the company 's average market yield for 2011 and 2010 was 126 and 123 , respectively . the market yield is a measure of each hotel 's revpar compared to the average in the market , with 100 being the average ( the 27 index excludes hotels under renovation or open less than two years ) and is provided by smith travel research , inc. ò , an independent company that tracks historical hotel performance in most markets throughout the world . the company will continue to pursue market opportunities to improve revenue . in addition , 14 of the hotels owned as of december 31 , 2011 have opened since the beginning of 2010. generally , newly constructed hotels require 12-24 months to establish themselves in their respective markets . therefore , revenue is below anticipated or market levels for this period of time . story_separator_special_tag expenses hotel operating expenses relate to the 88 hotels owned as of december 31 , 2011 for their respective periods owned and consist of direct room expenses , hotel administrative expense , sales and marketing expense , utilities expense , repair and maintenance expense , franchise fees and management fees . for the years ended december 31 , 2011 and 2010 , hotel operating expenses totaled $ 184.6 million or 58 % of total revenue and $ 97.3 million or 61 % of total revenue . eight of the 43 hotels acquired in 2010 and six of the 12 new hotels in 2011 are newly opened hotels and as a result , hotel operating expenses as a percentage of total revenue for these hotels are higher than is expected once the properties have established themselves within their respective markets . in addition , operating expenses were impacted by several hotel renovations , with approximately 16,000 room nights out of service during 2011 and 14,400 room nights out of service during 2010 due to such renovations . although operating expenses will increase as revenue increases , the company will continue to work with its management companies to reduce costs as a percentage of revenue as aggressively as possible while maintaining quality and service levels at each property . taxes , insurance , and other expenses for the years ended december 31 , 2011 and 2010 totaled $ 19.5 million or 6 % of total revenue and $ 10.3 million or 6 % of total revenue . as discussed above , with the addition of 14 new hotels in the past two years , taxes , insurance and other expenses as a percentage of revenue is anticipated to decline as the properties become established in their respective markets . however , for comparable hotels , taxes will likely increase if the economy continues to improve and localities reassess property values accordingly . also , for comparable hotels , 2012 insurance rates have increased due to property and casualty carriers ' losses world-wide in the past year . general and administrative expense for the years ended december 31 , 2011 and 2010 was $ 8.2 million and $ 6.5 million , respectively . the principal components of general and administrative expense are advisory fees and reimbursable expenses , legal fees , accounting fees , the company 's share of the loss in its investment in apple air holding , llc , and reporting expenses . during 2011 and 2010 , the company incurred approximately $ 1.1 million and $ 500,000 , respectively in legal costs related to the legal and related matters discussed above and continued costs related to responding to securities and exchange commission inquiries . the company anticipates it will continue to incur significant legal costs at least during the first half of 2012. also , during the fourth quarter of 2011 , the company began to incur costs associated with its evaluation of a potential consolidation transaction with apple reit six , inc. , apple reit seven , inc. and apple reit eight , inc. total costs incurred were approximately $ 100,000. these costs will increase in 2012 if a transaction is pursued . acquisition related costs for the years ended december 31 , 2011 and 2010 were $ 5.3 million and $ 19.4 million , respectively . the decline was due to the reduction in acquisitions from 43 in 2010 to 11 in 2011. the costs include title , legal , accounting , pre-opening and other related costs , as well as the brokerage commission paid to asrg for the properties acquired or newly opened during the respective period . depreciation expense for the years ended december 31 , 2011 and 2010 was $ 48.4 million and $ 28.4 million , respectively . depreciation expense primarily represents expense of the company 's 88 hotel buildings and related improvements , and associated personal property ( furniture , fixtures , and equipment ) for their respective periods owned . the increase was due to the increase in the number of properties owned . interest expense for the years ended december 31 , 2011 and 2010 was $ 6.0 million and $ 2.9 million , respectively and is net of approximately $ 500,000 and $ 600,000 of interest capitalized associated with renovation and construction projects . interest expense primarily arose from debt assumed with the acquisition of 14 of the company 's hotels ( two loan assumptions during 2011 , five in 2010 , three in 2009 and four in 2008 ) . during the years ended december 31 , 2011 and 2010 , the company also recognized $ 1.6 million and $ 2.0 million in interest income , primarily representing interest on excess cash invested in short-term money market instruments 28 and two mortgage notes acquired during 2010 which are secured by two hotels . one of the notes totaling $ 11.0 million was repaid by the borrower in december 2011. results of operations for years 2010 and 2009 as of december 31 , 2010 , the company owned 76 hotels ( of which 43 were acquired during 2010 ) with 9,695 rooms as compared to 33 hotels , with a total of 3,900 rooms as of december 31 , 2009. as a result of the acquisition activity during 2009 and 2010 , a comparison of operations for 2010 to prior periods is not representative of the results that would have occurred if all properties had been owned for the entire periods presented . revenues the company 's principal source of revenue is hotel revenue consisting of room and other related revenue . for the years ended december 31 , 2010 and 2009 , the company had hotel revenue of $ 160.1 million and $ 85.2 million , respectively . this revenue reflects hotel operations for the 76 hotels acquired through december 31 , 2010 for their respective periods of ownership by the company .
| hotel operations although hotel performance can be influenced by many factors including local competition , local and general economic conditions in the united states and the performance of individual managers assigned to each hotel , performance of the hotels as compared to other hotels within their respective local markets , in general , has met the company 's expectations for the period owned . with the significant decline in economic conditions throughout the united states over the 2008 through 2010 time period , overall performance of the company 's hotels has not met expectations since acquisition . although there is no way to predict future general economic conditions , the hotel industry and the company 's revenues have shown evidence of improvement in 2011 and 22 the company anticipates mid single digit percentage increases for comparable hotels for 2012 as compared to 2011. in evaluating financial condition and operating performance , the most important indicators on which the company focuses are revenue measurements , such as average occupancy , average daily rate ( adr ) , revenue per available room ( revpar ) and market yield which compares an individual hotel 's results to others in its local market , and expenses , such as hotel operating expenses , general and administrative and other expenses described below . the following is a summary of the results from continuing operations of the 88 hotels owned as of december 31 , 2011 for their respective periods of ownership by the company : replace_table_token_8_th ( 1 ) calculated from data provided by smith travel research , inc. ò excludes hotels under renovation or opened less than two years during the applicable periods . legal proceedings and related matters the term the apple reit companies means the company , apple reit six , inc. , apple reit seven , inc. , apple reit eight , inc. and apple reit ten , inc. on december 13 , 2011 , the united states district court for the eastern district of new york ordered that three putative class actions , kronberg , et al . v. david lerner associates , inc. , et al. , kowalski
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due to the increase in net interest income and decrease in provision outweighting the offset in real estate owned expense , pre-tax income for our community banking segment increased $ 1.4 million to $ 15.2 million during the year ended december 31 , 2014 , compared to $ 13.8 million during the year ended december 31 , 2013. offsetting the increase in pre-tax income generated from our community banking segment , pre-tax income from our mortgage banking segment decreased $ 5.0 million to $ 4.1 million during the year ended december 31 , 2014 , compared to $ 9.1 million during the year ended december 31 , 2013. sales volumes decreased slightly compared to the prior year , however , sales margins remained consistent . mortgage banking segment revenues decreased $ 3.2 million , or 3.7 % , to $ 81.7 million during the year ended december 31 , 2014 compared to $ 84.9 million during the year ended december 31 , 2013. in addition to the decrease in mortgage banking income , 2013 pre-tax income decreased in the mortgage banking segment due to an increase in general operating expenses . total noninterest expense increased $ 2.0 million , or 2.7 % to $ 78.3 million during the year ended december 31 , 2014 compared to $ 76.2 million during the year ended december 31 , 2013. the increase in expense resulted from an increase in occupancy , office furniture , and equipment expense , due to the relocation of the mortgage banking segment 's corporate headquarters to a larger leased facility during the year ended december 31 , 2013. consolidated net income totaled $ 12.7 million for the year ended december 31 , 2014 , compared to $ 14.7 million during the year ended december 31 , 2013. income tax expense totaled $ 7.2 million for the year ended december 31 , 2014 , which represents a 36.0 % effective tax rate compared to a 37.0 % effective tax rate in the prior year . 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 ; comparison of the estimated current book value to that of updated sales values experienced on similar real estate owned ; comparison of the estimated current book value to that of updated values seen on more current appraisals of similar properties ; and comparison of 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 ) . - 37 - waterstone bank also establishes valuation allowances based on an evaluation of the various risk components that are inherent in the credit portfolio ( general component ) . the risk components that are evaluated include past loan loss experience ; the level of non-performing and classified assets ; current economic conditions ; volume , growth , and composition of the loan portfolio ; adverse situations that may affect the borrower 's ability to repay ; the estimated value of any underlying collateral ; regulatory guidance ; and other relevant factors . the allowance is increased by provisions charged to earnings and recoveries of previously charged-off loans and reduced by charge-offs . charge-offs approximate the amount by which the outstanding principal balance exceeds the estimated net realizable value of the underlying collateral . the appropriateness of the allowance for loan losses is reviewed and approved quarterly by the waterstone bank board of directors . the allowance reflects management 's best estimate of the amount needed to provide for the probable loss on impaired loans and other inherent losses in the loan portfolio , and is based on a risk model developed and implemented by management and approved by the waterstone bank board of directors . actual results could differ from this estimate , and future additions to the allowance may be necessary based on unforeseen changes in loan quality and economic conditions . more specifically , if our future charge-off experience increases substantially from our past experience ; or if the value of underlying loan collateral , in our case real estate , declines in value by a substantial amount ; or if unemployment in our primary market area increases significantly ; our allowance for loan losses may be inadequate and we will incur higher provisions for loan losses and lower net income in the future . in addition , state and federal regulators periodically review the waterstone bank allowance for loan losses . such regulators have the authority to require waterstone bank to recognize additions to the allowance at the time of their examination . income taxes . the company and its subsidiaries file consolidated federal , combined state income tax , and separate state income tax returns . story_separator_special_tag the provision for income taxes is based upon income in the consolidated financial statements , rather than amounts reported on the income tax return . 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 as well as for net operating loss carry forwards . 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 as income or expense in the period that includes the enactment date . under generally accepted accounting principles , a valuation allowance is required to be recognized if it is `` more likely than not '' that a deferred tax asset will not be realized . the determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management 's evaluation of both positive and negative evidence , the forecasts of future income , applicable tax planning strategies , and assessments of current and future economic and business conditions . examples of positive evidence may include the existence of taxes paid in available carry-back years as well as the probability that taxable income will be generated in future periods . examples of negative evidence may include cumulative losses in a current year and prior two years and general business and economic trends . positions taken in the company 's tax returns are subject to challenge by the taxing authorities upon examination . the benefit of uncertain tax positions are initially recognized in the financial statements only when it is more likely than not the position will be sustained upon examination by the tax authorities . such tax positions are both initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 % likelihood of being realized upon settlement with the tax authority , assuming full knowledge of the position and all relevant facts . interest and penalties on income tax uncertainties are classified within income tax expense in the income statement . fair value measurements . the company determines the fair value of its assets and liabilities in accordance with asc 820. asc 820 establishes a standard framework for measuring and disclosing fair value under gaap . a number of valuation techniques are used to determine the fair value of assets and liabilities in the company 's financial statements . the valuation techniques include quoted market prices for investment securities , appraisals of real estate from independent licensed appraisers and other valuation techniques . fair value measurements for assets and liabilities where limited or no observable market data exists are based primarily upon estimates , and are often calculated based on the economic and competitive environment , the characteristics of the asset or liability and other factors . therefore , the valuation results can not be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability . additionally , there are inherent weaknesses in any calculation technique , and changes in the underlying assumptions used , including discount rates and estimates of future cash flows , could significantly affect the results of current or future values . significant changes in the aggregate fair value of assets and liabilities required to be measured at fair value or for impairment are recognized in the income statement under the framework established by gaap . comparison of financial condition at december 31 , 2014 and at december 31 , 2013 total assets . total assets decreased by $ 163.7 million , or 8.4 % , to $ 1.78 billion at december 31 , 2014 from $ 1.95 billion at december 31 , 2013. the decrease in total assets primarily reflects the return of funds received in connection with our second-step stock offering . as of december 31 , 2013 , the company had received stock subscription proceeds totaling $ 388.7 million . prior to the completion of the stock offering , $ 16.5 million in proceeds were returned to subscribers who had canceled their subscription . upon the completion of the stock offering in january 2014 , approximately $ 125.3 million in oversubscribed funds were returned to stock subscribers . cash and cash equivalents . cash and cash equivalents decreased $ 256.3 million to $ 172.8 million at december 31 , 2014 from $ 429.2 million at december 31 , 2013. as of december 31 , 2013 , the company had received stock subscription proceeds totaling $ 388.7 million . prior to the completion of the stock offering , $ 16.5 million in funds were returned to subscribers who had canceled their subscriptions . upon the completion of the stock offering in january 2014 , approximately $ 125.3 million in oversubscribed funds were returned to stock subscribers . during the year ended december 31 , 2014 cash and cash equivalents were also used to fund a $ 60.0 million increase in securities available for sale , a $ 28.1 million increase in loans held for sale , a $ 10.0 million increase in bank owned life insurance , and a $ 22.9 million loan to the esop plan . securities available for sale . securities available for sale increased by $ 60.0 million , or 28.1 % , to $ 273.4 million at december 31 , 2014 from $ 213.4 million at december 31 , 2013. this increase reflects a $ 39.8 million increase in government sponsored enterprise issued collateralized mortgage obligations , a $ 12.2 million increase in mortgage-backed securities and an $ 18.3 million increase in municipal securities , partially offset by an $ 11.2 million decrease in government sponsored enterprise bonds . loans held for sale .
| loans originated for sale in the secondary market totaled $ 1.66 billion during the year ended december 31 , 2014 , compared to the $ 1.75 billion originated during the year ended december 31 , 2013. sales margin remained consistent year over year . during the year ended december 31 , 2014 , loan origination volume shifted towards loans made for the purpose of a purchase . loans originated for the purpose of a residential property purchase , which generally yield a higher margin than loans originated for the purpose of a refinance , comprised 87.0 % of total originations during the year ended december 31 , 2014 , compared to 67.9 % during the year ended december 31 , 2013. the mix of loan type stayed consistent with conventional loans and governmental loans comprising 62.6 % and 37.4 % of all loan originations , respectively , during the year ended december 31 , 2014. during the year ended december 31 , 2013 conventional loans and governmental loans comprised 62.7 % and 37.3 % of all loan originations , respectively . 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 . - 41 - during the year ended december 31 , 2014 , the company sold mortgage servicing rights related to $ 713.0 million in loans receivable with a book value of $ 4.6 million at a gain of $ 2.5 million . the sales were timed to take advantage of preferable market pricing conditions . during the year ended december 31 , 2013 , the company sold $ 541.6 million in loans receivable with a book value $ 2.8 million at a gain of $ 2.6 million . total compensation , payroll taxes and other employee benefits decreased $ 858,000 , or 1.5 % , to $ 54.6 million for the year ended december 31 , 2014 from $ 55.5 million during the year ended december 31 , 2013 .
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the strength , value and quality of our products were recognized with several industry awards and honors , notably for the dxi6700 and vmpro 4000 , in addition to our enterprise and midrange tape automation libraries . we offer products and solutions in several high growth markets , namely the markets for disk-based back up , big data , virtual data protection and cloud based solutions . our opportunity and goal in these markets is to increase our product and solution offerings and to significantly grow revenue from sales of our disk systems and software solutions to increase total revenue . we project total revenue in the tape automation market will be essentially the same over the next few years with growth in demand for tape automation products used as a storage tier in the big data and archive market offset by declines in demand for tape automation products in the data protection market . our opportunity and goal for tape automation systems is to grow our market share with our innovative products . our goal for fiscal 2013 is to grow total revenue , driven primarily by increased revenue from our disk systems and software solutions , with minimal expected growth in branded tape automation revenue . we expect this revenue growth to be tempered by declines in tape automation revenue from oem customers and a decline in royalty revenue . story_separator_special_tag revenue due to declines in enterprise and midrange product sales mostly offset by increased entry-level product sales from the addition of the scalar i40 and i80 products . product revenue from devices and non-royalty media sales decreased 15 % to $ 92.1 million primarily due to anticipated decreases in sales of older oem device technologies that reached , or are nearing , end of life . we continued to be strategic with media sales in fiscal 2011 and chose to not pursue opportunities that would not provide sufficient margins . media revenues were approximately the same as fiscal 2010. service revenue service revenue includes revenue from sales of hardware service contracts , product repair , installation and professional services . hardware service contracts are typically purchased by our customers to extend the warranty or to provide faster service response time , or both . service revenue decreased 4 % to $ 144.4 million in fiscal 2012 compared to fiscal 2011 primarily due to lower hardware service contract revenues from end of service life on higher revenue service contracts for certain legacy branded tape automation products and to a lesser extent from decreased oem product repair services . service contracts on certain newer technology branded products provide lower revenue than service contracts on older technology branded products nearing end of service life . oem service revenue decreases are primarily due to a number of our device products that reached end of service life in fiscal 2011 and fiscal 2012. service revenue decreased 3 % to $ 151.1 million in fiscal 2011 compared to fiscal 2010 primarily due to planned decreases in oem product repair services and , to a lesser extent , reduced hardware service contracts from our oem customers . oem service revenue decreases are due to many of our device products that reached , or are nearing , end of service life . service revenue from our branded products was approximately the same as fiscal 2010 . 28 royalty revenue royalty revenue declined 12 % , or $ 7.6 million , in fiscal 2012 and decreased 7 % , or $ 4.6 million , in fiscal 2011 primarily due to expected decreases of maturing dlt media unit sales by media licensees in both fiscal years . royalties from lto media decreased 4 % in fiscal 2012 primarily due to decreased lto media unit sales by media licensees . in fiscal 2011 , the dlt royalty decrease was partially offset by increased royalties from lto media . gross margin replace_table_token_4_th * fiscal 2012 total gross margin includes a $ 0.3 million restructuring benefit related to cost of revenue and fiscal 2011 total gross margin includes $ 0.6 million of restructuring charges related to cost of revenue . fiscal 2012 compared to fiscal 2011 the 10 basis point decrease in gross margin percentage in fiscal 2012 compared to fiscal 2011 was due to largely offsetting factors . gross margin decreased due to less high margin revenue in our product mix , largely from decreased oem deduplication software revenue and royalty revenue . both oem deduplication software and royalty revenue provide among the highest margins of our portfolio . gross margin was favorably impacted by lower intangible amortization from certain intangibles becoming fully amortized in fiscal 2011 and fiscal 2012. fiscal 2011 compared to fiscal 2010 the 100 basis point increase in gross margin percentage in fiscal 2011 compared to fiscal 2010 was largely due to lower intangible amortization from certain intangibles becoming fully amortized in the first half of fiscal 2011. in addition , gross margin was favorably impacted by the continued shift in sales mix toward higher margin products and services . product sales through our branded channels comprised a higher percentage of non-royalty revenue in fiscal 2011 than fiscal 2010. branded sales comprised 79 % of non-royalty revenue in fiscal 2011 , compared to 74 % for fiscal 2010. sales of branded products typically generate higher gross margins than sales to our oem customers ; however , as noted above , oem deduplication software revenue provides one of our highest product margins . contributing to the change in our revenue mix in fiscal 2011 was our emphasis on sales growth of our disk systems and software solutions which increased to 17 % of revenue in fiscal 2011 compared to 12 % of revenue in the prior year . the gross margin percentage increase was tempered by the $ 4.6 million decrease in royalty revenue . product gross margin fiscal 2012 compared to fiscal 2011 product gross margin dollars decreased 1 % in fiscal 2012 compared to fiscal 2011 primarily due to the 1 % decrease in product revenue . story_separator_special_tag however , product gross margin percentage improved slightly from fiscal 2011. the product gross margin increase was primarily due to a $ 7.1 million decrease in intangible amortization in fiscal 2012 , mostly offset by the decrease in high margin oem deduplication software revenue compared to fiscal 2011 . 29 fiscal 2011 compared to fiscal 2010 product gross margin dollars increased $ 7.0 million , or 5 % , and product gross margin percentage improved approximately 150 basis points from fiscal 2010 although product revenue was approximately the same in fiscal 2011 compared to fiscal 2010. these margin increases were primarily due to a $ 7.4 million decrease in intangible amortization in fiscal 2011. product gross margin was also favorably impacted by the change in our product revenue mix compared to fiscal 2010. revenue from branded product sales increased 7 % in fiscal 2011. in addition , revenue from disk systems and software solutions increased to 24 % of product revenue in fiscal 2011 , compared to 18 % of product revenue in fiscal 2010. offsetting the change in product revenue mix was increased warranty expense due to warranty benefits in fiscal 2010 compared to warranty expense in fiscal 2011. warranty benefits in the prior year were attributable to decreasing overall service and repair costs , a declining number of in-warranty units repaired and numerous products reaching the end of their warranty coverage . service gross margin fiscal 2012 compared to fiscal 2011 service gross margin dollars decreased $ 0.9 million , or approximately 2 % , in fiscal 2012 compared to fiscal 2011. our service gross margin percentage increased 110 basis points to 38.7 % in fiscal 2012 , largely due to decreased external provider expenses and inventory allowance expense . external service provider expense decreased due to a combination of bringing repair of additional product lines in-house and negotiating lower rates on the renewals of contracts with certain service providers in fiscal 2012. we had higher inventory allowance expense in fiscal 2011 due to end of service life plans for several products . in addition , we had a change in the mix of services for oem repairs and for our branded products under contract . our service activities for fiscal 2012 reflected a greater proportion of revenue from branded products under contract , which have relatively higher margins than margins for oem repair services . fiscal 2011 compared to fiscal 2010 service gross margin dollars increased $ 1.1 million , or approximately 2 % , despite a 3 % reduction in service revenue in fiscal 2011 compared to the prior year . additionally , our service gross margin percentage increased 200 basis points to 37.6 % in fiscal 2011 from 35.6 % in fiscal 2010 , primarily due to expense reductions in our service delivery model . in addition , branded service revenue comprised a larger proportion of service revenue in fiscal 2011 than in fiscal 2010 primarily due to declines in repairs for oem customers . we reduced expense in our service delivery model by repairing certain product lines in our facilities at a lower cost in fiscal 2011 than we incurred with external service providers in prior years . research and development expenses replace_table_token_5_th fiscal 2012 compared to fiscal 2011 the increase in research and development expenses for fiscal 2012 was primarily due to a $ 1.7 million increase in salaries and benefits from investment in our disk systems software and hardware and our virtual systems engineering teams to support new product development efforts . partially offsetting this increase was a $ 0.5 million decrease in travel expenses compared to the prior year . 30 fiscal 2011 compared to fiscal 2010 the increase in research and development expenses for fiscal 2011 was primarily due to a $ 3.7 million increase in salaries and benefits from investment in our disk systems and software engineering teams to support new product development efforts . partially offsetting this increase was a $ 0.8 million decrease in project materials due to the types of products under development and related testing material requirements compared to the prior year . sales and marketing expenses replace_table_token_6_th fiscal 2012 compared to fiscal 2011 sales and marketing expenses increased in fiscal 2012 primarily due to a $ 7.2 million increase in salaries and benefits , including commissions . commissions increased due to increased branded product revenue and salaries and benefits increased largely due to growing our branded sales force . in addition , travel expenses increased $ 1.0 million due in part to increased airfare and fuel costs , incremental travel by our sales engineers to support customer sales and increased travel for sales training events to expand our position with existing and new channel partners to drive future growth . fiscal 2011 compared to fiscal 2010 sales and marketing expenses increased in fiscal 2011 primarily due to a $ 5.4 million increase in salaries and benefits from growing our branded sales force and marketing team . in addition , advertising and marketing expenditures increased by $ 1.8 million from supporting new product introductions and efforts to expand our position with existing and new channel partners to drive future growth . general and administrative expenses replace_table_token_7_th fiscal 2012 compared to fiscal 2011 the increase in general and administrative expenses was primarily due to a $ 2.2 million increase in salaries and benefits primarily from increased stock compensation expense due to equity grants related to promotions and merit increases . in addition , we had $ 1.4 million in credits in fiscal 2011 primarily due to accounts receivable recoveries and a litigation settlement that were not repeated . we may incur higher than typical legal costs in fiscal 2013 to defend ourselves while a patent infringement lawsuit brought by compression technology solutions llc ( cts ) is ongoing . the cts lawsuit is discussed in more detail in note 13 commitments and contingencies under legal proceedings .
| operating expenses increased $ 11.9 million , or 5 % , primarily due to increased sales and marketing expenses , largely due to growing our branded sales force to increase branded revenue and expand our position with existing and new channel partners to drive future growth . we had $ 5.2 million in income from operations in fiscal 2012 , down from $ 24.7 million in fiscal 2011. interest expense decreased in fiscal 2012 largely due to a decrease in average interest rates from refinancing subordinated term debt in fiscal 2011. in addition during fiscal 2012 , we refinanced our senior secured term debt with a revolving credit facility with terms that are financially more beneficial and provide additional flexibility to run our business . during fiscal 2012 , we paid $ 104.3 million in principal to fully repay the senior secured term debt and borrowed $ 49.5 million on a new revolving credit line . we continued to generate cash from operating activities , with $ 45.7 million in fiscal 2012 compared to $ 52.3 million in fiscal 2011 . 26 results of operations for fiscal 2012 , 2011 and 2010 revenue replace_table_token_2_th total revenue decreased in fiscal 2012 compared to fiscal 2011 primarily due to expected reductions in oem and royalty revenue . the largest decreases in oem revenue were from lower deduplication software , tape automation products , devices and service revenue . partially offsetting these decreases were increased sales of branded disk systems and software solutions in fiscal 2012. total revenue decreased in fiscal 2011 compared to fiscal 2010 primarily due to expected reductions in oem , service and royalty revenue . we had a slight increase in product revenue in fiscal 2011 primarily due to increased sales of disk systems and software solutions revenue , largely offset by expected reductions in oem devices and media revenue from a number of devices reaching end of life and expected decreases in oem tape automation systems revenue . product revenue replace_table_token_3_th fiscal 2012 compared to
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on march 12 , 2010 , the bank acquired certain assets and liabilities of the former statewide bank , a full-service community bank formerly headquartered in covington , louisiana , from the fdic . as a result of the statewide acquisition , the bank 's branch office network was expanded to include six branches in the northshore ( of lake pontchartrain ) region of louisiana . assets acquired in the statewide transaction totaled $ 188.0 million , which included loans of $ 110.4 million , investment securities of $ 24.8 million and cash of $ 11.6 million . in addition , the bank recorded a fdic asset , representing the portion of estimated losses covered by loss sharing agreements between the bank and the fdic , of $ 34.4 million . the loss sharing agreements between the bank and the fdic afford us significant protection against future losses in the loan portfolio ( covered loans ) and repossessed assets ( collectively referred to as covered assets ) acquired in the statewide transaction . the bank also recorded a core deposit intangible asset of $ 1.4 million and goodwill of $ 560,000 relating to the statewide acquisition , and assumed liabilities of $ 223.9 million , which included $ 206.9 million in deposits and $ 16.8 million in fhlb advances . critical accounting policies the accounting and financial reporting policies of the company conform gaap and to general practices within the banking industry . accordingly , the financial statements require certain estimates , judgments and assumptions , which are believed to be reasonable , based upon the information available . these estimates and assumptions affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the periods presented . the following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results . these policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods . 23 allowance for loan losses . the allowance for loan losses on loans in our portfolio is maintained at an amount which management determines covers the reasonably estimable and probable losses on such portfolio . the allowance for loan losses is established through a provision for loan losses charged to expense . loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely . subsequent recoveries are added to the allowance . the allowance is an amount that represents the amount of probable and reasonably estimable known and inherent losses in the loan portfolio , based on evaluations of the collectability of loans . the evaluations take into consideration such factors as changes in the types and amount of loans in the loan portfolio , historical loss experience , adverse situations that may affect the borrower 's ability to repay , estimated value of any underlying collateral , estimated losses relating to specifically identified loans and current economic conditions . this evaluation is inherently subjective as it requires material estimates including , among others , exposure to default , the amount and timing of expected future cash flows on loans , value of collateral , estimated losses on our commercial and residential loan portfolios as well as consideration of general loss experience . all of these estimates may be susceptible to significant change . while management uses the best information available to make loan loss allowance evaluations , adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance . the occ , as an integral part of its examination processes , periodically reviews our allowance for loan losses . the occ may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations . to the extent that actual outcomes differ from management 's estimates , additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods . as part of the risk management program , an independent review is performed on the loan portfolio , which supplements management 's assessment of the loan portfolio and the allowance for loan losses . the result of the independent review is reported directly to the audit committee of the board of directors . acquired loans from the statewide and gsfc transactions were recorded at fair value at the date of acquisition with no carryover of the allowance for loan losses . as of december 31 , 2013 , our allowance for loan losses included $ 248,000 allocated to acquired loans with deteriorated credit quality . our accounting policy for acquired loans is described below . accounting for loans . the following briefly describes the distinction between originated , non-covered acquired and covered loans and certain significant accounting policies relevant to each category . originated loans loans originated for investment are reported at the principal balance outstanding net of unearned income . interest on loans and accretion of unearned income are computed in a manner that approximates a level yield on recorded principal . interest on loans is recorded as income as earned . the accrual of interest on an originated loan is discontinued when it is probable the borrower will not be able to meet payment obligations as they become due . the company maintains an allowance for loan losses on originated loans that represents management 's estimate of probable losses incurred in this portfolio category . story_separator_special_tag non-covered acquired loans non-covered acquired loans at december 31 , 2013 and 2012 are those associated with our acquisition of gs financial corp. ( gsfc ) , the former holding company of guaranty savings bank of metairie , louisiana on july 15 , 2011. these loans were recorded at estimated fair value at the acquisition date with no carryover of the related allowance for loan losses . the non-covered acquired loans were segregated between those considered to be performing ( acquired performing ) and those with evidence of credit deterioration ( acquired impaired ) , and then further segregated into loan pools designed to facilitate the development of expected cash flows . the fair value estimate for each pool of acquired performing and acquired impaired loans was based on the estimate of expected cash flows , both principal and interest , from that pool , discounted at prevailing market interest rates . the difference between the fair value of an acquired performing loan pool and the contractual amounts due at the acquisition date ( the fair value discount ) is accreted into income over the estimated life of the pool . management estimates an allowance for loan losses for acquired performing loans using a methodology similar to that used for originated loans . the allowance determined for each loan pool is compared to the remaining fair value discount for that pool . if the allowance amount calculated under the company 's methodology is greater than the company 's 24 remaining discount , the additional amount called for is added to the reported allowance through a provision for loan losses . if the allowance amount calculated under the company 's methodology is less than the company 's recorded discount , no additional allowance or provision is recognized . actual losses first reduce any remaining fair value discount for the loan pool . once the discount is fully depleted , losses are applied against the allowance established for that pool . acquired performing loans are placed on nonaccrual status and considered and reported as nonperforming or past due using the same criteria applied to the originated portfolio . the excess of cash flows expected to be collected from an acquired impaired loan pool over the pool 's estimated fair value at acquisition is referred to as the accretable yield and is recognized in interest income using an effective yield method over the remaining life of the pool . each pool of acquired impaired loans is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows . management recasts the estimate of cash flows expected to be collected on each acquired impaired loan pool periodically . if the present value of expected cash flows for a pool is less than its carrying value , an impairment is recognized by an increase in the allowance for loan losses and a charge to the provision for loan losses . if the present value of expected cash flows for a pool is greater than its carrying value , any previously established allowance for loan losses is reversed and any remaining difference increases the accretable yield which will be taken into interest income over the remaining life of the loan pool . acquired impaired loans are generally not subject to individual evaluation for impairment and are not reported with impaired loans , even if they would otherwise qualify for such treatment . covered loans and the related loss share receivable the loans purchased in the bank 's 2010 acquisition of certain assets and liabilities of statewide bank are covered by loss share agreements between the fdic and the bank that afford the bank significant loss protection . in connection with the transaction , home bank entered into loss sharing agreements with the fdic which cover the acquired loan portfolio ( covered loans ) and repossessed assets ( collectively referred to as covered assets ) . under the terms of the loss sharing agreements , the fdic will , subject to the terms and conditions of the agreements , absorb 80 % of the first $ 41,000,000 of losses incurred on covered assets and 95 % of losses on covered assets exceeding $ 41,000,000 during the periods specified in the loss sharing agreements . these covered loans are accounted for as acquired impaired loans as described above . the loss share receivable is measured separately from the related covered loans as it is not contractually embedded in the loans and is not transferable should the loans be sold . the fair value of the loss share receivable at acquisition was estimated by discounting projected cash flows related to the loss share agreements based on the expected reimbursements for losses using the applicable loss share percentages . the discounted amount is accreted into non-interest income over the remaining life of the covered loan pool or the life of the loss share agreement . the loss share receivable is reviewed and updated prospectively as loss estimates related to covered loans change . increases in expected reimbursements under the loss sharing agreements from a covered loan pool will lead to an increase in the loss share receivable . a decrease in expected reimbursements is reflected first as a reversal of any previously recorded increase in the loss share receivable on the covered loan pool with the remainder reflected as a reduction in the loss share receivable 's accretion rate . increases and decreases in the loss share receivable can result in reductions in or additions to the provision for loan losses , which serve to offset the impact on the provision from impairment recognized on the underlying covered loan pool and reversals of previously recognized impairment . the impact on operations of a reduction in the loss share receivable 's accretion rate is associated with an increase in the accretable yield on the underlying loan pool . income taxes .
| interest expense decreased $ 303,000 , or 5.8 % , over the same period as the average rate paid on deposit accounts declined 21 basis points year over year . the decrease was primarily due to lower rates paid on interest-bearing liabilities as the result of reduced market rates and an improved mix of interest-bearing liabilities . the company 's net interest spread was 4.52 % , 4.66 % and 4.47 % for the years ended december 31 , 2013 , 2012 and 2011 , respectively . the company 's net interest margin , which is net interest income as a percentage of average interest-earning assets , was 4.65 % , 4.81 % and 4.64 % during the years ended december 31 , 2013 , 2012 and 2011 , respectively . in accordance with asc 310 , receivables , the company evaluates the expected cash flows of acquired loans throughout the year . as cash flow expectations related to covered loans change , the company adjusts the accretable yield recognized on covered loans . these same cash flow expectations affect the level of fdic asset amortization recorded , which also impacts the yield recognized on covered loans . as a result of improved estimated cash flows on covered loans , which are expected to result in lower payments from the fdic , the company amortized $ 1,817,000 of the fdic asset during 2013 . 35 the covered loan portfolio yielded 11.08 % , 9.40 % and 7.31 % for the years ended december 31 , 2013 , 2012 and 2011 , respectively . excluding covered loans , the yield on loans would have been 5.65 % at december 31 , 2013 , compared to 6.09 % and 6.27 % for the years ended december 31 , 2012 and 2011 , respectively . as of december 31 , 2013 , the company had an fdic asset in the amount of $ 12.7 million . the company 's remaining fdic asset consists of two primary components : schedule a ( single family residential mortgage and home equity loans ) and schedule b ( all other covered loans ) . the fdic asset related to schedule a loans totaled $ 4.2 million at december 31 , 2013. schedule
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● our 2015 results also included the following : $ 557 million tax charge and a $ 362 million ( $ 235 million , net of income tax ) charge for interest on uncertain tax positions r ecorded under accounting guidance for the recognition of tax uncertainties related to the u.s. tax treatment of taxes paid by a wholly-owned united kingdom ( “ u.k. ” ) investment subsidiary of mlic $ 183 million of tax benefits related to ( i ) restructuring in chile ; ( ii ) a change in tax rate in japan ; ( iii ) the repatriation of earnings from japan ; and ( iv ) the devaluation of the peso in argentina ● our 2014 results also included the following : $ 104 million , net of income tax , of favorable reserve adjustments related to disability premium waivers in the retail life business $ 117 million , net of income tax , increase in the litigation reserve related to asbestos charge of $ 57 million , net of income tax , related to delayed settlement interest on unclaimed funds held by state governments in the retail life business charges totaling $ 57 million , net of income tax , related to a settlement of a licensing matter with the department of financial services and the district attorney , new york county net tax charge of $ 9 million related to : ( i ) charge related to a tax reform bill in chile ; and ( ii ) benefit related to the filing of the company 's u.s. federal tax return for a more in-depth discussion of our consolidated results , see “ — results of operations — consolidated results ” and “ — results of operations — consolidated results — operating. ” 77 year ended december 31 , 2014 compared with the year ended december 31 , 2013 consolidated results highlights income ( loss ) from continuing operations , net of income tax , up $ 2.9 billion : ● net derivative gains ( losses ) favorable by $ 4.6 billion ( $ 3.0 billion , net of income tax ) driven by changes in interest rates and foreign currency exchange rates ● annual assumption reviews related to reserves and dac favorable by $ 262 million ( $ 174 million , net of income tax ) ● net investment gains ( losses ) unfavorable by $ 358 million ( $ 233 million , net of income tax ) primarily driven by a loss on the disposition of mal ( 1 ) see “ — results of operations — consolidated results ” and “ — non-gaap and other financial disclosures ” for reconciliations and definitions of non-gaap financial measures . consolidated results - operating highlights operating earnings available to common shareholders up $ 299 million : ● results of operations impacted by : ( i ) higher net investment income from portfolio growth ; ( ii ) higher asset-based fee income ; ( iii ) lower interest credited expense ; ( iv ) unfavorable mortality , morbidity and claims experience ; ( v ) lower investment yields ; and ( vi ) additional items described below . ● fourth quarter 2013 acquisition of provida favorable by $ 166 million , net of income tax ( excluding impact of tax reform charge in chile ) ● our 2014 results also included the following : a $ 58 million non-tax deductible charge related to ppaca additional items presented in “ —year ended december 31 , 2015 compared with the year ended december 31 , 2014 — consolidated results — operating highlights ” above ● our 2013 results also included the following : a $ 101 million , net of income tax , increase in the litigation reserve related to asbestos a $ 57 million , net of income tax , reserve strengthening in australia for a more in-depth discussion of our consolidated results , see “ — results of operations — consolidated results ” and “ — results of operations — consolidated results — operating. ” consolidated company outlook as part of an enterprise-wide strategic initiative , we announced that , by 2016 , we expected to increase our operating return on common stockholders ' equity ( “ operating roe ” ) , excluding aoci , other than fcta , driven by higher operating earnings . in 2016 , we expect our operating roe , excluding aoci other than fcta , to be approximately 11 % . when making projections , we must rely on the accuracy of our assumptions about future economic and business conditions , which can be affected by known and unknown risks and other uncertainties . our assumptions have been and will continue to be impacted by ( i ) metlife , inc. 's plan to pursue the separation , ( ii ) regulatory uncertainty regarding capital requirements applicable to us , as a non-bank sifi , which , among other things , impacted the level of our share repurchases , ( iii ) lower investment margins ( primarily in the u.s. ) as a result of the sustained low interest rate environment , ( iv ) lower than anticipated merger and acquisition activity , and ( v ) the impact on our foreign operations of the strengthening of the u.s. dollar . 78 we will need to take the above-referenced factors into account when formulating further assumptions . due to the fact that the separation is a significant restructuring of our business , we will not be able to further expand our outlook until we have further clarity on the nature of the separation . the separation is consistent with our “ accelerating value ” strategic initiative , giving greater weight to our commitments to maximize shareholder value and , subject to board approval , regulatory constraints and acquisition opportunities , pay out our free cash flow to shareholders . other key information basis of presentation certain international subsidiaries have a fiscal year cutoff of november 30 th . story_separator_special_tag accordingly , the company 's consolidated financial statements reflect the assets and liabilities of such subsidiaries as of november 30 , 2015 and 2014 and the operating results of such subsidiaries for the years ended november 30 , 2015 , 2014 and 2013 . the company is in the process of converting to calendar year reporting for these subsidiaries . these conversions are expected to be substantially complete in the first quarter of 2016. the impact of the conversions on our financial statements to date has been de minimis and , therefore , has been reported in net income in the quarter of conversion . significant events on january 12 , 2016 , the company announced its plan to pursue the separation . the company is currently evaluating structural alternatives for the proposed separation , including a public offering of shares in an independent , publicly traded company , a spin-off , or a sale . the completion of a public offering would depend on , among other things , the sec filing and review process , as well as market conditions . any separation that might occur will be subject to the satisfaction of various conditions and approvals , including approval of any transaction by the metlife , inc. board of directors , satisfaction of any applicable requirements of the sec , and receipt of insurance and other regulatory approvals and other anticipated conditions . in november 2014 , micc , a wholly-owned subsidiary of metlife , inc. , re-domesticated from connecticut to delaware , changed its name to metlife insurance company usa and merged with its subsidiary , mli-usa , and its affiliate , mliic , each a u.s. insurance company that issued variable annuity products in addition to other products , and exeter , a former offshore , captive reinsurance subsidiary of metlife , inc. and affiliate of micc that mainly reinsured guarantees associated with variable annuity products . the surviving entity of the mergers was metlife usa . the mergers have provided increased transparency relative to our capital allocation and variable annuity risk management . see “ business — regulation — u.s. regulation — insurance regulation — insurance regulatory examinations and other activities ” and “ — liquidity and capital resources — the company — capital — affiliated captive reinsurance transactions ” for information on our use of captive reinsurers . in october 2013 , metlife , inc. completed its acquisition of provida , the largest private pension fund administrator in chile based on assets under management and number of pension fund contributors . the acquisition of provida supports the company 's growth strategy in emerging markets and further strengthens the company 's overall position in chile . see note 3 of the notes to the consolidated financial statements . industry trends we continue to be impacted by the unstable global financial and economic environment that has been affecting the industry . financial and economic environment our business and results of operations are materially affected by conditions in the global capital markets and the economy generally . stressed conditions , volatility and disruptions in global capital markets , particular markets , or financial asset classes can have an adverse effect on us , in part because we have a large investment portfolio and our insurance liabilities are sensitive to changing market factors . global market factors , including interest rates , credit spreads , equity , oil and commodity prices , real estate markets , foreign currency exchange rates , consumer spending , business investment , government spending , the volatility and strength of the capital markets , deflation and inflation , all affect the business and economic environment and , ultimately , the amount and profitability of our business . disruptions in one market or asset class can also spread to other markets or asset classes . upheavals in the financial markets can also affect our business through their effects on general levels of economic activity , employment and customer behavior . see “ risk factors — economic environment and capital markets-related risks — we are exposed to significant global financial and capital markets risks which may adversely affect our results of operations , financial condition and liquidity , and may cause our net investment income to vary from period to period , ” and “ risk factors — economic environment and capital markets-related risks — if difficult conditions in the global capital markets and the economy generally persist , they may materially adversely affect our business and results of operations. ” 79 weakness in the energy and metals and mining sectors and concerns about the political and or economic stability of countries in regions outside the eu , including china , ukraine , russia , argentina , brazil , japan and the middle east , as well as puerto rico , have contributed to global market volatility . see “ — investments — current environment — selected country and sector investments. ” concerns about global economic conditions , capital markets and the solvency of certain eu member states and europe 's perimeter region , their banking systems and the financial institutions that have significant direct or indirect exposure to debt issued by these countries or their respective banking systems , have also been a cause of elevated levels of market volatility . see “ — investments — current environment ” for information regarding our exposure to obligations of european governments , european private obligors and europe 's perimeter region . contributing to such volatility are concerns that such countries could default on their obligations , have to restructure their outstanding debt , or that financial institutions with significant holdings of sovereign or private debt of such countries , including europe 's perimeter region , could experience financial stress , any of which could have significant adverse effects on the european and global economies and on financial markets , generally .
| results for 2014 include a $ 161 million ( $ 105 million , net of income tax ) benefit associated with our annual assumption review related to reserves and dac , of which $ 137 million ( $ 89 million , net of income tax ) was recognized in net derivative gains ( losses ) . of the $ 161 million benefit , $ 82 million ( $ 53 million , net of income tax ) was related to dac and $ 79 million ( $ 52 million , net of income tax ) was associated with reserves . taxes . income tax expense for the year ended december 31 , 2015 was $ 2.1 billion , or 29 % of income ( loss ) from continuing operations before provision for income tax , compared with $ 2.5 billion , or 28 % of income ( loss ) from continuing operations before provision for income tax , for the year ended december 31 , 2014. the company 's 2015 effective tax rate differs from the u.s. statutory rate of 35 % primarily due to non-taxable investment income , tax credits for low income housing , and foreign earnings taxed at lower rates than the u.s. statutory rate . our 2015 results include one-time tax charges of $ 681 million , of which $ 557 million was recorded under accounting guidance for the recognition of tax uncertainties , $ 88 million was related to foreign exchange-related gains on investments in argentina and $ 36 million was the result of a deferred tax liability true-up in japan . these charges were partially offset by one-time tax benefits of $ 174 million in japan related to a change in tax rate , $ 61 million related to restructuring in chile , $ 57 million related to the repatriation of earnings from japan and $ 31 million related to the devaluation of the peso in argentina . the company 's 2014 effective tax rate was different from the u.s. statutory rate of 35 % primarily due to non-taxable investment income , tax credits for low income housing , foreign earnings taxed at lower rates than the u.s. statutory rate , and the tax effects of the mal divestiture . the 2014 period also includes a $ 54 million tax charge related to tax reform in
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pursuant to the original collaboration agreement , we granted to abbvie worldwide exclusive rights to develop and commercialize products that incorporate our proprietary tritac technology together with soluble tcrs provided by abbvie that bind to targets accepted by the parties . under the terms of the original collaboration agreement , abbvie was allowed to designate up to two targets , which it selected in 2017 and 2019 , respectively . pursuant to the restated collaboration agreement , the worldwide , exclusive license granted to abbvie under the collaboration agreement to develop and commercialize products that incorporate our proprietary tri-specific t-cell activating construct , or tritac , platform technology together with soluble t cell receptors , or tcrs , provided by abbvie has been expanded to cover products that incorporate antibodies provided by abbvie or by us . the expansion of the collaboration also allows abbvie to designate up to six additional targets , selected during a specified period following the effective date , to be the subject of activities under the collaboration . during a period of up to four years following the date of abbvie 's designation of each target for the products , and confirmation of target availability , we and abbvie will conduct certain research and discovery activities under a mutually agreed discovery and research plan in connection with the creation and evaluation of constructs comprising our proprietary tritac technology , in conjunction with the soluble tcr or antibody sequences directed at the agreed upon targets of interest . we may not , including through any third party , develop or commercialize any competing product that binds to any of the included targets . as was the case under the original collaboration agreement , following the discovery phase , abbvie will be solely responsible , at its cost , for the development , manufacture and commercialization of the products that arise from the activities under the discovery plan . abbvie is required to use commercially reasonable efforts to develop and commercialize one such product directed to each target for which the discovery activities were completed in each major market ( as defined in the restated collaboration agreement ) . in addition to the upfront payment of $ 17 million already paid under the original collaboration agreement , under the restated collaboration agreement , we received an upfront payment of $ 20 million for abbvie 's right to select two additional targets and an option to select up to four further targets . abbvie will be required to make payments to us , upon target selection , of $ 10 million for each target , up to four further targets selected by abbvie . for each of the up to eight targets selected , we will receive up to $ 300 million in the aggregate for the achievement of specified development , regulatory and commercial sales milestones for licensed products indicated for human therapeutic or prophylactic use , totaling up to $ 2.4 billion in the aggregate , if such licensed products are successfully progressed against all-included targets and indications . we will also be eligible to receive tiered royalties on net sales by abbvie , its affiliates and sublicensees of licensed products at percentages in the mid-single digits , subject to specified offsets and reductions . royalties will be payable under the restated collaboration agreement on a product-by-product and country-by-country basis commencing on the date of first commercial sale of each product , and ending on the later of expiration of all valid claims of specified licensed patents in such country , expiration of regulatory exclusivity in such country or ten years following first commercial sale of such product in such country . if licensed products are developed and commercialized for diagnostic or veterinary use , or certain screening or monitoring uses , the parties have agreed to negotiate an appropriate reduction in the economic terms applicable to such non-therapeutic and prophylactic applications . we recognized revenue under the original collaboration agreement over a period in which related research and development activities occur . accordingly , of the $ 17.0 million upfront payment received in 2017 , $ 4.0 million and $ 4.3 million of revenue was recognized during the years ended 2019 and 2018 , respectively , and , as of december 31 , 2019 , we had $ 8.0 million of deferred revenue under the original collaboration agreement . 74 we will recognize revenue under the restated collaboration agreement over a period in whic h related research and development activities occur . accordingly , of the $ 20.0 million upfront payment received in 2019 , no revenue was recognized for the year ended 2019 and as of december 31 , 2019 , we had $ 20.0 million of deferred revenue under the resta ted collaboration agreement . the restated collaboration agreement will terminate upon the date of the expiration of all abbvie 's royalty payment obligations in all countries . the restated collaboration agreement may be terminated by either party immediately for the insolvency of the other party or on 90 days ' written notice for an uncured material breach of such agreement by the other party . abbvie may also terminate the restated collaboration agreement in its entirety or on a target-by-target or country-by-country basis for any reason on 30 days ' written notice to the company . in addition , abbvie may terminate the restated collaboration agreement immediately in its entirety or on a target-by-target basis if abbvie considers in good faith that there has been a failure of the discovery or development efforts with respect to such target , or that further development or commercialization of products directed to such target is not advisable as a result of a serious safety issue . license agreement with werewolf therapeutics , inc. in march 2018 , we entered into an assignment and license agreement , or the werewolf agreement , with werewolf therapeutics , inc. , or werewolf , a portfolio company of mpm capital , inc. , a holder of more than 5 % of our capital stock . story_separator_special_tag dr. luke evnin , a member of our board , is the chairman of the board of directors of werewolf . under the werewolf agreement , we assigned certain patents that relate to certain inducible polypeptides ( and binding moiety for conditional activation of certain polypeptides ) to werewolf and granted to werewolf a non-exclusive , royalty-bearing , sublicenseable license under certain other patents owned by us and relating to certain proteins , to make , use and commercialize products that are covered by such patents in the field of molecules comprising a certain polypeptide . werewolf assigned certain patents to us relating to adoptive cell therapies and binding moieties for conditional activation of immunoglobulin and non-immunoglobulin molecules . under the werewolf agreement , werewolf paid us an upfront fee of $ 0.5 million . if werewolf commercializes products covered by the licensed patents , then beginning on the first sale of such products , werewolf will be obligated to pay to us a royalty on net sales of such products by werewolf , its affiliates and licensees at a percentage in the low single digits , subject to an obligation to make a minimum annual royalty payment at an amount in the low hundreds of thousands of dollars . in december 2019 , we and werewolf amended the werewolf agreement by entering into a second amended and restated assignment and license agreement , or the amended werewolf agreement , to include the grant to werewolf of an exclusive , royalty-bearing , sublicensable license under certain patents owned by us and relating to certain proteins , to make , use , and commercialize products that are covered by such patents in the field of molecules comprising a certain protein . if werewolf commercializes products covered by these licensed patents , then beginning on the first sale of such products , werewolf will be obligated to pay to us a royalty on net sales of such products by werewolf , its affiliates and licensees at a percentage in the low single digits , and this royalty can not be added to any other royalty owed to us under the amended werewolf agreement . in addition , each party granted to the other a non-exclusive , royalty-free , sublicensable , perpetual license under certain other patents relating to a certain binding domain of a certain protein , to make , use and commercialize products that are covered by such patents in a field defined by a certain type of molecule for each party . royalties on net sales will be recognized when the underlying sales occur . no royalty revenue was recognized under the werewolf agreement as of december 31 , 2019 . 75 financial operations overview revenue we have no products approved for commercial sale and have not generated any revenue from product sales . our collaboration and license revenue to date is related to work performed by us under the restated collaboration agreement and development and option agreement , and is recognized when designated research and development services are performed . to date , we have not received any milestone or royalty payments under the original collaboration agreement or the restated collaboration agreement . we expect that any collaboration and license revenue we generate from the restated collaboration agreement and the development and option agreement and any future collaboration partners will fluctuate from period to period as a result of the timing and amount of milestones and other payments . additionally , for r & d services that we recognize over time , we measure our progress using an input method . the input methods we use are based on the effort we expend or costs we incur toward the satisfaction of our performance obligation . we estimate the amount of effort we expend , including the time we estimate it will take us to complete the activities , or costs we incur in a given period , relative to the estimated total effort or costs to satisfy the performance obligation . this results in a percentage that we multiply by the transaction price to determine the amount of revenue we recognize each period . this approach requires us to make numerous estimates and use significant judgement . if our estimates or judgements change over the course of the collaboration , they may affect the timing and amount of revenue that we recognize in the current and future periods . on january 1 , 2017 , we adopted on a full retrospective basis accounting standards codification topic 606 , revenue from contracts with customers , or topic 606. see further discussion under “ critical accounting policies and estimates – revenue recognition. ” operating expenses research and development research and development expenses represent costs incurred in performing research , development and manufacturing activities in support of our own product development efforts and those of our collaborators , and include salaries , employee benefits , stock-based compensation , laboratory supplies , outsourced research and development expenses , professional services and allocated facilities-related costs . we expense both internal and external research and development expenses as they are incurred . we do not allocate our costs by product candidates , as our research and development expenses include internal costs , such as payroll and other personnel expenses , and external costs , neither of which are tracked by product candidate . in particular , with respect to internal costs , several of our departments support multiple product candidate research and development programs . non-refundable advance payments for services that will be used or rendered for future research and development activities are recorded as prepaid expenses and recognized as expenses as the related services are performed . we expect our research and development expenses to continue to increase substantially in absolute dollars for the foreseeable future as we advance our product candidates into and through preclinical studies and clinical trials , pursue regulatory approval of our product candidates and expand our pipeline of product candidates .
| we currently have two tritac product candidates in clinical development . hpn424 , is currently in a phase 1 clinical trial for the treatment of metastatic castration-resistant prostate cancer , or mcrpc . hpn536 , is currently in a phase 1/2a clinical trial for the treatment of ovarian cancer and other mesothelin- , or msln- , expressing solid tumors . we also have two tritac product candidates in preclinical development , hpn217 , targeting b-cell maturation antigen , or bcma , for the treatment of multiple myeloma and hpn328 , targeting delta-like ligand 3 , or dll3 , for the treatment of small cell lung cancer , or sclc . pipeline update hpn424 : our lead product candidate is currently in the dose escalation portion of a phase 1 clinical trial for the treatment of mcrpc . the dose escalation phase is designed to determine the maximum tolerated dose and a recommended phase 2 dose . once a recommended phase 2 dose is determined , we will initiate the dose expansion phase . consistent with the tritac mechanism of action , we observed adverse events associated with t cell activation and cytokine induction , which prompted us to explore the use of dexamethasone as a premedication to limit potential adverse events . we have found that the addition of weekly dexamethasone premedication , tapered over several weeks , has successfully limited adverse events . several patients have completed the scheduled taper and have successfully continued treatment with hpn424 in the absence of dexamethasone , with no complications observed thus far . enrollment is ongoing in the dose-escalation phase of the trial . pharmacokinetics observed to date continue to support once-weekly dosing of hpn424 . we expect to present interim dose-escalation data at asco at the end of may 2020 and to initiate an expansion cohort in 2020. hpn536 : in april 2019 , we advanced our second tritac , hpn536 , a msln-targeting t cell engager , into the clinic and dosed the first
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we recognize revenue net of amounts retained by facebook . prior to our migration to facebook credits , we used third-party payment processors and paid these processors service fees ranging from 2 % to 10 % of the purchase price of our virtual goods which were recorded in cost of revenue . players can purchase facebook credits from facebook directly through our games or through game cards purchased from retailers and distributors . in june 2012 , facebook announced its plans to discontinue the use of facebook credits and instead support pricing in local currencies . we expect to begin our transition away from facebook credits and to adopt facebook 's local currency-based payments model in the first half of 2013. on platforms other than facebook , players purchase our virtual goods through various widely accepted payment methods offered in the games , including credit cards , paypal , apple itunes accounts and direct wires . players can purchase game cards from retailers and distributors that can be redeemed in our games . advertising . advertising revenue primarily includes branded virtual goods and sponsorships , engagement ads and offers , mobile ads , display ads and licensing . we generally report our advertising revenue net of amounts due to advertising agencies and brokers . key metrics we regularly review a number of metrics , including the following key financial and operating metrics , to evaluate our business , measure our performance , identify trends in our business , prepare financial projections and make strategic decisions . key financial metrics bookings . bookings is a non-gaap financial measure that is equal to revenue recognized during the period plus the change in deferred revenue during the period . we record the sale of virtual goods and mobile downloads as deferred revenue and then recognize that revenue over the estimated average payer life or as the virtual goods are consumed . advertising sales which consist of certain branded virtual goods and sponsorships are also deferred and recognized over the estimated average life of the branded virtual good , similar to online game revenue . bookings , as opposed to revenue , is the fundamental top-line metric we use to manage our business , as we believe it is a better indicator of the sales activity in a given period . over the long term , the factors impacting our bookings and revenue are the same . however , in the short term , there are factors that may cause revenue to exceed or be less than bookings in any period . 41 we use bookings to evaluate the results of our operations , generate future operating plans and assess the performance of our company . while we believe that this non-gaap financial measure is useful in evaluating our business , this information should be considered as supplemental in nature and is not meant as a substitute for revenue recognized in accordance with u.s. gaap . in addition , other companies , including companies in our industry , may calculate bookings differently or not at all , which reduces its usefulness as a comparative measure . adjusted ebitda . adjusted ebitda is a non-gaap financial measure that we calculate as net income ( loss ) , adjusted for ( provision for ) / benefit from income taxes ; other income ( expense ) , net ; interest income ; gain ( loss ) from legal settlements ; depreciation and amortization ; stock-based expense ; impairment of intangible assets ; restructuring charges and change in deferred revenue . we believe that adjusted ebitda provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors . for a reconciliation of net income ( loss ) to adjusted ebitda , see the section titled non-gaap financial measures included in item 6. selected consolidated financial data of this annual report on form 10-k. key operating metrics we manage our business by tracking several operating metrics : daus , which measure daily active users of our games , maus , which measure monthly active users of our games , muus , which measure monthly unique users of our games , mups , which measure monthly unique payers in our games , and abpu , which measures our average daily bookings per average dau , each of which is recorded by our internal analytics systems . daus . we define daus as the number of individuals who played one of our games during a particular day . under this metric , an individual who plays two different games on the same day is counted as two daus . similarly , an individual who plays the same game on two different platforms ( e.g . web and mobile ) or on two different social networks on the same day would be counted as two daus . average daus for a particular period is the average of the daus for each day during that period . we use daus as a measure of audience engagement . maus . we define maus as the number of individuals who played a particular game in the 30-day period ending with the measurement date . under this metric , an individual who plays two different games in the same 30-day period is counted as two maus . similarly , an individual who plays the same game on two different platforms ( e.g. , web and mobile ) or on two different social networks in a 30-day period would be counted as two maus . average maus for a particular period is the average of the maus at each month-end during that period . we use maus as a measure of total game audience size . muus . we define muus as the number of unique individuals who played any of our games on a particular platform in the 30-day period ending with the measurement date . story_separator_special_tag an individual who plays more than one of our games in a given 30-day period would be counted as a single muu . however , because we can not always distinguish unique individuals playing across multiple platforms , an individual who plays any of our games on two different platforms ( e.g. , web and mobile ) in a given 30-day period may be counted as two muus in the event that we do not have data that allows us to de-duplicate the player . because many of our players play more than one game in a given 30-day period , muus are always lower than maus in any given time period . average muus for a particular period is the average of the muus at each month-end during that period . we use muus as a measure of total audience reach across our network of games . mups . we define mups as the number of unique players who made a payment at least once during the applicable month through a payment method for which we can quantify the number of unique payers , including payers from certain of our mobile games . mups does not include payers who use certain payment methods for which we can not quantify the number of unique payers . if a player made a payment in our games on two separate platforms ( e.g. , facebook and google+ ) in a period , the player would be counted as two unique payers in that period . mups are presented as an average of the three months in the applicable quarter . 42 abpu . we define abpu as ( i ) our total bookings in a given period , divided by ( ii ) the number of days in that period , divided by , ( iii ) the average daus during the period . we believe that abpu provides useful information to investors and others in understanding and evaluating our results in the same manner as our management and board of directors . we use abpu as a measure of overall monetization across all of our players through the sale of virtual goods and advertising . our business model for social games is designed so that , as there are more players that play our games , social interactions increase and the more valuable the games and our business become . all engaged players of our games help drive our bookings and , consequently , both online game revenue and advertising revenue . virtual goods are purchased by players who are socializing with , competing against or collaborating with other players , most of whom do not buy virtual goods . accordingly , we primarily focus on bookings , daus , maus , muus , mups and abpu , which together we believe best reflect key audience metrics . replace_table_token_8_th na means data is not available . the increase in daus , maus and muus for the three months ended march 31 , 2012 as compared to the same period of the prior year was primarily the result of the release of castleville , which launched in the fourth quarter of 2011 and reached seven million daus in two weeks , and hidden chronicles , which launched in the first quarter of 2012. additionally we released four titles on mobile platforms . the increase in daus for the three months ended june 30 , 2012 as compared to the prior quarter was the result of new users from draw something , a game we acquired through the omgpop acquisition . daus and muus decreased in the three months ended september 30 , 2012 as compared to the prior quarter , primarily due to declines in the performance of draw something . the decrease in daus , maus and muus for the three months ended december 31 , 2012 as compared to the prior quarter was the result of declines in web players and mobile players . future growth in audience and engagement will depend on our ability to retain current players , attract new players , launch new games and expand into new markets and distribution platforms . our daus , maus and muus all increased in the three months ended march 31 , 2011 , primarily due to the launch of cityville in december 2010 , the addition of new content to existing games and the launch of several mobile initiatives . in the third and fourth quarters of 2011 , daus declined compared to the first two quarters of the year , mainly due to a decline in players of our more mature games . however , during that same period we saw an increase in maus and abpu as we continued to expand our reach as a result of new game launches and improve our monetization as a result of both new game launches and increased bookings from advertising . 43 other metrics although our management primarily focuses on the operating metrics above , we also monitor periodic trends in paying players of our games . the table below shows average monthly unique payer bookings , average mups and unique payer bookings per unique payer for the last six quarters . these metrics are not available for the first and second quarters of 2011 due to mobile payer data not becoming available until the third quarter of 2011 : replace_table_token_9_th na means data is not available . ( 1 ) average monthly unique payer bookings represent the monthly average amount of bookings for the applicable quarter that we received through payment methods for which we can quantify the number of unique payers and excludes bookings generated from certain mobile payers in the first quarter of 2012 due to our acquisition of omgpop late in that quarter , as well as bookings from certain payment methods for which we can not quantify the number of unique payers . also excluded are bookings from advertising . ( 2 ) monthly unique payer bookings per mup is calculated by dividing average monthly unique payer bookings by average mups .
| international revenue as a percentage of total revenue was 41 % and 36 % in 2012 and 2011 , respectively . in 2012 , farmville , zynga poker , and cityville , were our top revenue-generating games and comprised 24 % , 19 % , and 12 % , respectively , of our online game revenue for the period . no other game generated more than 10 % of online game revenue during the year . consumable virtual goods accounted for 30 % and 29 % of online game revenue 2012 and 2011 , respectively . durable virtual goods accounted for 70 % and 71 % of online game revenue in 2012 and 2011 , respectively . the estimated weighted-average life of durable virtual goods was 12 months in 2012 , compared to 15 months in 2011. in addition , changes in our estimated average life of durable virtual goods during 2012 for various games resulted in an increase in revenue of $ 14.1 million in that period , which is the result of adjusting the remaining recognition period of deferred revenue generated in prior periods at the time of a change in estimate . for 2011 , changes in our estimated average life of durable virtual goods resulted in an increase in revenue of $ 53.9 million . advertising revenue increased $ 62.6 million from 2011 to 2012 , due to a $ 62.3 million increase in in-game display ads , a $ 7.9 million increase in licensing revenue , and a $ 9.0 million increase in in-game sponsorship revenue , offset by a decrease of $ 16.6 million from in-game offers , engagement ads and other advertising revenue . 2011 compared to 2010 . total revenue increased $ 542.6 million in 2011 , as a result of growth in both online game and advertising revenue . bookings increased by $ 316.6 million from 2010 to 2011. abpu increased from $ 0.041 to $ 0.055 , reflecting improved overall monetization of our players , while daus increased from 56 million to 57 million . despite the increase in revenue the
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the 2019 solar loan matures on july 1 , 2024. we used the initial proceeds of the 2019 solar loan to pay off the 2018 solar loan , along with related prepayment , legal and other fees and expenses totaling approximately $ 2.3 million , which included a $ 1.8 million fee to solar capital upon repayment of the 2018 solar loan that was previously accrued and a $ 400,000 prepayment fee to solar capital that was capitalized as deferred financing costs . we expect to use the remaining proceeds of the 2019 solar loan to provide additional working capital for general corporate purposes . ( see note 11 of our notes to consolidated financial statements below . ) sources of revenues our revenues for the fiscal years ended december 31 , 2019 and 2018 were generated from product sales primarily in the u.s. , germany and the u.k. in the u.s. , two large pharmaceutical distributors accounted for 60 % and 69 % of our consolidated revenues for the years ended december 31 , 2019 and 2018 , respectively . these u.s.-based distributors purchase iluvien from us , maintain inventories of iluvien and sell downstream to physician offices , pharmacies and hospitals . internationally , in countries where we sell direct , our customers are hospitals , clinics and pharmacies . we sometimes refer to physician offices , pharmacies , hospitals and clinics as end users . in international countries where we sell to distributors , these distributors maintain inventory levels of iluvien and sell to their customers . reverse stock split effective november 14 , 2019 on november 14 , 2019 , we filed a certificate of amendment to our restated certificate of incorporation with the secretary of state of the state of delaware , which effected a one-for-15 reverse stock split ( the “ reverse split ” ) of our issued and outstanding shares of common stock at 5:01 pm eastern time on that date . as a result of the reverse split , every 15 shares of common stock issued and outstanding were converted into one share of common stock . no fractional shares were issued in connection with the reverse split . stockholders who would otherwise have been entitled to a fractional share of common stock instead received a cash payment equal to such fraction multiplied by the average of the closing sales prices of the common stock ( as adjusted to give effect to the reverse split ) on the nasdaq global market for the five consecutive trading days immediately preceding the effective date . the reverse split did not change the par value of the common stock or the authorized number of shares of common stock . the reverse split affected all stockholders uniformly and did not alter any stockholder 's percentage interest in our equity ( other than as a result of the payment of cash in lieu of fractional shares ) . all outstanding options , preferred stock , restricted stock units , warrants and other securities entitling their holders to purchase or otherwise receive shares of alimera 's common stock have been adjusted as a result of the reverse split , as required by the terms of each security . the number of shares available to be awarded under our 2019 omnibus incentive plan and the number of shares that are purchasable under our 2010 employee stock purchase plan have also been appropriately adjusted . the common stock began trading on the nasdaq global market on a post-reverse split basis on november 15 , 2019. the reverse split permitted us to regain compliance with nasdaq 's “ minimum bid price ” requirement for continued listing , which requires that the bid price of the stock of a listed company be at least $ 1.00 per share . failure to comply with nasdaq continued listing requirement our common stock trades on the nasdaq global market , which we believe helps support and maintain liquidity for our stock . companies whose shares are listed on the nasdaq global market , however , are subject to various rules and requirements imposed by nasdaq that a listed company must satisfy to continue having its stock listed on the exchange . we received notice in september 2019 from the nasdaq stock market ( nasdaq ) that , for the last 30 consecutive trading days before the date of the notice , the market value of listed securities ( mvls ) for our common stock was below the minimum mvls of $ 50,000,000 required for continued listing on the nasdaq global market . we have not regained compliance with nasdaq 's minimum mvls requirement , and our 180-day compliance period expires on march 9 , 2020. nasdaq has three alternate standards for continued listing , and we expect to regain compliance with nasdaq 's continued listing standards by qualifying under a different listing standard that requires a listed company 's revenue and total assets in each case to exceed $ 50 million ( the total assets/total revenue standard ) . based on our revenue and total assets as reflected on the audited consolidated financial statements included in this annual report on form 10-k , we believe that we meet the total assets/total revenue standard . if nasdaq concurs with our view as we expect , the listing qualifications department of nasdaq will send us a letter to that effect . we expect the letter to state that we have complied with the total assets/total revenue standard and therefore our failure to comply with the minimum mvls requirement will no longer affect our continued listing . we will not 44 be able to confirm that we have regained compliance , however , until we receive a letter to that effect from the listing qualifications department of nasdaq . we can not provide any assurances , however , that we will be able to regain compliance with the continued listing standards . our statements in this section that we expect to regain compliance with the continued listing standards are forward-looking statements . story_separator_special_tag we may not regain compliance , and actual results could differ materially from those projected in our forward-looking statements . meaningful factors that could cause actual results to differ include our inability to meet the total assets/total revenue standard as interpreted by nasdaq . for more information about this topic , see the first risk factor under the heading “ risk factors - risks related to the ownership of our common stock ” above . results of operations - year ended december 31 , 2019 compared to year ended december 31 , 2018 replace_table_token_1_th revenue we began generating revenue from iluvien in 2013. in addition to generating revenue from product sales , we intend to seek to generate revenue from other sources such as upfront fees , milestone payments in connection with collaborative or strategic relationships , and royalties resulting from the licensing of iluvien or any future product candidates and other intellectual property . additionally , revenue from our international distributors fluctuates depending on the timing of the shipment of iluvien to the distributors and the distributors ' sales of iluvien to their customers . net revenue increased by approximately $ 7.3 million , or 16 % , to approximately $ 53.9 million for 2019 , compared to approximately $ 46.6 million for 2018. the increase was primarily attributable to the new and existing markets in which we sell to our international distributors . we also increased our sales volume in the u.s. and the countries in our international segment where we sell direct . 45 cost of goods sold , excluding depreciation and amortization , and gross profit gross profit is affected by costs of goods sold , which includes costs of manufactured goods sold and royalty payments to eyepoint under the new collaboration agreement . additionally , cost of goods sold by our international distributors fluctuates depending on the revenue share attributable to the respective contract . cost of goods sold , excluding depreciation and amortization increased by approximately $ 2.3 million , or 53 % , to approximately $ 6.6 million for 2019 , compared to approximately $ 4.3 million for 2018. the increase was primarily attributable to our increased sales volume and an increase in royalty expense payable on our global net revenue as a result of the increased royalty percentage payable to eyepoint . gross profit increased by approximately $ 5.0 million , or 12 % , to approximately $ 47.3 million for 2019 , compared to approximately $ 42.3 million for 2018. gross margin was 88 % and 91 % for 2019 and 2018 , respectively . as our revenues to our international distributors increase and our royalty expense payable to eyepoint increases , we expect our gross margin to decrease . research , development and medical affairs expenses currently , our research , development and medical affairs expenses are primarily focused on activities that support iluvien and include salaries and related expenses for research and development and medical affairs personnel , including medical science liaisons . our research , development and medical affairs expenses also include costs related to the provision of medical affairs support , including symposia development for physician education , and costs related to compliance with fda , eea or other regulatory requirements . we expense both internal and external development costs as they are incurred . research , development and medical affairs expenses decreased by approximately $ 300,000 , or 3 % , to approximately $ 11.0 million for 2019 , compared to approximately $ 11.3 million for 2018. the decrease was primarily attributable to decreases of approximately $ 610,000 in clinical studies as we are approaching the termination of our ongoing clinical studies , $ 280,000 in stability studies and approximately $ 160,000 of scientific communications costs . this decrease was partially offset by increases of approximately $ 580,000 in consultant expenses primarily due to staff turnover , and $ 190,000 in safety and quality costs . story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > basic and diluted earnings per share attributable to shares of common stock and shares of preferred stock that are convertible into common stock ( participating securities ) are as follows : replace_table_token_2_th common stock equivalent securities that would potentially dilute basic eps in the future , but were not included in the computation of diluted eps because they were either classified as participating or would have been anti-dilutive , totaled approximately 2.3 million and 0.9 million for 2019 and 2018 , respectively . potentially dilutive common stock equivalents are excluded from the diluted earnings per share denominator for periods of net loss because of their anti-dilutive effect . therefore , for 2019 , the weighted average shares used to calculate both basic and diluted loss per share were the same . 48 results of operations - segment review the following selected unaudited financial and operating data are derived from our consolidated financial statements . the results and discussions that follow reflect how executive management monitors the performance of our reporting segments . we have three segments : u.s. , international and other . each segment is separately managed and is evaluated primarily upon segment loss from operations . non-cash items including stock-based compensation expense , depreciation and amortization are categorized as other . we allocate certain operating expenses between our reporting segments based on activity-based costing methods . these activity-based costing methods require us to make estimates that affect the amount of each expense category that is attributed to each segment . changes in these estimates will directly affect the amount of expense allocated to each segment and therefore the operating profit of each reporting segment . there were no significant changes in our expense allocation methodology during 2019 or 2018. u.s. segment replace_table_token_3_th u.s. segment - year ended december 31 , 2019 compared to year ended december 31 , 2018 net revenue .
| sales and marketing expenses increased by approximately $ 1.5 million , or 6 % , to approximately $ 25.0 million for 2019 , compared to approximately $ 23.5 million for 2018. the increase was primarily attributable to increases of approximately $ 970,000 in marketing costs , the largest component of which was associated with the launch of our direct-to-patient advertising pilot program in the u.s. , and approximately $ 240,000 in market access costs . 46 operating expenses as a result of the changes in expenses described above , total operating expenses increased by approximately $ 600,000 , or 1 % , to approximately $ 52.6 million for 2019 , compared to approximately $ 52.0 million for 2018. the increase was primarily attributable to an approximately $ 1.5 million increase in sales and marketing expenses , partially offset by decreases of $ 500,000 in general and administrative expenses and $ 300,000 in research , development and medical affairs expenses as described above . interest expense and other as described in our overview above , we entered into the 2018 solar loan agreement on january 5 , 2018 , which we refinanced with the 2019 solar loan agreement on december 31 , 2019. for 2018 and 2019 , interest expense consisted primarily of interest and amortization of deferred financing costs and debt discounts associated with our outstanding debt under the 2018 solar loan agreement . interest income consisted primarily of interest earned on our cash , cash equivalents and investments . interest expense and other . interest expense and other increased by approximately $ 100,000 , or 2 % , to approximately $ 4.9 million for 2019 , compared to approximately $ 4.8 million for 2018. loss on early extinguishment of debt we recorded a loss on early extinguishment of debt of approximately $ 1.8 million during 2018 as a result of our refinancing the hercules loan by entering into the 2018 solar loan agreement on january 5 , 2018. we accounted for the december 31 , 2019 refinancing of the 2018 solar loan agreement with the 2019 solar loan agreement as a modification , and as such , we did not incur a loss on extinguishment of debt in 2019. gain on extinguishment of preferred stock on september 4 , 2018 , we entered
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on september 17 , 2012 , our pressure cylinders operating segment acquired 100 % of the outstanding common shares of westerman , inc. ( westerman ) for cash consideration of approximately $ 62.7 million and the assumption of approximately $ 7.3 million of debt , which was repaid at closing . westerman manufactures tanks , pressure vessels and other products for the oil and gas and nuclear markets as well as hoists and other products for marine applications . westerman also leverages its manufacturing competencies to produce pressure vessels , atmospheric tanks , controls and various custom machined components for other industrial end markets . westerman became part of our pressure cylinders operating segment upon closing . on october 31 , 2012 , our pressure cylinders operating segment completed the sale of its european air brake tank business to frauenthal automotive . based in hustopece , czech republic , worthington cylinders a.s. manufactured air brake tank cylinders for the european commercial vehicle market . on april 9 , 2013 , our pressure cylinders operating segment acquired the business of palmer mfg . & tank , inc. ( palmer ) for cash consideration of $ 113.5 million . palmer manufactures steel and fiberglass tanks and processing equipment for the oil and gas industry , and custom manufactured fiberglass tanks for agricultural , chemical and general industrial applications . the acquired net assets became part of our pressure cylinders operating segment upon closing . during the fourth quarter of fiscal 2013 , we repurchased a total of 925,000 of our common shares for $ 30.4 million at an average price of $ 32.88 per share . 32 on june 21 , 2013 , we announced the planned consolidation of the bernzomatic hand torch manufacturing operations in medina , new york into our existing facility in chilton , wisconsin . the company estimates that the consolidation and closure will result in restructuring charges in the range of $ 4.0 million to $ 5.0 million , primarily due to severance costs , relocation and equipment installation , training costs and other miscellaneous start-up costs . approximately $ 2.5 million of severance costs were recognized in the fourth quarter of fiscal 2013 in connection with this matter . the closure of the medina operation is expected to be complete by mid-calendar 2014 to ensure an orderly transition . on june 26 , 2013 , the board of directors declared a quarterly dividend of $ 0.15 per share , an increase of $ 0.02 per share from the previous quarterly rate . the dividend is payable on september 27 , 2013 to shareholders of record on september 13 , 2013. market & industry overview we sell our products and services to a diverse customer base and a broad range of end markets . the breakdown of our net sales by end market for fiscal 2013 and fiscal 2012 is illustrated in the following chart : the automotive industry is one of the largest consumers of flat-rolled steel , and thus the largest end market for our steel processing operating segment . approximately 57 % of the net sales of our steel processing operating segment are to the automotive market . north american vehicle production , primarily by chrysler , ford and general motors ( the detroit three automakers ) , has a considerable impact on the activity within this operating segment . the majority of the net sales of five of our unconsolidated joint ventures are also to the automotive end market . approximately 10 % of the net sales of our steel processing operating segment , 45 % of the net sales of our engineered cabs operating segment and substantially all of the net sales of our construction services operating segment are to the construction market . while the market price of steel significantly impacts these businesses , there are other key indicators that are meaningful in analyzing construction market demand , including u.s. gross domestic product ( gdp ) , the dodge index of construction contracts , and trends in the relative price of framing lumber and steel . the construction market is also the predominant end market for three of our unconsolidated joint ventures , wave , clarkdietrich and worthington modern steel framing manufacturing co. , ltd. ( wmsfmco ) . substantially all of the net sales of our pressure cylinders operating segment , and approximately 33 % and 55 % of the net sales of our steel processing and engineered cabs operating segments , respectively , are to other markets such as leisure and recreation , industrial gas , hvac , lawn and garden , agriculture , mining and appliance . given the many different products that make up these net sales and the wide variety of end 33 markets , it is very difficult to detail the key market indicators that drive this portion of our business . however , we believe that the trend in u.s. gdp growth is a good economic indicator for analyzing these operating segments . we use the following information to monitor our costs and demand in our major end markets : replace_table_token_5_th 1 2012 figures based on revised actuals 2 cru index ; period average 3 ihs global 4 lme zinc ; period average 5 nymex henry hub natural gas ; period average 6 energy information administration ; period average u.s. gdp growth rate trends are generally indicative of the strength in demand and , in many cases , pricing for our products . a year-over-year increase in u.s. gdp growth rates is indicative of a stronger economy , which generally increases demand and pricing for our products . conversely , decreasing u.s. gdp growth rates generally indicate a weaker economy . changes in u.s. gdp growth rates can also signal changes in conversion costs related to production and in selling , general and administrative ( sg & a ) expense . the market price of hot-rolled steel is one of the most significant factors impacting our selling prices and operating results . story_separator_special_tag when steel prices fall , we typically have higher-priced material flowing through cost of goods sold , while selling prices compress to what the market will bear , negatively impacting our results . on the other hand , in a rising price environment , our results are generally favorably impacted , as lower-priced material purchased in previous periods flows through cost of goods sold , while our selling prices increase at a faster pace to cover current replacement costs . the following table presents the average quarterly market price per ton of hot-rolled steel during fiscal 2013 , fiscal 2012 , and fiscal 2011 : replace_table_token_6_th 1 cru hot-rolled index no single customer contributed more than 10 % of our consolidated net sales during fiscal 2013. while our automotive business is largely driven by the production schedules of the detroit three automakers , our customer base is much broader and includes other domestic manufacturers and many of their suppliers . during fiscal 2013 , we continued to benefit from improving automotive production from the detroit three automakers , which experienced a 6 % increase in vehicle production over the prior year . additionally , north american vehicle production during fiscal 2013 was up 10 % over the prior year . 34 certain other commodities , such as zinc , natural gas and diesel fuel , represent a significant portion of our cost of goods sold , both directly through our plant operations and indirectly through transportation and freight expense . story_separator_special_tag affiliates of this annual report on form 10-k. income tax expense increased $ 12.6 million from fiscal 2012 due primarily to higher earnings . fiscal 2013 income tax expense reflects an effective tax rate attributable to controlling interest of 32.1 % versus 31.0 % in fiscal 2012. these rates are calculated based on net earnings attributable to controlling interest , as reflected in our consolidated statements of earnings . the increase in the effective tax rate attributable to controlling interest was due primarily to a reduction in the benefit associated with lower tax rates on foreign income . the reduction in the tax benefit associated with lower tax rates on foreign income was due to certain foreign impairment charges for which there was no associated tax benefit . the 32.1 % rate is lower than the federal statutory rate of 35 % primarily as a result of the benefits from the qualified production activities deduction and lower tax rates on foreign income ( collectively decreasing the rate by 3.6 % ) . these impacts are partially offset by state and local income taxes of 1.0 % ( net of their federal tax benefit ) . for additional information , refer to item 8 . financial statements and supplementary data notes to consolidated financial statements note l income taxes of this annual report on form 10-k. 36 segment operations steel processing the following table presents a summary of operating results for our steel processing operating segment for the periods indicated : replace_table_token_8_th net sales and operating highlights were as follows : net sales decreased $ 135.0 million from fiscal 2012. lower base material prices throughout fiscal 2013 led to decreased pricing for our products , negatively impacting net sales by $ 120.7 million . overall volumes were also down during fiscal 2013 , negatively impacting net sales by $ 14.3 million . the mix of direct versus toll tons was 56 % to 44 % during fiscal 2013 versus 51 % to 49 % in the prior fiscal year . after excluding volumes from the misa metals facilities , which were wound down or sold during the current year , direct volumes increased approximately 3 % . the change in mix of direct versus toll tons was driven primarily by our spartan joint venture . as expected , volumes at spartan were down as a result of our partner moving business to their in-house galvanizing facility . however , volumes have stabilized at the lower level and the business remains solidly profitable . operating income decreased $ 5.5 million from fiscal 2012 primarily due to the impact of lower volumes . also contributing to the decrease was a $ 2.1 million gain in the prior fiscal year related to the disposal of two of the three misa metals steel processing facilities acquired in fiscal 2011. this gain was included in the joint venture transactions financial statement caption to correspond with amounts previously recognized in connection with this transaction . pressure cylinders the following table presents a summary of operating results for our pressure cylinders operating segment for the periods indicated : replace_table_token_9_th 37 net sales and operating highlights were as follows : net sales increased $ 89.2 million from fiscal 2012 driven almost entirely by the impact of acquisitions . operating income increased $ 21.2 million from fiscal 2012 due primarily to improved margins , as costs associated with the voluntary product recall decreased by $ 7.1 million . gross margin also improved due to contributions from acquisitions , cost containment efforts , and a more favorable product mix . the increase in gross margin was partially offset by higher sg & a expense due to the impact of acquisitions , an increase in corporate allocated expenses , and increased spending for new product development . additionally , sg & a expense in the prior fiscal year included a $ 4.4 million gain related to the settlement of a legal dispute . refer to item 8 . financial statements and supplementary data notes to consolidated financial statements note e contingent liabilities and commitments for additional detail . fiscal 2013 impairment charges included $ 5.0 million related to our investment in a 60 % -owned consolidated joint venture in india and $ 1.5 million related to the sale of our air brake tank business in czech republic .
| impairment charges of $ 6.5 million consisted of $ 5.0 million related to pressure cylinders ' investment in a 60 % -owned consolidated joint venture in india , $ 2.0 million of which was attributed 35 to the non-controlling interest , and $ 1.5 million related to the sale of pressure cylinders ' business in czech republic . for additional information regarding these impairment charges , refer to item 8 . financial statements and supplementary data notes to consolidated financial statements note c goodwill and other long-lived assets of this annual report on form 10-k. restructuring charges of $ 3.3 million consisted primarily of a $ 2.5 million accrual for severance costs associated with the recently announced consolidation of our bernzomatic hand torch manufacturing operation in medina , new york into the existing pressure cylinders facility in chilton , wisconsin and $ 1.8 million of facility exit and other costs associated with the closure of our commercial stairs business . for additional information regarding these restructuring charges , refer to item 8 . financial statements and supplementary data notes to consolidated financial statements note d restructuring and other expense of this annual report on form 10-k. in connection with the wind down of our former metal framing operating segment , we recognized a net benefit of $ 0.6 million within the joint venture transactions financial statement caption in our consolidated statement of earnings . this amount consisted primarily of $ 1.9 million of net gains on asset disposals partially offset by facility exit and other costs . for additional information , refer to item 8 . financial statements and supplementary data notes to consolidated financial statements note d restructuring and other expense of this annual report on form 10-k. interest expense of $ 23.9 million was $ 4.4 million higher than the prior fiscal year , as the impact of higher average interest rates due to a higher mix of long-term versus short-term debt more than offset the impact of lower average debt levels . for additional information , refer to item 8 . financial statements and supplementary data notes
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, 2013 include equity-based compensation expense of $ 5.0 million and $ 3.6 million , respectively . research and development expenses for the year ended december 31 , 2013 , includes an offset to research and development expenses of $ 2.7 million related to the correction of an error related to equity awards granted to non-employees with performance based vesting . contingent consideration . contingent consideration expenses for the years ended december 31 , 2014 and 2013 , were $ 24.4 million and $ 6.9 million , respectively . the increase in contingent consideration expense was primarily attributable to an increase in the fair value of our contingent obligations to the former stockholders of opko renal due to changes in assumptions regarding probabilities of successful achievement of future milestones driven by the two successful phase 3 trials of rayaldee in 2014. the contingent consideration liabilities at december 31 , 2014 relate to potential amounts payable to former stockholders of curna , opko diagnostics , opko health europe and opko renal pursuant to our acquisition agreements in january 2011 , october 2011 , august 2012 and march 2013 , respectively . amortization of intangible assets . amortization of intangible assets was $ 10.9 million and $ 11.1 million , respectively , for the years ended december 31 , 2014 and 2013. amortization expense reflects the amortization of acquired intangible assets with defined useful lives . the acquisitions of opko renal and opko biologics resulted in principally acquiring ipr & d assets which will not be amortized until the underlying development programs are completed . upon obtaining regulatory approval by the fda , the ipr & d asset will then be accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life . in-process research and development . in may 2014 , we acquired inspiro , a privately held company that is developing the inspiromatic , a “ smart ” easy-to-use dry powder inhaler with several advantages over existing devices . we recorded the transaction as an asset acquisition and recorded the assets and liabilities at fair value . as the asset had no alternative future use , we recorded $ 10.1 million of acquired in-process research and development expense . in addition , pursuant to our agreement with schering plough corporation , now merck & co. ( “ merck ” ) , we were required to make a $ 2.0 million payment upon the achievement of a milestone for rolapitant which was achieved in the fourth quarter of 2014. the agreement was accounted for as an asset acquisition and the entire $ 2.0 million milestone payment was allocated to in-process research and development expense . we did not have any such activity during the year ended december 31 , 2013 . we record expense for in-process research and development projects accounted for as asset acquisitions which have not reached technological feasibility and which have no alternative future use . inspiromatic and rolapitant have not reached a stage of technological feasibility and have no alternative future use . other income and ( expense ) , net . other income and ( expense ) , net for the years ended december 31 , 2014 and 2013 was $ ( 25.2 ) million and $ ( 24.6 ) million , respectively . during the year ended december 31 , 2014 , we recorded $ 12.2 million non-cash other charge , net , related to the changes in the fair value of the embedded derivatives in the 2033 senior notes , and a $ 2.7 million gain as the result of the exchange of $ 70.4 million principal of 2033 senior notes in june 2014. other income and ( expense ) , net , for the year ended december 31 , 2014 , also included $ 12.3 million of interest expense principally related to 53 interest incurred on the 2033 senior notes and the amortization of related deferred financing costs . other income and ( expense ) , net for the year ended december 31 , 2014 , includes a $ 1.4 million other-than-temporary impairment charge to write our investment in arno therapeutics , inc. down to its fair value of $ 0.6 million as of december 31 , 2014. for the year ended december 31 , 2013 , we recorded a $ 52.7 million non-cash charge , net , related to the changes in the fair value of the embedded derivatives in the 2033 senior notes , partially offset by a $ 1.0 million gain on early partial conversion of the 2033 senior notes , income of $ 6.5 million related to changes in the fair value of the pharmsynthez note receivable , a certain pharmsynthez purchase option , warrants and options received in connection with our investment in neovasc and arno , and by a gain of $ 29.9 million on the sale of certain of our strategic investments . other income and ( expense ) , net , for the year ended december 31 , 2013 , also included $ 13.8 million of interest expense primarily related to the 2033 senior notes and the amortization of related deferred financing costs . the decrease in interest expense for the year ended december 31 , 2014 compared to the same period in 2013 is due the exchange of $ 70.4 million principal of 2033 senior notes in june 2014 , which was partially offset by a non-cash write-off of deferred financing costs of $ 1.5 million as interest expense related to exchange of the 2033 senior notes in june 2014. loss from investments in investees . we have made investments in other early stage companies that we perceive to have valuable proprietary technology and significant potential to create value for us as a shareholder . we account for these investments under the equity method of accounting , resulting in the recording of our proportionate share of their losses until our share of their loss exceeds our investment . until the investees ' technologies are commercialized , if ever , we anticipate they will continue to report a net loss . story_separator_special_tag loss from investments in investees was $ 3.6 million and $ 11.5 million for the years ended december 31 , 2014 and 2013 , respectively . the decrease in loss from investments in investees is primarily due to decreased losses at rxi pharmaceuticals corporation and cocrystal pharma , inc. during the third quarter of 2014 , we discontinued applying the equity method of accounting for rxi and account for our investment in rxi as an available for sale investment . income taxes . our income tax provision reflects the projected income tax payable in israel , chile , spain , mexico , canada and scivac ltd ( “ scivac ” ) , a consolidated variable interest entity . we have recorded a full valuation allowance against our deferred tax assets in the u.s. for the years ended december 31 , 2013 and december 31 , 2012 revenues . revenues for the year ended december 31 , 2013 , were $ 96.5 million , compared to $ 47.0 million for the year ended december 31 , 2012. the increase principally reflected revenues related to the december 2012 acquisition of opko lab , the october 2012 acquisition of scivac , and the august 2012 acquisition of opko health europe , which contributed $ 10.8 million , $ 1.7 million and $ 18.8 million of revenue , respectively , during the year ended december 31 , 2013 , as compared with revenues from those units of $ 0.4 million , $ 0.6 million and $ 6.1 million , respectively , during the year ended december 31 , 2012. revenue from our chilean operations increased $ 5.1 million during the year ended december 31 , 2013 , primarily due to increased sales to government agencies . revenue from finetech increased $ 4.6 million during the year ended december 31 , 2013 , primarily related to increased sales to new and existing customers . revenues for the year ended december 31 , 2013 also reflects the one-time , non–cash revenue of $ 12.5 million related to the transfer of substantially all of our assets in the field of rna interference to rxi ( the “ rxi revenue ” ) . revenue related to our molecular diagnostics collaboration agreements and license agreements , excluding the rxi revenue , increased $ 3.7 million during the year ended december 31 , 2013 , compared to the year ended december 31 , 2012 , primarily related to revenue recorded in connection to the pharmsynthez collaboration agreements . cost of revenues . costs of revenues for the year ended december 31 , 2013 , were $ 48.9 million , compared to $ 27.9 million for the year ended december 31 , 2012. costs of revenues for the year ended december 31 , 2013 , increased principally as a result of costs of revenue recorded by opko lab , scivac and opko health europe of $ 10.0 million , $ 3.6 million and $ 4.3 million , respectively . costs of revenue recorded by finetech , our chilean and mexican operations increased $ 1.1 million , $ 1.9 million and $ 0.5 million , respectively , during the year ended december 31 , 2013 , primarily related to higher revenue levels recorded by those businesses . selling , general and administrative expenses . selling , general and administrative expenses for the year ended december 31 , 2013 , were $ 55.3 million , compared to $ 27.8 million for the year ended december 31 , 2012. the increase in selling , general and administrative expenses principally resulted from $ 15.0 million of such expenses recorded during the year ended december 31 , 2013 , by opko health europe , scivac , opko lab , opko renal , the january 2013 acquisition of opko brazil , and the august 2013 acquisition of opko biologics ( collectively , the “ acquired businesses ” ) . excluding the selling , general and administrative expenses of the acquired businesses , selling , general and administrative expenses increased by $ 10.4 million during the year ended december 31 , 2013 , principally as a result of increased personnel expenses and professional fees associated with our increased operations . selling , general and administrative expenses during the year ended december 31 , 2013 and 2012 , include equity-based compensation expense of $ 7.3 million and $ 3.1 million , respectively . 54 research and development expenses . research and development expenses for the years ended december 31 , 2013 and 2012 , were $ 53.9 million and $ 19.5 million , respectively . research and development expenses include external and internal expenses , partially offset by third-party grants and funding arising from collaboration agreements . external expenses include clinical and non-clinical activities performed by contract research organizations , lab services , purchases of drug and diagnostic product materials and manufacturing development costs . we track external research and development expenses by individual program , with phase 3 clinical trials for drug approval and or pmas , if any . research and development employee-related expenses include salaries , benefits and stock-based compensation expense . other unallocated internal research and development expenses are incurred to support overall research and development activities and include expenses related to general overhead and facilities . the following table summarizes the components of our research and development expenses : replace_table_token_4_th the increase in research and development expenses during the year ended december 31 , 2013 as compared with the year ended december 31 , 2012 , principally resulted from an increase of $ 28.3 million related to research and development expenses incurred by opko renal , which business was acquired in march 2013 , and opko biologics , including $ 13.1 million related to the costs of ongoing phase 3 clinical trials for rayaldee ( ctap101 ) and hgh-ctp . research and development expenses for the years ended december 31 , 2013 and 2012 , include equity-based compensation expense of $ 3.6 million and $ 2.0 million , respectively .
| in addition , inventory obsolescence charges decreased $ 0.9 million for the year ended december 31 , 2014 compared to 2013. this was partially offset by increased cost of revenue due to increased pharmaceutical product sales . selling , general and administrative expenses . selling , general and administrative expenses for the year ended december 31 , 2014 were $ 57.9 million , compared to $ 55.3 million for the year ended december 31 , 2013 . the increase in selling , general and administrative expenses for the year ended december 31 , 2014 was a result of increased personnel expenses including equity based compensation as well as sales and marketing activities related to the launch of our 4kscore test in the u.s. in march 2014 and europe in september 2014. these increases were partially offset by decreased professional fees as the 2013 period included expenses related to the acquisitions of opko renal and opko biologics . selling , general and administrative expenses during the years ended december 31 , 2014 and 2013 , include equity-based compensation expense of $ 9.7 million and $ 7.3 million , respectively . research and development expenses . research and development expenses for the year ended december 31 , 2014 were $ 83.6 million , compared to $ 53.9 million for the year ended december 31 , 2013 . research and development costs include external and internal expenses , partially offset by third-party grants and funding arising from collaboration agreements . external expenses include clinical and non-clinical activities performed by contract research organizations , lab services , purchases of drug and diagnostic product materials and manufacturing development costs . we track external research and development expenses by individual program for phase 3 clinical trials for drug approval and pma 's ( pre-market approval ) for diagnostics tests , if any . internal expenses include employee-related expenses including salaries , benefits and stock-based compensation expense . other unallocated internal research and development expenses are incurred to support
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this summary should be read in conjunction with a more complete discussion of our accounting policies included in note 2 to the consolidated financial statements in this annual report on form 10-k. real estate real estate is carried at cost , net of accumulated depreciation and amortization . as of december 31 , 2014 and 2013 , the carrying amount of our real estate , net of accumulated depreciation and amortization , was $ 783,902,000 and $ 734,201,000 , respectively . maintenance and repairs are expensed as incurred . depreciation requires an estimate by management of the useful life of each property and improvement as well as an allocation of the costs associated with a property to its various components . if we do not allocate these costs appropriately or incorrectly estimate the useful lives of our real estate , depreciation expense may be misstated . as real estate is undergoing development activities , all property operating expenses directly associated with and attributable to , the development and construction of a project , including interest expense , are capitalized to the cost of the real property to the extent that we believe such costs are recoverable through the value of the property . the capitalization period begins when development activities are underway and ends when the project is substantially complete . general and administrative costs are expensed as incurred . 23 critical accounting policies and estimates – continued our properties and related intangible assets , including properties to be developed in the future and currently under development , are individually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable . an impairment exists when the carrying amount of an asset exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset . estimates of future cash flows are based on our current plans , intended holding periods and available market information at the time the analyses are prepared . for our development properties , estimates of future cash flows also include all future expenditures necessary to develop the asset , including interest payments that will be capitalized as part of the cost of the asset . an impairment loss is recognized only if the carrying amount of the asset is not recoverable and is measured based on the excess of the property 's carrying amount over its estimated fair value . if our estimates of future cash flows , anticipated holding periods , or fair values change , based on market conditions or otherwise , our evaluation of impairment charges may be different and such differences could be material to our consolidated financial statements . estimates of future cash flows are subjective and are based , in part , on assumptions regarding future occupancy , rental rates and capital requirements that could differ materially from actual results . plans to hold properties over longer periods decrease the likelihood of recording impairment losses . allowance for doubtful accounts we periodically evaluate the collectibility of amounts due from tenants , including the receivable arising from the straight-lining of rents , and maintain an allowance for doubtful accounts ( $ 1,544,000 and $ 1,993,000 as of december 31 , 2014 and 2013 , respectively ) for estimated losses resulting from the inability of tenants to make required payments under the lease agreements . we exercise judgment in establishing these allowances and consider payment history and current credit status in developing these estimates . these estimates may differ from actual results , which could be material to our consolidated financial statements . revenue recognition we have the following revenue sources and revenue recognition policies : · base rent – revenue arising from tenant leases . these rents are recognized over the non-cancelable term of the related leases on a straight-line basis , which includes the effects of rent steps and free rent abatements under the leases . we commence rental revenue recognition when the tenant takes possession of the leased space and the leased space is substantially ready for its intended use . in addition , in circumstances where we provide a tenant improvement allowance for improvements that are owned by the tenant , we recognize the allowance as a reduction of rental revenue on a straight-line basis over the term of the lease . · percentage rent – revenue arising from retail tenant leases that is contingent upon the sales of tenants exceeding defined thresholds . these rents are recognized only after the contingency has been removed ( i.e. , when tenant sales thresholds have been achieved ) . · expense reimbursements – revenue arising from tenant leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes of the respective properties . this revenue is accrued in the same periods as the expenses are incurred . · parking income – revenue arising from the rental of parking space at our properties . this income is recognized as cash is received . before we recognize revenue , we assess , among other things , its collectibility . if our assessment of the collectibility of revenue changes , the impact on our consolidated financial statements could be material . income taxes we operate in a manner intended to enable us to continue to qualify as a real estate investment trust ( “ reit ” ) under sections 856 – 860 of the internal revenue code of 1986 , as amended ( the “ code ” ) . in order to maintain our qualification as a reit under the code , we must distribute at least 90 % of our taxable income to stockholders each year . we distribute to our stockholders 100 % of our taxable income and therefore , no provision for federal income taxes is required . if we fail to distribute the required amount of income to our stockholders , or fail to meet other reit requirements , we may fail to qualify as a reit , which may result in substantial adverse tax consequences . story_separator_special_tag 24 results of operations – year ended december 31 , 2014 compared to december 31 , 2013 property rentals property rentals were $ 136,628,000 in the year ended december 31 , 2014 , compared to $ 135,908,000 in the prior year , an increase of $ 720,000. this increase was primarily due to higher parking revenues . expense reimbursements tenant expense reimbursements were $ 64,186,000 in the year ended december 31 , 2014 , compared to $ 60,551,000 in the prior year , an increase of $ 3,635,000. this increase was primarily due to higher real estate taxes . operating expenses operating expenses were $ 69,897,000 in the year ended december 31 , 2014 , compared to $ 64,930,000 in the prior year , an increase of $ 4,967,000. this increase was primarily comprised of higher real estate taxes of $ 3,536,000 and higher non-reimbursable operating expenses of $ 1,860,000. depreciation and amortization depreciation and amortization was $ 29,196,000 in the year ended december 31 , 2014 , compared to $ 28,987,000 in the prior year , an increase of $ 209,000. story_separator_special_tag style= '' text-align : justify ; text-indent : 0.2in ; margin : 0in 0in 0pt '' > property rental income is our primary source of cash flow and is dependent on a number of factors including the occupancy level and rental rates of our properties , as well as our tenants ' ability to pay their rents . our properties provide us with a relatively consistent stream of cash flow that enables us to pay our operating expenses , interest expense , recurring capital expenditures and cash dividends to stockholders . other sources of liquidity to fund cash requirements include our existing cash , proceeds from financings , including mortgage or construction loans secured by our properties and proceeds from asset sales . we anticipate that cash flows from continuing operations over the next twelve months , together with existing cash balances , will be adequate to fund our business operations , cash dividends to stockholders , debt amortization , recurring capital expenditures and development expenditures related to the rego park ii apartment tower . dividends on january 21 , 2015 , we increased our regular quarterly dividend to $ 3.50 per share ( a new indicated annual rate of $ 14.00 per share ) . the new dividend , if continued for all of 2015 , would require us to pay out approximately $ 71,600,000. development project we are in the process of constructing an apartment tower above our rego ii shopping center , containing 312 units aggregating 255,000 square feet , which is expected to be completed in 2015. the estimated cost of this project is approximately $ 125,000,000 , of which $ 73,327,000 has been incurred as of december 31 , 2014. there can be no assurance that the project will be completed , or completed on schedule or within budget . financing activities and contractual obligations below is a summary of our outstanding debt and maturities as of december 31 , 2014. we intend to refinance our maturing debt as it comes due . replace_table_token_4_th below is a summary of our contractual obligations and commitments as of december 31 , 2014. replace_table_token_5_th 28 liquidity and capital resources – continued commitments and contingencies insurance we maintain general liability insurance with limits of $ 300,000,000 per occurrence and all-risk property and rental value insurance coverage with limits of $ 1.7 billion per occurrence , including coverage for acts of terrorism , with sub-limits for certain perils such as floods and earthquakes on each of our properties . fifty ninth street insurance company , llc ( “ fnsic ” ) , our wholly owned consolidated subsidiary , acts as a direct insurer for coverage for acts of terrorism , including nuclear , biological , chemical and radiological ( “ nbcr ” ) acts , as defined by the terrorism risk insurance program reauthorization act , which expires in december 2020. coverage for acts of terrorism ( including nbcr acts ) is up to $ 1.7 billion per occurrence and in the aggregate . coverage for acts of terrorism ( excluding nbcr acts ) is fully reinsured by third party insurance companies with no exposure to fnsic . for nbcr acts , fnsic is responsible for a $ 275,000 deductible and 15 % of the balance ( 16 % effective january 1 , 2016 ) of a covered loss , and the federal government is responsible for the remaining 85 % ( 84 % effective january 1 , 2016 ) of a covered loss . we are ultimately responsible for any loss incurred by fnsic . we continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism . however , we can not anticipate what coverage will be available on commercially reasonable terms in the future . we are responsible for deductibles and losses in excess of our insurance coverage , which could be material . our mortgage loans are non-recourse to us , except for $ 75,000,000 of the $ 320,000,000 mortgage on the retail portion of our 731 lexington avenue property , in the event of a substantial casualty , as defined . our mortgage loans contain customary covenants requiring us to maintain insurance . although we believe that we have adequate insurance coverage for purposes of these agreements , we may not be able to obtain an equivalent amount of coverage at reasonable costs in the future . if lenders insist on greater coverage than we are able to obtain , it could adversely affect our ability to finance our properties . litigation rego park i on june 24 , 2014 , sears roebuck and co. ( “ sears ” ) filed a lawsuit in the supreme court of the state of new york against vornado and us ( and certain of our subsidiaries ) with regard to space that sears leases at our rego park i property .
| expense reimbursements tenant expense reimbursements were $ 60,551,000 in the year ended december 31 , 2013 , compared to $ 56,465,000 in the year ended december 31 , 2012 , an increase of $ 4,086,000. this increase was primarily due to higher real estate taxes and reimbursable operating expenses . operating expenses operating expenses were $ 64,930,000 in the year ended december 31 , 2013 , compared to $ 61,755,000 in the year ended december 31 , 2012 , an increase of $ 3,175,000. this increase was primarily comprised of higher ( i ) real estate taxes of $ 3,991,000 and ( ii ) reimbursable operating expenses of $ 512,000 , partially offset by ( iii ) lower bad debt expense of $ 1,362,000. depreciation and amortization depreciation and amortization was $ 28,987,000 in the year ended december 31 , 2013 , compared to $ 28,815,000 in the year ended december 31 , 2012 , an increase of $ 172,000. general and administrative expenses general and administrative expenses were $ 5,026,000 in the year ended december 31 , 2013 , compared to $ 5,162,000 in the year ended december 31 , 2012 , a decrease of $ 136,000. interest and other income , net interest and other income , net was $ 1,527,000 in the year ended december 31 , 2013 , compared to $ 177,000 in the year ended december 31 , 2012 , an increase of $ 1,350,000. this increase was primarily due to dividend income in the current year on the macerich common shares that we received in connection with the sale of kings plaza in november 2012. interest and debt expense interest and debt expense was $ 44,540,000 in the year ended december 31 , 2013 , compared to $ 45,652,000 in the year ended december 31 , 2012 , a decrease of $ 1,112,000. this decrease was primarily due to lower average debt balances . income tax benefit ( expense ) in the year ended december 31 , 2013 , we
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there is no assurance that the company 's projections , including estimates for growth and changes in earnings , will in fact be achieved . please refer to assumptions contained in this section , as well as the various important factors listed in item 1a - risk factors . changes in such assumptions and factors could cause actual future results to differ materially from the company 's growth and earnings projections . for information pertinent to various commitments and contingencies , see item 8 - notes to consolidated financial statements . for a summary of the company 's business segments , see item 8 - note 16 . electric and natural gas distribution strategy and challenges the electric and natural gas distribution segments provide electric and natural gas distribution services to customers , as discussed in items 1 and 2 - business properties . both segments strive to be a top performing utility company measured by integrity , safety , employee satisfaction , customer service and shareholder return , while continuing to focus on providing safe , environmentally friendly , reliable and competitively priced energy and related services to customers . the company is focused on cultivating organic growth while managing operating costs and continues to monitor opportunities for these segments to retain , grow and expand their customer base through extensions of existing operations , including building and upgrading electric generation , transmission and distribution and natural gas systems , and through selected acquisitions of companies and properties with similar operating and growth objectives at prices that will provide stable cash flows and an opportunity to earn a competitive return on investment . the continued efforts to create operational improvements and efficiencies across both segments promotes the company 's business integration strategy . the primary factors that impact the results of these segments are the ability to earn authorized rates of return , the cost of natural gas , cost of electric fuel and purchased power , weather , competitive factors in the energy industry , population growth and economic conditions in the segments ' service areas . the electric and natural gas distribution segments are subject to extensive regulation in the jurisdictions where they conduct operations with respect to costs , timely recovery of investments and permitted returns on investment , as well as certain operational , environmental and system integrity regulations . to assist in the reduction of regulatory lag with the increase in investments , tracking mechanisms have been implemented in certain jurisdictions , as further discussed in items 1 and 2 - business properties and item 8 - note 19 . the pipeline and hazardous materials safety administration recently issued additional rules to strengthen the safety of natural gas transmission and hazardous liquid pipelines . the company is currently evaluating the first phase of the rules . legislative and regulatory initiatives to increase renewable energy resources and reduce ghg emissions could impact the price and demand for electricity and natural gas , as well as increase costs to produce electricity and natural gas . the segments continue to invest in facility upgrades to be in compliance with the existing and future regulations . 34 mdu resources group , inc. form 10-k part ii tariff increases on steel and aluminum materials could negatively affect the segments ' construction projects and maintenance work . the company continues to monitor the impact of tariffs on raw material costs . the natural gas distribution segment is also facing increased lead times on delivery of certain raw materials used in pipeline projects . in addition to the effect of tariffs , long lead times are attributable to increased demand for steel products from pipeline companies as they respond to the united states department of transportation pipeline system safety and integrity plan . the company continues to monitor the material lead times and is working with manufacturers to proactively order such materials to help mitigate the risk of delays due to extended lead times . the ability to grow through acquisitions is subject to significant competition and acquisition premiums . in addition , the ability of the segments to grow their service territory and customer base is affected by the economic environment of the markets served and competition from other energy providers and fuels . the construction of any new electric generating facilities , transmission lines and other service facilities is subject to increasing costs and lead times , extensive permitting procedures , and federal and state legislative and regulatory initiatives , which will likely necessitate increases in electric energy prices . revenues are impacted by both customer growth and usage , the latter of which is primarily impacted by weather . very cold winters increase demand for natural gas and to a lesser extent , electricity , while warmer than normal summers increase demand for electricity , especially among residential and commercial customers . average consumption among both electric and natural gas customers has tended to decline as more efficient appliances and furnaces are installed , and as the company has implemented conservation programs . natural gas decoupling mechanisms in certain jurisdictions have been implemented to largely mitigate the effect that would otherwise be caused by variations in volumes sold to these customers due to weather and changing consumption patterns on the company 's distribution margins . earnings overview - the following information summarizes the performance of the electric segment . replace_table_token_14_th adjusted gross margin is a non-gaap financial measure . for additional information and reconciliation of the non-gaap adjusted gross margin attributable to the electric segment , see the non-gaap financial measures section later in this item . 2019 compared to 2018 electric earnings increased $ 7.8 million ( 17 percent ) as a result of : adjusted gross margin : increase of $ 10.8 million , primarily due to an increase in revenues . story_separator_special_tag the revenue increase was driven by implemented regulatory mechanisms , which include approved montana interim and final rates and recovery of the investment in the mdu resources group , inc. form 10-k 35 part ii bsse project placed into service in the first quarter of 2019. also contributing to the increase was the absence in 2019 of a transmission formula rate adjustment recognized in the third quarter of 2018 for decreased costs on the bsse project . these increases were partially offset by lower retail sales volumes of 1.2 percent across all major customer classes . operation and maintenance : increase of $ 2.7 million , primarily resulting from higher payroll-related costs , partially offset by lower material expenses across all locations . depreciation , depletion and amortization : increase of $ 7.7 million as a result of increased property , plant and equipment balances including the bsse project , as previously discussed , and other capital projects , as well as a reserve for certain costs related to the retirement of three aging coal-fired electric generating units , as discussed in item 8 - note 7 , which is offset in income taxes . taxes , other than income : increase of $ 1.6 million , primarily from higher property taxes in certain jurisdictions . other income : increase of $ 2.2 million , largely the result of higher returns on the company 's benefit plan investments , partially offset by the write-down of a non-utility investment , as discussed in item 8 - note 8 . interest expense : decrease of $ 600,000 driven by higher afudc , which resulted in more interest being capitalized on regulated construction projects . income taxes : increase in income tax benefits of $ 6.2 million , largely due to increased production tax credits , as well as increased excess deferred tax amortization . 2018 compared to 2017 electric earnings decreased $ 2.4 million ( 5 percent ) as a result of : adjusted gross margin : decrease of $ 9.6 million , primarily due to lower operating revenues driven by the reserves against revenues in certain jurisdictions for anticipated refunds to customers for lower income taxes due to the enactment of tcja and a transmission formula rate adjustment due to lower than anticipated project costs on the bsse project recorded in the third quarter of 2018. partially offsetting the decreases to adjusted gross margin were the absence in 2018 of reserves related to tracker balances in prior years and increased retail sales volumes of 1 percent to all major customer classes . operation and maintenance : increase of $ 800,000 , largely from higher contract services at certain generating stations . partially offsetting the increase were lower payroll-related costs . depreciation , depletion and amortization : increase of $ 3.3 million as a result of increased plant balances . taxes , other than income : increase of $ 1.0 million , primarily from higher property taxes in certain jurisdictions . other income : decrease of $ 2.0 million , largely the result of lower returns on investments . interest expense : comparable to the prior year . income taxes : decrease of $ 14.2 million , largely due to the enactment of the tcja reduced corporate tax rate , reduced income before income taxes and the absence of $ 2.1 million of income tax expense in 2018 for the revaluation of nonutility net deferred tax assets in 2017. partially offsetting these decreases were lower production tax credits . a portion of the reduction in income taxes are being reserved against revenues , as previously discussed , resulting in a minimal impact on overall earnings . 36 mdu resources group , inc. form 10-k part ii story_separator_special_tag generating units at heskett and lewis & clark stations . heskett unit 4 was included in the company 's recently submitted integrated resource plan . on august 28 , 2019 , the company filed for an advanced determination of prudence with the ndpsc for heskett unit 4. if approved , heskett unit 4 is expected to be placed into service in 2023. the company filed requests for the usage of deferred accounting for the costs related to the retirement of lewis & clark station and units 1 and 2 at heskett station with the ndpsc on september 16 , 2019 , the mtpsc on november 1 , 2019 and the sdpuc on november 8 , 2019. the sdpuc approved the use of deferred accounting as requested on january 7 , 2020. the company continues to be focused on the regulatory recovery of its investments . the company files for rate adjustments to seek recovery of operating costs and capital investments , as well as reasonable returns as allowed by regulators . the company 's most recent cases by jurisdiction are discussed in item 8 - note 19 . 38 mdu resources group , inc. form 10-k part ii pipeline and midstream strategy and challenges the pipeline and midstream segment provides natural gas transportation , gathering and underground storage services , as discussed in items 1 and 2 - business properties . the segment focuses on utilizing its extensive expertise in the design , construction and operation of energy infrastructure and related services to increase market share and profitability through optimization of existing operations , organic growth and investments in energy-related assets within or in close proximity to its current operating areas . the segment focuses on the continual safety and reliability of its systems , which entails building , operating and maintaining safe natural gas pipelines and facilities . the segment continues to evaluate growth opportunities including the expansion of existing storage , gathering and transmission facilities ; incremental pipeline projects ; and expansion of energy-related services leveraging on its core competencies . in support of this strategy , the company completed and placed into service the following projects in 2019 and 2018 : in november 2019 , phase i of the line section 22 expansion project in the billings , montana , area increased capacity by 14.3 mmcf per day .
| partially offsetting these increases was a write-down of a non-utility investment , as discussed in item 8 - note 8 . interest expense : increase of $ 4.8 million , largely resulting from increased debt balances to finance higher gas costs to be collected from customers , as discussed in item 8 - note 19 . mdu resources group , inc. form 10-k 37 part ii income taxes : decrease of $ 2.7 million , largely due to increased permanent tax benefits related to the company 's benefit plan investments . 2018 compared to 2017 natural gas distribution earnings increased $ 5.5 million ( 17 percent ) as a result of : adjusted gross margin : increase of $ 1.4 million , primarily due to increased retail sales margins , mainly the result of weather normalization mechanisms in certain jurisdictions and conservation revenue , which offsets the conservation expense in operation and maintenance expense . also contributing to the retail sales margin increase were higher basic service charges as a result of increased retail sales customers and rate design . these increases were partially offset by tax reform revenue impacts for refunds to customers as a result of lower income taxes due to the enactment of tcja and lower volumes in certain jurisdictions . operation and maintenance : increase of $ 9.1 million , largely related to conservation expenses being recovered in revenue ; contract services , which includes the recognition of a non-recurring expense related to the approved wutc general rate case settlement in the second quarter 2018 ; and higher payroll-related costs . depreciation , depletion and amortization : increase of $ 3.1 million , primarily as a result of increased plant balances offset in part by lower depreciation rates implemented in certain jurisdictions . taxes , other than income : increase of $ 1.2 million due to higher property taxes in certain jurisdictions . other income : decrease of $ 1.8 million , primarily the result of lower returns on investments . interest expense : comparable
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we continually review our product offerings throughout the combined organization and strive to expand product designs , production methods and marketing strategies . the supportive response to the palm harbor and fleetwood acquisitions and advancement to full ownership by cavco shareholders has been encouraging . we plan to continue our consistent focus on developing synergies among all operations . overall , we believe that these expansions and ongoing improvements will provide positive long-term strategic benefits for the company . industry and company outlook according to data reported by the mhi , during calendar year 2013 , our industry shipped approximately 60,000 hud code manufactured homes . this followed approximately 55,000 homes shipped in 2012 , 52,000 in 2011 and 50,000 shipped in each of calendar years 2010 and 2009 , the lowest levels since shipment statistics began to be recorded in 1959. yearly home shipments from 2003 to 2013 were less than the annual home shipments for each of the 40 years from 1963 to 2002. for the past 10- and 20-year periods , annual home shipments averaged 84,000 and 183,000 , respectively . while industry hud code manufactured homes improved modestly during the three most recent years , the manufactured housing industry and the company continue to operate at relatively low production and shipment levels , based on historical shipment levels . ongoing economic challenges continue to hinder annual industry and company home sales . high unemployment and underemployment rates among home buyers who favor affordable housing and low consumer confidence levels are two of the most significant impediments . `` first-time '' and `` move-up '' buyers of affordable homes are historically among the largest segments of new manufactured home purchasers . included in this group are lower-income households that are particularly affected by the high unemployment and underemployment consequences of the recession . low consumer confidence in the u.s. economy is not conducive for potential customers to commit to a home purchase . many potential manufactured home buyers interested in our products for seasonal retirement living may remain concerned about financial stability , and therefore , may be hesitant to commit to a new home purchase . as employment and consumer confidence levels improve , we anticipate rising demand for our homes . 31 consumer financing for the retail purchase of manufactured homes needs to become generally more available before marked emergence from current low home shipment levels can occur . restrictive underwriting guidelines , irregular appraisal processes , higher interest rates compared to site-built homes , regulatory burdens , a limited number of institutions lending to manufactured home buyers and limited secondary market availability for manufactured home loans are significant restraints to industry growth . we are working directly with other industry participants to develop manufactured home consumer financing models to better attract industry financiers interested in furthering or expanding lending opportunities in the industry . we have invested in community-based lending initiatives that provide home-only financing to residents of certain manufactured home communities . we are also working through industry trade associations to encourage favorable legislative and gse action to address the mortgage financing needs of potential buyers of affordable homes . only limited progress has been made in this area and meaningful positive impact in the form of increased home orders has yet to be realized . see `` regulatory developments '' below . while sales activity of existing homes appear to be showing signs of improvement , the current lending environment that favors site-built housing and more affluent home buyers has not resulted in similar improved capabilities for affordable-home buyers to facilitate a new home purchase . in addition , the contingency contract process , wherein potential manufactured home buyers must sell their existing home in order to facilitate the purchase of a new factory-built home continues to be somewhat impeded . based on the relatively low cost associated with manufactured home ownership , our products have traditionally competed with rental housing 's monthly payment affordability . rental housing activity is reported to have increased in recent years . as a result , tenant housing vacancy rates appear to have declined , which often causes a corresponding rise in associated rental rates . these rental market factors may cause some renters to become interested buyers of affordable-housing alternatives , including manufactured homes . further , with respect to the general rise in demand for rental housing , we have realized a larger proportion of orders from developers and community owners for new manufactured homes intended for use as rental housing . this demand has likely been driven by a shift to a rent-versus-own perspective , somewhat tied to low consumer confidence levels and high unemployment rates . the backlog of sales orders at march 29 , 2014 varied among our 15 factories , but in total was $ 33.6 million , or approximately four weeks of current production levels , compared to $ 26.0 million at march 30 , 2013 . the company 's capacity utilization rate was approximately 47 % during the fourth quarter of fiscal year 2014 , versus 41 % during the same quarter last year . inventory financing for the industry 's wholesale distribution chain continues to be in short supply . faced with illiquid capital markets in late calendar year 2008 , each of the manufactured housing sector 's remaining inventory finance companies ( floor plan lenders ) initiated significant changes and one company ceased lending activities in the industry entirely . other finance programs are subject to more restrictive terms that continue to evolve and in some cases require the financial involvement of the company . in connection with certain of these participation inventory finance programs , the company provides a significant amount of the funds that independent financiers then lend to distributors to finance retail inventories of our products . in addition , the company has entered into direct inventory finance arrangements with distributors of our products under which the company provides all of the funds for financing inventory ( see note 6 to the consolidated financial statements ) . story_separator_special_tag the company 's involvement in inventory finance has increased the availability of manufactured home inventory financing to distributors of our products . we believe that our taking part in the wholesale financing of inventory is quite helpful to retailers and allows our homes continued exposure to potential home buyers . these initiatives support the company 's ongoing efforts to expand our distribution base in all of our markets with existing and new customers . however , the initiatives expose the company to risks associated with the creditworthiness of certain customers and business partners , including independent retailers , developers , communities and inventory financing partners , many of whom may be adversely affected by the volatile conditions in the economy and financial markets . 32 the two largest manufactured housing consumer demographics , young adults and those who are 55+ years old , are both growing . the u.s. adult population is estimated to expand by approximately 15 million between 2014 and 2020. young adults born from 1976 to 1995 , sometimes referred to as gen y , represent a large segment of the population . late-stage gen y is approximately 2 million people larger than the next age category born from 1966 to 1975 , gen x , and is considered to be in the peak household-formation and home-buying years . gen y represents prime first-time home buyers who may be attracted by the affordability , diversity of style choices and location flexibility of factory-built homes . the age 55 and older category is reported to be the fastest growing segment of the u.s. population . this group is similarly interested in the value proposition ; however , they are also motivated by the energy efficiency and low maintenance requirements of systems-built homes , and by the lifestyle offered by planned communities that are specifically designed for homeowners that fall into this age group . with manufacturing facilities strategically positioned across the nation , we utilize local market research to design homes to meet the demands of our customers . we have the ability to customize floor plans and designs to fulfill specific needs and interests . by offering a full range of homes from entry-level models to large custom homes with the ability to engineer designs in-house , we can accommodate virtually any customer request . in addition to homes built to the federal hud code , we construct modular homes that conform to state and local codes , park models and cabins and light commercial buildings at many of our manufacturing facilities . we employ a concerted effort to identify niche market opportunities where our diverse product lines and custom building capabilities provide us with a competitive advantage . our green building initiatives involve the creation of an energy efficient envelope including higher utilization of renewable materials . these homes provide environmentally-friendly maintenance requirements , typically lower utility costs , specially designed ventilation systems and sustainability . cavco also builds homes designed to use alternative energy sources such as solar and wind . building green may significantly reduce greenhouse gas emissions without sacrificing features , style or comfort . from bamboo flooring and tankless water heaters to solar-powered homes , our products are diverse and tailored to a wide range of consumer interests . innovation in housing design is a forte of the company and we continue to introduce new models at competitive price points with expressive interiors and exteriors that complement home styles in the areas in which they are located . we maintain a conservative cost structure , which enables us to build added value into our homes . we have placed a consistent focus on developing synergies among all operations . in addition , the company has worked diligently to maintain a solid financial position . our balance sheet strength and position in cash and cash equivalents should help us to avoid liquidity problems and enable us to act effectively as market opportunities present themselves . we were named the 2014 manufacturer of the year by the members of mhi , the factory-built home industry 's national trade organization , for the fifth consecutive year . in addition , several new product designs from each of our main housing brands , namely cavco homes , fleetwood homes and palm harbor homes , were individually recognized recently by winning design awards from mhi . in january 2008 , we announced a stock repurchase program under which a total of $ 10.0 million may be used to repurchase our outstanding common stock . the repurchases may be made in the open market or in privately negotiated transactions in compliance with applicable state and federal securities laws and other legal requirements . the level of repurchase activity is subject to market conditions and other investment opportunities . the plan does not obligate us to acquire any particular amount of common stock and may be suspended or discontinued at any time . the repurchase program will be funded using our available cash . no repurchases have been made under this program to date . 33 regulatory developments in 2010 , the dodd-frank act was passed into law . the dodd-frank act is a sweeping piece of legislation , and the financial services industry is still assessing its implications and implementing necessary changes in procedures and business practices . although congress detailed some significant changes , and new rules have been implemented , the full impact will not be fully known for months or even years , as regulations that are intended to implement the dodd-frank act are adopted by the appropriate agencies , and the text of the dodd-frank act is analyzed by impacted stakeholders and possibly the courts . the dodd-frank act established the cfpb to regulate consumer financial products and services . on january 10 , 2013 , the cfpb released certain mortgage finance rules required under the dodd-frank act .
| interest expense decreased by 18.9 % to $ 4.8 million for fiscal year 2014 , compared to $ 6.0 million for the prior year . interest expense consisted primarily of debt service on securitization financings connected to the countryplace securitized manufactured home loan portfolios and decreased in connection with the continued principal reductions of the securitization financings . other income . other income primarily represents interest income earned on inventory finance notes receivable and gains , losses or impairment on property , plant and equipment , including assets held for sale or sold . other income decreased 30.0 % to $ 1.1 million for fiscal year 2014 as compared to $ 1.6 million last year . the decrease resulted mainly from impairments recorded on idle real estate properties . income before income taxes . pre-tax income increased to $ 27.8 million for the year ended march 29 , 2014 , from $ 16.6 million last year . the current year amount consisted of $ 27.3 million from the factory-built housing segment and $ 11.6 million from the financial services segment , offset by general corporate charges of $ 11.0 million . this compared to $ 14.3 million from the factory-built housing segment and $ 10.3 million from the financial services segment , offset by general corporate charges of $ 8.0 million for the year ended march 30 , 2013 . income taxes . the effective income tax rate was approximately 33 % for fiscal year 2014 ( see note 13 to the consolidated financial statements ) and 38 % for fiscal year 2013 . the effective income tax rate for the current year was positively impacted from the purchase of all noncontrolling interests in fleetwood and the timing of certain tax credits and deductions . as cavco 's taxable income has grown , we have realized additional benefit from tax deductions established to favor domestic manufacturing operations . we also received benefit from tax credits , including the work opportunity tax credit and the new energy efficient home
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the effective tax rate on income before income taxes was 18.3 % and 20.6 % in 2014 and 2013 , respectively . the company 's adjusted effective tax rate on income before income taxes , excluding certain nonrecurring charges was 23.9 % in 2014 and 23.1 % in 2013. see the regulation g reconciliation below for details of ppg 's adjusted effective tax rate from continuing operations . diluted earnings-per-share for the year ended december 31 , 2014 were $ 15.03 , comprised of net income from continuing operations of $ 8.10 and discontinued operations , net of tax of $ 6.93. these diluted earnings per share from continuing operations compare to $ 6.55 in the year ended december 31 , 2013. operationally , each reporting segment delivered earnings growth of at least 15 % . the company benefited from the 5.7 million shares of stock repurchased in 2013 as well as the 3.8 million shares of stock repurchased during 2014. the diluted earnings per share from discontinued operations relates to the transitions optical joint venture and sunlens business which were sold in march of 2014. regulation g reconciliation - results from operations ppg industries believes investors ' understanding of the company 's operating performance is enhanced by the disclosure of income before income taxes , ppg 's effective tax rate , tax expense , net income from continuing operations and earnings per diluted share adjusted for nonrecurring charges . ppg 's management considers this information useful in providing insight into the company 's ongoing operating performance because it excludes the impact of items that can not reasonably be expected to recur on an ongoing basis . income before income taxes , the effective tax rate , tax expense , net income from continuing operations and earnings per diluted share adjusted for these items are not recognized financial measures determined in accordance with u.s. generally accepted accounting principles ( `` gaap '' ) and should not be considered a substitute for income before income taxes , the effective tax rate , tax expense , net income from continuing operations or earnings per diluted share or other financial measures as computed in accordance with u.s. gaap . in addition , adjusted income before income taxes , adjusted effective tax rate , adjusted tax expense , adjusted net income from continuing operations and adjusted earnings per diluted share from continuing operations may not be comparable to similarly titled measures as reported by other companies . 2014 ppg annual report and form 10-k 19 income before income taxes is reconciled to adjusted income before income taxes below : replace_table_token_3_th the effective tax rate from continuing operations is reconciled to the adjusted effective tax rate from continuing operations below : replace_table_token_4_th replace_table_token_5_th net income ( attributable to ppg ) and earnings per share – assuming dilution ( attributable to ppg ) are reconciled to adjusted net income ( attributable to ppg ) and adjusted earnings per share – assuming dilution below : replace_table_token_6_th replace_table_token_7_th results of reportable business segments replace_table_token_8_th performance of reportable business segments performance coatings performance coatings net sales increased $ 764 million , or approximately 10 % from 2013 , to $ 8,698 million primarily due to net sales from acquisitions , including the akzo nobel north american architectural coatings acquisition and comex , partially offset by unfavorable currency translation . acquisitions contributed an 8 % increase in net sales for the year . prices increased modestly , and segment volumes , excluding acquisitions , advanced nearly 2 % across all major regions . architectural coatings-emea sales volumes improved by low-single digit percentages year-over-year aided by partial demand recovery in some regions and in comparison to strengthening prior year levels . sales volume improvement occurred early in the year , aided by favorable weather conditions , 20 2014 ppg annual report and form 10-k which was partially offset by lower year-over-year sales volumes late in the year . the protective and marine coatings business experienced modest sales improvement , driven primarily by sales volume increases in the north american and european protective markets . marine new-build sales volumes were negative early in the year , but positive late in the year . the aerospace and automotive refinish businesses both delivered slightly higher sales volumes year-over-year in each major region . demand trends in the overall aerospace industry continued to remain favorable globally . refinish growth was supported by higher emerging region activity and solid growth in the developed regions , including benefits from the expansion of the vehicle parc in asia , higher north american demand and a partial demand recovery in europe . excluding the impacts of acquisitions and currency , architectural coatings , america and asia pacific , net sales were up modestly year over year . segment income increased $ 162 million , or 16 % from the prior year , to $ 1,205 million primarily due to the increase in net sales and acquisitions , including the further realization of cost synergies , partially offset by cost inflation . in the first quarter of 2015 , moderate north american architectural coatings market demand growth is expected to continue , including growth in both residential and non-residential end use-markets . the company will be making growth-related investments during 2015 in certain architectural coatings distribution channels in the region . this includes additional sales and marketing efforts and the addition of new company-owned store locations . the protective and marine business is expected to deliver year-over-year sales volume growth in the first quarter of 2015 due to improving asian marine new build end-use market demand . looking forward for the segment , the comex acquisition is expected to add between $ 180 to $ 200 million of sales in the first quarter 2015. additionally , based on current exchange rates , we expect foreign currency translation to be unfavorable in sequential and year-over-year sales and earnings comparisons . story_separator_special_tag industrial coatings industrial coatings segment net sales increased $ 288 million , or 6 % from the prior year , to $ 5,552 million primarily due to sales volume growth of 6 % . ppg 's global automotive oem business grew net sales by high single-digit percentages year-over-year , and continued a multi-quarter trend of outperforming global industry growth . ppg continues to benefit from the adoption of new technologies and ongoing focus on customer service and customer process improvement initiatives . growth accelerated in the industrial coatings business , aided by continued north american and emerging region strength , and european demand remained positive year-over-year . packaging coatings year-over-year net sales were lower , reflecting continued weakness in europe . specialty coatings and materials net sales grew year-over-year aided by higher sales volumes in oled materials , optical materials , precipitated silicas and teslin® . segment income increased $ 127 million , or 15 % from the year ended december 31 , 2013 , to $ 951 million primarily due to the benefit from sales volume growth and improved manufacturing costs as a result of our continued focus on increased productivity and efficiency . the industrial coatings segment is our most geographically diverse segment and currency translation is expected to negatively impact year-over-year financial results in the first quarter of 2015. on a sequential quarter basis , we expect that higher sales seasonally will be partly offset by unfavorable currency translation as current rates are below fourth quarter average conversion rates for many currencies . recent global industrial production trends are expected to continue , resulting in generally consistent demand growth for ppg products . glass glass net sales increased $ 43 million , or 4 % compared to the prior year , to $ 1,110 million primarily due to higher pricing and sales volumes in flat glass and higher sales volumes in fiber glass . sales volumes in flat glass reflect improvements in residential and non-residential end-use market demand , partly offset by unfavorable currency translation , primarily the canadian dollar . segment income increased $ 25 million from 2013 , to $ 81 million as the benefit of manufacturing cost improvements and the impact of improved sales were partially offset by higher costs stemming from scheduled maintenance projects . higher natural gas-based energy costs early in the year were also a negative factor although this impact declined later in the year . looking ahead , overall demand growth is expected to continue in flat glass , as is the favorable value-added product mix . mixed global fiber glass demand trends are expected to continue . unfavorable currency translation is also expected sequentially and year-over-year , although the majority of the segment sales are u.s. dollar denominated . the segment will incur higher pension and other post-employment benefits ( `` opeb '' ) expense in 2015 versus 2014 stemming from revised mortality assumptions and a lower year-end discount rate . however , year-over-year earnings comparisons will benefit from the absence of first quarter 2014 costs associated with significant plant maintenance projects . review and outlook during 2014 , overall economic conditions remained mixed among the major global economies , with the pace of economic activity in each region fairly constant throughout the year . demand was also varied by major coatings end-use market ; however , we realized global growth in nearly all end-use categories . these economic trends were an important element in ppg 's aggregate sales volume growth of 3.5 % compared to the previous year . ppg achieved sales volume growth of greater than 2 % in each major region for the year , and sales volume growth improved in every major region versus 2013 growth levels . year-over-year sales volumes grew about 4 % in the u.s. and canada in 2014 , with sales volume growth adding to strong prior year gains and broad-based growth across many ppg businesses . the u.s. and canada remained ppg 's largest region representing 47 % of 2014 sales . during 2014 , industrial activity continued to improve in the region aided by low regional energy costs , continued demand and production increases in several industries , including automotive oem and aerospace . 2014 ppg annual report and form 10-k 21 construction spending in the region continued to recover in a measured manner . u.s. housing starts grew moderately during the year and were supplemented by continued , modest improvement in the residential remodeling market . non-residential construction demand remained suppressed early in the year but exhibited stronger but inconsistent growth in the latter portion of the year . although smaller in size , demand growth in the canadian construction market was also modest . growth in the region and various end-use markets was also aided somewhat by lower u.s. unemployment rates which improved throughout the year . falling energy and gasoline prices late in the year are expected to result in improved consumer spending and additional regional growth prospects for ppg entering 2015. the pace of european economic activity remained subdued in 2014 , with the region continuing to face limited employment growth . industrial production and gross domestic product growth was mixed by country and generally weak across the region . regional demand was strongest early in the year aided somewhat by modest winter weather conditions , with ppg year-over-year sales volumes advancing by about 5 % in the first quarter . demand trends were more muted for the remainder of the year , with full year regional sales volume growth of 2 % . however , the level of demand was not consistent across the various countries in the region , as certain eastern european countries and the u.k. experienced solid demand growth , while other large countries in the region , including france , remained challenged from a demand perspective . europe remains a very large region for ppg , representing just under one-third of ppg 's 2014 sales .
| segment income was $ 1,043 million for 2013 , an increase of $ 154 million , or 17 % , compared to the prior year primarily due to the income from acquired businesses , lower overhead and manufacturing costs stemming from prior restructuring actions and ongoing cost management , offset partially by the negative impact on segment income from the lower sales volumes . industrial coatings industrial coatings net sales increased $ 509 million , or 11 % from the prior year , to $ 5,264 million primarily due to sales volume growth ( 6 % ) and net sales from acquired businesses ( 4 % ) . in 2013 , ppg 's global automotive oem coatings sales volumes grew 10 % , outpacing global industry auto production growth of about 3 % year-over-year . the industrial coatings business experienced varied sales volume results by region compared with the prior year , as strong improvements across emerging regions and modestly higher sales volumes in north america were offset by weak demand in europe . packaging coatings sales volumes grew modestly in asia pacific and latin america , were down low-single-digits year-over-year in europe and essentially flat in north america . specialty coatings and materials sales volumes increased as the silicas business business achieved higher year over year sales volumes in both the u.s. and europe as a result of solid demand growth . segment income increased $ 147 million , or 22 % from the prior year , to $ 824 million primarily due to the impact from the higher sales coupled with ongoing cost management initiatives and the benefits from the company 's restructuring actions initiated in 2012 . 2014 ppg annual report and form 10-k 25 glass glass segment net sales increased $ 35 million , or 3 % from the prior year , to $ 1,067 million primarily due to higher fiber glass sales volumes . sales volumes in fiber glass increased modestly , reflecting higher global demand in various end-use markets . segment income was $ 56 million , a decrease of $ 7 million , or 11 % from
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our gross new business awards , excluding the rps acquisition , for the years ended december 31 , 2013 and 2012 were $ 997.7 million and $ 947.8 million , respectively . new business awards arise when a client selects us to execute its trial and is documented by written or electronic correspondence or for our strategic solutions offering when the amount of revenue expected to be recognized is measurable . the number of new business awards can vary significantly from year to year , and awards can have terms ranging from several months to several years . for our strategic solutions offering , the value of a new business award is the anticipated service revenue to be recognized in the corresponding quarter of the next fiscal year . for the remainder of our business , the value of a new award is the anticipated service revenue over the life of the contract , which does not include reimbursement activity or investigator fees . in the normal course of business , we experience contract cancellations , which are reflected as cancellations when the client provides us with written or electronic correspondence that the work should cease . during the years ended december 31 , 2014 , 2013 and 2012 we had $ 251.7 million , $ 223.3 million , and $ 294.3 million , respectively , of cancellations for which we received correspondence from the client . the number of cancellations can vary significantly from year to year . the value of the cancellation is the remaining amount of unrecognized service revenue , less the estimated effort to transition the work back to the client . our backlog consists of anticipated service revenue from new business awards that either have not started or are in process but have not been completed . backlog varies from period to period depending upon new business awards and contract modifications , cancellations , and the amount of service revenue recognized under existing contracts . our backlog at december 31 , 2014 , 2013 and 2012 was $ 2.1 billion , $ 1.9 billion , and $ 1.4 billion , respectively . industry trends isr estimated in its `` 2014 cro market size projections '' report , which we refer to as the isr 2014 market report , that the size of the worldwide cro market was approximately $ 22 billion in 2013 and will grow at an 8 % cagr to $ 32 billion over the next five years . this growth will be driven by an increase in the amount of research and development expenditures and higher levels of clinical development outsourcing by biopharmaceutical companies . acquisition of pra by kohlberg kravis roberts & co. l.p. effective september 23 , 2013 , we were acquired by affiliates of kkr for $ 1.4 billion pursuant to a plan of merger by and among the company , merger sub and genstar , or merger . upon completion of the kkr transaction , merger sub was merged with and into pra holdings , inc. , predecessor company , which became a subsidiary of pinnacle holdco parent , inc. , or parent . on december 19 , 2013 , pinnacle holdco parent , inc. changed its name to pra global holdings , inc. and on july 10 , 2014 , pra global holdings , inc. changed its name to pra health sciences , inc. 48 business combinations acquisition by kkr concurrent with the closing of the kkr transaction , kkr contributed equity of $ 454.8 million and we entered into debt agreements totaling $ 1.3 billion . the debt agreements were comprised of a $ 825.0 million first lien term loan , a $ 125.0 million revolving line of credit that was undrawn at closing , and $ 375.0 million in notes . the proceeds were used to fund a portion of the total consideration paid , repay all outstanding debt of the predecessor company and pay transaction fees associated with the merger . upon consummation of the merger , the pra acquisition stockholders received $ 17.37 in cash for each share of the predecessor company 's stock owned . the transaction was accounted for as a business combination using the acquisition method of accounting . in connection with the acquisition , we recorded $ 849.6 million of goodwill , which is not deductible for income tax purposes . factors that contributed to the recognition of goodwill for the acquisition included our expected growth rates and profitability . the increase in expected growth rates is primarily related to growth in our revenue due to an increase in our global footprint and expansion of service offerings . the increase in expected profitability is primarily related to corporate wide initiatives to streamline and improve the efficiency in which the company conducts clinical trials as well as continued leveraging of selling , general and administrative costs . customer relationships , customer backlog and other intangibles , and finite-lived trade name intangibles are being amortized on an accelerated method over 23 years , five years and 10 years , respectively . since december 31 , 2013 , goodwill decreased by $ 33.3 million as a result of our jurisdictional allocation of acquisition related intangibles , which also required an adjustment to the acquired income tax balances . acquisition of rps on september 23 , 2013 , immediately following the pra acquisition , and using the proceeds from the borrowings issued on the same day , we acquired all of the outstanding shares of rps , a global contract research organization based in the united states , for $ 289.3 million , subject to a working capital adjustment of up to $ 15.0 million . the acquisition of rps provides us with a more diverse client mix , including 16 of the 20 largest pharmaceutical companies in the world . the acquisition of rps was accounted for as a business combination and , accordingly , the assets acquired and the liabilities assumed have been recorded at their respective fair values as of the acquisition date . story_separator_special_tag in connection with the acquisition , we recorded approximately $ 153.4 million of goodwill , which is not deductible for income tax purposes . factors that contributed to the recognition of goodwill for the acquisition included expected growth rates and profitability of rps and expected synergies with our existing operations . anticipated synergies include procurement leverage and lower selling , general and administrative expenses , including reduced labor and facilities costs . longer term , the company expects to benefit from synergies related to service revenue expansion , as the acquisition serves to significantly increase the depth of relationships with large pharmaceutical companies . customer relationships and trade name intangibles are being amortized on an accelerated method over 13 years and 10 years , respectively , and other intangibles are amortized on a straight-line basis over three years . the results of operations for rps are included in our consolidated financial statements from the date of acquisition . 49 since december 31 , 2013 , goodwill decreased by $ 4.2 million , primarily as a result of adjustments to the acquired income tax balances and adjustments to the fair value on certain contracts due to new information regarding the facts and circumstances that existed on the date of the acquisition . cri lifetree on december 2 , 2013 , we completed the acquisition of cri lifetree , a specialized clinical research organization , for $ 77.1 million in cash . cri lifetree focuses on the conduct and design of early stage , patient population studies , and is therapeutically focused in human abuse liability , addiction , pain , psychiatry , neurology , pediatric and infectious disease services . cri lifetree has approximately 250 full-time employees and has three clinic locations : marlton , nj , philadelphia , pa , and salt lake city , ut . in addition to inpatient and outpatient studies , cri lifetree provides highly-specialized early phase research support services such as data management , biostatistics , and study report writing . in order to fund the acquisition of cri lifetree , kkr made an equity contribution of $ 13.5 million in cash and we increased our first lien term loan borrowings by $ 65.0 million . the acquisition of cri lifetree was accounted for as a business combination and , accordingly , the assets acquired and the liabilities assumed have been recorded at their respective fair values as of the acquisition date . in connection with the acquisition , we recorded approximately $ 51.7 million of goodwill , of which $ 15.4 million is tax deductible . factors that contributed to the recognition of goodwill for the acquisition included expected growth rates and profitability of cri lifetree and expected synergies with our existing operations . anticipated synergies include lower selling , general and administrative expenses , including reduced labor and facilities costs . longer term , the company expects to benefit from synergies related to service revenue expansion , as the acquisition serves to significantly expand the company 's phase i to phase ii services . the results of operations for cri lifetree are included in our consolidated financial statements from the date of acquisition . since december 31 , 2013 , goodwill increased by $ 2.0 million , primarily as a result of adjustments to the acquired intangible assets . acquisition of clinstar on february 28 , 2013 , we acquired all of the outstanding member 's interest of clinstar , a contract research organization and logistics provider based in the united states with operations in eastern europe , for $ 45.0 million in cash and contingent consideration in the form of a potential earn-out payment of up to $ 5.0 million . the earn-out payment is contingent upon the achievement of certain revenue and earnings targets during the 24-month period following closing . we recognized a liability of approximately $ 3.7 million as the estimated acquisition date fair value of the earn-out ; the fair value was based on significant inputs not observed in the market and thus represented a level 3 measurement . any change in the fair value of the earn-out subsequent to the acquisition date will be recognized in earnings in the period of the change . the fair value of the contingent consideration changed by $ 0.4 million , $ ( 1.1 ) million and $ 0.5 million during the predecessor 2013 period , successor 2013 period , and the year ended december 31 , 2014 , respectively . during the year ended december 31 , 2014 , we paid $ 1.6 million of the contingent consideration . the remaining contingent consideration is a current liability at december 31 , 2014 , totaling $ 1.9 million , and is recorded in accrued expenses . the acquisition of clinstar was accounted for as a business combination and , accordingly , the assets acquired and the liabilities assumed have been recorded at their respective fair values as of the acquisition date . in connection with the acquisition , we recorded approximately $ 15.1 million of goodwill , a portion of which is deductible for income tax purposes . factors that contributed to the recognition of goodwill for the acquisition included expected growth rates and profitability of clinstar and expected synergies with our existing operations . anticipated synergies include lower selling , general 50 and administrative expenses , including reduced labor and facilities costs . longer term , the company expects to benefit from synergies related to service revenue expansion , as the acquisition serves to significantly increase the company 's presence in eastern europe . the results of operations for clinstar are included in our consolidated financial statements from the date of acquisition . joint ventures in december 2012 , pra and wuxi signed a joint venture agreement to offer a broad platform of phase i-iv clinical trial services in china , hong kong and macau . the joint venture provides services including clinical trial monitoring , project management , regulatory strategy and submissions , data management , biostatistics , drug safety reporting , and medical monitoring .
| million for the predecessor 2013 period . direct costs were 67.8 % of service revenue for the year ended december 31 , 2014 and 59.8 % of service revenue during the predecessor 2013 period . the 8.0 % increase in direct costs as a percentage of service revenue is due to an increase in salaries and benefits as we continue to hire billable staff to support our current projects and as we hire additional staff in anticipation of our growing portfolio of studies . in addition , a significant portion of the increase in salaries and benefits relates to the acquisition of rps , which typically requires higher staffing levels and which operates at a lower margin than we have historically experienced . selling , general and administrative expenses were $ 254.0 million for the year ended december 31 , 2014 and $ 142.9 million for the predecessor 2013 period . selling , general and administrative expenses were 20.1 % of service revenue for the year ended december 31 , 2014 and 28.1 % of service revenue during the predecessor 2013 period . the 8.0 % decrease in selling , general and administrative expenses as a percentage of service revenue is primarily related to a decrease in salaries and benefits as we realize synergies from our acquisitions , and our continued leverage of our selling and administrative functions , partially offset by the termination fee of $ 11.9 million we paid kkr in connection with the completion of the ipo . additionally , the predecessor 2013 period included $ 23.6 million in stock-based compensation expense associated with the payment we made to holders of vested service-based stock options in connection with the february 2013 dividend to option holders and the accelerated vesting of unvested options related to the kkr transaction in the predecessor 2013 period . there were no transaction-related costs for year ended december 31 , 2014 and transaction-related costs were
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the covid-19 pandemic has had multiple impacts on our business , including , but not limited to , the temporary closure of our and our customers ' stores , disruption to both international and domestic tourism and disruption to consumer shopping habits . the covid-19 pandemic impacted our business operations and results of operations throughout fiscal 2021 resulting in lower sales and profitability . covid-19 could continue to have an adverse impact on our results of operations and liquidity , the operations of our suppliers , vendors and customers , and on our employees as a result of quarantines , facility closures , and travel and logistics restrictions . even as businesses have reopened as governmental restrictions were loosened with respect to stay at home orders and various restrictions with respect to the operation of retail businesses , the ultimate economic impact of the covid-19 pandemic is highly uncertain . we expect that our business operations and results of operations , including our net sales , earnings and cash flows , will continue to be adversely impacted in fiscal 2022 . during this crisis we have been focused on protecting the health and safety of our employees , our customers and our communities . we have taken precautionary measures intended to help minimize the risk of covid-19 to our employees , including requiring our employees to work remotely during the first half of fiscal 2021. during the second half of fiscal 2021 , our personnel have started to work in our offices on a part-time , capacity restricted basis . having our employees work remotely may disrupt our operations or increase the risk of a cybersecurity incident . as a result , we have taken steps to mitigate the increased cybersecurity risks associated with remote working and reliance on videoconferencing platforms . most of our retail partners , including our largest customer , macy 's , closed their stores in north america during the initial reaction to the pandemic in the spring of 2020. some of our customers , such as costco and sam 's club , remained open for business . our retail partners have since reopened with certain limitations and restrictions . our retail partners that closed stores asked to cancel orders and extend their payment terms with us . we continue to negotiate resolutions with our retail partners that are equitable and fiscally responsible for each of us . certain of our retail partners have publicized actual or potential bankruptcy filings or other liquidity issues that could impact our anticipated income and cash flows , as well as require us to record additional accounts receivable reserves . in addition , we could be required to record increased excess 46 and obsolete inventory reserves due to decreased sales or noncash impairment charges related to our intangible assets or goodwill due to reduced market values and cash flows . further , a more promotional retail environment may cause us to lower our prices or sell existing inventory at larger discounts than in the past , negatively impacting our margins . there is significant uncertainty around the breadth and duration of business disruptions related to the covid-19 pandemic , as well as its impact on the u.s. and global economies and on consumer willingness to visit stores as they re-open . consumer businesses have re-opened in most areas of the united states under governmental social distancing and other restrictions that are expected to limit the scope of operations for an unknown period of time compared to pre-covid-19 business operations . these restrictions are expected to adversely impact sales even as retail stores are open again . the extent to which covid-19 impacts our results will depend on continued developments in the public and private responses to the pandemic and the success and efficacy of efforts in the united states and around the world to vaccinate people against covid-19 . the continued impact of covid-19 remains highly uncertain and can not be predicted . new information may emerge concerning the severity of the outbreak and the spread of variants of the covid-19 virus in locations that are important to our business . actions taken to contain covid-19 or treat its impact may change or become more restrictive as additional waves of infections occur , or continue to occur , as a result of the loosening of governmental restrictions . in response to these challenges , we have taken measures to preserve liquidity and contain costs that include , but are not limited to , employee furloughs , job eliminations , temporary salary reductions , reduced advertising and other promotional spending and deferral of capital projects . we also reviewed our inventory needs and worked with suppliers to curtail , or cancel , production of product which we believed would not be able to be sold in season . we have worked with our suppliers , landlords and licensors to renegotiate related agreements and extend payment terms in order to preserve capital . during the second half of fiscal 2021 , certain furloughed employees were reinstated and salaries that had been reduced were increased to their pre-pandemic levels . we also received royalty relief from certain licensors . refinancing of our term loan and revolving credit facility on august 7 , 2020 , we completed a private debt offering of $ 400 million aggregate principal amount of our 7.875 % senior secured notes due 2025 ( the “ notes ) . the net proceeds of the notes were used ( i ) to repay our prior term loan facility due 2022 , ( ii ) to pay related fees and expenses and ( iii ) for general corporate purposes . the notes bear interest at a rate of 7.875 % per year payable semi-annually in arrears on february 15 and august 15 of each year , commencing on february 15 , 2021 . story_separator_special_tag also on august 7 , 2020 , we entered into the second amended and restated credit agreement ( the “ abl credit agreement ” ) the abl credit agreement is a five year senior secured credit facility and provides for borrowings in the aggregate principal amount of up to $ 650 million . the abl credit agreement refinances , amends and restates our prior amended credit agreement which provided for borrowings of up to $ 650 million and was due to expire in december 2021 . for a description of the notes , the abl credit agreement and our other debt instruments , see “ liquidity and capital resources ” under this item 7 of this annual report on form 10-k. restructuring of our retail operations segment in june 2020 , we commenced a restructuring of our retail operations segment , including the closing of the wilsons leather , g.h . bass and calvin klein performance stores . all store closings included in the restructuring have been completed as of the end of fiscal 2021 . after completion of the restructuring , our retail operations segment consists of our dkny and karl lagerfeld paris stores , as well as the digital channels for dkny , donna karan , karl lagerfeld paris , g.h . bass , andrew marc and wilsons leather . part of our restructuring plan includes making significant changes to our dkny and karl lagerfeld retail operations . in addition to the stores operated as part of our retail operations segment , as of january 31 , 2021 , vilebrequin products were distributed through 98 company-operated stores and owned digital channels in europe and the united states , as well as through 71 franchised locations . 47 in connection with the restructuring of our retail operations , we incurred an aggregate charge of approximately $ 100 million related to store operating costs , landlord termination fees , severance costs , store liquidation and closing costs , write-offs related to right-of-use assets and legal and professional fees . the cash portion of this charge was approximately $ 65 million . our ongoing plan focuses on the operations and growth of our dkny and karl lagerfeld paris stores , as well as operating our digital business . our plan is based on the assumed continued strength of the dkny and karl lagerfeld brands , changes in planning and allocation and improvements in gross margin . we expect to reduce corporate headcount and administrative costs , while expanding our store base . we need to successfully implement this strategy in order to significantly reduce the losses in our retail operations with the goal of ultimately attaining profitability in our retail operations segment . fabco fabco holding b.v ( “ fabco ” ) is a dutch joint venture limited liability company that was 49 % owned by us through november 30 , 2020. effective december 1 , 2020 , we acquired an additional ownership interest in fabco for nominal consideration , resulting in an increase of our ownership interest in fabco to 75 % . effective december 1 , 2020 , fabco is a consolidated majority-owned subsidiary of ours . prior to december 1 , 2020 , we accounted for our investment in fabco using the equity method of accounting . fabco operates our dkny business in china through its subsidiary . segments we report based on two segments : wholesale operations and retail operations . our wholesale operations segment includes sales of products to retailers under owned , licensed and private label brands , as well as sales related to the vilebrequin business . wholesale revenues also include royalty revenues from license agreements related to our owned trademarks including dkny , donna karan , vilebrequin , g.h . bass and andrew marc . our retail operations segment consists primarily of direct sales to consumers through our company-operated stores and through digital channels . in june 2020 , we commenced the restructuring of our retail operations , including the closure of the wilsons leather , g.h . bass and calvin klein performance stores . the closure of these stores was completed during fiscal 2021. after completion of the restructuring , our retail operations segment consists of our dkny and karl lagerfeld paris stores , as well as the digital channels for dkny , donna karan , karl lagerfeld paris , g.h . bass , andrew marc and wilsons leather . trends industry trends significant trends that affect the apparel industry include retail chains closing unprofitable stores , an increased focus by retail chains and others on expanding digital sales and providing convenience-driven fulfillment options , the continued consolidation of retail chains and the desire on the part of retailers to consolidate vendors supplying them . in addition , consumer shopping preferences have continued to shift from physical stores to online shopping and retail traffic remains under pressure . all of these factors have led to a more promotional retail environment that includes aggressive markdowns in an attempt to offset declines caused by a reduction in physical store traffic . the effects of the covid-19 pandemic have accelerated these trends . we sell our products over the web through retail partners such as macys.com , nordstrom.com and dillards.com , each of which has a substantial online business . as digital sales of apparel continue to increase , we are developing additional digital marketing initiatives on our web sites and through social media . we are investing in digital personnel , marketing , logistics , planning and distribution to help us expand our online opportunities going forward . our digital business consists of our own web platforms at www.dkny.com , www.donnakaran.com , www.ghbass.com , www.vilebrequin.com , www.andrewmarc.com and www.wilsonsleather.com . we also sell karl lagerfeld paris products on our website , www.karllagerfeldparis.com . in addition , we sell to pure play online retail partners such as amazon and fanatics .
| this decrease primarily reflected reduced demand as a result of disruptions related to covid-19 and the liquidation of our wilsons and g.h . bass stores . same store sales decreased across all store brands due to the covid-19 related store closures and reduced store traffic . in addition , the decrease in domestic and international tourism resulting from covid-19 travel restrictions also had a negative impact on net sales of our retail operations segment . as we proceeded to liquidate 54 inventory and close stores in connection with the restructuring of our retail operations segment beginning during the second quarter of fiscal 2021 , net sales were also negatively impacted by the significant promotional activity involved in liquidation sales of inventory in the stores we were closing . net sales of our retail operations segment also declined due to the decrease in the number of stores operated by us from 282 at january 31 , 2020 to 50 at january 31 , 2021 . gross profit was $ 744.4 million , or 36.2 % of net sales , for fiscal 2021 and compared to $ 1.12 billion , or 35.4 % of net sales , last year . the gross profit percentage in our wholesale operations segment was 35.9 % for the year ended january 31 , 2021 as compared to 32.7 % for the year ended january 31 , 2020. the gross profit percentage for our wholesale segment was positively impacted by the reversal of previously anticipated markdown accruals that are no longer necessary due to the reduction in sales to our retail customers . the gross profit percentage in our retail operations segment was 33.6 % for the year ended january 31 , 2021 compared to 46.7 % for the same period last year . the gross profit percentage for our retail segment was negatively impacted by the reduction of our net sales caused by covid-19 related closures of our retail stores , increased promotional activity due to the covid-19 pandemic and liquidation sales in connection with the restructuring of our retail operations segment .
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on january 7 , 2016 , we also announced that our board of directors authorized an increase in the company 's existing share repurchase program to $ 150.0 million , from the approximately $ 75.0 million that was available as of december 31 , 2015. the dividend and share repurchase programs , which can be suspended , modified or terminated at any time for any reason , are part of our balanced capital allocation strategy , including funding organic investments , dividends , share repurchases and acquisitions . in fiscal 2016 , demand patterns for our products reflected conditions within the overall semiconductor industry as demand was relatively soft during the first half of the fiscal year , followed by stronger demand during the second half . the demand patterns that we experienced appear to be consistent with those experienced by other participants in the semiconductor industry . industry reports and some of our customers have indicated that inventories currently appear to be below normal levels in a number of areas , which appears to be driven by new product launches and stronger than normal seasonal demand . based on this , industry analysts and some of our customers are forecasting continued solid demand in the first quarter of our fiscal 2017. over the long-term , we continue to believe that semiconductor demand will grow , fueled by demand for mobile internet devices ( mids ) , as well as a range of other electronic applications , including automotive and industrial , accompanied by the continued advancement of semiconductor technology , including growth of more complex device architectures such as 3d nand and finfet . however , there are many factors that make it difficult for us to predict future revenue trends for our business , including those discussed in part i , item 1a entitled `` risk factors '' in this form 10-k. revenue for fiscal 2016 was $ 430.4 million , which represented an increase of 3.9 % from $ 414.1 million reported for fiscal 2015. the increase in revenue from fiscal 2015 reflects $ 23.5 million in revenue from nexplanar pad products , partially offset by the impact of soft industry demand conditions in the first half of the fiscal year , and competitive dynamics in certain dielectrics and data storage applications , which we have disclosed previously . we achieved record annual revenue in our tungsten slurry and polishing pad product areas . gross profit for fiscal 2016 expressed as a percentage of revenue was 48.8 % , including a 120 basis point adverse impact of acquisition-related costs and nexplanar amortization expense , compared to 51.3 % reported for fiscal 2015. the decrease in gross profit percentage from fiscal 2015 was primarily due to higher fixed manufacturing costs , including nexplanar amortization expense and other nexplanar-related costs , and higher material costs , partially offset by a higher-valued product mix , and lower costs associated with our annual cash incentive program ( short term incentive program , or stip , and previously , our annual incentive program , or aip ) . our gross profit percentage was consistent with our revised fiscal 2016 guidance of around 49.0 % of revenue . we expect our gross profit percentage for full fiscal year 2017 to be between 48.0 % and 50.0 % of revenue . we may experience fluctuations in our gross profit due to a number of factors , including the level of our revenue , the extent to which we utilize our manufacturing capacity , and changes in our product mix , which may cause our quarterly gross profit to be above or below this annual guidance range . operating expenses of $ 135.7 million , which include research , development and technical , selling and marketing , and general and administrative expenses , decreased 1.1 % , or $ 1.5 million , from the $ 137.2 million reported for fiscal 2015. the decrease in operating expenses was primarily due to lower costs associated with our stip , lower clean room material costs , and the absence of costs associated with our ceo transition in fiscal 2015 , partially offset by nexplanar costs , including $ 1.8 million of nexplanar amortization expense , $ 1.6 million of acquisition-related costs , and a $ 1.0 million impairment charge on certain nexplanar in-process technology . we expect total operating expenses for our full fiscal year 2017 to be in the range of $ 137.0 million to $ 142.0 million . diluted earnings per share in fiscal 2016 were $ 2.43 , including a $ 0.25 adverse impact of nexplanar amortization expense , acquisition-related costs and the impairment charge , and represented an increase of 7.5 % , or $ 0.17 , from $ 2.26 in fiscal 2015. the increase was primarily due to higher revenue and a lower effective tax rate , partially offset by a lower gross profit margin . 27 index critical accounting policies and estimates this md & a , as well as disclosures included elsewhere in this form 10-k , are based upon our audited 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 , and related disclosure of contingencies . on an ongoing basis , we evaluate the estimates used , including those related to bad debt expense , inventory valuation , valuation and classification of auction rate securities , impairment of long-lived assets and investments , business combinations , goodwill , other intangible assets , interest rate swaps , share-based compensation , income taxes and contingencies . story_separator_special_tag we base our estimates on historical experience , current conditions 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 that are not readily apparent from other sources , as well as for identifying and assessing our accounting treatment with respect to commitments and contingencies . actual results may differ from these estimates under different assumptions or conditions . we believe the following critical accounting policies involve significant judgments and estimates used in the preparation of our consolidated financial statements . allowance for doubtful accounts we maintain an allowance for doubtful accounts for estimated losses resulting from the potential inability of our customers to make required payments . our allowance for doubtful accounts is based on historical collection experience , adjusted for any specific known conditions or circumstances . while historical experience may provide a reasonable estimate of uncollectible accounts , actual results may differ from what was recorded . we will continue to monitor the financial solvency of our customers and , if global economic , or individual customer , conditions weaken , we may have to record additional increases to our allowance for doubtful accounts . as of september 30 , 2016 , our allowance for doubtful accounts represented 2.8 % of gross accounts receivable , including $ 0.5 million recorded in the fourth quarter of fiscal 2016 for a customer that was placed into receivership . if we had increased our estimate of bad debts by 100 basis points to 3.8 % of gross accounts receivable , our general and administrative expenses would have increased by $ 0.6 million . inventory valuation we value inventory at the lower of cost or market and write down the value of inventory for estimated obsolescence or if inventory is deemed unmarketable . an inventory reserve is maintained based upon a historical percentage of actual inventories written off applied against the inventory value at the end of the period , adjusted for known conditions and circumstances . we exercise judgment in estimating the amount of inventory that is obsolete . for instance , we wrote off approximately $ 1.4 million of inventory during the third quarter of fiscal 2015 related to raw material that did not meet our quality requirements . should actual product marketability be affected by conditions that are different from those projected by management , revisions to the estimated inventory reserve may be required . if we had increased our reserve for obsolete inventory at september 30 , 2016 by 10 % , our cost of goods sold would have increased by $ 0.2 million . 28 index valuation and classification of auction rate securities as of september 30 , 2016 , we owned two auction rate securities ( ars ) recorded at cost with a par value of $ 5.5 million and an estimated fair value of $ 5.1 million , which are classified as other long-term assets on our consolidated balance sheet and are considered held-to-maturity investments . in general , ars investments are securities with long-term nominal maturities for which interest rates are intended to be reset through a dutch auction every seven to 35 days . historically , these periodic auctions provided a liquid market for these securities ; however , beginning in 2008 , general uncertainties in the global credit markets significantly reduced liquidity in the ars market , and this illiquidity continues . despite this lack of liquidity , there have been no defaults in payment of the underlying securities and interest income on these holdings continues to be received on scheduled interest payment dates . our ars , when purchased , were issued by a-rated municipalities . although the credit ratings of both municipalities have been downgraded since our original investment , one of the ars is credit enhanced with bond insurance , and the other has become an obligation of the bond insurer . both ars currently carry a credit rating of aa- by standard & poor 's . we classify these investments as held-to-maturity based on our intention and ability to hold the securities until maturity . although there has been occasional trading activity on these securities , the ars market is not considered active . consequently , we determine the fair value of these securities using level 2 fair value inputs , including trading activity . the calculation of fair value and the balance sheet classification for our ars requires critical judgments and estimates by management , including the probabilities that a security may be monetized through a future successful auction , of a refinancing of the underlying debt , or of a default in payment by the issuer or the bond insurance carrier . an other-than-temporary impairment must be recorded when a credit loss exists ; that is when the present value of the expected cash flows from a debt security is less than the amortized cost basis of the security . however , we believe the gross $ 0.4 million unrecognized loss on these securities is due to illiquidity in the ars market rather than credit loss . if illiquidity in the ars market continues , if issuers of our ars are unable to refinance the underlying securities , if the issuing municipalities are unable to pay their debt obligations and the bond insurance fails , or if credit ratings decline or other adverse developments occur in the credit markets , we may not be able to monetize our securities in the near term and may be required to adjust the carrying value of these instruments through an impairment charge that may be deemed other-than-temporary . impairment of long-lived assets and investments we assess the recoverability of the carrying value of long-lived assets , including finite-lived intangible assets , whenever events or changes in circumstances indicate that the assets may be impaired . we perform a periodic review of our long-lived assets to determine if such impairment indicators exist . we must exercise judgment in assessing whether an event of impairment has occurred .
| this was partially offset by a change in the mix of earnings among various jurisdictions in which we operate , including a scheduled reduction in the benefit available under our tax holiday in south korea from 100 % to 50 % of the statutory tax rate in effect in south korea . see note 17 of the notes to the consolidated financial statements for more information on our income tax provision . we expect our effective tax rate for full fiscal 2017 to be in the range of 17.0 % to 20.0 % . net income net income was $ 59.8 million in fiscal 2016 , which represented an increase of 6.6 % , or $ 3.7 million , from fiscal 2015. the increase was primarily due to higher revenue and a lower effective tax rate , partially offset by higher production costs . 34 index year ended september 30 , 2015 , versus year ended september 30 , 2014 revenue revenue was $ 414.1 million in fiscal 2015 , which represented a decrease of 2.5 % , or $ 10.6 million , from fiscal 2014. the decrease in revenue was primarily due to a $ 12.0 million decrease in sales volume , a $ 7.5 million decrease due to the effect of foreign exchange rate changes , primarily due to the weakening of the japanese yen and the korean won versus the u.s. dollar , and $ 1.9 million due to changes in average selling prices . these decreases were partially offset by a $ 10.8 million increase due to product mix . the decrease in revenue from fiscal 2014 reflected softness of demand in the global semiconductor industry and the loss of approximately $ 20.0 million in annualized legacy dielectrics slurry business for lower-performing applications for 200 millimeter wafers , discussed in our quarterly reports on form 10-q for the quarters ended march 31 , 2015 and june 30 , 2015. we also generated lower revenue from our slurries for polishing aluminum and data storage applications , as well as from our polishing pads . these
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in connection with the tcja , our discussion of material federal income tax considerations with respect to ownership of our capital stock , is supplemented by , and should be read together with the information set forth in “ additional material u.s. federal income tax considerations , ” attached hereto as exhibit 99.1 , which is incorporated herein by reference . the current regulatory environment may be impacted by future legislative developments , such as amendments to key provisions of the dodd-frank act or changes to fannie mae and freddie mac , including with respect to how long they will continue to be in existence , the extent of their roles in the market and what forms they will take . there is a lack of clarity around both the timing and the exact details of any such regulatory reform and the impact of such potential reform on our operations . story_separator_special_tag style= '' font : 10pt times new roman , times , serif ; margin : 0pt 0 ; text-align : justify '' > net realized gain/ ( loss ) represents the net gain or loss recognized on any ( i ) sales of real estate securities out of our gaap investment portfolio , ( ii ) sales of residential mortgage loans out of our gaap investment portfolio , transfers of residential mortgage loans to other assets , and sales of other assets , ( iii ) sales of derivatives and other instruments , and ( iv ) other-than-temporary-impairment ( “ otti ” ) charges recorded during the period . see note 2 , note 3 and note 4 of the notes to consolidated financial statements for further discussion on otti . the following table presents a summary of net realized gain/ ( loss ) for the years ended december 31 , 2017 , december 31 , 2016 and december 31 , 2015 : replace_table_token_7_th realized loss on periodic interest settlement of derivative instruments , net realized loss on periodic interest settlement of derivative instruments , net represents the net interest expense paid on our interest rate swaps . year ended december 31 , 2017 compared to the year ended december 31 , 2016 realized loss on periodic interest settlement of derivative instruments , net increased by $ 1.8 million from $ 6.0 million at december 31 , 2016 to $ 7.8 million at december 31 , 2017 due to an increase in swap notional amount for the period , coupled with an increase in three-month libor . the weighted average swap notional increased from $ 599.8 million for the year ended december 31 , 2016 to $ 1.4 billion for the year ended december 31 , 2017. in addition , three-month libor increased from 0.998 % at december 31 , 2016 to 1.694 % at december 31 , 2017 . 48 year ended december 31 , 2016 compared to the year ended december 31 , 2015 realized loss on periodic interest settlement of derivative instruments , net decreased by $ 7.2 million from $ 13.2 million at december 31 , 2015 to $ 6.0 million at december 31 , 2016 due to a decrease in swap notional amount for the period , coupled with an increase in three-month libor . the weighted average swap notional decreased from $ 1.1 billion at december 31 , 2015 to $ 599.8 million at december 31 , 2016. in addition , three-month libor increased from 0.613 % at december 31 , 2015 to 0.998 % at december 31 , 2016. unrealized gain/ ( loss ) on real estate securities and loans , net refer to the “ market overview ” section of this item 7 for a discussion of the changes in market pricing which contributed to our “ unrealized gain/ ( loss ) on real estate securities and loans , net. ” realized gains and losses on sale also may impact our unrealized gains and losses . year ended december 31 , 2017 for the year ended december 31 , 2017 , unrealized gain/ ( loss ) on real estate securities and loans , net was $ 45.5 million . the $ 45.5 million was comprised of unrealized gains on securities of $ 45.3 million , coupled with unrealized gains on loans of $ 0.2 million during the year . year ended december 31 , 2016 for the year ended december 31 , 2016 , unrealized gain/ ( loss ) on real estate securities and loans , net was $ 2.7 million . the $ 2.7 million was comprised of unrealized gains on securities of $ 3.9 million , offset by unrealized losses on loans of $ 1.2 million during the year . year ended december 31 , 2015 for the year ended december 31 , 2015 , unrealized gain/ ( loss ) on real estate securities and loans , net was $ ( 32.5 ) million . the $ ( 32.5 ) million was comprised of unrealized losses on securities of $ 34.0 million , offset by unrealized gains on loans of $ 1.5 million during the year . unrealized gain/ ( loss ) on derivative and other instruments , net refer to the “ market overview ” section of this item 7 for a discussion of the changes in market pricing which contributed to our “ unrealized gain/ ( loss ) on derivative and other instruments , net ” line items . realized gains and losses on sale may also impact our unrealized gains and losses . year ended december 31 , 2017 for the year ended december 31 , 2016 , unrealized gain/ ( loss ) on derivative and other instruments , net was $ 19.8 million . the $ 19.8 million was comprised of unrealized gains on certain derivatives of $ 19.2 million , coupled with unrealized gains on tbas of $ 0.6 million during the year . year ended december 31 , 2016 for the year ended december 31 , 2016 , unrealized gain/ ( loss ) on derivative and other instruments , net was $ 8.6 million . story_separator_special_tag the $ 8.6 million was comprised of unrealized gains on certain derivatives of $ 8.9 million , offset by unrealized losses on tbas of $ 0.3 million during the year . year ended december 31 , 2015 for the year ended december 31 , 2015 , unrealized gain/ ( loss ) on derivative and other instruments , net was $ ( 12.2 ) million . the $ ( 12.2 ) million was comprised of unrealized losses on certain derivatives of $ 10.6 million , coupled with unrealized losses on tbas of $ 1.6 million during the year . 49 other income other income pertains to certain fees we receive on our residential mortgage loans . year ended december 31 , 2017 compared to the year ended december 31 , 2016 for the years ended december 31 , 2017 and december 31 , 2016 , other income was $ 55,447 and $ 373,902 respectively . the decrease in other income pertains to decreased fees we received on one of our residential mortgage loan pools . year ended december 31 , 2016 compared to the year ended december 31 , 2015 for the years ended december 31 , 2016 and december 31 , 2015 , other income was $ 373,902 and $ 66,250 , respectively . the increase in other income pertains to increased fees we received on one of our residential mortgage loan pools . management fee to affiliate our management fee is based upon a percentage of our stockholders ' equity . see the “ contractual obligations ” section of this item 7 for further detail on the calculation of our management fee and for the definition of stockholders ' equity . year ended december 31 , 2017 compared to the year ended december 31 , 2016 for the years ended december 31 , 2017 and december 31 , 2016 , our management fees were $ 9.8 million and $ 9.8 million , respectively . management fees increased slightly primarily due to the increase in our stockholders ' equity as calculated pursuant to our management agreement . year ended december 31 , 2016 compared to the year ended december 31 , 2015 for the years ended december 31 , 2016 and december 31 , 2015 our management fees were $ 9.8 million and $ 10.0 million , respectively . management fees decreased slightly primarily due to the decrease in our stockholders ' equity as calculated pursuant to our management agreement . other operating expenses these amounts are primarily comprised of professional fees , directors ' and officers ' ( “ d & o ” ) insurance and directors ' fees , as well as certain expenses reimbursable to the manager . we are required to reimburse our manager or its affiliates for operating expenses which are incurred by our manager or its affiliates on our behalf , including certain salary expenses and other expenses relating to legal , accounting , due diligence , and other services . refer to the “ contractual obligations ” section below for more detail on certain expenses reimbursable to the manager . the following table presents a summary of certain expenses within other operating expenses for the years ended december 31 , 2017 , december 31 , 2016 and december 31 , 2015 , exclusive of certain expenses reimbursable to the manager : replace_table_token_8_th servicing fees we incur servicing fee expenses in connection with the servicing of our residential mortgage loans . as of december 31 , 2017 , december 31 , 2016 , and december 31 , 2015 , we owned residential mortgage loans with fair market value of $ 18.9 million , $ 38.2 million , and $ 57.1 million , respectively . year ended december 31 , 2017 compared to the year ended december 31 , 2016 for the years ended december 31 , 2017 and december 31 , 2016 our servicing fees were $ 234,264 and $ 404,129 , respectively . the decrease in fees primarily pertains to sales of residential mortgage loans during the period . 50 year ended december 31 , 2016 compared to the year ended december 31 , 2015 for the years ended december 31 , 2016 and december 31 , 2015 our servicing fees were $ 404,129 and $ 671,246 , respectively . the decrease in fees primarily pertains to sales of residential mortgage loans during the period . equity based compensation to affiliate equity based compensation to affiliate represents the amortization of the fair value of the restricted stock units granted to our manager remeasured quarterly , less the present value of dividends expected to be paid on the underlying shares through the requisite period . year ended december 31 , 2017 compared to the year ended december 31 , 2016 for the years ended december 31 , 2017 and december 31 , 2016 , our equity based compensation to affiliate was $ 300,688 and $ 298,592 , respectively . the increase is a result of an increased stock price for the year . year ended december 31 , 2016 compared to the year ended december 31 , 2015 for the years ended december 31 , 2016 and december 31 , 2015 , our equity based compensation to affiliate was $ 298,592 and $ 164,487 , respectively . the increase is a result of an increased stock price for the year . excise tax excise tax represents a four percent tax on the required amount of our ordinary income and net capital gains not distributed during the year . the quarterly expense is calculated in accordance with applicable tax regulations . year ended december 31 , 2017 compared to the year ended december 31 , 2016 for the years ended december 31 , 2017 and december 31 , 2016 our excise tax remained relatively unchanged . year ended december 31 , 2016 compared to the year ended december 31 , 2015 for the years ended december 31 , 2016 and december 31 , 2015 our excise tax remained relatively unchanged .
| ” net income/ ( loss ) available to common stockholders increased $ 49.9 million from $ 0.3 million for the year ended december 31 , 2015 to $ 50.2 million for the year ended december 31 , 2016 primarily due to higher prices on our securities , which increased our “ unrealized gain/ ( loss ) on real estate securities and loans , net , ” coupled with higher derivative prices , which increased our “ unrealized gain/ ( loss ) on derivative and other instruments , net. ” interest income interest income is calculated using the effective interest method for our gaap investment portfolio and calculated based on the actual coupon rate and the outstanding principal balance on our u.s. treasury securities . year ended december 31 , 2017 compared to the year ended december 31 , 2016 interest income increased by $ 5.8 million from $ 123.0 million at december 31 , 2016 to $ 128.8 million at december 31 , 2017 primarily due to an increase in the weighted average cost of our gaap investment portfolio and u.s. treasury securities period over period by $ 0.1 billion from $ 2.8 billion at december 31 , 2016 to $ 2.9 billion at december 31 , 2017. this was coupled with an increase in the weighted average yield on our gaap investment portfolio and u.s. treasury securities during the period of 0.08 % from 4.37 % at december 31 , 2016 to 4.45 % at december 31 , 2017 . 47 year ended december 31 , 2016 compared to the year ended december 31 , 2015 interest income decreased by $ 18.3 million from $ 141.3 million at december 31 , 2015 to $ 123.0 million at december 31 , 2016 primarily due to a decrease in the weighted average cost of our gaap investment portfolio and u.s. treasury securities period over period by $ 0.4 billion from $ 3.2 billion at december 31 , 2015 to $ 2.8 billion at december 31 , 2016. this was coupled with a decrease in the weighted average yield on our gaap investment portfolio and u.s. treasury securities during the period of 0.08 % from 4.45 % at december 31 , 2015 to 4.37 % at december 31 , 2016. interest expense interest expense is calculated
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lower subscription revenue was a result of fewer subscribers compared with the year-earlier period . further contributing to the decline was lower revenue from advertising of $ 4.9 million . cost of revenue decreased by $ 9.0 million , or 29 % . this decrease was primarily due to the decrease in partner royalties expense , which has a direct correlation with the decrease in games revenue . operating expenses decreased by $ 10.8 million , or 18 % . the decrease was primarily due to reductions in marketing expenses of $ 7.2 million , primarily related to our non-social games , in addition to reductions in personnel and related costs of $ 2.4 million . 2011 compared with 2010 revenue decreased by $ 13.5 million , or 12 % . the decline was due to lower license revenue of $ 4.8 million primarily due to a decrease in the number of games sold through our games syndication services . further contributing to the decline was lower revenue from our subscription products of $ 4.8 million as a result of fewer subscribers . in addition , distribution of third party software declined by $ 3.7 million due to reduced traffic for our games properties . cost of revenue increased by $ 1.6 million , or 5 % . the increase was due primarily to higher costs associated with distribution of third party games as well as increased delivery costs for our games products and services . gross margins decreased due to lower subscription revenue and lower distribution of third party software , both of which are higher-margin revenues . operating expenses decreased by $ 17.6 million , or 23 % . the decrease was primarily due to reductions in personnel and related costs of approximately $ 8.7 million . further , we reduced our spending on marketing and related activities by approximately $ 3.4 million in 2011. in addition , depreciation expense related to our games technology platform decreased by $ 3.1 million . music we currently own approximately 45 % of rhapsody , which provides products and services that enable consumers to have unlimited access to digital music content anytime from a variety of devices . rhapsody currently generates revenue primarily in the u.s. through subscriptions to its music services , and sales of tracks and advertising . as described in detail in note 3 , rhapsody joint venture , on march 31 , 2010 , we completed the restructuring of rhapsody , which at that time , resulted in our ownership interest in rhapsody decreasing to approximately 47 % and the loss of our operating control over rhapsody . our revenue and operating results for the first quarter of 2010 includes results from rhapsody 's operations , as during that time we owned 100 % of rhapsody and their results were included in our financial statements . beginning with the second quarter of 2010 , rhapsody 's revenue and other operating results are no longer consolidated within our financial statements and we have not been recording any operating or other financial results for the music segment . starting with the second quarter of 2010 , we account for our investment in rhapsody using the equity method of accounting for investments . our share of rhapsody 's accounting losses for the years ended december 31 , 2012 and 2011 were $ 5.7 million and $ 7.9 million . our share of rhapsody 's losses for the nine-month period from april 1 , 2010 to december 31 , 2010 , was $ 14.2 million . for the three month period ending march 31 , 2010 , during which we owned 100 % of rhapsody , our music segment results of operations was as follows ( dollars in thousands ) : 23 2010 total revenue $ 35,733 cost of revenue 21,864 gross profit 13,869 gross margin 39 % total operating expenses 13,911 operating income ( loss ) $ ( 42 ) corporate certain corporate-level activity is not allocated to our segments , including costs of : human resources , legal , finance , information technology , procurement activities , litigation , corporate headquarters , legal settlements and contingencies , stock compensation , restructuring costs and losses on excess office facilities . corporate segment results of operations were as follows ( dollars in thousands ) : replace_table_token_8_th 2012 compared with 2011 cost of revenue increased by $ 2.9 million . the increase was due primarily to a reduction in expense in the prior year from a change in estimates of our accrued royalties on our historical music business of approximately $ 3.6 million . the net gain from the sale of patents and other technology assets to intel corporation of $ 116.4 million in 2012 reflects the cash proceeds of $ 120.0 million in the second quarter , less $ 3.6 million of direct transaction expenses incurred during the first and second quarters . operating expenses increased by $ 15.5 million , or 28 % . the increase compared with the prior period was primarily due to increased restructuring costs and losses on excess office facilities totaling $ 10.5 million , and to the impact of a benefit in 2011 of $ 6.4 million related to an insurance reimbursement for previously settled litigation that reduced expense in the prior year . these increases were partially offset by reductions in personnel and related costs of $ 2.4 million in 2012 , which resulted from our ongoing work to align our operating expenses with our revenue profile . 2011 compared with 2010 cost of revenue declined by $ 2.5 million , or 86 % . the majority of the decline was the result of a change of estimates in our accrued royalties , which resulted in a reversal of approximately $ 3.6 million in royalty expense primarily associated with our historical music business . operating expenses decreased by $ 30.2 million , or 36 % . story_separator_special_tag the decrease was due in part to lower restructuring charges and loss on excess office facilities of approximately $ 11.8 million as well as a reduction in personnel and related costs and professional services expense of approximately $ 11.5 million . the remaining decrease in operating expenses was due in part to a benefit in 2011 from an insurance reimbursement of $ 6.4 million related to previously settled litigation , which was accounted for as a reduction to operating expenses . operating expenses research and development research and development expenses consist primarily of salaries and related costs of research and development personnel , expense associated with stock-based compensation , and consulting fees associated with product development . to date , all research and development costs have been expensed as incurred because technological feasibility for software products is generally not established until substantially all development is complete . research and development costs were as follows ( dollars in thousands ) : 24 replace_table_token_9_th 2012 compared with 2011 research and development expenses , including non-cash stock-based compensation , decreased by $ 7.0 million , or 10 % , primarily due to a decrease in personnel and related costs of $ 6.1 million . 2011 compared with 2010 research and development expenses , including non-cash stock-based compensation , decreased by $ 30.7 million , or 31 % . the decline was primarily due to a decrease in personnel and related costs of approximately $ 18.5 million as well as a decrease in depreciation expense related to our games technology platform of $ 3.1 million . in addition , the removal of rhapsody 's operating expenses from our consolidated financial results beginning april 1 , 2010 , contributed approximately $ 3.8 million to the decline . further contributing to the decline was the reduction of $ 5.7 million of professional services costs due primarily to reduced development work in our saas business . the decrease in research and development expenses as a percentage of total revenue from 25 % in 2010 to 21 % in 2011 was due primarily to our ongoing cost-containment efforts . sales and marketing sales and marketing expenses consist primarily of salaries and related costs for sales and marketing personnel , sales commissions , amortization of certain intangible assets capitalized in our acquisitions , credit card fees , subscriber acquisition costs , consulting fees , trade show expenses , advertising costs and costs of marketing collateral . sales and marketing costs were as follows ( dollars in thousands ) : replace_table_token_10_th 2012 compared with 2011 sales and marketing expenses , including non-cash stock-based compensation , decreased by $ 21.0 million , or 19 % . the decrease was due primarily to a decrease in personnel and related costs of $ 13.4 million . further contributing to the decline in sales and marketing costs was reductions in marketing expenses of $ 7.1 million , primarily related to our non-social games . 2011 compared with 2010 sales and marketing expenses , including non-cash stock-based compensation , decreased by $ 7.2 million , or 6 % . the decrease was due primarily to the removal of rhapsody 's operating expenses of $ 8.8 million from our consolidated financial results beginning april 1 , 2010. also contributing to the overall decrease of sales and marketing expenses was a decrease in personnel and related costs of approximately $ 5.7 million due to our restructuring activities and reduced third-party sales commissions of $ 1.6 million . these decreases in sales and marketing costs were partially offset by an increase in marketing expenses for realplayer of $ 8.1 million , as well as higher professional services expense of $ 2.4 million . general and administrative general and administrative expenses consist primarily of salaries and related personnel costs , fees for professional and temporary services and contractor costs , stock-based compensation , and other general corporate costs . general and administrative costs were as follows ( dollars in thousands ) : replace_table_token_11_th 2012 compared with 2011 general and administrative expenses , including non-cash stock-based compensation , increased by $ 6.7 million , or 18 % . this increase was primarily due to the impact of a benefit in the first quarter of 2011 of $ 6.4 million related to an insurance reimbursement for previously settled litigation that reduced expense in the prior year . 25 2011 compared with 2010 general and administrative expenses , including non-cash stock-based compensation , decreased by $ 14.0 million , or 27 % . the decrease was due primarily to a reduction in personnel and related costs of $ 7.7 million and an insurance reimbursement of $ 6.4 million related to settlement costs associated with previously-settled litigation . 2011 impairment of deferred costs we assess the recoverability of all deferred project costs on a quarterly basis . as of december 31 , 2011 , we determined that the total estimated costs associated with certain carrier customer projects exceeded the total estimated revenues expected to be recognized on those projects . as a result , we recorded a charge of $ 20.0 million . see note 1 , description of business and summary of significant accounting policies - deferred costs , for more information . no such charges existed in 2012 or 2010. restructuring and other charges restructuring and other charges in 2012 , 2011 and 2010 consist of costs associated with the ongoing reorganization of our business operations and focus on aligning our operating expenses with our revenue profile . the expense amounts in all three years primarily relate to severance costs due to workforce reductions . for additional details on these charges see note 10 , restructuring charges . loss on excess office facilities as a result of the reduction in use of realnetworks ' office space , primarily in the corporate headquarters in seattle , washington , and certain other locations , losses have been recognized representing rent and contractual operating expenses over the remaining life of the leases , and related write-downs of leasehold improvements to their estimated fair value .
| cost of revenue decreased by $ 18.1 million compared with the year earlier period due primarily to lower costs of $ 21.9 million from the deconsolidation of the rhapsody joint venture . we recorded impairments of deferred costs of $ 20.0 million in the fourth quarter of 2011 related to certain contracts with carrier customers for which the total estimated costs exceeded the total estimated revenues expected to be recognized . operating expenses improved by $ 64.8 million due primarily to reduced personnel and related costs of $ 31.6 million , $ 13.9 million resulting from the rhapsody deconsolidation , and lower restructuring charges and losses on excess office facilities totaling $ 11.8 million . segment reporting core products the core products segment primarily generates revenue and incurs costs from the sales of saas services , such as ringback tones , intercarrier messages , music on demand and video on demand , professional services and system integration services to carriers and mobile handset companies , sales of licenses of our software products such as helix for handsets , and consumer subscriptions such as superpass and international radio subscriptions . core products segment results of operations were as follows ( dollars in thousands ) : replace_table_token_5_th 2012 compared with 2011 total core products revenue decreased by $ 42.0 million , or 22 % . this decrease was primarily due to reduced revenue from our saas offerings of $ 29.1 million . the decline in saas revenue was due primarily to a $ 24.3 million decline in our 21 ringback tone , intercarrier messaging and video on demand revenues due to both fewer subscribers and lower contract prices . in addition , subscription revenue , mainly from our superpass product , decreased $ 8.9 million due to a decline in subscribers , and revenue from systems integration declined $ 4.0 million . gross margin increased primarily due to the impairments of deferred costs of $ 19.3 million within the year ended december 31 , 2011 , related to certain contracts with carrier customers for which the total estimated costs exceeded the total estimated revenues
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26 liquidity and capital resources the following table highlights key financial measurements of the company : replace_table_token_7_th twelve months ending september 30 , 2011 2010 cash flow activites : net cash provided by operating activites $ 2,276,166 $ 5,600,467 net cash ( used in ) investing activites ( 255,454 ) ( 189,790 ) net cash ( used in ) financing activites ( 311,204 ) ( 60,025 ) ( 1 ) excludes deferred revenue ; includes current portion of capitalized lease obligations ( 2 ) calculated as : ( cash and cash equivalents and accounts receivable , net ) divided by current liabilities ( 3 ) calculated as : current assets divided by current liabilities is & s finances its business primarily with cash from operations and its cash and cash equivalents . at september 30 , 2011 , the company 's primary source of liquidity was cash flow provided by operating activities and $ 42.6 million of cash and cash equivalents . is & s requires cash principally to finance inventory , payroll and accounts receivable . operating activities during fiscal 2011 , the company generated $ 2.3 million in cash flow from operating activities . continued focus on inventory reductions contributed to the positive cash flow and was offset by increases in accounts receivable and decreases in accounts payable and accrued expenses . increase in accounts receivable at the end of 2011 was due to higher volume of sales to customers with credit terms at the end of the year compared to sales to customers that pay in advance at the end of 2010. cash flow provided by operating activities was $ 5.6 million in fiscal 2010 as compared to $ 5.3 million from operating activities in fiscal 2009 , despite the $ 4.3 million decline in net income in fiscal 2010. the $ 0.3 million difference was primarily attributable to decreases in accounts receivable , prepaid expenses , continued focus on inventory reduction and an increase in income tax payable , offset by a decrease in accounts payable and accrued expenses . the company had positive operating cash flow of $ 5.3 million for fiscal 2009 primarily emanating from the $ 5.0 net income for the year . investing activities . cash used in investing activities was $ 0.3 million , $ 0.2 million and $ 0.3 million for fiscal year 2011 , 2010 and 2009 respectively , and consisted of spending for licensing fees , production equipment and laboratory test equipment . the company plans to continue investing in capital expenditures at approximately the same level it has in prior years . 27 financing activities . cash used in financing activities was $ 0.3 million for fiscal year 2011 , primarily for the repurchase of 62,400 shares of common stock for $ 0.3 million . cash used in financing activities was $ 0.1 million for fiscal year 2010 and consisted primarily of the repurchase of 12,000 shares of common stock for $ 0.1 million . cash used in financing activities was $ 4.5 million for fiscal year 2009 and consisted primarily of the repayment in full of the industrial development bond of $ 4.3 million and the repurchase of 25,000 shares of common stock for $ 0.1 million . to accommodate future growth , in 2001 the company purchased 7.5 acres of land in the eagleview corporate park , exton , pennsylvania , and built a 45,000 square foot facility which is expandable to 65,200 square feet . both the land and building cost approximate $ 6.5 million , $ 4.3 million of which was funded through an industrial development bond ( `` idb '' ) and the remainder from cash from operations . the company used $ 4.3 million to retire the idb in august 2009. summary . the company 's future capital requirements depend on numerous factors , including market acceptance of its products ( in particular fpds ) , the timing and rate of expansion of the business , acquisitions , joint ventures and other factors . is & s has experienced increases in the company 's expenditures since its inception consistent with growth in the operations , personnel , and product line , and it anticipates that operations and expenditures will continue to increase in the foreseeable future . is & s believes that the current cash and cash equivalents will provide sufficient capital to fund its operations for at least the next twelve months . however , the company may need to raise additional funds through public or private financing or other arrangements if its business grows more rapidly than it anticipates . potential lenders may have suffered losses related to their lending and other financial relationships , especially because of the generally weak national and global economies and financial instability of many borrowers . as a result , some lenders may become insolvent or tighten their lending standards , which could make it more difficult for is & s to borrow or to obtain new financing on favorable terms or at all . the company 's financial condition and results of operations would be adversely affected if it is unable to obtain cost-effective financing in the future . further , is & s may develop and introduce new or enhanced products , respond to competitive pressures , invest in or acquire businesses or technologies or respond to unanticipated requirements or developments . contractual obligations the company 's contractual obligations as of september 30 , 2011 mature as follows : replace_table_token_8_th * a `` purchase obligation '' is defined as an agreement to purchase goods or services that is enforceable and legally binding on the company and that specifies all significant terms , including : fixed or minimum quantities to be purchased ; fixed , minimum or variable price provisions ; and the approximate timing of the transaction . these amounts are primarily comprised of open purchase order commitments entered in the ordinary course of business with vendors and subcontractors pertaining to fulfillment of the company 's current order backlog . 28 off-balance sheet arrangements the company has no off-balance sheet arrangements . story_separator_special_tag inflation is & s does not believe inflation had a material effect on its financial position or results of operations during the past three years ; however , it can not predict future effects of inflation . critical accounting policies the preparation of financial statements in conformity with accounting principles generally accepted in the united states of america requires management to make estimates and assumptions that affect reported amounts of assets and liabilities , disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period . the company 's most critical accounting policies are revenue recognition , income taxes , inventory valuation , share based compensation and warranty reserves . revenue recognition the company enters into sales arrangements with customers that , in general , provide for the company to design , develop , manufacture and deliver large flat-panel display systems , flight information computers , and advanced monitoring systems that measure and display critical flight information , including data relative to aircraft separation , airspeed , and altitude , as well as engine and fuel data measurements . the company 's sales arrangements may include multiple deliverables as defined in fasb asc topic 605-25 `` multiple-element arrangements '' ( `` asc topic 605-25 '' ) , which typically include design and engineering services and the production and delivery of the flat panel display and related components . the company includes any design and engineering services elements in emd sales and any functional upgrade and product elements in `` product '' sales on the accompanying consolidated statement of operations . multiple element arrangements the company identifies all goods and or services that are to be delivered separately under such a sales arrangement and allocates revenue to each deliverable ( if more than one ) based on the selling price of that deliverable . the company then considers the appropriate recognition method for each deliverable . typically , such deliverables are purchased engineering and design services and product sales and or the sale of functional upgrades . the company 's multiple element arrangements can typically include defined design and development activities and or functional upgrades , along with product sales . the company utilizes the selling price hierarchy that has been established by fasb accounting standards update 2009-13 , `` multiple-deliverable revenue arrangementsa consensus of the fasb emerging issues task force '' ( `` asu 2009-13 '' ) , which requires that the selling price for each deliverable be based on vendor-specific objective evidence if available , third-party evidence if vendor-specific objective evidence is not available , or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available . to the extent that an arrangement includes a deliverable for which estimated selling price is used , the company 's determines the best estimate of selling price by applying the same pricing policies and methodologies that would be used to determine the price to sell the deliverable on a standalone basis . to the extent that an arrangement contains software elements that are essential to the functionality of tangible products sold in the arrangement , the company recognizes revenue for the deliverables in accordance with the guidance included in fasb accounting standards update 2009-14 , `` revenue 29 arrangements that include software elements `` , ( `` asu 2009-14 '' ) , asu 2009-13 and fasb asc topic 605 , `` revenue recognition `` ( `` asc topic 605 '' ) . to the extent that an arrangement contains defined design and development activities as an identified deliverable in addition to products ( resulting in a multiple element arrangement ) , the company recognizes as emd revenue amounts earned during the design and development phase of the contract following the guidance included in fasb asc topic 605-35 , `` construction-type and production-type contracts '' ( `` asc topic 605-35 '' ) . to the extent that multiple element arrangements include product sales , revenue is generally recognized once revenue recognition criteria for the product deliverable have been met based on the provisions of fasb asc topic 605. the company includes any design and engineering services elements in emd sales and any functional upgrade and product elements in `` product '' sales on the accompanying consolidated statement of operations . to the extent that an arrangement contains software components , which include functional upgrades , that are sold on a standalone basis and which the company has deemed outside the scope of the exception defined by asu 2009-14 , the company recognizes software revenue in accordance with asc topic 985 , `` software `` ( `` asc topic 985 '' ) . single element arrangements products to the extent that a single element arrangement provides for product sales and repairs , revenue is generally recognized once revenue recognition criteria for the product deliverable have been met based on the provisions of asc topic 605. the company also receives orders for existing equipment and parts . revenue from the sale of such products is generally recognized upon shipment to the customer . the company offers its customers extended warranties for additional fees . these warranty sales are recorded as deferred revenue and recognized as sales on a straight-line basis over the warranty period . engineering services the company also may enter into service arrangements to perform specified design and development services related to its products . the company recognizes revenue from these arrangements as emd revenue , following the guidance included in asc topic 605-35. the company considers the nature of these service arrangements ( including term , size of contract , level of effort ) when determining the appropriate accounting treatment for a particular contract . the company recognizes the revenue from these contracts using either the percentage-of-completion method or completed contract method of accounting . the company records revenue relating to these contracts using the percentage-of-completion method when the company determines that progress toward completion is reasonable and reliably estimable and the contract is long-term in nature ; the company uses the completed contract method for all others .
| selling , general and administrative expenses decreased $ 0.4 million , or 5.1 % , to $ 7.7 million , or 29.9 % of net sales for fiscal 2011 from $ 8.1 million or 32.1 % of net sales for fiscal 2010. the decrease was primarily the result of a reduction in selling expenses ( primarily reduced participation in trade shows ) and travel expenses during the year . interest income , net . net interest income decreased slightly by $ 43,000 to $ 142,433 or 0.6 % of net sales for fiscal 2011 from $ 185,815 or 0.7 % of net sales for fiscal 2010. the decrease was primarily because of lower interest rates during fiscal 2011 compared to fiscal 2010. other income . other income increased marginally by $ 0.1 million in fiscal 2011 when compared to fiscal 2010 from proceeds of settlements of legal proceedings . income taxes . the income tax expense for fiscal year ended september 30 , 2011 was $ 0.2 million compared to an income tax benefit of $ 0.1 million for the fiscal year ended september 30 , 2010. the increase in the amount of tax from a tax benefit to an expense was attributable primarily to the increase in pre-tax income for the fiscal year ended 2011 , and less net reversals of deductible temporary differences in the fiscal year ended september 30 , 2011 when compared to the fiscal year ended september 30 , 2010. the effective tax rate for the year ended september 30 , 2011 was 20.4 % . the effective tax rate differs from the statutory rate for the year ended september 30 , 2011 primarily due to the utilization of research and development tax credits . the effective tax rate for the year ended september 30 , 2010 was ( 17.1 % ) . the effective tax rate differs from the statutory rate for the year ended september 30 , 2010 due to : 1 ) reversal of certain deductible temporary differences in the fiscal year ended september 30 , 2010 ,
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we believe that rhopressa ® represents the first of a new drug class for reducing iop in patients with glaucoma in over 20 years . initial indications point to healthcare professionals prescribing rhopressa ® as a concomitant therapy to prostaglandins or non-pga medications when additional iop reduction is desired . we believe rhopressa ® is primarily competing with other non-pga products , due to its targeting of the diseased tm , its demonstrated ability to reduce iop at consistent levels across tested baselines , its preferred once-daily dosing relative to other currently marketed non-pga products and its safety profile . adjunctive therapies currently represent nearly one-half of the glaucoma prescription market in the united states , according to iqvia . we believe that rhopressa ® may also become a preferred therapy where pgas are contraindicated , for patients who do not respond to pgas and for patients who choose to avoid the cosmetic issues associated with pga products . rhopressa ® received fda approval on december 18 , 2017 and we launched rhopressa ® in the united states at the end of april 2018. rhopressa ® is now being sold to national and regional u.s. pharmaceutical distributors , and patients have access to rhopressa ® through pharmacies across the united states . we have obtained formulary coverage for rhopressa ® for approximately 90 % of lives covered under commercial plans and approximately 40 % of lives covered under medicare part d plans . we expect medicare part d tier 2 equivalent coverage to increase to over 70 % by the end of the first quarter of 2019 . in october 2018 , we announced that the ema accepted our maa for review for rhokiinsa ® . additionally , we completed a phase 1 clinical trial and a successful pilot phase 2 clinical study in the united states on japanese and japanese-american subjects , which were designed to support meeting the requirements of japan 's pmda for potential regulatory submission of rhopressa ® in japan . we are also planning to initiate a phase 2 clinical trial on japanese patients in japan by the end of the first quarter of 2019 to support subsequent phase 3 registration trials that are also expected to be conducted in japan under our direction . rocklatan tm our advanced-stage product candidate , rocklatan tm , is a once-daily fixed-dose combination of rhopressa ® and latanoprost , the most commonly prescribed drug for the treatment of patients with open-angle glaucoma . we believe , based on our clinical data , that rocklatan tm has the potential to provide a greater iop-reducing effect than any currently marketed glaucoma medication . therefore , we believe that rocklatan tm , if approved and formulary coverage is obtained , could compete with both pga and non-pga therapies and become the product of choice for patients requiring maximal iop reduction , including those with higher iops and those who present with significant disease progression despite using currently available therapies . we submitted an nda for rocklatan tm to the fda in may 2018 under section 505 ( b ) ( 2 ) of the fdca , which provides for an abbreviated approval pathway , since rocklatan tm is a fixed dose combination of two fda-approved drugs in the united states . in july 2018 , we announced that the nda was accepted for review by the fda and the pdufa goal date was set for march 14 , 2019. with respect to rocklatan tm in jurisdictions outside the united states , we also initiated a phase 3 registration trial for roclanda tm , named mercury 3 , in europe during the third quarter of 2017. mercury 3 , a six-month efficacy and safety trial , is designed to compare roclanda tm to ganfort ® , a fixed-dose combination product marketed in europe of bimatoprost , a pga , and timolol , a beta blocker . if successful , mercury 3 is expected to improve our commercialization prospects in europe . we currently expect to read out topline 90-day efficacy data for the trial in 2019. since roclanda tm is a fixed-dose combination product that includes rhokiinsa ® , we plan to submit an maa for roclanda tm with the ema if and when rhokiinsa ® is approved by the ema . we expect to submit the maa for roclanda tm in early 2020 , if the ema has approved rhokiinsa ® by such time . pipeline opportunities our stated objective is to build a major ophthalmic pharmaceutical company . we are evaluating our portfolio of owned rock inhibitors for additional indications within and beyond glaucoma . our owned preclinical small molecule , ar-13503 , is a rock and protein kinase c inhibitor sustained-release implant with potential in the treatment of dme , wet amd and related diseases of the retina . ar-13503 , which has the same active metabolite as rhopressa ® , has shown lesion size decreases in an in 75 vivo preclinical model of wet amd at levels similar to the current market-leading wet amd anti-vegf product . when used in combination preclinically with the market-leading anti-vegf product , ar-13503 produced greater lesion size reduction than the anti-vegf product alone in a model of proliferative dr. this molecule has not yet been tested in humans in a clinical trial setting . pending additional studies , ar-13503 may have the potential to provide an entirely new mechanism and pathway to treat dme , wet amd and related diseases of the retina . since ar-13503 is a small molecule with a short half-life , and the aforementioned diseases are located in the back of the eye , a delivery mechanism is needed to deliver the molecule to the back of the eye for a sustained delivery period . to that end , in july 2017 , we announced that we entered into a collaborative research , development and licensing agreement with dsm , a global science-based company headquartered in the netherlands . story_separator_special_tag the research collaboration agreement includes an option to license dsm 's bio-erodible polymer implant technology for sustained delivery of certain aerie compounds to treat ophthalmic diseases . in august 2018 , we announced the expansion of our collaboration with dsm to provide for ( i ) a worldwide exclusive license for all ophthalmic indications to dsm 's polyesteramide polymer technology , ( ii ) continuation of the collaborative research initiatives through the end of 2020 , including the transfer of dsm 's formulation technology to aerie during that time and ( iii ) access to a preclinical latanoprost implant . this technology uses polyesteramide polymers to produce an injectable , thin fiber that is minute in size . preclinical experiments have demonstrated early success in conjunction with ar-13503 , including demonstration of linear , sustained elution rates over several months and achievement of target retinal drug concentrations . we expect to submit an ind for ar-13503 by the end of the first quarter of 2019. further , in october 2017 , we acquired the rights to use print ® technology in ophthalmology and certain other assets from envisia . print ® is a proprietary technology capable of creating precisely-engineered sustained release products utilizing fully-scalable manufacturing processes . in addition , we acquired envisia 's intellectual property rights relating to envisia 's preclinical dexamethasone steroid implant for the potential treatment of macular edema due to rvo that also utilizes the print ® technology , which we refer to as ar-1105 . the ind for this sustained-release implant was submitted in december 2018. in january 2019 , we announced that the fda reviewed the ind for ar-1105 and it is now in effect , allowing aerie to initiate human studies in the treatment of macular edema due to rvo . we expect to initiate a phase 2 clinical study for ar-1105 in the first quarter of 2019. we are also evaluating the print ® technology platform for sustained release of therapies to the front of the eye , including to treat glaucoma or ocular hypertension , as examples . we commenced operation of our cgmp-validated manufacturing facility for production of ophthalmic implants using print ® technology in our durham , north carolina , facility in october 2018. we may continue to enter into research collaboration arrangements , license , acquire or develop additional product candidates and technologies to broaden our presence in ophthalmology , and we continually explore and discuss potential additional opportunities for new ophthalmic products , delivery alternatives and new therapeutic areas with potential partners . we are also currently screening our owned library of rock inhibitors for indications beyond ophthalmology considering that third-party studies and trials have demonstrated potential for rock inhibition in treating certain disease categories . we are initially focused on exploring potential opportunities for our molecules in pulmonary health , dermatology and cancers . financial overview our cash and cash equivalents totaled $ 202.8 million as of december 31 , 2018 . we believe that our cash and cash equivalents and projected cash flows from revenues will provide sufficient resources for our current ongoing needs through at least the next twelve months , though there may be need for additional financing activity as we continue to grow , including the potential use of the currently undrawn $ 100 million credit facility . see “ —liquidity and capital resources ” below and note 9 to our consolidated financial statements included elsewhere in this report for further discussion . we have incurred net losses since our inception in june 2005. until 2018 , when we commenced commercial operations , our business activities were primarily limited to research and development and raising capital . as of december 31 , 2018 , we had an accumulated deficit of $ 696.4 million . we recorded net losses of $ 232.6 million , $ 145.1 million and $ 99.1 million for the years ended december 31 , 2018 , 2017 and 2016 , respectively . our capital resources and business efforts are largely focused on activities relating to the commercialization of rhopressa ® , advancing our product pipeline , international expansion and construction of our manufacturing facility in athlone , ireland . we expect to continue to incur operating losses until our products generate adequate commercial revenue to render aerie profitable . if we do not successfully commercialize rhopressa ® , or rocklatan tm or any future product candidates , if approved , we may be unable to generate adequate product revenues to achieve such profitability . we may be required to draw down on the credit facility , or to obtain further funding through public or private debt or equity offerings or other arrangements . adequate additional funding may not be available to us on acceptable terms , or at all . if we are unable to raise capital when needed or on acceptable terms , we may be forced to delay , reduce or eliminate our research and development programs or commercialization or manufacturing efforts . 76 product revenues , net we launched rhopressa ® in the united states in late april 2018 and commenced generating product revenues from sales of rhopressa ® during the second quarter of 2018. our product revenues are recorded net of provisions relating to estimates for ( i ) trade discounts and allowances , such as discounts for prompt payment and distributor fees , ( ii ) estimated rebates to third-party payers , estimated payments for medicare part d prescription drug program coverage gap ( commonly called the “ donut hole ” ) , patient co-pay program coupon utilization , chargebacks and other discount programs and ( iii ) reserves for expected product returns . these estimates reflect current contractual and statutory requirements , known market events and trends , industry data and forecasted customer mix . actual amounts may ultimately differ from these estimates . if actual results vary , estimates may be adjusted in the period such change in estimate becomes known , which may have an impact on earnings in the period of adjustment .
| employee-related expenses also included an increase in stock-based compensation expense of $ 7.8 million . selling and marketing expenses increased by $ 24.1 million for the year ended december 31 , 2018 as compared to the year ended december 31 , 2017 related to our commercial launch of rhopressa ® in the united states and the preparation for our planned commercial launch of rocklatan tm in the united states , if approved . pre-approval commercial manufacturing expenses pre-approval commercial manufacturing expenses increased by $ 9.8 million for the year ended december 31 , 2018 as compared to the year ended december 31 , 2017 . employee-related expenses increased by $ 4.8 million for the year ended december 31 , 2018 as compared to the year ended december 31 , 2017 primarily due to increased headcount in our manufacturing plant in ireland . other commercial manufacturing expenses increased by $ 5.1 million for the year ended december 31 , 2018 as compared to the year ended december 31 , 2017 , primarily related to the build-out and operation of our manufacturing plant in ireland . research and development expenses research and development expenses increased by $ 14.0 million for the year ended december 31 , 2018 as compared to the year ended december 31 , 2017 . this increase is primarily comprised of an increase of $ 19.4 million related to early-stage pipeline activities , including $ 12.6 million related to our expanded collaboration agreement with dsm , an increase of $ 9.4 million of employee-related expenses related to an increase in headcount and an increase of $ 5.3 million in expenses for rhopressa ® , as discussed below . these increases were partially offset by a decrease of $ 24.8 million of research and development expenses related to our envisia asset acquisition that occurred in 2017 for acquired ipr & d that was expensed during the year ended december 31 , 2017
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38 further discussion of the potential impacts on our business , financial condition , results of operations , liquidity and the market price of our class a common stock due to the covid-19 pandemic is provided in the section entitled “ risk factors ” in part i , item 1a of this report . british touring car championship license in may 2020 , we secured a multi-year licensing agreement to exclusively develop and publish the video games for the btcc racing series across console , mobile and casual gaming channels . in addition , through this license , we have the right to create and organize esports leagues and events for the btcc racing series . our license with the btcc expires on december 31 , 2026. acquisitions of 704games common stock on august 18 , 2020 , we entered into a stock purchase agreement with hc2 holdings 2 , inc. ( “ hc2 ” ) and continental general insurance company ( “ continental ” ) pursuant to which we purchased an aggregate of 106,307 shares of common stock of 704games company ( “ 704games ” ) , which is equal to approximately 26.2 % of the outstanding equity interests of 704games , at a price of $ 11.2881 per share for an aggregate consideration of approximately $ 1,200,000. additionally , on october 6 , 2020 , we entered into a stock purchase agreement with leo capital holdings , llc ( “ leo capital ” ) pursuant to which we purchased an aggregate of 10,301 shares of common stock of 704games , which is equal to approximately 2.5 % of the outstanding equity interests of 704games , at a price of $ 11.2881 per share for an aggregate consideration of approximately $ 116,000. following our purchases of shares from hc2 , continental and leo capital , our ownership interest in 704games increased to 82.2 % from 53.5 % . we are currently involved in certain legal proceedings relating to these purchases of common stock of 704games , including complaints filed by hc2 and continental . however , we believe that the plaintiffs ' allegations are without merit and intend to vigorously defend our position to the full extent permitted by law . see note 14 – subsequent events – litigation in our consolidated financial statements for additional information . on march 11 , 2021 , we entered into a share exchange agreement with playfast games , llc ( “ playfast ” ) pursuant to which we will acquire 30,903 shares of common stock of 704games owned by playfast , which is equal to approximately 7.6 % of the outstanding equity interests of 704games , in exchange for ( i ) 366,541 newly issued shares of our class a common stock and ( ii ) cash in an amount to be determined based on the share price of our class a common stock over the last 10 trading days of march of 2021. additionally , on march 14 , 2021 , we entered into a share exchange agreement with ascend fs , inc. ( “ ascend ” ) pursuant to which we will acquire 41,204 shares of common stock of 704games owned by ascend , which is equal to approximately 10.15 % of the outstanding equity interests of 704games , in exchange for ( i ) 488,722 newly issued shares of our class a common stock and ( ii ) cash in an amount to be determined based on the share price of our class a common stock over the last 10 trading days of march of 2021. the exchange transactions with each of playfast and ascend are subject to customary conditions to closing , including the receipt of necessary third-party approvals , and are expected to be completed on april 1 , 2021. upon closing of such exchange transactions , our ownership interest in 704games will increase to 100 % . initial public offering on january 15 , 2021 , we completed our initial public offering ( “ ipo ” ) of 3,450,000 shares of class a common stock at a price to the public of $ 20.00 per share , which includes the exercise in full by the underwriters of their option to purchase from us an additional 450,000 shares of class a common stock . we received net proceeds of approximately $ 62.9 million from the ipo , after deducting underwriting discounts and offering expenses payable by us . repayment of promissory note on january 20 , 2021 and january 29 , 2021 , we repaid $ 10,000,000 and $ 400,000 , respectively , of the promissory note payable due to motorsport network . amendment to joint venture agreement with aco on january 25 , 2021 , we entered into an amendment to our joint venture agreement with automobile club de l'ouest ( “ aco ” ) with respect to the le mans esports series limited joint venture . pursuant to the amendment , we increased our ownership interest in the joint venture from 45 % to 51 % . additionally , through certain multi-year licensing agreements that were entered into in connection with the amendment , we secured the rights to be the exclusive video game developer and publisher for the le mans race and the wec , as well as the rights to create and organize esports leagues and events for the le mans race , the wec and the 24 hours of le mans virtual event . in exchange for certain of these license rights , we agreed to fund up to 8,000,000 ( approximately $ 9.8 million usd as of december 31 , 2020 ) as needed for development of the video game products , to be contributed on an as-needed basis during the term of the applicable license . 39 kartkraft acquisition on march 19 , 2021 , we acquired all assets comprising the kartkraft computer video game from black delta holdings pty , black delta trading pty ltd and black delta ip pty ltd ( collectively , “ black delta ” ) . story_separator_special_tag the purchase price for the assets was $ 1,000,000 , of which $ 750,000 was paid at closing and $ 250,000 will be paid on the six-month anniversary of closing . through this acquisition , we plan to enter the simulated kart-racing space . black delta 's development team is expected to form a new division , motorsport games australia . studio397 binding term sheet on february 25 , 2021 , we entered into a binding term sheet with luminis international bv ( “ luminis ” ) . pursuant to the binding term sheet , the company and luminis intend that the company will acquire from luminis 100 % of the share capital of studio397 b.v. ( “ studio397 ” ) . the purchase price for the shares will be $ 16,000,000 , payable in two installments as follows : $ 12,800,000 at closing and $ 3,200,000 on the first-year anniversary of closing . the parties are in the process of negotiating the definitive acquisition documents to complete the transaction , which is subject to customary closing conditions . digital tales binding term sheet on march 22 , 2021 , we entered into a binding term sheet with eleda s.r.l . ( “ eleda ” ) . pursuant to the binding term sheet , we and eleda intend that we will acquire from eleda all of the shares of digital tales usa , llc , a florida limited liability company ( the “ interests ” ) . the purchase price for the interests will be $ 2,200,000 , payable as follows : ( i ) $ 1,540,000 at closing , ( ii ) $ 260,000 on the six-month anniversary of closing , ( iii ) $ 200,000 after the sbk video game license or substantially similar two-wheel racing brand license currently held by the digital tales usa , llc is amended to be extended beyond current expiration date in 2024 for no less than 3 additional years , so long as such amendment is executed within 12 months of closing and ( iv ) $ 200,000 after the sbk video game license or substantially similar two-wheel racing brand license currently held by the digital tales usa , llc is amended to be expanded to include console and pc video game development and publishing for the same period , so long as such amendment is executed within 12 months of closing . in addition , we agreed to reimburse eleda for its legal fees and expenses up to $ 60,000. the parties are in the process of negotiating the definitive acquisition documents to complete the transaction , which is subject to customary closing conditions . see part ii , item 9b , “ other information ” of this report for additional information . product release nascar heat 5 is a racing video game simulating the 2020 nascar season . nascar heat 5 was developed by 704games and published by motorsport games on july 10 , 2020 for playstation 4 , xbox one and microsoft windows via steam . six downloadable content packs ( “ dlc ” ) were released in the second half of 2020. we are also expanding our supported platforms to include the nintendo switch and expect to launch nascar heat on the nintendo switch platform in 2021. trends and factors affecting our business product release schedule our financial results are affected by the timing of our product releases and the commercial success of those titles . our nascar heat products have historically accounted for the majority of our revenue . we have recently obtained the exclusive license to develop multi-platform games for the btcc , and we recently obtained the exclusive license to develop multi-platform games for the wec series , including the iconic 24 hours of le mans race . the btcc and le mans products are currently under development , and we currently anticipate releasing games for these racing series in 2022. going forward , we intend to expand our license arrangements to other internationally recognized racing series and the platforms we operate on . we believe that having a broader product portfolio will improve our operating results and provide a revenue stream that is less cyclical based on the release of a single game per year . economic environment and retailer performance our physical gaming products are sold primarily through a distribution network with exclusive partners who specialize in the distribution of games , including through mass-market retailers ( e.g. , target , wal-mart ) , consumer electronics stores ( e.g. , best buy ) , discount warehouses , game specialty stores ( e.g. , gamestop ) and other online retail stores ( e.g. , amazon ) . we currently derive , and expect to continue to derive , significant revenues from sales of our products to a very limited number of distribution partners . for the years ended december 31 , 2020 and 2019 , we had one distribution partner through which we sold substantially all of our products for the retail market , which represented approximately 34 % and 40 % of our total revenue for the year ended december 31 , 2020 and 2019 , respectively . see “ risk factors—risks related to our business and industry—the importance of retail sales to our business exposes us to the risks of that business model ” and “ risk factors—risks related to our business and industry—we primarily depend on a single third-party distribution partner to distribute our games for the retail channel , and our ability to negotiate favorable terms with such partner and its continued willingness to purchase our games is critical for our business ” in part i , item 1a of this report for additional information regarding the importance of retail sales and our distribution partners to our business . additionally , we continue to monitor economic conditions , including the impact of the covid-19 pandemic , that may unfavorably affect our businesses , such as deteriorating consumer demand , delays in development , pricing pressure on our products , credit quality of our receivables and foreign currency exchange rates .
| cost of revenues our cost of revenues consisted of the following : replace_table_token_1_th for the year ended december 31 , 2020 , cost of revenues from our gaming segment increased by $ 1,440,204 , or 30 % , to $ 6,306,581 from $ 4,866,377 for the year ended december 31 , 2019 , primarily due to increased revenue during the current year period and the costs associated with delivering that revenue . for the year ended december 31 , 2020 , cost of revenues from our esports segment increased by $ 266,791 or 1,186 % to $ 289,291 from $ 22,500 for the year ended december 31 , 2019 , primarily due to the increase in the number of esports events hosted and the associated increase in live stream production costs and cash prizes . 43 gross profit our gross profit and gross margin consisted of the following : replace_table_token_2_th for the year ended december 31 , 2020 , gross profit from our gaming segment increased by $ 5,529,174 , or 80 % , to $ 12,438,584 from $ 6,909,410 for the year ended december 31 , 2019 primarily due to increased game sales . for the year ended december 31 , 2020 and 2019 , the gross margin from our gaming segment was 66 % and 59 % , respectively , an increase of seven percentage points primarily due to higher sales of our games as direct digital downloads , which have a higher gross margin than sales through retail channels . gross margin from direct digital download sales also fluctuates with the relative selling prices of our games . our new games tend to sell at their highest price point in the days , weeks and months immediately following their launch and our back catalog sells at relatively lower prices . the mix of sales from new games and back catalog games plus the mix of games sold via direct digital download and retail channels all impact our gross margins . for the year
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many of our office workers in our manufacturing and distribution facilities , as well as the corporate headquarters , continue to work remotely , where possible . the crisis management team , which includes members of senior management , meets regularly to review and assess the status of the company 's operations and the health and safety of its employees . a significant portion of the company 's total product sales is dependent on u.s. housing starts and its business , financial condition , and results of operations depends significantly on the level of housing and residential construction activity . we anticipated previously that the effects of responses to the pandemic would have a negative effect on our north america operations . however , single-family housing starts increased from april 's and may 's lower levels and increased from prior-year 's level of starts . due to the return of lowe 's , increased housing starts and a strong home repair and remodel market , sales for the fiscal year 2020 sales increased compared to the fiscal year 2019. whether this trend continues at the same pace or decline for the year 2021 is not known . our first 2020 plan objective was a continued focus on organic growth with the goal of achieving a compounded annual growth rate in net sales of approximately 8 % from 2016 through 2020. since 2016 net sales has grown 47.3 % or at a compound annual growth rate of 10.2 % . milestones that helped support this goal included a price increase for the majority of our u.s. wood connector products in the third quarter of 2018 , the signing of one of the largest u.s. homebuilding companies onto our builder program , resulting in 23 of the top 25 u.s. builders now engaged on our program , strong repair and remodel trends associated with the covid-19 pandemic , as well as the return of lowe 's in mid-2020 . our second objective involved rationalizing our cost structure to improve company-wide profitability . our goal was to reduce total operating expenses as a percent of net sales to a range of 26 % to 27 % by the end of 2020 through a combination of zero-based budgeting , lowering our indirect procurement costs and taking other cost reduction measures in both europe and our concrete business . specifically in 2020 we also experienced cost savings from our expense management practices as well as one-time benefits from reduced travel and trade show costs as a result of covid-19 restrictions . these factors , combined with 27 strong sales growth , resulted in operating expenses as a percentage of net sales improving 570 basis points lowering to 25.6 % for the year ended december 31 , 2020 from 31.3 % for the year ended december 31 , 2016. our third objective was to improve company-wide operating margins to a range of 16 % to 17 % by the end of 2020. this goal was going to be largely affected by another profitability goal to improve operating margins in europe by rolling out our fastener lines in the nordic region and france , the consolidation of our european management team to create efficiencies , and through other cost cutting initiatives . further , in late 2017 we implemented a new concrete strategy , which narrowed our concentration to six distinct product categories to improve gross margins . as a result of these initiatives , favorable raw material prices in 2020 , as well as limited spending on certain operating expenses due to covid-19 restrictions during 2020 , operating margins improved 340 basis points increasing to 19.9 % for the year ended december 31 , 2020 from 16.5 % for the year ended december 31 , 2016. our fourth objective focused on improving our working capital management and overall balance sheet discipline . since the onset of the 2020 plan we 've implemented lean principles in our factories . we also completed a 3-phased sku reduction program , eliminating over 12,000 non-moving or slow-removing skus and converting our customers over to replacement products . in addition , we carried out rapid improvement events in our u.s. production facilities resulting in efficiency enhancements as well as improved management of inventory and purchasing practices . the final element of our 2020 plan was focused on maximizing stockholder value , with the goal of improving our return on invested capital from 10.5 % in 2016 to a range of 15 % to 16 % by year end 2020. through our operational execution , combined with the enactment of the u.s. tax cuts and jobs act of 2017 , which lowered our effective income tax rate beginning in 2018 , return on invested capital ( 1 ) increased to 20.0 % for the year ended december 31 , 2020. factors affecting our results of operations unlike lumber or other products that have a more direct correlation to housing starts , our products are used to a greater extent in areas that are subject to natural forces , such as seismic or wind events . our products are generally used in a sequential manner that follows the construction process . residential , light industrial and commercial construction begins with the foundation , followed by the wall and the roof systems , and then the installation of our products , which flow into a project or a house according to these schedules . our sales also tend to be seasonal , with operating results varying from quarter to quarter . with some exceptions , our sales and income have historically been lower in the first and fourth quarters than in the second and third quarters of a fiscal year , as our customers tend to purchase construction materials in the late spring and summer months for the construction season . weather conditions , such as extended cold or wet weather , which affect and sometimes delay installation of some of our products , could negatively affect our results of operations . story_separator_special_tag political , economic events such as tariffs and the possibility of additional tariffs on imported raw materials or finished goods or such as labor disputes can also have an effect on our gross and operating profits as well as the amount of inventory on-hand . our operations expose us to risks associated with pandemics , epidemics or other public health emergencies , such as the covid-19 pandemic which spread from china to many other countries including the u.s. see `` item ia—risk factors . '' erp integration in july 2016 , our board of directors approved a plan to replace our current in-house enterprise resource planning ( “ erp ” ) and externally sourced accounting platforms with a fully integrated erp platform from sap america , inc. ( “ sap ” ) in multiple phases by location at all facilities plus our headquarters , with a focus on configuring , instead of customizing , the standard sap modules . we went live with our first wave of the sap implementation project in february of 2018 , and we implemented sap at five additional locations in 2019 , 2020 and early 2021 , completing our north america operations . we are tracking toward rolling out sap technology with a company-wide completion currently targeted for 2022. meeting the 2022 goal is highly dependent on the lifting of current travel restrictions , which are the result of the covid-19 pandemic . while we believe the sap implementation will be beneficial to the company over time , annual operating expenses have and are expected to continue to increase through 2024 as a result of the sap implementation , primarily due to increases in training costs and the depreciation of previously capitalized costs . as of december 31 , 2020 , we have capitalized $ 21.4 million and expensed $ 39.1 million of the costs , including $ 5.9 million in amortization expense of capitalized costs . 28 business segment information historically our north america segment has generated more revenues from wood construction products compared to concrete construction products . during 2020 , the return of lowe 's , favorable weather conditions , increased home improvement activity and increased housing starts resulted in higher sales volumes over the same time period of 2019 , which had extremely wet weather in the first half of the year . wood construction product sales volume increased 15.6 % for the year ended december 31 , 2020 compared to the year ended december 31 , 2019 , primarily due to increased sales volumes in connection with the return of lowe 's and increased housing starts and repair and remodel activity , which resulted in increased sales to some of our other sales distributor channels.net sales of our concrete construction product increased slightly for the year ended december 31 , 2020 compared to the year ended december 31 , 2019 mostly due to increased sales volumes . operating profits increased due to higher sales , and lower cost of goods sold mostly due to lower material costs . in operating expenses , increases in cash profit sharing and stock-based compensation expense were partially offset by reductions in consulting fees and travel related expense . our europe segment also generates more revenues from wood construction products than concrete construction products . europe net sales increased due to approximately $ 2.2 million of positive foreign currency translations resulting from some europe currencies strengthening against the u.s. dollar . in local currency , europe net sales decreased primarily due to lower sales volume . in u.s. dollars , wood construction product sales increased 4.3 % for the year ended december 31 , 2020 compared to the year ended december 31 , 2019. concrete construction product sales are mostly project based , and net sales decreased 9.9 % for the year ended december 31 , 2020 compared to the year ended december 31 , 2019. operating profits increased due to lower material costs , and lower operating expenses as well as benefiting from foreign currency translation from most europe currencies strengthening against the u.s. dollar . see “ europe ” below . our asia/pacific segment has generated revenues from both wood and concrete construction products . we believe that the asia/pacific segment is not significant to our overall performance . ( 1 ) when referred to above , the company 's return on invested capital ( “ roic ” ) for a fiscal year is calculated based on ( i ) the net income of that year as presented in the company 's consolidated statements of operations prepared pursuant to generally accepted accounting principles in the u.s. ( “ gaap ” ) , as divided by ( ii ) the average of the sum of total stockholders ' equity and total long-term interest bearing liabilities , ( which for the company are long-term capital lease obligations ) , at the beginning of and at the end of such year , as presented in the company 's consolidated balance sheets prepared pursuant to gaap for that applicable year . as such , the company 's roic , a ratio or statistical measure , is calculated using exclusively gaap financial measures . business outlook based on current information and subject to future events and circumstances the company estimates that its full year 2021 : operating margin will be between approximately 16.5 % and 18.5 % . depreciation and amortization expense will be approximately $ 44 million to $ 48 million , of which approximately $ 38 million to $ 42 million is related to depreciation . effective tax rate will be approximately 25.0 % to 26.0 % , including both federal and state income tax rates . capital expenditures for the full year are estimated to be in the range of $ 50 million to $ 55 million . story_separator_special_tag compared to $ 134.0 million .
| the gross profit margins , including some intersegment expenses eliminated in consolidation , and excluding other expenses that are allocated according to product group , increased to 45.5 % from 42.9 % for wood construction products and decreased to 41.6 % from 42.2 % for concrete construction products . research and development and other engineering expense increased 8.0 % to $ 50.8 million from $ 47.1 million , primarily due to increases of $ 2.1 million in cash profit sharing expense , $ 1.4 million in personnel costs , $ 0.4 million for computer , software and phone expense and $ 0.3 million in in stock-based compensation , partly offset by a decrease of $ 0.8 million in travel and entertainment expense . selling expense decreased slightly to $ 112.5 million from $ 112.6 million , primarily due to decreases of $ 4.7 million in travel and entertainment expenses , $ 2.4 million in marketing , promotion and advertising expenses , $ 0.6 million in professional fees , $ 0.6 million in lease expense and $ 0.6 million in royalty expense , which was partly offset by increases of $ 3.8 million in cash profit sharing expense , $ 3.5 million in personnel costs , $ 1.3 million in sales commissions and $ 0.4 million in stock-based compensation expense . general and administrative expense increased 2.4 % to $ 161.0 million from $ 157.3 million , primarily due to increases of $ 7.0 million in cash profit sharing expense , $ 3.2 million in personnel costs , $ 1.8 million in computer costs including software subscription and licensing fees , $ 1.6 million in depreciation and amortization expense $ 0.8 million in insurance expense , and $ 0.7 million in stock-based compensation , which was partly offset by decreases of $ 5.6 million in consulting and other professional fees , $ 3.0 million in travel and entertainment expense , $ 1.1 million in bad debt expense , $ 1.0 million in legal fees and $ 0.5 million in facilities expense . costs associated with the sap , including implementation and support costs of
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at the same time , we have retained the rights to other programs , which are the basis of future potential collaborations and which over time may provide a pathway for us to develop our own biopharmaceutical commercial , sales and marketing organization . collaborative research and development and other revenues collaborative research and development and other revenues consist of three broad categories : ( a ) the recognition of upfront license payments over the period of our continuing involvement with the third party , ( b ) the reimbursement of qualified research expenses by third parties and ( c ) milestone payments in connection with our collaborative agreements . during the last three years , we generated collaborative research and development revenues from collaborative agreements with sandoz , pain therapeutics , zogenix , santen and others . 53 product revenues we also currently generate product revenue from the sale of three product lines : alzet ® osmotic pumps which are used for animal research ; lactel ® biodegradable polymers which are used by our customers as raw materials in their pharmaceutical and medical products ; and certain key excipients that are included in methydur and one excipient that is included in a currently marketed animal health product . because we consider our core business to be developing and commercializing pharmaceuticals , we do not intend to significantly increase our investments in or efforts to sell or market any of our existing product lines . however , we expect that we will continue to make efforts to increase our revenues related to collaborative research and development by entering into additional research and development agreements with third-party collaborators to develop product candidates based on our drug delivery technologies . revenues from sale of intellectual property rights from time-to-time , we also enter into arrangements in which we sell intellectual property rights and , in return , may receive upfront payments , contingent milestone payments and earn-outs from third party collaborators . our deliverable under these arrangements typically consists of the sale of intellectual property rights , and does not include any substantive continuing obligations subsequent to the transfer of the related rights , title , and interest to the buyer . we recognize the upfront payment as revenue because such arrangement is part of our revenue-earning activities and is in line with our ordinary course of ongoing business operations . in september 2017 , we entered into a patent purchase agreement with indivior and received a non-refundable payment of $ 12.5 million . operating results since our inception in 1998 , we have generally had a history of operating losses . at december 31 , 2018 , we had an accumulated deficit of $ 468.6 million . our net losses were $ 25.3 million , $ 3.7 million and $ 34.5 million for the years ended december 31 , 2018 , 2017 and 2016 , respectively . these losses have resulted primarily from costs incurred to research and develop our product candidates and to a lesser extent , from selling , general and administrative costs associated with our operations and product sales . we expect our research and development expenses to increase in 2019 compared to 2018 and our selling , general and administrative expenses to be comparable in 2019 to 2018. we do not anticipate meaningful revenues from our products in development , should they be approved , for at least the next twelve months . therefore , we expect to incur continuing losses and negative cash flows from operations for the foreseeable future . critical accounting policies and estimates the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods . the most significant estimates and assumptions relate to inventories and purchase commitments , revenue recognition , contract research liabilities , and stock-based compensation . actual amounts could differ significantly from these estimates . inventories and purchase commitments our inventories , in part , include certain excipients that are sold to a customer for a currently marketed animal health product and included in several products in development , awaiting regulatory approval or commercial launch . these inventories are capitalized based on management 's judgment of probable sale prior to their expiration dates . the valuation of inventory requires management to estimate the value of inventory that may become expired prior to use . we may be required to expense previously capitalized inventory costs upon a change in management 's judgment due to , among other potential factors , a denial or delay of approval of a customer 's product by the necessary regulatory bodies , or new information that suggests that the inventory will not be saleable . in addition , these circumstances may cause us to record a liability related to minimum purchase agreements that we have in 54 place for raw materials . in october 2017 , we announced that persist , the phase 3 clinical trial for posimir , did not meet its primary efficacy endpoint of reduction in pain on movement over the first 48 hours after surgery as compared to standard bupivacaine hcl . as a result , during the year ended december 31 , 2017 , we recorded charges to cost of goods sold of approximately $ 2.0 million , of which approximately $ 503,000 related to the write-down of the cost basis of inventory on hand , $ 500,000 related to the prepaid inventory for the minimum purchase commitment for the excipient , and $ 1.0 million related to the recognition of our remaining minimum purchase commitment for the same excipient . as of december 31 , 2018 , the remaining carrying value of the excipient residing within our inventory was $ 6 8 ,000 . story_separator_special_tag in the event that management determines that we will not utilize all of these materials , there could be a potential write-off related to this inventory . if we are able to subsequent ly sell products made with raw materials that were previously written down , we will report an unusually high gross profit as there will be no associated cost of goods for these materials . revenue recognition we enter into license and collaboration agreements under which we may receive upfront license fees , research funding and contingent milestone payments and royalties . prior to january 1 , 2018 , we evaluated the accounting treatment under these agreements including whether multiple deliverables existed , how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting . for our collaborations with multiple deliverables , we had concluded that the deliverables were not separable and the arrangements should be accounted for as a combined unit of accounting . as a combined unit of accounting , we recognized the consideration for the combined unit of accounting in the same manner as the revenue was recognized for the final deliverable , which was generally ratably over the longest period of involvement . for example , upfront payments received upon execution of collaborative agreements were recorded as deferred revenue and recognized as collaborative research and development revenue based on a straight-line basis over the period of our continuing involvement with the third-party collaborator pursuant to the applicable agreement . such period generally represented the longer of the estimated research and development period or other continuing obligation period defined in the respective agreements between us and our third-party collaborators . if we determined that the expected timeline for a project and therefore our continuing involvement was materially different than we previously assumed , we adjusted the period over which we recognized the deferred revenue . effective january 1 , 2018 , we adopted fasb asc topic 606 , revenue from contracts with customers , or asc 606. in accordance with asc 606 , we changed certain characteristics of our revenue recognition accounting policy as described below . asc 606 was applied using the modified retrospective method , where the cumulative effect of the initial application was recognized as an adjustment to opening accumulated deficit at january 1 , 2018. therefore , comparative prior periods have not been adjusted and continue to be reported under fasb asc topic 605 , revenue recognition , or asc 605. we recorded a net decrease to opening accumulated deficit of $ 470,000 with an offset entry to a contra liability account as of january 1 , 2018 due to the cumulative impact of adopting topic 606 , with the impact relating to our deferred collaborative research and development revenues . there was no impact to reported total assets , revenues and operating expenses for the twelve months ended december 31 , 2018 as a result of applying topic 606. product revenues , net we sell osmotic pumps used in laboratory research , and design , develop and manufacture a wide range of standard and custom biodegradable polymers and excipients for pharmaceutical and medical device clients for use as raw materials in their products . revenues from product sales are recognized when the customer obtains control of our product , which occurs at a point in time , typically upon shipment to the customer . we expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that we would have recognized is one year or less . trade discounts and allowances : we provide certain customers with discounts that are explicitly stated in our contracts and are recorded as a reduction of revenues in the period the related product revenues are recognized . product returns : consistent with industry practice , we generally offer customers a limited right of return for products that have been purchased from us . we estimate the amount of our product sales that may be returned by our customers and record this estimate as a reduction of revenues in the period the related product revenues is 55 recognized . we currently estimate product return liabilities using our own historical sales information . we expect product returns to be minimal . collaborative research and development revenues we enter into license agreements which are within the scope of topic 606 , under which we license certain rights to our product candidates to third parties . the terms of these arrangements typically include payment to us of one or more of the following : non-refundable , up-front license fees ; reimbursement of development costs incurred by us under approved work plans ; development , regulatory and commercial milestone payments ; payments for manufacturing supply services we provide through our contract manufacturers ; sales-based milestones and royalties on net sales of licensed products . each of these payments results in collaborative research and development revenues , except for revenues from royalties on net sales of licensed products , which are classified as royalty revenues . in determining the appropriate amount of revenue to be recognized as we fulfill our obligations under each of our agreements , we perform the following steps : ( i ) identification of the promised goods or services in the contract ; ( ii ) determination of whether the promised goods or services are performance obligations , including whether they are distinct in the context of the contract ; ( iii ) measurement of the transaction price , including the constraint on variable consideration ; ( iv ) allocation of the transaction price to the performance obligations ; and ( v ) recognition of revenue when ( or as ) we satisfy each performance obligation . as part of the accounting for these arrangements , we must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract .
| ( 3 ) amounts related to recognition of upfront fees were zero in 2018 , $ 20.0 million in 2017 and zero in 2016 ; we and sandoz signed a license agreement effective june 2017. as of december 31 , 2017 , all of the $ 20.0 million upfront fee had been recognized as revenue as our contractual performance obligations had been fulfilled . in january 2019 , the license agreement was terminated . ( 4 ) amounts related to ratable recognition of upfront fees were zero in 2018 , $ 833,000 in 2017 and $ 208,000 in 2016 ; we and zogenix signed a license agreement effective july 2011. in august 2017 , we and zogenix terminated the license agreement . as a result , we recognized as revenue all of the remaining upfront fees in the twelve months ended december 31 , 2017 that had previously been deferred . ( 5 ) includes revenue recognized associated with our feasibility agreements for each of the years ended december 2018 , 2017 and 2016. the decrease in collaborative research and development revenues in 2018 compared with 2017 was primarily due to lower revenue recognized from our agreements with sandoz , zogenix and pain therapeutics , partially offset by higher revenue recognized from feasibility agreements with other companies . in addition , we earned a $ 5.0 million milestone payment from indivior upon nda approval of perseris in the third quarter of 2018. the increase in collaborative research and development revenue in 2017 compared with 2016 was primarily due to higher revenue recognized from our agreements with sandoz and zogenix and higher revenue recognized from feasibility agreements with other companies , partially offset by lower revenue recognized from our agreements with pain therapeutics and santen . we received a $ 20.0 million upfront fee in connection with the license agreement signed with sandoz in june 2017. at december 31 , 2017 , all of the $ 20.0 million upfront fee had been recognized as
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loans past due 30-59 days decreased from $ 38.2 million at december 31 , 2012 to $ 10.7 million at december 31 , 2013 and loans past due 60-89 days decreased from $ 20.3 million at december 31 , 2012 to $ 775,000 at december 31 , 2013. this was primarily driven by the migration of two relationships totaling $ 36.2 million from past due to nonaccrual status in the first quarter of 2013. foreclosed properties decreased to $ 30.9 million at december 31 , 2013 , compared with $ 43.7 million at december 31 , 2012. during the year ended december 31 , 2013 , the company acquired $ 20.6 million and sold $ 30.8 million of other real estate owned ( oreo ) . in addition , we recorded fair value write-downs of $ 2.5 million during the year reflecting declines in appraisal valuations and changes in pricing strategies . our ratio of non-performing assets to total assets increased to 12.35 % at december 31 , 2013 , compared with 11.89 % at december 31 , 2012. on july 16 , 2013 , a jury in louisville , kentucky returned a verdict against pbi bank awarding the plaintiffs compensatory damages of $ 1.5 million and punitive damages of $ 5.5 million . after conferring with its legal advisors , pbi bank believes the findings and damages are excessive and contrary to the law , and that it has meritorious grounds on which it is moving forward to appeal . although we have made provisions in our condensed consolidated financial statements for this self-insured matter , the amount of our legal reserve is less than the original amount of the damages awarded , plus accrued interest . these items are discussed in further detail throughout this management 's discussion and analysis of financial condition and results of operations section . going concern considerations and future plans our consolidated financial statements have been prepared on a going concern basis , which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the foreseeable future . however , the events and circumstances described in this discussion create an uncertainty about the company 's ability to continue as a going concern . for the year ended december 31 , 2013 , we reported net loss attributable to common shareholders of $ 3.4 million . this loss was attributable primarily to loan collection expenses of $ 4.7 million and oreo expense of $ 4.5 million resulting from fair value write-downs driven by new appraisals and reduced marketing prices , net loss on sales , and ongoing operating expenses . we also had lower net interest margin due to lower average loans outstanding , loans re-pricing at lower rates , and the level of non-performing loans in our portfolio . net loss to common shareholders of $ 3.4 million for the year ended december 31 , 2013 , compares with net loss to common shareholders of $ 33.4 million for year ended december 31 , 2012 . 28 for the year ended december 31 , 2012 , we reported net loss attributable to common shareholders of $ 33.4 million . this loss was attributable primarily to $ 40.3 million of provision for loan losses expense due to continued decline in credit trends in our portfolio that resulted in net charge-offs of $ 36.1 million , oreo expense of $ 10.5 million resulting from fair value write-downs driven by new appraisals and reduced marketing prices , net loss on sales , and ongoing operating expense . we also had lower net interest margin due to lower average loans outstanding , loans re-pricing at lower rates , and the level of non-performing loans in our portfolio . net loss to common shareholders of $ 33.4 million , for the year ended december 31 , 2012 , compares with net loss to common shareholders of $ 105.2 million for year ended december 31 , 2011. in june 2011 , the bank entered into a consent order with the fdic and kdfi in which the bank agreed , among other things , to improve asset quality , reduce loan concentrations , and maintain a minimum tier 1 leverage ratio of 9 % and a minimum total risk based capital ratio of 12 % . the consent order was included in our current report on 8-k filed on june 30 , 2011. in october 2012 , the bank entered into a new consent order with the fdic and kdfi , again agreeing to maintain a minimum tier 1 leverage ratio of 9 % and a minimum total risk based capital ratio of 12 % . the bank also agreed that if it should be unable to reach the required capital levels , and if directed in writing by the fdic , then the bank would within 30 days develop , adopt and implement a written plan to sell or merge itself into another federally insured financial institution or otherwise immediately obtain a sufficient capital investment into the bank to fully meet the capital requirements . we expect to continue to work with our regulators toward capital ratio compliance as outlined in the written capital plan submitted by the bank in december 2012. the new consent order also requires the bank to continue to adhere to the plans implemented in response to the june 2011 consent order , and includes the substantive provisions of the june 2011 consent order . the new consent order was included in our current report on 8-k filed on september 19 , 2012. as of december 31 , 2013 , the capital ratios required by the consent order were not met . in order to meet these capital requirements , the board of directors and management are continuing to evaluate strategies to achieve the following objectives : increasing capital through a possible public offering or private placement of common stock to new and existing shareholders . story_separator_special_tag we have engaged a financial advisor to assist our board in this evaluation and to assist in evaluating our options for the redemption of our series a preferred stock currently held by the us treasury . continuing to operate the company and bank in a safe and sound manner . this strategy will require us to reduce our lending concentrations , remediate non-performing loans , and reduce other noninterest expense through the disposition of oreo . continuing with succession planning and adding resources to the management team . in 2012 , john t. taylor was named president and ceo of pbi bank . john r. davis was appointed the bank 's chief credit officer , with responsibility for establishing and executing the credit quality policies and overseeing credit administration for the entire organization . in 2013 , mr. taylor succeeded maria l. bouvette as ceo of porter bancorp . we have also augmented our staffing in the commercial lending area , which is now led by joe c. seiler . evaluating and implementing improvements to our internal processes and procedures , distribution of labor , and work-flow to ensure we have adequately and appropriately deployed resources in an efficient manner in the current environment . executing on our commitment to improve credit quality and reduce loan concentrations and balance sheet risk . we have reduced the size of our loan portfolio significantly from $ 1.3 billion at december 31 , 2010 , to $ 1.1 billion at december 31 , 2011 to $ 899.1 million at december 31 , 2012 , and $ 709.3 million at december 31 , 2013. we have significantly improved our credit administration function which is now led by john r. davis , who joined the management team in august 2012 and serves as chief credit officer . our consent order calls for us to reduce our construction and development loans . at december 31 , 2013 , we have reduced construction and development loans to $ 43.3 million , or 52 % of total risk-based capital , and $ 70.3 million , or 82 % of total risk-based capital , at december 31 , 2012. our consent order also requires us to continue to reduce concentrations in commercial real estate loans . these loans totaled $ 237.0 million , or 284 % of total risk-based capital , at december 31 , 2013 compared with $ 311.1 million , or 362 % of total risk-based capital , at december 31 , 2012 . 29 we are working to reduce non-owner occupied commercial real estate loans , construction and development loans , and multi-family residential real estate loans by being more selective in seeking new construction and development lending and new non-owner occupied commercial real estate lending opportunities . we are also receiving principal reductions from amortizing credits and pay-downs from our customers who sell properties built for resale . we have reduced the construction loan portfolio from $ 199.5 million at december 31 , 2010 to $ 43.3 million at december 31 , 2013. our non-owner occupied commercial real estate loans declined from $ 293.3 million at december 31 , 2010 to $ 237.0 million at december 31 , 2013. executing on our commitment to sell other real estate owned and reinvest in quality income producing assets . our acquisition of real estate assets through the loan remediation process slowed during 2013 , as we acquired $ 20.6 million of oreo in 2013 compared with $ 33.5 million during 2012. however , nonaccrual loans totaled $ 101.8 million at december 31 , 2013 , and we expect to resolve many of these loans by foreclosure which could result in further additions to our oreo portfolio . we incurred oreo losses totaling $ 2.6 million during the 2013 , comprised of $ 132,000 in loss on sale and $ 2.5 million in fair value write-downs to reflect declines in appraisal valuations and changes in our pricing strategies . we continually evaluate opportunities to maximize the value we receive from the sale of oreo . we pursue multiple sales channels with focus primarily on internal marketing and the use of brokers . real estate construction represents 62 % of the oreo portfolio at december 31 , 2013 compared with 51 % at december 31 , 2012. commercial real estate represents 19 % of the oreo portfolio at december 31 , 2013 compared with 35 % at december 31 , 2012 , and 1-4 family residential properties represent 16 % of the portfolio at december 31 , 2013 compared with 12 % at december 31 , 2012. bank regulatory agencies can exercise discretion when an institution does not meet the terms of a consent order . based on individual circumstances , the agencies may issue mandatory directives , impose monetary penalties , initiate changes in management , or take more serious adverse actions . our consolidated financial statements do not include any adjustments that may result should the company be unable to continue as a going concern . application of critical accounting policies our accounting and reporting policies comply with gaap and conform to general practices within the banking industry . we believe that of our significant accounting policies , the following may involve a higher degree of management assumptions and judgments that could result in materially different amounts to be reported if conditions or underlying circumstances were to change . allowance for loan losses pbi bank maintains an allowance for loan losses believed to be sufficient to absorb probable incurred credit losses existing in the loan portfolio , and the board of directors evaluates the adequacy of the allowance for loan losses on a quarterly basis . we evaluate the adequacy of the allowance using , among other things , historical loan loss experience , known and inherent risks in the portfolio , adverse situations that may affect the borrower 's ability to repay , estimated value of the underlying collateral and current economic conditions and trends .
| % and 3.31 % , respectively , for 2012. average nonaccrual loans were $ 107.3 million and $ 90.8 million in 2013 and 2012 , respectively . the decrease in net interest income was primarily the result of lower average earning assets coupled with lower rates on those assets . in addition , net interest income and net interest margin were adversely affected by $ 5.6 million and $ 4.9 million of interest lost on nonaccrual loans during 2013 and 2012 , respectively . our average interest-earning assets were $ 1.05 billion for 2013 , compared with $ 1.28 billion for 2012 , an 18.1 % decrease , primarily attributable to lower average loans and partially offset by higher average investment securities and interest bearing deposits with financial institutions . average loans were $ 788.2 million for 2013 , compared with $ 1.03 billion for 2012 , a 23.7 % decrease . average interest bearing deposits with financial institutions were $ 65.1 million in 2013 , compared with $ 62.1 million in 2012 , a 4.7 % increase . average investment securities were $ 184.2 million for 2013 , compared with $ 173.1 million for 2012 , a 6.4 % increase . our total interest income decreased 25.1 % to $ 43.2 million for 2013 , compared with $ 57.7 million for 2012. the change was due primarily to lower interest rates on loans , lower volume of loans and lower interest rates on investment securities . our average interest-bearing liabilities decreased by 18.1 % to $ 937.4 million for 2013 , compared with $ 1.14 billion for 2012. our total interest expense decreased by 29.4 % to $ 11.1 million for 2013 , compared with $ 15.8 million during 2011 , due primarily to lower interest rates paid on and lower volume of certificates of deposit , now and money market deposits . our average volume of certificates of deposit decreased 22.8 % to $ 704.0 million for 2013 , compared with $
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in addition , during 2013 , an after-tax loss of $ 43 million ( $ 41 million recorded at neer and $ 2 million recorded at corporate and other ) was recorded associated with the decision to pursue the sale of neer 's ownership interests in oil-fired generating plants located in maine ( maine fossil ) . during 2014 , neer decided not to pursue the sale of maine fossil and recorded an after-tax gain of $ 12 million to increase maine fossil 's carrying value to its estimated fair value . see note 4 - nonrecurring fair value measurements . also in 2013 , neer recorded an impairment of $ 300 million and other related charges ( $ 342 million after-tax ) related to the spain solar projects in nee 's consolidated statements of income . see note 4 - nonrecurring fair value measurements and note 13 - spain solar projects . in order to make period to period comparisons more meaningful , adjusted earnings also exc lude the items discussed above , and , beginning in the third quarter of 2013 , the after-tax operating results associated with the spain solar projects . the following table provides details of the adjustments to net income considered in computing nee 's adjusted earnings discussed above . replace_table_token_12_th ( a ) for 2014 , 2013 and 2012 , $ 171 million of the gains , $ 54 million of losses and $ 37 million of losses , respectively , are included in neer 's net income ; the balance is included in corporate and other . ( b ) for 2014 , $ 1 million of gains are included in neer 's net income ; the balance is included in corporate and other . for 2013 and 2012 , all of the gains are included in neer 's net income . ( c ) for 2013 , $ 216 million of the gain is included in neer 's net income ; the balance is included in corporate and other . ( d ) for 2014 , all of the gain is included in neer 's net income . for 2013 , $ 41 million of the loss is included in neer 's net income ; the balance is included in corporate and other . 44 the change in unrealized mark-to-market activity from non-qualifying hedges is primarily attributable to changes in forward power and natural gas prices and interest rates , as well as the reversal of previously recognized unrealized mark-to-market gains or losses as the underlying transactions were realized . 2014 story_separator_special_tag font-size:10pt ; '' > higher earnings on investment in plant in service of approximately $ 105 million . investment in plant in service grew fpl 's average retail rate base in 2014 by $ 2.3 billion reflecting , among other things , the modernized riviera beach power plant and ongoing transmission and distribution additions , growth in wholesale services provided which increased earnings by $ 47 million , the absence of $ 32 million of after-tax charges associated with the cost savings initiative recorded in 2013 , and higher earnings of $ 30 million related to the increase in the targeted regulatory roe from 11.25 % to 11.50 % , partly offset by , lower cost recovery clause results of $ 22 million primarily due to the transfer of new nuclear capacity to retail rate base as discussed below under retail base , cost recovery clauses and interest expense , and lower afudc - equity of $ 19 million primarily related to the riviera beach and cape canaveral power plants being placed in service in april 2014 and april 2013 , respectively . in 2013 , the growth in earnings for fpl was primarily driven by the following : higher earnings on investment in plant in service of approximately $ 175 million . investment in plant in service grew fpl 's average retail rate base in 2013 by $ 3.4 billion reflecting , among other things , the modernized cape canaveral power plant , generation power uprates at fpl 's nuclear units and ongoing transmission and distribution additions , partly offset by , lower cost recovery clause results of $ 45 million primarily due to the transfer of new nuclear capacity to retail rate base as discussed below under retail base , cost recovery clauses and interest expense , and the $ 32 million of after-tax charges associated with the cost savings initiative . fpl 's operating revenues consisted of the following : replace_table_token_13_th retail base fpsc rate orders in 2014 and 2013 , fpl 's retail base revenues benefited from the 2012 rate agreement as retail base rates and charges were designed to increase approximately $ 350 million on an annualized basis , as well as a $ 164 million annualized retail base rate increase associated with the cape canaveral power plant , which was placed in service in april 2013 and a $ 234 million annualized retail base rate increase associated with the riviera beach power plant which was placed in service in april 2014. the 2012 rate agreement : 46 remains in effect until december 2016 , establishes fpl 's allowed regulatory roe at 10.50 % , with a range of plus or minus 100 basis points , and allows for an additional retail base rate increase as the modernized port everglades project becomes operational ( which is expected by mid-2016 ) . in 2012 , fpl 's retail base revenues were impacted by the 2010 rate agreement . see item 1. business - fpl - fpl regulation - fpl rate regulation - base rates for additional information on the 2012 and 2010 rate agreements . story_separator_special_tag included in retail base revenues for 2014 was approximately $ 192 million of additional base revenues related to the riviera beach power plant which was placed in service in april 2014 and $ 53 million of additional retail base revenues related to the cape canaveral power plant which was placed in service in april 2013. included in retail base revenues for 2013 was approximately $ 302 million of additional revenues associated with new retail base rates under the 2012 rate agreement and $ 129 million of additional retail base revenues related to the cape canaveral power plant . additional retail base revenues of approximately $ 115 million and $ 237 million were recorded in 2014 and 2013 , respectively , primarily related to new nuclear capacity which was placed in service in 2013 and 2012 as permitted by the fpsc 's nuclear cost recovery rule . see cost recovery clauses below for discussion of the nuclear cost recovery rule . retail customer usage and growth in 2014 and 2013 , fpl experienced a 1.8 % and 1.1 % increase , respectively , in the average number of customer accounts and a 0.4 % and 0.2 % decrease , respectively , in the average usage per retail customer , which collectively , together with other factors , increased revenues by approximately $ 36 million and $ 37 million , respectively . a portion of the increase in the average number of customer accounts in 2014 and 2013 can be attributed to the remote disconnection of inactive meters ( meters at premises where electric service is available but no customer is requesting service ) through the use of smart meters and the subsequent establishment of valid customer accounts ( reactivated customers ) . generally the usage of these reactivated customers was lower than average usage customers and , accordingly , did not increase revenues proportionally . an improvement in the florida economy contributed to the increased revenues for both periods and favorable weather contributed to the increased revenues in 2013. cost recovery clauses revenues from fuel and other cost recovery clauses and pass-through costs , such as franchise fees , revenue taxes and storm-related surcharges , are largely a pass-through of costs . such revenues also include a return on investment allowed to be recovered through the cost recovery clauses on certain assets , primarily related to nuclear capacity , solar and environmental projects . in 2014 , 2013 and 2012 , cost recovery clauses contributed $ 93 million , $ 115 million and $ 160 million , respectively , to fpl 's net income . the decrease in 2014 and 2013 in cost recovery clause results is primarily due to the collection in both years of retail base revenues related to new nuclear capacity which was placed in service in 2013 and 2012 ( see retail base above ) . in 2014 , there was minimal contribution to net income from the nuclear cost recovery rule as all nuclear uprates have been placed in service and associated costs are now collected through base rates . fluctuations in fuel cost recovery revenues are primarily driven by changes in fuel and energy charges which are included in fuel , purchased power and interchange expense in the consolidated statements of income , as well as by changes in energy sales . fluctuations in revenues from other cost recovery clauses and pass-through costs are primarily driven by changes in storm-related surcharges , capacity charges , franchise fee costs , the impact of changes in o & m and depreciation expenses on the underlying cost recovery clause , investment in solar and environmental projects , investment in nuclear capacity until such capacity goes into service and is recovered in base rates , pre-construction costs associated with the development of two additional nuclear units at the turkey point site and changes in energy sales . capacity charges are included in fuel , purchased power and interchange and franchise fee costs are included in taxes other than income taxes and other in the consolidated statements of income . underrecovery or overrecovery of cost recovery clause and other pass-through costs can significantly affect nee 's and fpl 's operating cash flows . the change from december 31 , 2013 to december 31 , 2014 in deferred clause and franchise expenses and in deferred clause and franchise revenues was approximately $ 67 million and negatively affected nee 's and fpl 's cash flows from operating activities in 2014. the increase in fuel cost recovery revenues in 2014 is primarily due to a higher average fuel factor of approximately $ 329 million and higher energy sales of $ 158 million . in addition , higher interchange power sales , partly offset by lower gas sales associated with an incentive mechanism allowed under the 2012 rate agreement ( incentive gas sales ) , increased fuel cost recovery revenues in 2014 by approximately $ 55 million . the decrease in fuel cost recovery revenues in 2013 is primarily due to a lower average fuel factor , partly offset by incentive gas sales and higher interchange power sales ( collectively , approximately $ 200 million ) . the decrease in revenues from other cost recovery clauses and pass-through costs in 2014 and 2013 primarily reflects higher revenues in 2012 associated with the fpsc 's nuclear cost recovery rule reflective of higher earnings on additional nuclear capacity investments and the shift , in 2013 and 2014 , to the collection of nuclear capacity recovery through retail base revenues ( see retail base above ) . the nuclear cost recovery rule provides for the recovery of prudently incurred pre-construction costs and carrying charges ( equal to the pretax afudc rate ) on construction costs and a return on investment for new nuclear capacity through levelized charges under the capacity clause . the same rule provides for the recovery of construction costs , once property related to the new nuclear capacity goes into service , through a retail base rate increase effective beginning the following january .
| neer 's results increased in 2014 reflecting higher results from new investments , net unrealized gain from non-qualifying hedge activity compared to losses on such hedges in the prior year period , and the absence of $ 342 million of after-tax charges associated with the impairment of the spain solar projects recorded in 2013 , partly offset by the absence of the $ 231 million after-tax gain from discontinued operations recorded in 2013. in 2014 , neer added approximately 1,217 mw of wind capacity in the u.s. and canada , net of sales and dismantlements , and 265 mw of solar capacity in the u.s. and increased its backlog of contracted renewable development projects . corporate and other 's results in 2014 decl ined primarily due to consolidating tax adjustments and higher investment losses . in 2014 , nee committed to make an equity investment in a joint venture which plans to construct an approximately 300-mile natural gas pipeline . see item 1. business - other nee operating subsidiaries - natural gas pipeline systems - mountain valley pipeline . nee and its subsidiaries , including fpl , require funds to support and grow their businesses . these funds are primarily provided by cash flow from operations , short- and long-term borrowings and proceeds from the sale of differential membership interests and of noncontrolling interests in subsidiaries associated with nep and , from time to time , issuance of equity securities . as of december 31 , 2014 , nee 's total net available liquidity was approximately $ 7.0 billion , of which fpl 's portion was approximately $ 2.1 billion . results of operations net income attributable to nee for 2014 was $ 2.47 billion , compared to $ 1.91 billion in 2013 and $ 1.91 billion in 2012 . in 2014 , net income attributable to nee improved due to higher results at fpl and neer partly offset by lower results at corporate and other . in 2013 , net income was unfavorably affected by lower results at neer , offset by higher results at fpl and corporate and other . nee 's effective income tax rate for all periods presented reflects ptcs for wind projects at neer and deferred income tax benefits associated with convertible itcs under the american recovery
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a 20 % change in our estimate at december 31 , 2013 would have resulted in a change in income before income taxes of $ 0.8 million . intangible assets the company 's intangible assets , excluding goodwill , represent purchased trade names and customer relationships . trade names are not being amortized and are treated as indefinite lived assets . trade names are tested for recoverability on an annual basis in october of each year . the annual test showed no indication of impairment . if this test had indicated that an impairment had occurred , we would have recognized the loss in operating income . the company assigns useful lives to its intangible assets based on the periods over which it expects the assets to contribute directly or indirectly to the future cash flows of the company . customer relationships are amortized over 6 or 7 year useful lives . if events or circumstances were to indicate that any of the company 's definite-lived intangible assets might be impaired , the company would assess recoverability based on the estimated undiscounted future cash flows to be generated from the applicable intangible asset . vendor rebates many of our arrangements with our vendors entitle us to receive a rebate of a specified amount when we achieve any of a number of measures , generally related to the volume of purchases from the vendor . we account for such rebates as a reduction of the prices of the vendor 's products and therefore as a reduction of inventory until we sell the product , at which time such rebates reduce cost of sales . throughout the year , we estimate the amount of the rebates earned based on purchases to date relative to the total purchase levels expected to be achieved during the rebate period . we continually revise these estimates to reflect rebates expected to be earned based on actual purchase levels and forecasted purchase volumes for the remainder of the rebate period . a 20 % change in our estimate of total rebates earned during 2013 would have resulted in a change in income before income taxes of $ 1.4 million for the year ended december 31 , 2013. goodwill goodwill represents the excess of the amount we paid to acquire businesses over the estimated fair value of tangible assets and identifiable intangible assets acquired , less liabilities assumed . determining the fair value of assets acquired and liabilities assumed requires management 's judgment and often involves the use of significant estimates and assumptions , including assumptions with respect to future cash flows , discount rates and asset lives among other items . at december 31 , 2013 , our goodwill balance was $ 17.5 million , representing 8.9 % of our total assets . the company reviews goodwill for impairment annually , or more frequently if indications of possible impairment exist , using a three-step process . the first step is a qualitative evaluation as to whether it is more likely than not that the fair value of any of the reporting units is less than its carrying value using an assessment of relevant events and circumstances . examples of such events and circumstances include financial performance , industry and market conditions , macroeconomic conditions , reporting unit-specific events , historical results of goodwill impairment testing and the timing of the last performance of a quantitative assessment . if the company concludes that the goodwill associated with any reporting units is more likely than not impaired , a second step is performed for that reporting unit . this second step , used to quantitatively screen for potential impairment , compares the fair value of the reporting unit with its carrying amount , including goodwill . the third step , employed for any reporting unit that fails the second step , is used to measure the amount of any potential impairment and compares the implied fair value of the reporting unit 's goodwill with the carrying amount of goodwill . the second and third steps that we use to evaluate goodwill for impairment involve the determination of the fair value of our reporting units . inherent in such fair value determinations are certain judgments and estimates relating to future cash flows , including our interpretation of current economic indicators and market valuations , and assumptions about our strategic plans . in developing fair values for our reporting units , we may employ a market multiple or a discounted cash flow methodology , or a combination thereof . the market multiple methodology compares us to similar companies on the basis of risk characteristics to determine our risk profile relative to the comparable companies as a group . this analysis generally focuses on quantitative considerations , which include financial performance and other quantifiable data , and qualitative considerations , which include any factors which are expected to impact future financial performance . the most significant assumptions affecting the market multiple methodology are the market multiples and control premium . a control premium represents the value an investor would pay above noncontrolling interest transaction prices in order to obtain a controlling interest in the respective company . 15 the discounted cash flow methodology establishes fair value by estimating the present value of the projected future cash flows to be generated from the reporting unit . the discount rate applied to the projected future cash flows to arrive at the present value is intended to reflect all risks of ownership and the associated risks of realizing the stream of projected future cash flows . the discounted cash flow methodology uses our projections of financial performance . the most significant assumptions used in the discounted cash flow methodology are the discount rate , the customer attrition rate and expected future revenue and operating margins , which vary among reporting units . story_separator_special_tag if actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values , we may be exposed to future impairment losses that could be material to our results of operations . during the third quarter of 2013 and prior to the annual impairment test of goodwill at october 1 , 2013 , the company concluded that impairment indicators existed at the sw reporting unit , due to a decline in the overall financial performance and overall market demand . the carrying value of the sw reporting unit 's goodwill was $ 20.1 million and its implied fair value resulting from the impairment test was less than the carrying value . as a result , the company recorded a non-cash goodwill impairment charge of $ 7.6 million during the year ended december 31 , 2013 . 16 sales we generate most of our sales by providing wire and cable and related hardware to our customers , as well as billing for freight charges . we recognize revenue upon shipment of our products to customers from our distribution centers or directly from our suppliers . sales incentives earned by customers are accrued in the same month as the shipment is invoiced and are accounted for as a reduction in sales . cost of sales cost of sales consists primarily of the average cost of the wire and cable and related hardware that we sell . we also incur shipping and handling costs in the normal course of business . cost of sales also reflects cash discounts for prompt payment to vendors and vendor rebates generally related to annual purchase targets , as well as inventory obsolescence charges . operating expenses operating expenses include all expenses , excluding freight , incurred to receive , sell and ship product and administer the operations of the company . salaries and commissions . salary expense includes the base compensation , and any overtime earned by hourly personnel , for all sales , administrative and warehouse employees and stock compensation expense for options and restricted stock granted to employees . commission expense is earned by inside sales personnel based on gross profit dollars generated , by field sales personnel from generating sales and meeting various objectives , by sales , national and marketing managers for driving the sales process , by region managers based on the profitability of their branches and by corporate managers based primarily on our profitability and also on other operating metrics . other operating expenses . other operating expenses include all other expenses , except for salaries and commissions and depreciation and amortization . this includes all payroll taxes , health insurance , traveling expenses , public company expenses , advertising , management information system expenses , facility rent and all distribution expenses such as packaging , reels , and repair and maintenance of equipment and facilities . depreciation and amortization . we incur depreciation expense on costs related to capitalized property and equipment on a straight-line basis over the estimated useful lives of the assets , which range from three to thirty years . we incur amortization expense on leasehold improvements over the shorter of the lease term or the life of the related asset and on intangible assets over the estimated life of the asset . interest expense interest expense consists primarily of interest we incur on our debt . 17 story_separator_special_tag normal ; text-indent : 0.25in ; margin : 0in 0in 0pt ; clear : both '' > operating expenses as a percentage of sales increased to 14.8 % in 2012 from 14.0 % in 2011. more than half of this increase resulted from the onetime reversal during 2011 relating to $ 1.7 million of salary expense recognized prior to january 1 , 2011 attributed to the change in the estimated forfeiture rate from 0 % to 100 % for non-vested options previously awarded to our former chief executive officer . interest expense interest expense decreased 12.1 % to $ 1.3 million in 2012 from $ 1.4 million in 2011 due to lower libor interest rates and a higher percentage of the debt in libor borrowings . average debt was $ 58.0 million in 2012 compared to $ 58.5 million in 2011. the average effective interest rate decreased to 2.1 % in 2012 from 2.3 % in 2011. this decrease was primarily due to a lower applicable libor spread as a result of the higher availability under the loan agreement in 2012. income tax expense income tax expense decreased $ 1.6 million or 13.4 % to $ 10.6 million in 2012 compared to $ 12.3 million in 2011 , as pretax income decreased by 13.4 % year over year . the effective income tax rate remained the same for both periods at 38.4 % . net income our net income in 2012 was $ 17.0 million compared to $ 19.7 million in 2011 , a decrease of 13.4 % . 20 impact of inflation and commodity prices our results of operations are affected by changes in the inflation rate and commodity prices . moreover , because copper , petrochemical , aluminum and steel products are components of the wire and cable and related hardware we sell , fluctuations in the costs of these and other commodities have historically affected our operating results . we estimate decreasing metal prices negatively impacted sales by approximately 3 % in 2013. to the extent commodity prices decline , the net realizable value of our existing inventory could also decline , and our gross profit can be adversely affected because of either reduced selling prices or lower of cost or market adjustments in the carrying value of our inventory .
| other operating expenses increased 3.7 % to $ 26.1 million in 2013 from $ 25.1 million in 2012. this increase is primarily related to higher operations expenses related to additional facilities and higher inventory . additional headcount also contributed to the increase . depreciation and amortization . depreciation and amortization increased slightly between the periods . impairment of goodwill . the company recorded a non-cash goodwill impairment charge in 2013 with respect to its sw reporting unit . ( see note 3 ) operating expenses as a percentage of sales increased to 17.6 % in 2013 from 14.8 % in 2012. this increase primarily relates to the impairment of goodwill , as well as higher operations cost and personnel costs . interest expense interest expense decreased 20.8 % to $ 1.0 million in 2013 from $ 1.3 million in 2012 due to lower average interest rates , lower average debt and a higher percentage of the debt in london interbank offered rate ( “ libor ” ) borrowings . average debt was $ 47.8 million in 2013 compared to $ 58.0 million in 2012. the average effective interest rate decreased to 1.9 % in 2013 from 2.1 % in 2012. this decrease was primarily due to a lower applicable libor spread as a result of the higher availability under the loan agreement in 2013. income tax expense income tax expense decreased 22.8 % to $ 8.2 million in 2013 compared to $ 10.6 million in 2012. this percentage decrease was lower than the percentage decrease in operating income due to the non-deductible portion of the goodwill impairment . net income our net income in 2013 was $ 7.9 million compared to $ 17.0 million in 2012 , a decrease of 53.6 % . comparison of years ended december 31 , 2012 and 2011 sales replace_table_token_8_th our sales in 2012 decreased 0.9 % to $ 393.0 million from $ 396.4 million in 2011. when adjusted for fluctuation in metals prices , revenues in 2012 were up approximately 3 % over 2011 sales . while mega projects which occurred in 2011
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-12- under its agreements with the respective lenders , the company is subject to certain financial covenants dealing with , among other things , the company 's funded indebtedness , leverage , fixed charge coverage ratio , accounts receivable and inventories . the agreements also include certain restrictions which affect the company 's ability to incur additional debt , acquire other companies , make certain investments , repurchase its own common stock , sell or place liens upon assets , provide guarantees and pay cash dividends . the company was in compliance with all of its borrowing covenants as of december 31 , 2003 and for the year then ended . the bank credit facilities are collateralized by substantially all of the company 's assets and contain certain cross-default provisions in conjunction with the senior notes . the company had working capital of $ 137.4 million at december 31 , 2003 and its current ratio was 1.50. during 2003 , total cash generated by operating activities totaled $ 37.7 million . the company 's strong annual cash flow , solid financial position and sizable credit facilities allowed it to make the acquisitions of merchant 's , incorporated on april 1 , 2003 and ntw incorporated on november 29 , 2003 ( see note 3 to the consolidated financial statements ) . the company was also able to fund capital expenditures totaling $ 21.0 million in 2003. capital expenditures , including those during 2003 and 2002 , have historically been primarily for equipment and tire molds . the company had no material commitments for capital expenditures at the end of 2003. the company expects to fund 2004 day-to-day operating expenses and normally recurring capital expenditures out of operating funds and its present financial resources . the company expects its future growth to include additional strategic acquisitions such as the acquisitions during 2003 of merchant 's and ntw . significant future acquisitions could require additional capital resources and would involve new or amended credit facilities . see forward-looking statements and risks below , which identifies certain risks associated with the company 's acquisition strategy , as well as many of the other factors which influence the company 's operating results , its future growth potential and the industry in which it operates . off-balance sheet arrangements financial guarantees - as discussed in note 11 to the consolidated financial statements , the company 's big o tires , inc. subsidiary has provided certain financial guarantees associated with real estate leases and financing of its franchisees . although the guarantees were issued in the normal course of business to meet the financing needs of its franchisees , they represent credit risk in excess of the amounts reported on the balance sheet as of december 31 , 2003. the contractual amounts of the guarantees , which represent the company 's maximum exposure to credit loss in the event of non-performance by the franchisees , totaled $ 3,874,000 as of december 31 , 2003. the credit risk associated with these guarantees is essentially the same as that involved in extending loans to the franchisees . big o evaluates each franchisee 's creditworthiness and requires that sufficient collateral and security interests be obtained by the third party lenders or lessors , before the guarantees are issued . there are no cash requirements associated with the guarantees , except in the event that an actual financial loss is subsequently incurred due to non-performance by the franchisees . variable interest entities - as discussed in note 13 to the consolidated financial statements , in january 2003 and december 2003 , the fasb issued interpretation no . 46 , consolidation of variable interest entities ( fin 46 ) , and its revision , fin 46-r , respectively . fin 46 and fin 46-r provide guidance on the consolidation of entities whose equity holders have either not provided sufficient equity at risk to allow the entity to finance its own activities or do not possess certain characteristics of a controlling financial interest . fin 46 and fin 46-r require the consolidation of these entities , known as variable interest entities ( vie 's ) , by the primary beneficiary of the entity and also require certain disclosures by primary beneficiaries and other significant variable interest holders . the primary beneficiary is the entity , if any , that is subject to a majority of the risk of loss from the vie 's activities , entitled to receive a majority of the vie 's residual returns , or both . the guidance of fin 46 was immediately applicable for vie 's created after january 31 , 2003. in applying such guidance for purposes of determining whether an entity is a vie , the company has reviewed arrangements created after that date in which it has : 1 ) an economic interest in an entity or obligations to that entity ; 2 ) issued guarantees related to the liabilities of an entity ; 3 ) transferred assets to an entity ; 4 ) managed the assets of an entity ; or 5 ) leased assets from an entity or provided that entity with financing . for any vie 's created prior to february 1 , 2003 , the company will perform such analysis for the quarter ending march 31 , 2004. as of december 31 , 2003 , the company has determined that it holds interests in certain vie 's created after january 31 , 2003 in connection with the franchise business activities conducted at its big o tires , inc. subsidiary . story_separator_special_tag however , there were no material expected losses that the company would have been required to absorb nor were there any significant residual returns that the company expected to receive from such entities as of december 31 , 2003 , and therefore no vie 's are included in the consolidated financial statements of the company as of december 31 , 2003 and for the year then ended . -13- contractual obligations in addition to the debt obligations discussed in the liquidity and capital resources section , the company has operating and capital lease commitments as set forth in note 6 to the consolidated financial statements . the table below summarizes the company 's known material contractual obligations as of december 31 , 2003 ( in thousands ) . replace_table_token_2_th critical accounting policies the preparation of financial statements in conformity with accounting principles generally accepted in the united states requires management to make estimates and assumptions that affect the reported amounts of assets , liabilities , revenues and expenses , as well as certain financial statement disclosures . actual results could differ from those estimates . significant accounting policies employed by the company , including the use of estimates and assumptions , are presented in the notes to consolidated financial statements . management bases its estimates on its historical experience , together with other relevant factors , in order to form the basis for making judgements , which will affect the carrying values of assets and liabilities . on an ongoing basis , management evaluates its estimates and makes revisions as deemed necessary . the following areas are considered to be of critical importance : net sales - net sales include revenues from sales of products and services , plus franchise and royalty fees charged to big o franchisees , less estimated returns , allowances and customer rebates . sales are recognized at the time products are shipped or services are rendered and the estimated costs of returns , allowances and rebates are accrued at the same time . historically , management 's estimates for the costs of returns , allowances and rebates have not been materially different than the actual costs later incurred . each big o franchisee is required to pay an initial franchise fee as well as monthly royalty fees of 2 % of gross sales . initial franchise fees are deferred and recognized when all material services or conditions relating to the sale or transfer of the franchise have been substantially completed . allowance for doubtful accounts and notes - the company maintains an allowance for doubtful accounts and notes for estimated losses resulting from the inability of its customers to make required payments . the allowance is based on review of the overall condition of receivable balances and review of significant past due accounts . the company evaluated its allowance for doubtful account at december 31 , 2003 and determined that such amount was adequate but not excessive , based on facts and conditions known at that time . if the financial condition of the company 's customers were to deteriorate in such a way as to impair their ability to make payments , additional allowances may be required . inventories - inventories , consisting of tires and other automotive products held for resale , are valued at the lower of cost or market . certain inventories are valued using the last in-first out method ; however , the amount by which the current costs of those inventories exceeded the lifo value did not change significantly from december 31 , 2002 to december 31 , 2003 and thus the reported results would not have been materially different under a different inventory costing method . -14- goodwill , trademarks and other intangible assets - goodwill represents the excess of cost over the fair value of identifiable net assets acquired . under the provisions of sfas no . 142 , goodwill and other indefinite-lived intangible assets ceased the amortization of goodwill effective january 1 , 2002 , with charges being recorded only if impairment is found to exist . at least annually , the company compares the carrying values of its reporting units to their fair value , with a reporting unit being defined as an operating segment or one level below a segment if discrete financial information is prepared and reviewed regularly by management . if the carrying value of a reporting unit exceeds its fair value , an impairment loss is required to be recognized . no impairment to the recorded value of company 's indefinite-lived assets was found to exist as a result of the required testing . warranty costs - the costs of anticipated adjustments for workmanship and materials that are the responsibility of the company are estimated based on historical experience and charged against earnings currently . management reviews these estimates on a regular basis and adjusts the warranty provisions as actual experience differs from historical estimates or other information becomes available . during 2003 , accruals for warranty expenses were adjusted to reflect changes in purchasing arrangements with certain suppliers that caused the company 's responsibility for warranty costs to be lessened . reserves for future warranty claims and service are included in liabilities in the balance sheets . retirement plan obligations - the values of certain assets and liabilities associated with the company 's retirement plan obligations are determined on an actuarial basis and include estimates and assumptions such as the expected return on plan assets and discount rates . discount rates are determined based on rates of high quality , fixed income investments . actual changes in the fair market value of plan assets , differences between the actual return and the expected return on plan assets and changes in the discount rate affect the amount of the pension expense recognized . impact of recently issued accounting standards see recent accounting pronouncements in note 1 to the consolidated financial statements for a complete discussion of the impact of recently issued
| an increased number of franchised and company-operated stores was the primary reason for the growth in retail tire volume and service revenues compared to the year-earlier level . at the end of december 2003 , the company had 40 more franchised stores and 369 more company-operated stores than at december 31 , 2002 , with the acquisitions of merchant 's in april 2003 and ntw in november 2003 adding 112 and 225 company-operated stores , respectively , to the retail segment . the acquired merchant 's stores contributed $ 126.0 million to 2003 retail sales during the nine months following the acquisition . for the one month following the ntw acquisition , the acquired ntw stores contributed net sales of $ 44.9 million . the $ 13.3 million decrease in net sales by the wholesale segment was primarily due to a 4.5 % decline in unit tire shipments that exceeded the impact of a 3.4 % increase in the average wholesale tire sales price . the percentage of total sales attributable to tires declined from 85 % in 2002 to 79 % in 2003 , due to the impact of increased service revenues at company-operated retail stores . total unit tire volume in 2003 increased 4.5 % compared to the 2002 level . in comparison , unit tire shipments for the replacement tire industry as a whole increased approximately 1.7 % during 2003 ( based on preliminary data ) . average tire sales prices for the company as a whole increased 6.4 % compared to a year earlier , due largely to favorable mix changes . gross profit as a percentage of net sales increased from 27.2 % in 2002 to 32.9 % in 2003. the improved overall gross profit percentage was largely due to the increased contribution from the retail segment and from the increased level of service revenues within the retail segment . in addition , the company 's growth over the past several years has resulted in greater purchasing leverage and an improvement in net purchase costs from tire suppliers . gross profit percentages on sales by the company 's retail segment
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we sell our products to property owners and contractors through a network of manufacturers ' representatives and our internal sales force . the demand for our products is influenced by national and regional economic and demographic factors . the commercial and industrial new construction market is subject to cyclical fluctuations in that it is generally tied to housing starts , but has a lag factor of six to 18 months . housing starts , in turn , are affected by such factors as interest rates , the state of the economy , population growth and the relative age of the population . when new construction is down , we emphasize the replacement market . the new construction market in 2015 continued to be unpredictable and uneven . thus , throughout the year , we emphasized promotion of the benefits of aaon equipment to property owners in the replacement market . the principal components of cost of goods sold are labor , raw materials , component costs , factory overhead , freight out and engineering expense . the principal high volume raw materials used in our manufacturing processes are steel , copper and aluminum and are obtained from domestic suppliers . we also purchase from domestic manufacturers certain components , including compressors , motors and electrical controls . the price levels of our raw materials have remained relatively consistent the past few years , but the market continues to be volatile and unpredictable as a result of the uncertainty related to the u.s. economy and global economy . for the year ended december 31 , 2015 , the prices for copper , galvanized steel and stainless steel decreased approximately 13.0 % , 10.6 % and 13.9 % , respectively , from a year ago , while the price for aluminum increased 1.8 % from a year ago . for the year ended december 31 , 2014 , the price for copper decreased approximately 5.1 % , while the prices for galvanized steel , stainless steel , and aluminum increased 2.2 % , 3.4 % and 8.6 % , respectively , from 2013 . in 2011 , we began using an all aluminum microchannel condenser coil on our small rooftop unit product line , and in 2013 , we began using this condenser coil in our new large rooftop product line as well . the condenser coil is the outdoor coil of a conventional air conditioning system . we expect to be using this type of condenser coil throughout the complete rooftop unit product line . this will reduce our copper tube usage in this component of the product , however , copper will remain a high volume raw material because of its use throughout the equipment . we attempt to limit the impact of price fluctuations on these materials by entering into cancellable and non-cancellable fixed price contracts with our major suppliers for periods of six to 18 months . we expect to receive delivery of raw materials from our fixed price contracts for use in our manufacturing operations . the following are highlights of our results of operations , cash flows , and financial condition : we spent $ 21.0 million in capital expenditures in 2015 , an increase of $ 4.9 million from the $ 16.1 million spent in 2014 , to increase our production capacity and efficiency . we paid cash dividends of $ 11.9 million in 2015 compared to $ 9.7 million in 2014 . we reinstated open market repurchases of our stock , repurchasing slightly more than 1.0 million shares for nearly $ 25.0 million from the open market in the last two months of 2015 . 13 story_separator_special_tag million . we repurchased shares of stock from the open market , from employees ' 401 ( k ) savings investment plan , option exercises of our directors and officers and vested restricted stock from employees , directors and officers in the amount of $ 37.1 million for 1.6 million shares , $ 29.3 million for 1.5 million shares and $ 8.2 million for 0.6 million shares in 2015 , 2014 and 2013 , respectively . we repurchased the shares at current market prices . for the years ended december 31 , 2015 , 2014 and 2013 we paid cash dividends of $ 11.9 million , $ 9.7 million and $ 7.4 million , respectively . based on historical performance and current expectations , we believe our cash and cash equivalents balance , the projected cash flows generated from our operations , our existing committed revolving credit facility ( or comparable financing ) and our expected ability to access capital markets will satisfy our working capital needs , capital expenditures and other liquidity requirements associated with our operations in 2016 and the foreseeable future . 17 statement of cash flows the table below reflects a summary of our net cash flows provided by operating activities , net cash flows used in investing activities , and net cash flows used in financing activities for the years indicated . replace_table_token_16_th cash flows from operating activities cash flows from operating activities have remained relatively consistent in 2015 with 2014 and 2013. cash flows from investing activities capital expenditures increased in 2015 as compared to 2014 and were primarily related to investments in additional manufacturing and production equipment to support our growth and improve efficiencies . the capital expenditure program for 2016 is estimated to be approximately $ 32.7 million . the increase in capital expenditures is primarily due to construction projects related to our new research and development lab . many of these projects are subject to review and cancellation at the discretion of our ceo and board of directors without incurring substantial charges . story_separator_special_tag cash flows from financing activities we continued to increase our buyback activity in 2015 compared to prior years , resulting in approximately $ 25.0 million in open market repurchases of our stock in 2015 . 18 off-balance sheet arrangements we are not party to any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition , changes in financial condition , revenues , expenses , results of operations , liquidity , capital expenditures or capital resources . commitments and contractual agreements we had no material contractual purchase agreements as of december 31 , 2015 . contingencies we are subject to various claims and legal actions that arise in the ordinary course of business . we closely monitor these claims and legal actions and frequently consult with our legal counsel to determine whether they may , when resolved , have a material adverse effect on our financial position , results of operations or cash flows and we accrue and or disclose loss contingencies as appropriate . we have concluded that the likelihood is remote that the ultimate resolution of any pending litigation or claims will be material or have a material adverse effect on the company 's business , financial position , results of operations or cash flows . critical accounting estimates the preparation of financial statements in conformity with accounting principles generally accepted in the united states of america ( “ us gaap ” ) requires management to make estimates and assumptions about future events , and apply judgments that affect the reported amounts of assets , liabilities , revenue and expenses in our consolidated financial statements and related notes . we base our estimates , assumptions and judgments on historical experience , current trends and other factors believed to be relevant at the time our consolidated financial statements are prepared . however , because future events and their effects can not be determined with certainty , actual results could differ from our estimates and assumptions , and such differences could be material . we believe the following critical accounting policies affect our more significant estimates , assumptions and judgments used in the preparation of our consolidated financial statements . inventory reserves – we establish a reserve for inventories based on the change in inventory requirements due to product line changes , the feasibility of using obsolete parts for upgraded part substitutions , the required parts needed for part supply sales , replacement parts and for estimated shrinkage . warranty – a provision is made for estimated warranty costs at the time the product is shipped and revenue is recognized . the warranty period is : the earlier of one year from the date of first use or 18 months from date of shipment for parts only ; an additional four years on compressors ( if applicable ) ; 15 years on aluminized steel gas-fired heat exchangers ( if applicable ) ; 25 years on stainless steel heat exchangers ( if applicable ) ; and 10 years on gas-fired heat exchangers in rl products ( if applicable ) . with the introduction of the rq product line in 2010 , our warranty policy for the rq series was implemented to cover parts for two years from date of unit shipment and labor for one year from date of unit shipment . warranty expense is estimated based on the warranty period , historical warranty trends and associated costs , and any known identifiable warranty issue . due to the absence of warranty history on new products , an additional provision may be made for such products . our estimated future warranty cost is subject to adjustment from time to time depending on changes in actual warranty trends and cost experience . should actual claim rates differ from our estimates , revisions to the estimated product warranty liability would be required . stock compensation – we measure and recognize compensation expense for all share-based payment awards made to our employees and directors , including stock options and restricted stock awards , based on their fair values at the time of grant . compensation expense , net of estimated forfeitures , is recognized on a straight-line basis during the service period of the related share-based compensation award . forfeitures are estimated based on the company 's historical experience . the fair value of each option award and restricted stock award is estimated on the date of grant using the black-scholes-merton option pricing model . the use of the black-scholes-merton option valuation model requires the input of subjective assumptions such as : the expected volatility , the expected term of the options granted , expected dividend yield , and the risk-free rate . 19 new accounting pronouncements changes to u.s. gaap are established by the financial accounting standards board ( `` fasb '' ) in the form of accounting standards updates ( `` asus '' ) to the fasb 's accounting standards codification . we consider the applicability and impact of all asus . asus not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial statements and notes thereto . in may 2014 , the fasb issued asu 2014-09 , revenue from contracts with customers , which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers . the asu will replace most existing revenue recognition guidance in u.s. gaap when it becomes effective . in august 2015 , with the issuance of asu 2015-14 , the fasb amended the effective date for us to january 1 , 2018. the standard permits the use of either the retrospective or cumulative effect transition method . we do not expect asu 2014-09 will have a material effect on our consolidated financial statements and notes thereto . in november 2015 , the fasb issued asu 2015-17 ,
| the principal high volume raw materials used in our manufacturing processes are steel , copper and aluminum , which are obtained from domestic suppliers . the improvement in gross profit is primarily due to efficiencies gained from our investment in equipment . twelve month average raw material cost per pound as of december 31 : replace_table_token_13_th selling , general and administrative expenses replace_table_token_14_th the increase in sg & a is primarily due to an additional $ 4.0 million in charitable donations , higher profit sharing expense as a result of higher operating income before income taxes and increased compensation costs in 2014. these increases were offset by a decrease in warranty expense as a result of improvement in quality control . 16 income taxes replace_table_token_15_th the income tax provision for 2013 reflected benefits related to the r & d credit and the indian employment credit of approximately $ 0.9 million for tax years 2013 and 2012. these federal credits were retroactively reinstated on january 2 , 2013 , with the enactment of the american taxpayer relief act of 2012 ( `` atra '' ) . liquidity and capital resources our working capital and capital expenditure requirements are generally met through net cash provided by operations and the occasional use of the revolving bank line of credit based on our current liquidity at the time . our cash and cash equivalents decreased $ 14.0 million from december 31 , 2014 to december 31 , 2015 . as of december 31 , 2015 , we had $ 7.9 million in cash and cash equivalents . as of december 31 , 2015 , we had certificates of deposit of $ 12.0 million and investments held to maturity at amortized cost of $ 17.5 million . these certificates of deposit had maturity dates of less than one month to approximately 15 months . the investments held to maturity at amortized cost had maturity dates of less than one month to approximately 15 months . on
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note : the above ratings reflect only the view , at the time the ratings are issued or affirmed , of the applicable rating agency , from whom an explanation of the significance of such ratings may be obtained . such ratings are not recommendations to buy , sell or hold any securities ; such ratings may be subject to revision or withdrawal at any time by the rating agencies ; and each rating should be evaluated independently of any other rating . issuances of common stock through the hawaiian electric industries , inc. dividend reinvestment and stock purchase plan ( drip ) , hawaiian electric industries retirement savings plan ( heirsp ) and the asb 401 ( k ) plan provided new capital of $ 30 million ( approximately 1 million shares ) in 2016. from january 1 , 2016 through january 5 , 2016 , and from december 7 , 2016 to date , hei satisfied the share purchase requirements of the drip , heirsp and asb 401 ( k ) plan through open market 35 purchases of its common stock rather than new issuances . also , from june 2 , 2016 through august 9 , 2016 , hei satisfied the share purchase requirements of the heirsp and asb 401 ( k ) plan through open market purchases of its common stock . operating activities provided net cash of $ 499 million in 2018 , $ 420 million in 2017 and $ 496 million in 2016 . investing activities used net cash of $ 792 million in 2018 , $ 815 million in 2017 and $ 736 million in 2016 . in 2018 , net cash used in investing activities was primarily due to capital expenditures , purchases of available-for-sale investment securities , net increase in loans held for investment , purchases of held-to-maturity investment securities , purchase of stock from federal home loan bank and contributions to low-income housing investments , partly offset by receipt of repayments from available-for-sale investment securities , contributions in aid of construction , proceeds from the sale of commercial loans , redemption of stock from federal home loan bank and repayments from held-to-maturity investment securities . in 2017 , net cash used in investing activities was primarily due to a hawaiian electric 's consolidated capital expenditures ( net of contributions in aid of construction ) , hamakua energy 's acquisition of a power plant and asb 's purchases of investment securities , partly offset by the repayments of investment securities , proceeds from sale of commercial loans and a net decrease in loans held for investment . financing activities provided net cash of $ 200 million in 2018 , $ 378 million in 2017 and $ 219 million in 2016 . in 2018 , net cash provided by financing activities included proceeds from issuance of long-term debt , net increases in deposits and retail repurchase agreements , partly offset by payment of common and preferred stock dividends , long-term debt maturities and net decreases in short-term debt and other bank borrowings . in 2017 , net cash provided by financing activities included net increases in deposits and long-term debt and net increases in short-term borrowings and asb 's retail repurchase agreements , partly offset by a net decrease in asb 's other borrowings and payment of common and preferred stock dividends . other than capital contributions from their parent company , intercompany services ( and related intercompany payables and receivables ) , hawaiian electric 's periodic short-term borrowings from hei ( and related interest ) and the payment of dividends to hei , the electric utility and bank segments are largely autonomous in their operating , investing and financing activities . ( see the electric utility and bank segments ' discussions of their cash flows in their respective “ financial condition-liquidity and capital resources ” sections below . ) during 2018 , hawaiian electric , asb ( through asb hawaii ) and pacific current paid cash dividends to hei of $ 103 million , $ 50 million and $ 1 million , respectively . a portion of the net assets of hawaiian electric and asb is not available for transfer to hei in the form of dividends , loans or advances without regulatory approval . in the absence of an unexpected material adverse change in the financial condition of the electric utilities or asb , such restrictions are not expected to significantly affect the operations of hei , its ability to pay dividends on its common stock or its ability to meet its debt or other cash obligations . see note 13 of the consolidated financial statements . forecasted hei consolidated “ net cash used in investing activities ” ( excluding “ investing ” cash flows from asb ) for 2019 through 2021 consists primarily of the net capital expenditures of the utilities , estimated to range from $ 1.2 billion to $ 1.4 billion over the next three years . in addition to the funds required for the utilities ' construction programs and debt maturities ( see “ electric utility–liquidity and capital resources ” ) , approximately $ 50 million will be required in 2021 to repay hei 's $ 50 million private placement note maturing in march 2021 , which is expected to be repaid with the proceeds from the issuance of commercial paper , bank borrowings , other medium- or long-term debt , common stock and or dividends from subsidiaries . story_separator_special_tag additional debt and or equity financing may be utilized to invest in the utilities , bank or pacific current ; to pay down commercial paper or other short-term borrowings ; or to fund unanticipated expenditures not included in the 2019 through 2021 forecast , such as increases in the costs of or an acceleration of the construction of capital projects of the utilities or unanticipated utility capital expenditures . in addition , existing debt may be refinanced prior to maturity with additional debt or equity financing ( or both ) . 36 selected contractual obligations and commitments . information about payments under the specified contractual obligations and commercial commitments of hei and its subsidiaries was as follows : replace_table_token_17_th 1 includes contractual obligations and commitments for capital expenditures and expense amounts . the table above does not include other categories of obligations and commitments , such as deferred taxes , trade payables , amounts that will become payable in future periods under collective bargaining and other employment agreements and employee benefit plans , and potential refunds of amounts collected from ratepayers ( e.g. , under the earnings sharing mechanism ) . as of december 31 , 2018 , the fair value of the assets held in trusts to satisfy the obligations of the company 's retirement benefit plans did not exceed the retirement benefit plans ' benefit obligation . minimum funding requirements for retirement benefit plans have not been included in the tables above ; however , see note 9 of the consolidated financial statements for 2019 estimated contributions . see note 3 of the consolidated financial statements for a discussion of fuel and power purchase commitments . see note 4 of the consolidated financial statements for a further discussion of asb 's commitments . the company adopted asu no . 2016-02 on january 1 , 2019 , which had a material effect on its balance sheet as of january 1 , 2019 due to the recognition of lease liabilities and right-of-use assets . see note 1 , “ summary of significant accounting policies—recent accounting pronouncements—leases , ” of the consolidated financial statements . off-balance sheet arrangements . although the company and the utilities have off-balance sheet arrangements , management has determined that it has no off-balance sheet arrangements that either have , or are reasonably likely to have , a current or future effect on the company 's and the utilities ' financial condition , changes in financial condition , revenues or expenses , results of operations , liquidity , capital expenditures or capital resources that are material to investors , including the following types of off-balance sheet arrangements : 1. obligations under guarantee contracts , 2. retained or contingent interests in assets transferred to an unconsolidated entity or similar arrangements that serve as credit , liquidity or market risk support to that entity for such assets , 3. obligations under derivative instruments , and 4. obligations under a material variable interest held by the company or the utilities in an unconsolidated entity that provides financing , liquidity , market risk or credit risk support to the company or the utilities , or engages in leasing , hedging or research and development services with the company or the utilities . material estimates and critical accounting policies . in preparing financial statements , management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities , the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses . actual results could differ significantly from those estimates . material estimates that are particularly susceptible to significant change include the amounts reported for pension and other postretirement benefit obligations ; contingencies and litigation ; income taxes ; regulatory assets and liabilities ; electric utility unbilled revenues ; allowance for loan losses ; and fair value . management considers an accounting estimate to be material if it 37 requires assumptions to be made that were uncertain at the time the estimate was made and changes in the assumptions selected could have a material impact on the estimate and on the company 's results of operations or financial condition . in accordance with sec release no . 33-8040 , “ cautionary advice regarding disclosure about critical accounting policies , ” management has identified the accounting policies it believes to be the most critical to the company 's financial statements -- that is , management believes that the policies discussed below are both the most important to the portrayal of the company 's results of operations and financial condition , and currently require management 's most difficult , subjective or complex judgments . the policies affecting both of the company 's two principal segments are discussed below and the policies affecting just one segment are discussed in the respective segment 's section of “ material estimates and critical accounting policies. ” management has reviewed the material estimates and critical accounting policies with the hei audit committee and , as applicable , the hawaiian electric audit committee . for additional discussion of the company 's accounting policies , see note 1 of the consolidated financial statements and for additional discussion of material estimates and critical accounting policies , see the electric utility and bank segment discussions below under the same heading . pension and other postretirement benefits obligations . the company 's reported costs of providing retirement benefits are dependent upon numerous factors resulting from actual plan experience and assumptions about future experience . for example , retirement benefits costs are impacted by actual employee demographics ( including age and compensation levels ) , the level of contributions to the plans , earnings and realized and unrealized gains and losses on plan assets , and changes made to the provisions of the plans . costs may also be significantly affected by changes in key actuarial assumptions , including the expected return on plan assets , the discount rate and mortality . the company 's accounting for retirement
| hawaiian electric 's effective tax rate ( combined federal and state income tax rates ) was higher for 2017 compared to 2016 , primarily due to the impact of the 2017 adjustment to accumulated deferred income tax balances ( exclusive of accumulated deferred income tax balances related to the regulated rate base of the utilities ) for the new federal corporate tax rate of 21 % . 43 most recent rate proceedings . unless otherwise agreed or ordered , each electric utility is currently required by puc order to initiate a rate proceeding every third year ( on a staggered basis ) to allow the puc and the consumer advocate to regularly evaluate decoupling and to allow the utility to request electric rate increases to cover rising operating costs and the cost of plant and equipment , including the cost of new capital projects to maintain and improve service reliability and integrate more renewable energy . the puc may grant an interim increase within 10 to 11 months following the filing of an application , but there is no guarantee of such an interim increase and interim amounts collected are refundable , with interest , to the extent they exceed the amount approved in the puc 's final d & o . the timing and amount of any final increase is determined at the discretion of the puc . the adoption of revenue , expense , rate base and cost of capital amounts ( including the roace and rorb ) for purposes of an interim rate increase does not commit the puc to accept any such amounts in its final d & o . in 2018 , final d & os were issued by the puc for the hawaiian electric 2017 rate case and the hawaii electric light 2016 rate case . interim rates for maui electric 's 2018 rate case were effective on august 23 , 2018 , with a final d & o pending . in december 2018 , hawaii electric light filed its 2019 rate case . replace_table_token_22_th note : the “ request ” date reflects the application filing
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factors that might cause such a difference include , but are not limited to , those discussed in “ item 1a risk factors. ” story_separator_special_tag information technology costs for marketing and selling projects . research and development ( “ r & d ” ) expenses for 2012 were $ 0.8 million compared to $ 0.6 million for 2011. r & d expenses represented 3.3 % and 2.5 % of revenue for 2012 and 2011 , respectively . the additional expenses related to the new enzyme immunoassay ( eia ) screening process . interest income decreased approximately $ 3,000 to approximately $ 2,000 for the year ended december 31 , 2012 compared to $ 5,000 for the year ended december 31 , 2011. interest income in both periods represented interest and dividends earned on cash equivalents and short-term investments . a decrease in the yield and a decrease in investment balances in 2012 as compared to 2011 caused the decrease in interest income . during the year ended december 31 , 2012 , the company recorded a tax provision of $ 2.0 million , representing an effective tax rate of 39.7 % . during the year ended december 31 , 2011 , the company recorded a tax provision of $ 2.3 million , representing an effective tax rate of 39.9 % . liquidity and capital resources at december 31 , 2013 , the company had $ 4.0 million of cash and cash equivalents , compared to $ 3.1 million at december 31 , 2012. the company 's operating activities generated net cash of $ 6.0 million in 2013 , $ 3.1 million in 2012 and $ 3.9 million in 2011. investing activities used $ 1.8 million in 2013 , used $ 2.3 million in 2012 and generated $ 0.5 million in 2011. financing activities used $ 3.3 million in 2013 , $ 3.2 million in 2012 and $ 2.6 million in 2011. 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 . the increase in operating cash flow of $ 2.9 million over 2012 was primarily driven by higher net income and a reduction of income tax receivable . operating cash flow of $ 3.1 million in 2012 primarily reflected net income of $ 3.0 million adjusted for depreciation and amortization of $ 0.6 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 : an increase in accounts receivable of $ 0.1 million , a decrease in accounts payable of $ 0.3 million , a decrease in accrued expenses of $ 0.4 million , and an increase in prepaid expenses ( and other current assets ) of $ 0.5 million , operating cash flow of $ 3.9 million in 2011 primarily reflected net income of $ 3.5 million adjusted for depreciation and amortization of $ 0.4 million , stock compensation expense of $ 0.4 million , and an increase in net deferred tax liabilities of $ 0.4 million . this was affected by the following changes in assets and liabilities : an increase in accounts receivable of $ 0.6 million , an increase in accounts payable of $ 0.3 million , and an increase in prepaid expenses ( and other current assets ) of $ 0.4 million , 12 investing cash flow principally reflected the purchase and sale of short-term investments and capital expenditures . during 2013 , there was an increase of $ 0.2 million in other assets which primarily related to patent costs . during 2012 , there was an increase of $ 0.1 million in other assets which primarily related to patent costs . during 2011 , the company redeemed at par short-term investments of $ 2.0 million . also in 2011 , there was an increase of $ 0.1 million in other assets which primarily related to patent costs . capital expenditures were $ 1.5 million , $ 2.2 million , and $ 1.4 million in 2013 , 2012 and 2011 , respectively . the expenditures related principally to new equipment and new software , including laboratory and computer equipment . during 2013 and 2012 , the company did not repurchase any shares of common stock for treasury . during 2011 , the company repurchased 2,785 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 , $ 3.2 million , and $ 2.5 million of cash dividends to its shareholders in 2013 , 2012 , and 2011 respectively . at december 31 , 2013 , the company 's principal sources of liquidity included approximately $ 4.0 million of cash and cash equivalents . management currently believes that such funds , together with future operating profits , should be adequate to fund anticipated working capital requirements and capital expenditures in the near term . story_separator_special_tag 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 joint ventures , 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 . at december 31 , 2013 , the company had no long-term debt . the company has paid dividends over the past sixty-nine quarters . it most recently declared a dividend in february 2014 which will be paid in march 2014 in the amount of $ 798,053. 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 , 2013 were as follows : payments due by period contractual obligation less than 1 year 1 3 years 4 5 years greater than 5 years total ( amounts in thousands ) operating leases $ 609 $ 575 $ $ $ 1,184 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 , 2013. significant customers the company did not have any individual customers that exceeded 10 % of revenue for the years ended december 31 , 2013 , 2012 and 2011 or accounts receivable as of december 31 , 2013 , 2012 and 2011. 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 . 13 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 $ 715,000 , $ 794,000 and $ 387,000 during the years ended december 31 , 2013 , 2012 and 2011 , respectively . the software development is for primarily for two 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
| gross profit increased $ 1.1 million to $ 15.4 million in 2013 compared to $ 14.3 million in 2012. direct costs increased by 5 % from 2012 to 2013 , driven by the higher volume . the gross profit margin remained the same at 57 % in 2013 and 2012. general and administrative ( “ g & a ” ) expenses were $ 4.2 million in 2013 compared to $ 3.9 in 2012 , an increase of 5 % . as a percentage of revenue , g & a expenses were 15.5 % and 15.6 % for 2013 and 2012 , respectively . marketing and selling expenses were $ 4.7 million in 2013 , compared to $ 4.5 million in 2012 , an increase of 4 % . total marketing and selling expenses represented 17.5 % and 18.0 % of revenue for 2013 and 2012 , respectively . research and development ( “ r & d ” ) expenses were $ 0.8 million in 2013 and 2012. r & d expenses represented 3.1 % and 3.3 % of revenue for 2013 and 2012 , respectively . other income increased approximately $ 90 thousand to approximately $ 92 thousand for 2013 compared to $ 2 thousand for 2012. the increase was from an insurance reimbursement of legal expenses . during the year ended december 31 , 2013 , the company recorded a tax provision of $ 2.0 million , representing an effective tax rate of 34.4 % . during the year ended december 31 , 2012 , the company recorded a tax provision of $ 2.0 million , representing an effective tax rate of 39.7 % . the change in tax rate was driven by a new allocation method for calculating income tax in california . this new calculation requires income tax to be paid only on the sales made within california . the old method taxed all income produced in california , and as the company has only one laboratory , which is located in california , 100 % of the income had been subject to california income tax . the rate also benefited from an r & d tax credit from 2012 which was recognized in 2013. we expect the tax rate to be approximately
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while it is difficult to estimate the duration and impact of covid-19 on the larger clinical sites and regional cancer care sites , as of the date of this report , we have not experienced and do not foresee material delays to the enrollment of patients or timelines for the luxeptinib phase 1a/b b-cell malignancy trial due to the variety of clinical sites that we have actively recruited for this trial . apto-253 , which is administered intravenously , requires the need for hospital / clinical site resources to assist and monitor patients during each infusion and based on the current conditions caused by covid-19 , future enrollment of patients on this trial is likely to be negatively impacted . 35 program updates luxeptinib ( cg-806 ) indication and clinical trials : luxeptinib is being developed with the intent to deliver the agent as an oral therapeutic for the treatment of r/r aml and for the treatment of a spectrum of b cell malignancies ( including but not limited to cll , sll and nhl ) . on march 25 , 2019 , we announced that the fda granted aptose ind allowance to initiate its phase 1a/b clinical trial for luxeptinib . the clinical trial is a multicenter , open label , dose-escalation study with additional optional expansion cohorts to assess the safety , tolerability , pharmacokinetics and pharmacodynamic effects , and prelimnary efficacy of luxeptinib in patients with cll , sll or nhl . in this study , luxeptinib is administered in gelatin capsules twice daily ( bid during a 28-day cycle . as of the date of this report , we have initiated thirty clinical sites for the phase 1a/b trial in patients with cll/sll or nhl which include specialty regional cancer care centers as well as large hospitals and key academic institutions . as of the date of this report , we have completed the first , second , third and fourth dose levels ( 150 mg , 300 mg , 450 mg and 600 mg bid , respectively ) . cohort 5 ( 750mg ) enrollment is ongoing . under an fda-approved accelerated titration protocol , only one patient was required at each of the first two dose levels , followed by three patients at each dose level thereafter . intra-patient dose escalation is allowed if the higher dose is safe in three or more patients , and additional patients may be enrolled at dose levels previously declared safe . to date , we have reported that among enrolled patients with an array of b-cell malignancies , three classic cll patients have received luxeptinib and all three demonstrated inhibition of phospho-btk and “ on-target ” lymphocytosis and modest tumor reductions in different tumor types , indicating target engagement and pharmacologic activity of luxeptinib . as luxeptinib moves from low/intermediate dose levels and into the higher dose levels , it is hoped that an optimal dose can be selected that demonstrates formal clinical responses without excessive toxicity . we are also advancing luxeptinib into myeloid malignancies , with an initial focus on aml , in a separate phase 1a/b trial . on june 29 , 2020 , we announced that we had received allowance from the fda to proceed into a study in r/r aml with a starting dose of 450 mg bid , and subsequently on october 19 , 2020 , announced that we had initiated dosing of the first patient with aml . as of the date of this report we have initiated six clinical sites for the phase 1a/b trial and dosing continues at the 600 mg dose cohort . the clinical trial is a multicenter , open label , dose-escalation study with additional optional expansion cohorts to assess the safety , tolerability , pharmacokinetics and pharmacodynamic effects , and preliminary efficacy of luxeptinib in patients with r/r aml . in this study , luxeptinib is administered in gelatin capsules bid during a 28-day cycle . our strategy was to identify a starting dose of luxeptinib that we believe could be therapeutically active in critically ill patients with r/r aml . in our ongoing phase 1a/b study in patients with cll and other b-cell malignancies , 450 mg bid luxeptinib delivered plasma levels potently inhibited phospho-flt3 in a plasma inhibitory activity ( pia ) reporter cell assay , suggesting that the 450 mg bid dose may be active in patients with aml . aptose plans to dose escalate beyond the 450 mg bid dose level , provided the 450 mg bid dose level is safe and well tolerated in r/r aml patients . based on strong preclinical evidence of luxeptinib 's activity against aml – including demonstration of mutation-agnostic and genotype-agnostic potency , particularly compared against other flt3 inhibitors , and its ability to safely cure aml in murine leukemia models – we believe that luxeptinib may offer hope to the fragile and difficult-to-treat aml patient population . the fda has granted orphan drug designation to luxeptinib for the treatment of patients with aml . orphan drug designation is granted by the fda to encourage companies to develop therapies for the treatment of diseases that affect fewer than 200,000 individuals in the united states . orphan drug status provides research and development tax credits , an opportunity to obtain grant funding , exemption from fda application fees and other benefits . the orphan drug designation also provides us with seven additional years of marketing exclusivity in this indication . manufacturing : during fiscal years 2017 and 2018 , we created a scalable chemical synthetic route for the manufacture of luxeptinib drug substance and have scaled the manufacture of api ( active pharmaceutical ingredient , or drug substance ) to multi-kg levels , we completed the manufacture of a multi-kg batch of api under gmp conditions as our api supply for our first-in-human clinical trials , and we manufactured under gmp conditions two dosage strengths of capsules to serve as our clinical supply in those human studies . story_separator_special_tag during fiscal 2019 and 2020 , we completed successful manufacture of multiple batches of api and drug product , and planned numerous gmp production campaigns to supply the ongoing trial and planned trials into the future . to date we have been able to manufacture api and capsules to support clinical supplies under gmp conditions . we are continuing our manufacturing campaigns in the current 2021 fiscal period and continue scale-up and tech transfer activities to support additional manufacturing capacity for the ongoing and planned clinical trials of luxeptinib . additional research and development funds are being utilized to support exploratory formulation studies in an ongoing effort to craft a superior formulation for later stage development of luxeptinib . 36 preclinical program updates : we have completed several non-clinical studies that demonstrate the highly differentiated profile of luxeptinib . key studies that have been presented at scientific forums are as follows : · on april 15 , 2018 , at the 2018 annual meeting of the american association for cancer research ( “ aacr ” ) , we presented with the ohsu knight cancer institute preclinical data demonstrating that luxeptinib , a pan-flt3/pan-btk inhibitor , demonstrates broader activity and superior potency to other flt3 and btk inhibitors against primary bone marrow samples from patients with hematologic malignancies . we also presented preclinical data demonstrating that luxeptinib targets multiple pathways to kill diverse subtypes of aml and b-cell malignancies in vitro . · on june 15 , 2018 , at the 23rd congress of the european hematology association ( “ eha ” ) , we presented , during a poster presentation , preclinical data demonstrating a unique binding mode of luxeptinib to wild type and c481s mutant btk . further , we presented that luxeptinib suppresses the bcr , akt/pi3k , erk and nfkb signaling pathways and exerts broader and far greater potency of direct cancer cell killing that ibrutinib against malignant bone marrow cells from patients with cll , all and a host of other hematologic malignancies . · on december 3 , 2018 , we announced two separate poster presentations at the american society of hematology ( “ ash ” ) annual meeting . the ohsu knight cancer institute and aptose presented data in one poster and the team at the university of mdacc presented data in a separate poster . these presentations highlighted several key findings . first , in collaboration with the mdacc , orally administered luxeptinib demonstrated efficacy in a pdx study in which the bone marrow cells from a patient with aml having dual itd and d835 mutations in flt3 were implanted into a mouse . the dual flt3 mutant form of aml represents a very difficult-to-treat population that has shown resistance to other flt3 inhibitors , and data from the pdx model suggest that luxeptinib may be useful in treating such patients . secondly , aptose presented high level data from preclinical glp toxicology studies that demonstrate orally administered luxeptinib is a well-tolerated targeted molecule . finally , in collaboration with the ohsu knight cancer center , studies of luxeptinib on 124 samples of freshly isolated bone marrow from cll patients demonstrated both broader and greater cell killing potency for luxeptinib than ibrutinib . · on april 1 , 2019 , at the 2019 annual meeting of the aacr , aptose , along with our collaborators at ohsu knight cancer institute , presented data highlighting luxeptinib was more potent in killing aml patient-derived samples than other flt3 inhibitors including midostaurin , sorafenib , sunitinib , dovitinib , quizartinib , crenolanib and gilteritinib . luxeptinib was equally potent against cells from patients in the adverse , intermediate and favorable risk groups ( 2017 eln risk stratification ) , and cells from patients with relapsed or transformed aml ( world health organization classification ) were as sensitive as those from patients with de novo aml . the data demonstrated potency on primary aml patient samples across all aml subgroups including relapsed/refractory/transformed aml and those with genetic abnormalities related to poor prognosis . while patient samples with flt3-itd mutations were expected to have greater sensitivity to luxeptinib , the most surprising correlation was the sensitivity of patient samples with idh1 r132 mutations . the enhanced sensitivity of idh-1 mutant aml to luxeptinib warrants investigation in the clinical setting . moreover , in studies of luxeptinib on aml patient bone marrow samples , we demonstrated that mutations in p53 , asxl1 and npm1 do not hinder the potency of luxeptinib . · on june 14 , 2019 , we presented new preclinical data for luxeptinib in a poster presentation at the 24th congress of the eha in amsterdam , the netherlands . the poster , cg-806 , preclinical in vivo efficacy and safety profile as a pan-flt3 / pan-btk inhibitor , highlights the in vivo anti-leukemic efficacy of luxeptinib and its glp toxicology and toxicokinetic profile . in a preclinical mv4-11 flt3-itd aml xenograft mouse model , luxeptinib suppressed leukemia growth at all doses tested throughout the 28-day period of dosing . in the mice treated with 100 mg/kg , 5 of 11 ( 45 % ) were cured through day 120 , and in the 300 mg/kg group , 10 of 11 ( 91 % ) of the mice were cured . retreating the “ uncured ' mice in these two dose groups for an additional 28 days beginning on day 88 led to rapid and robust antitumor response in all retreated mice through day 120. in the “ re-treated ” mice , no drug resistance and no toxicities were observed . glp 28-day toxicology and tk studies mice and dogs showed no adverse luxeptinib-related effects on body weight , ophthalmic , respiratory or neurological examinations , clinical pathology ( coagulation , clinical chemistry , or urinalysis ) , organ weight or macroscopic evaluations . no luxeptinib-related cardiovascular effects were noted in the 28-day glp toxicology study or in a separate preclinical cardiovascular safety study .
| the phase 1b , multicenter , open-label , dose-escalation clinical trial of apto-253 is designed to assess the safety , tolerability , pharmacokinetics and pharmacodynamic responses and efficacy of apto-253 as a single agent and determine the recommended phase 2 dose . apto-253 is being administered once weekly , over a 28-day cycle . the dose escalation stage of the study could potentially enroll up to 20 patients with r/r aml or high-risk mds . the study is designed to then transition , as appropriate , to single-agent expansion cohorts in r/r aml and or high-risk mds . as of the date of this report , we have multiple active sites recruiting patients in the dose escalation stage of the trial . as of the date of this report , we have completed enrollment and treatment of patients on the first , second , third and fourth dose levels ( 20 , 40 , 66 , and 100 mg/m 2 , respectively ) . under an fda-approved accelerated titration protocol , only one patient was required at each of the first two dose levels , followed by three patients at each dose level thereafter . aptose is currently enrolling and treating patients in the fifth dose level ( 150 mg/m 2 ) of apto-253 . during the second quarter of 2020 , the fda allowed an amendment for aptose to initiate more aggressive dose escalations with apto-253 , provided the tolerability profile remains favorable . the first four dosing cohorts have enrolled a mix of patients with aml and mds . to date , we have observed meaningful reductions in myc expression in peripheral blood mononuclear cells ( pbmcs ) from treated patients with aml and mds , demonstrating myc target engagement and mechanistic proof of concept in different indications . manufacturing : we are continuing to manufacture additional drug substance and drug product for use in the ongoing trial . we are exploring additional drug delivery methods for apto-253 and plan to initiate additional non-clinical studies for solid tumor and hematologic cancer development . as preparing , submitting , and advancing applications for regulatory approval , developing drugs and drug product and clinical trials are sometimes complex , costly , and time-consuming processes , an estimate of the future costs is not reasonable
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the decrease was primarily driven by negative currency rate movements , which had an unfavorable 15 percentage point impact on sales for 2015 compared to 2014 , as well as decreased sales of side-by-side vehicles , snowmobiles , and global adjacent markets vehicles , partially offset by increased sales of motorcycles . the decrease in snowmobile sales was primarily due to poor economic conditions in russia . cost of sales : the following table reflects our cost of sales in dollars and as a percentage of sales : replace_table_token_8_th for 2016 , cost of sales increased one percent to $ 3,411.0 million compared to $ 3,380.2 million in 2015 . the increase in cost of sales in 2016 is primarily attributed to higher warranty costs incurred related to product recalls , partially offset by decreased production . additionally , depreciation and amortization increased due to higher capital expenditures to increase production capacity and capabilities . for 2015 , cost of sales increased seven percent to $ 3,380.2 million compared to $ 3,160.5 million in 2014 . the increase in cost of sales in 2015 resulted primarily from the effect of a three percent increase in sales volume on purchased materials and services and labor and benefits . additionally , depreciation and amortization increased due to higher capital expenditures to increase production capacity and capabilities . 25 gross profit : the following table reflects our gross profit in dollars and as a percentage of sales : replace_table_token_9_th consolidated . consolidated gross profit , as a percentage of sales , decreased in 2016 due to increased warranty and promotional costs and negative currency impacts , partially offset by lower commodity costs and product cost reduction efforts . during 2016 , we incurred additional warranty expense equating to approximately 250 basis points of negative impact to gross profit margins , related primarily to increased warranty costs associated with vehicle recalls , of which approximately 200 basis points is considered to be one-time in nature . gross profit in absolute dollars decreased due to lower sales volume , unfavorable product mix , higher promotions and higher warranty costs , partially offset by lower commodity costs and cost savings from product cost reduction efforts . foreign currencies had a negative impact to gross profit of approximately $ 43.0 million for 2016 , when compared to the prior year period . consolidated gross profit , as a percentage of sales , was 28.4 percent for 2015 , a decrease of 108 basis points from 2014 . gross profit dollars increased two percent to $ 1,339.0 million in 2015 compared to 2014 . the increase in gross profit dollars resulted from higher selling prices , lower commodity costs and product cost reduction efforts , partially offset by the negative impact of currency movements and higher promotions . foreign currencies had a negative impact to gross profit of approximately $ 70.0 million for 2015 , when compared to the prior year period . the decrease in gross profit percentage resulted primarily from unfavorable foreign currency fluctuations , new plant start-up costs , higher promotional expenses and higher depreciation and amortization , partially offset by lower commodity costs , product cost reduction and higher selling prices . orv/snowmobiles . gross profit , as a percentage of sales , decreased from 2015 to 2016 , primarily due to decreased volumes , higher warranty costs and higher promotions , partially offset by product cost reduction efforts . included in warranty expense are costs related to recall activity , primarily for certain rzr vehicles . gross profit , as a percentage of sales , was approximately flat from 2014 to 2015 , primarily due to the negative impact of currency movements , decreased volumes and higher promotions , offset by product cost reduction efforts . motorcycles . gross profit , as a percentage of sales , decreased from 2015 to 2016 , primarily due to higher warranty costs associated with slingshot , partially offset by increased sales volumes of indian and victory motorcycles , and the absence of costs incurred in 2015 related to additional manufacturing costs and inefficiencies associated with our spirit lake , iowa motorcycle facility paint system . gross profit , as a percentage of sales , increased from 2014 to 2015 , primarily due to increased sales volumes of indian and slingshot , partially offset by additional manufacturing costs and inefficiencies associated with our efforts to scale-up production and add capacity to the paint system at our spirit lake , iowa motorcycle facility . global adjacent markets . gross profit , as a percentage of sales , increased from 2015 to 2016 , primarily due to the acquisition of taylor-dunn and increased sales volumes of aixam vehicles . gross profit , as a percentage of sales , decreased from 2014 to 2015 , primarily due to the negative impact of currency movements . other . gross profit was $ 19.8 million for 2016 due to the acquisition of tap in november 2016 , which includes approximately $ 9.0 million related to a purchase accounting inventory step-up adjustment . 26 operating expenses : the following table reflects our operating expenses in dollars and as a percentage of sales : replace_table_token_10_th operating expenses for 2016 , as a percentage of sales and in absolute dollars , increased primarily due to higher general and administrative expenses due to increased legal expenses and other costs related to product recalls . operating expenses also increased due to acquisitions and acquisition-related expenses , including approximately $ 13.0 million of acquisition-related expenses for the tap acquisition , as well as increased research and development expenses for ongoing product refinement and innovation . operating expenses for 2015 , as a percentage of sales decreased 20 basis points compared to 2014 . operating expenses in absolute dollars increased in 2015 primarily due to higher research and development expenses , as well as increased general and administrative expenses , which includes infrastructure investments being made to support global growth initiatives . story_separator_special_tag operating expenses as a percent of sales declined primarily due to operating cost control measures and a reduction in incentive compensation plan expenses . foreign currencies had a favorable impact to operating expenses of approximately $ 15.0 million for 2015 , when compared to the prior year period . income from financial services : the following table reflects our income from financial services : replace_table_token_11_th income from financial services increased 13 percent to $ 78.5 million in 2016 compared to $ 69.3 million in 2015 . the increase in 2016 is primarily due to a 10 percent increase in retail credit contract volume and increased profitability generated from the retail credit portfolios with performance finance , sheffield financial and synchrony bank and higher income from the sale of extended service contracts . income from financial services increased 12 percent to $ 69.3 million in 2015 compared to $ 61.7 million in 2014 . the increase in 2015 is primarily due to a 15 percent increase in retail credit contract volume and increased profitability generated from the retail credit portfolios with sheffield financial , synchrony bank , capital one , chrome capital and freedomroad , and slightly higher income from dealer inventory financing through polaris acceptance , due primarily to a 14 percent increase in financed receivables as of december 31 , 2015 . 27 remainder of the income statement : replace_table_token_12_th interest expense . the increase in 2016 compared to 2015 is primarily due to increased debt levels through borrowings on our term loan facility and revolving credit facility , primarily to finance acquisitions . the increase in 2015 compared to 2014 is primarily due to increased debt levels through borrowings on our existing revolving credit facility . equity in loss of other affiliates . increased losses at eicher-polaris private limited ( eppl ) related to continued operating activities related to the production of the jointly-developed multix personal vehicle , which is specifically designed to satisfy the varied transportation needs of consumers in india . during 2015 , eppl began production of the multix vehicle . we have recorded our proportionate 50 percent share of eppl losses . other expense , net . the change primarily relates to foreign currency exchange rate movements and the corresponding effects on foreign currency transactions , currency hedging positions and balance sheet positions related to our foreign subsidiaries from period to period . provision for income taxes . the income tax rate for 2016 was 32.0 % as compared with 33.6 % and 35.1 % in 2015 and 2014 , respectively . the lower income tax rate for 2016 , compared with 2015 was primarily due to the decrease in 2016 pretax income , as the beneficial impact of discrete items increases with lower pretax earnings . the lower income tax rate for 2015 as compared to 2014 was primarily due to tax benefits recorded related to research and development credits from the filing of our 2014 federal income tax return and other amended returns . the favorable impact , net of related tax reserves in 2015 , totaled approximately $ 10.0 million . for 2016 , 2015 and 2014 , the income tax provision was positively impacted by the united states congress extending and permanently enacting the research and development income tax credit . weighted average shares outstanding . the change in the weighted average diluted shares outstanding from 2015 to 2016 and from 2014 to 2015 is primarily due to share repurchases under our stock repurchase program . critical accounting policies the significant accounting policies that management believes are the most critical to aid in fully understanding and evaluating our reported financial results include the following : revenue recognition , sales promotions and incentives , dealer holdback programs , share-based employee compensation , product warranties and product liability . revenue recognition . revenues are recognized at the time of shipment to the dealer , distributor or other customers . historically , product returns , whether in the normal course of business or resulting from repurchases made under the floorplan financing program , have not been material . however , we have agreed to repurchase products repossessed by the finance companies up to certain limits . our financial exposure is limited to the difference between the amount paid to the finance companies and the amount received on the resale of the repossessed product . no material losses have been incurred under these agreements . we have not historically recorded any significant sales return allowances because we have not been required to repurchase a significant number of units . however , an adverse change in retail sales could cause this situation to change . polaris sponsors certain sales incentive programs and accrues liabilities for estimated sales 28 promotion expenses and estimated holdback amounts that are recognized as reductions to sales when products are sold to the dealer or distributor customer . sales promotions and incentives . we provide for estimated sales promotion and incentive expenses , which are recognized as a reduction to sales at the time of sale to the dealer or distributor . examples of sales promotion and incentive programs include dealer and consumer rebates , volume incentives , retail financing programs and sales associate incentives . sales promotion and incentive expenses are estimated based on current programs and historical rates for each product line . we record these amounts as a liability in the consolidated balance sheet until they are ultimately paid . at december 31 , 2016 and 2015 , accrued sales promotions and incentives were $ 158.6 million and $ 141.1 million , respectively , resulting primarily from an increased competitive environment in 2016 . actual results may differ from these estimates if market conditions dictate the need to enhance or reduce sales promotion and incentive programs or if the customer usage rate varies from historical trends .
| 22 our sales by reporting segment , which includes the respective pg & a , were as follows : replace_table_token_6_th orv/snowmobiles off-road vehicles orv sales , inclusive of pg & a sales , of $ 3,015.3 million in 2016 , which include core atv , ranger and rzr side-by-side vehicles , decreased nine percent from 2015 . this decrease reflects internal challenges such as delayed model year 2017 shipments , as well as external challenges such as currency pressures , heightened competitive product offerings , market share declines and slower retail sales , including in oil and gas producing regions of north america . polaris ' north american orv unit retail sales to consumers decreased mid-single digits percent for 2016 compared to 2015 , with atv unit retail sales decreasing high-single digits percent and side-by-side vehicles unit retail sales decreasing mid-single digits percent over the prior year . north american dealer inventories of orvs decreased 11 percent from 2015 . orv sales outside of north america decreased approximately three percent in 2016 compared to 2015 . for 2016 , the average orv per unit sales price decreased approximately four percent compared to 2015 's per unit sales price . orv sales , inclusive of pg & a sales , of $ 3,304.4 million in 2015 , which include core atv , ranger and rzr side-by-side vehicles , decreased one percent from 2014 . this decrease reflects external challenges such as currency pressures , heightened competitive product offerings and slower retail sales , particularly in oil and gas producing regions of north america . despite the external challenges , we continued north american market share gains for both atvs and side-by-side vehicles driven by strong consumer enthusiasm for our orv offerings , including an expanded line-up of innovative new models . polaris ' north american orv unit retail sales to consumers increased low-single digits percent for 2015 compared to 2014 , with both atv and side-by-side vehicles unit retail sales growing low-single digits percent over the prior year . north american
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we offer our services as an integrated solution , which enables our clients to outsource their complete ecommerce needs to a single source and to focus on their core competencies , though clients are also able to select individual or groupings of our various service offerings on an à la carte basis . we currently provide services to clients that operate in a range of vertical markets , including technology manufacturing , computer products , cosmetics , fragile goods , coins and collectibles , apparel , telecommunications , consumer electronics and consumer packaged goods , among others . in the service fee model , we typically charge for our services on time and material basis , a cost-plus basis , a percent of shipped revenue basis , a time and materials , project or retainer basis for our professional services or a per transaction basis , such as a per labor hour basis for web-enabled customer contact center services and a per-item basis for fulfillment services . additional fees are billed for other services . we price our services based on a variety of factors , including the depth and complexity of the services provided , the amount of capital expenditures or systems customization required , the length of contract and other factors . many of our service fee contracts involve third-party vendors who provide additional services , such as package delivery . the costs we are charged by these third-party vendors for these services are often passed on to our clients . our billings for reimbursements of these costs and other ‘ out-of-pocket ' expenses include travel , shipping and handling costs and telecommunication charges and are included in pass-through revenue . 25 agent ( flash ) model . in our pfs operations business unit , as an additional servi ce , we offer the agent , or flash , financial model , in which our clients maintain ownership of the product inventory stored at our locations as in the service fee model . when a customer orders the product from our clients , a “ flash ” sale transaction passes product ownership to us for each order and we in turn immediately re-sell the product to the customer . the “ flash ” ownership exchange establishes us as the merchant of record , which enables us to use our existing merchant infrastructure to process sales to end customers , removing the need for the clients to establish these business processes internally , but permitting them to control the sales process to end customers . in this model , based on the terms of our current client arrangements , we record product r evenue net of cost of product revenue as a component of service fee revenue in our consolidated statement of operations . retail model . our pfs operations business unit also provides a retail model which allows us to purchase inventory from the client . we place the initial and replenishment purchase orders with the client and take ownership of the product either upon shipment to or delivery to our facility . in this model , depending on the terms of our client arrangements , we may own the inventory and the accounts receivable arising from our product sales . under the retail model , depending upon the product category and sales characteristics , we may require the client to provide product price protection as well as product purchase payment terms , right of return , and obsolescence protection appropriate to the product sales profile . depending on the terms of our client arrangements in the retail model , we record in our consolidated statement of operations either : 1 ) product revenue as a component of product revenue , or 2 ) product revenue net of cost of product revenue as a component of service fee revenue . in general , we seek to structure client relationships in our retail model under the net revenue approach to more closely align with our service fee revenue financial presentation and mitigate inventory ownership risk , although we have one client still operating under the gross revenue approach . freight costs billed to customers are reflected as components of product revenue . this business model generally requires significant working capital , for which we have credit available either through credit terms provided by our clients or under senior credit facilities . currently , we are targeting growth within our retail model to be through relationships with clients under which we can record service fee revenue in our consolidated statement of operations . these relationships are often driven by the sales and marketing efforts of the manufacturers and third party sales partners . in addition , as a result of certain operational restructuring of its business , our primary client relationship operating in the retail model , ricoh , has implemented , and will continue to implement , certain changes in the sale and distribution of ricoh products . the changes have resulted , and are expected to continue to result , in reduced product revenues and profitability under our retail model . growth is a key element to achieving our future goals , including achieving and maintaining sustainable profitability . growth in our company is driven by two main elements : new client relationships and organic growth from existing clients . within our livearea professional services segment , we focus our sales efforts on engaging with brands , retailers and manufacturers to perform discrete projects such as website design , platform selection and platform implementation and system integration projects . we also focus our livearea sales efforts on engaging with brands , retailers and manufacturers to provide ongoing services such as digital marketing retainers and technology managed services engagements . within our pfs operations segment , we focus our sales efforts on larger contracts with brand-name companies within four primary target markets , health and beauty , home goods and collectibles , fashion , and consumer packaged goods . consumer packaged goods require a longer duration to close but also have the potential to be higher quality and longer duration engagements . story_separator_special_tag within both segments , we focus our sales efforts on both new clients and also on existing clients where we believe opportunity exists to expand a client relationship to include additional services within the segment , across segments and or across multiple geographies . we continue to monitor and control our costs to focus on profitability . while we are targeting our new service fee contracts to yield incremental gross profit , we also expect to incur incremental investments in technology development , operational and support management and sales and marketing expenses to help generate growth . our expenses comprise primarily four categories : 1 ) cost of service fee revenue , 2 ) cost of product revenue , 3 ) cost of pass-through revenue and 4 ) selling , general and administrative expenses . cost of service fee revenue – consists primarily of compensation and related expenses for our web-enabled customer contact center services , international fulfillment and distribution services and professional , digital agency and technology services , and other fixed and variable expenses directly related to providing services under the terms of fee based contracts , including certain occupancy and information technology costs and depreciation and amortization expenses . cost of product revenue – consists of the purchase price of product sold and freight costs , which are reduced by certain reimbursable expenses . these reimbursable expenses include pass-through customer marketing programs , direct costs incurred in passing on any price decreases offered by vendors to cover price protection and certain special bids , the cost of products provided to replace defective product returned by customers and certain other expenses as defined under the distributor agreements . cost of pass-through revenue – the related reimbursable costs for pass-through expenditures are reflected as cost of pass-through revenue . selling , general and administrative expenses – consist of expenses such as compensation and related expenses for sales and marketing staff , distribution costs ( excluding freight ) applicable to the agent and the retail model , executive , management and administrative personnel and other overhead costs , including certain occupancy and information technology costs , and depreciation and amortization expenses and acquisition related , restructuring and other costs . 26 monitoring and controlling our available cash balances and our expenses continues to be a primary focus . our cash and liquidity positions are important components of our financing of bo th current operations and our targeted growth . story_separator_special_tag cuts and jobs ac t , commonly referred to as the tax reform act . the tax reform act included significant changes to the u.s. income tax system , including , but not limited to : a federal corporate rate reduction from 35 % to 21 % ; limitations on the deductibility of interest ex pense and executive compensation ; repeal of the alternative minimum tax ( “ amt ” ) ; full expensing provisions related to business assets ; creation of new minimum taxes , such as the base erosion anti-abuse tax ( “ beat ” ) and global intangible low taxed income ( “ gilti ” ) tax ; and the transition of u.s. international taxation from a worldwide tax system to a modified te rritorial tax system , which result ed in a one-time u.s. tax liability on those earnings which have not previously been repatriated to the u .s . ( the “ transition tax ” ) . the impacts of this legislation are outlined below : beginning january 1 , 2018 , the u.s. corporate income tax rate is 21 % . the company is required to recognize the impacts of this rate change on its deferred tax assets and liabilities in the period enacted . at december 31 , 2017 , we remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future , which is generally 21 % . the amount related to the remeasurement of our deferred tax balance was $ 12.1 million that was mostly offset by a change in the valuation allowance , except for a $ 0.6 million benefit that was recorded to our statement of operations related to tax amortization of goodwill for the period ended december 31 , 2017. the transition tax on unrepatriated foreign earnings is a tax on previously untaxed accumulated and current earnings and profits ( `` e & p '' ) of the company 's foreign subsidiaries . to determine the amount of the transition tax , the company must determine , among other factors , the amount of post-1986 e & p of its foreign subsidiaries , as well as the amount of non-u.s. income taxes paid on such earnings . based on the company 's analysis of the transition tax , there were no provisional amounts recorded for the year ended december 31 , 2017. the company concluded the transition tax analysis in the fourth quarter of 2018 and concluded no measurement period adjustments were required . the tax reform act creates a new requirement that global intangible low tax income ( “ gilti ” ) earned by foreign subsidiaries must be included currently in the gross income of the u.s. shareholder . due to the complexity of the new gilti tax rules , the company is continuing to evaluate this provision of the tax reform act . under u.s. gaap , the company is permitted to make an accounting policy election to either treat taxes due on future inclusions in u.s. taxable income related to gilti as a current period expense when incurred or to factor such amounts into the company 's measurement of its deferred taxes .
| direct operating expenses increased by $ 4.9 million for the twelve months ended december 31 , 2018 compared to the corresponding period in 2017. the increase was primarily due to higher personnel and facility related costs . livearea professional services ( in thousands , except percentages ) replace_table_token_3_th livearea professional services revenues for the twelve months ended december 31 , 2018 decreased by $ 5.6 million compared with the corresponding period in 2017. the decreases in revenues are primarily due to reduced technology services project activity for certain clients , as well as client terminations . livearea professional services gross margin increased slightly to 48.3 % from 48.2 % for the twelve months ended december 31 , 2018 compared with the corresponding period in 2017. direct operating expenses decreased by $ 4.2 million for the twelve months ended december 31 , 2018 compared to the corresponding period in 2017. the decreases were primarily due to lower personnel costs attributable to our cost reduction efforts in response to lower revenues as well as reduced amortization of intangible assets of $ 1.8 million . excluding the decrease in amortization of intangible assets , direct contribution decreased by $ 0.2 million . corporate ( in thousands , except percentages ) year ended december 31 , 2018 2017 change change , % unallocated corporate expenses $ 34,424 $ 36,331 $ ( 1,907 ) ( 5 ) % unallocated corporate expenses decreased by $ 1.9 million for the twelve months ended december 31 , 2018 compared to the corresponding period in 2017. the decrease was primarily due to a $ 2.1 million decrease in earnout expense related to our final performance-based contingent payment applicable to our 2015 acquisition of crossview , inc. as well as reduced severance costs of $ 0.8 million , partially offset by an increase in stock-based compensation expenses of $ 0.7 million . excluding these expenses , unallocated corporate expenses increased by $ 0.3 million . income taxes during the twelve months ended december 31 , 2018 , we recorded a tax provision comprised primarily of $ 1.7 million related to the majority of our international operations , $ 0.6 million related to state income taxes , and
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during 2015 , we completed acquisitions of 66 medical office facilities located in 22 states for an aggregate purchase price of approximately $ 818.6 million . acquisitions are detailed in note 3 to our consolidated and combined financial statements included in item 8 to this report . in 2015 , we funded 5 mezzanine loan investments totaling approximately $ 21.4 million . additionally , we provided 3 advances on 1 construction loan totaling approximately $ 1.0 million . we have grown our portfolio of gross real estate investments from approximately $ 124 million at the time of our ipo in july 2013 to approximately $ 1.7 billion as of december 31 , 2015 . as of february 22 , 2016 , we have 108,596,965 common shares outstanding . on january 21 , 2015 , we completed a follow-on public offering of 18,975,000 common shares of beneficial interest , including 2,475,000 common shares issued upon exercise of the underwriters ' overallotment option , resulting in net proceeds to us of approximately $ 297.3 million . we contributed the net proceeds of this offering to our operating partnership in exchange for 18,975,000 op units , and our operating partnership used the net proceeds of the public offering to repay borrowings under our unsecured revolving credit facility and for general corporate and working capital purposes and funding acquisitions . on july 22 , 2015 , the operating partnership , as borrower , and we and certain subsidiaries and other affiliates of our company , as guarantors , entered into an amendment to the existing credit agreement with keybank national association as administrative agent , keybanc capital markets inc. , regions capital markets and bmo capital markets , as joint lead arrangers and joint bookrunners , regions capital markets and bmo capital markets , as co-syndication agents , and the lenders party thereto ( as amended , the “ credit agreement ” ) which increased the maximum principal amount available under an unsecured revolving credit facility from $ 400 million to $ 750 million . the credit agreement includes a swingline loan commitment for up to 10 % of the maximum principal amount and provides an accordion feature allowing us to increase borrowing capacity by up to an additional $ 350 million , subject to customary terms and conditions , resulting in a maximum borrowing capacity of $ 1.1 billion . the credit agreement has a maturity date of september 18 , 2019 and includes a one year extension option . borrowings under the credit agreement bear interest on the outstanding principal amount at an adjusted libor rate , which is based on the trust 's investment grade rating under the credit agreement . as of december 31 , 2015 , the trust had an investment grade rating from moody 's of baa3 and as such , borrowings under the credit agreement accrued interest on the outstanding principal at a rate of libor plus 1.20 % . the credit agreement includes a facility fee equal to 0.25 % per annum , which is also determined by the trust 's investment grade rating . the credit agreement contains financial covenants that , among other things , require compliance with leverage and coverage ratios and maintenance of minimum tangible net worth , as well as covenants that may limit our and the operating partnership 's ability to incur additional debt or make distributions . we may , at any time , voluntarily prepay any loan under the credit agreement in whole or in part without premium or penalty . as of december 31 , 2015 , we were in compliance with all financial covenants . 41 the credit agreement includes customary representations and warranties by the operating partnership , us and each other guarantor and imposes customary covenants on the operating partnership , us and each other guarantor . the credit agreement also contains customary events of default , and if an event of default occurs and continues , the operating partnership is subject to certain actions by the administrative agent , including without limitation , the acceleration of repayment of all amounts outstanding under the credit agreement . the credit agreement provides for revolving credit loans to the operating partnership . base rate loans , adjusted libor rate loans , and letters of credit ( each , as defined in the credit agreement ) will be subject to interest rates , based upon our investment grade rating as follows : replace_table_token_10_th on october 19 , 2015 , we completed a follow-on public offering of 15,812,500 common shares of beneficial interest , including 2,062,500 common shares issued upon exercise of the underwriters ' overallotment option , resulting in net proceeds to us of approximately $ 226.8 million . we contributed the net proceeds of this offering to our operating partnership in exchange for 15,812,500 op units , and our operating partnership used the net proceeds of the public offering to repay borrowings under our unsecured revolving credit facility and for general corporate and working capital purposes and funding acquisitions . we did not conduct business operations prior to completion of our ipo on july 24 , 2013 , therefore , the financial information herein for periods prior to july 24 , 2013 reflects the operations of the four healthcare real estate funds managed by ziegler , which we refer to as the ziegler funds or the predecessor , from whom we acquired the equity interests in the 19 properties that constituted our initial properties upon completion of our ipo and formation transactions . we determined the ziegler funds to be our accounting predecessor . the financial information herein since july 24 , 2013 reflect our operations since completion of the ipo and formation transactions . we are a maryland real estate investment trust and elected to be taxed as a reit for u.s. federal income tax purposes beginning with our short taxable year ended december 31 , 2013. we conduct our business through an upreit structure in which our properties are owned by our operating partnership directly or through limited partnerships , limited liability companies or other subsidiaries . story_separator_special_tag we are the sole general partner of our operating partnership and , as of february 22 , 2016 , own approximately 96.7 % of the op units . recent developments on january 4 , 2016 , our board of trustees authorized and we declared a cash distribution of $ 0.225 per common share and common op unit for the quarterly period ended december 31 , 2015 . the distribution was paid on january 29 , 2016 to common shareholders and op unit holders of record as of the close of business on january 15 , 2016 . january 2016 notes offering on january 7 , 2016 , our operating partnership issued and sold $ 150 million aggregate principal amount of senior notes , comprised of ( i ) $ 15,000,000 aggregate principal amount of 4.03 % senior notes , series a , due january 7 , 2023 ( the “ series a notes ” ) , ( ii ) $ 45,000,000 aggregate principal amount of 4.43 % senior notes , series b , due january 7 , 2026 ( the “ series b notes ” ) , ( iii ) $ 45,000,000 aggregate principal amount of 4.57 % senior notes , series c , due january 7 , 2028 ( the “ series c notes ” ) and ( iv ) $ 45,000,000 aggregate principal amount of 4.74 % senior notes , series d , due january 7 , 2031 ( the “ series d notes , ” and together with the series a notes , the series b notes and the series c notes , the “ notes ” ) . the proceeds of the notes were used to repay borrowings under our unsecured revolving credit facility and for general corporate and working capital purposes and funding acquisitions . 42 january 2016 follow-on equity offering on january 25 , 2016 , we completed a follow-on public offering of 21,275,000 common shares of beneficial interest , including 2,775,000 common shares issued upon exercise of the underwriters ' overallotment option , resulting in net proceeds to us of approximately $ 320.9 million . we contributed the net proceeds of this offering to our operating partnership in exchange for 21,275,000 op units , and our operating partnership used the net proceeds of the public offering to repay borrowings under our secured revolving credit facility and for general corporate and working capital purposes and funding acquisitions . 2016 property acquisitions since january 1 , 2016 , we have completed 8 acquisitions of 7 healthcare properties and 1 condominium for an aggregate purchase price of $ 105.1 million containing an aggregate of 326,326 net leasable square feet . additionally , we issued 1 mezzanine loan for $ 0.5 million . acquisitions subsequent to january 1 , 2016 are summarized below . replace_table_token_11_th we expect to acquire between $ 750 million and $ 1 billion of real estate during 2016 , including the approximately $ 106 million of acquisitions described above . components of our revenues , expenses and cash flow the financial information of our predecessor , the ziegler funds , prior to completion of the ipo , reflects a different structure than our operations following the inception of operations upon completion of our ipo and as a result , the results of operations of the predecessor and our results since our inception of operations may not be comparable . while the financial presentation of revenues pursuant to the leases at the properties in our initial portfolio and certain expenses , such as depreciation and amortization , are substantially consistent for the predecessor and for us , the expense structure of our company since completion of the ipo and the formation transactions differs from the historical expense structure of the predecessor . during the periods of financial information for the predecessor , the ziegler funds had no direct employees and paid a fixed annual management fee to ziegler , which managed the operations of the ziegler funds . by contrast , as a self-managed reit , we do not pay management fees to third parties ( other than to third party property management companies with respect to certain of our properties ) but rather we pay cash and other forms of compensation to our officers and employees . in addition , as a public reporting company , we have incurred and expect to continue to incur certain expenses , such as legal and accounting expenses relating to sec reporting and other matters that were not incurred historically by the predecessor , which was not a public reporting company . revenues revenues consist primarily of the rental revenues and property operating expense recoveries we collect from tenants pursuant to our leases . additionally , we recognize certain cash and non-cash revenues . these cash and non-cash revenues are highlighted below . rental revenues . rental revenues represent rent under existing leases that is paid by our tenants , straight-lining of contractual rents and below-market lease amortization reduced by lease inducements and above-market lease amortization . 43 expense recoveries . certain of our leases require our tenants to make estimated payments to us to cover their proportional share of operating expenses , including but not limited to real estate taxes , property insurance , routine maintenance and repairs , utilities , and property management expenses . we collect these estimated expenses and are reimbursed by our tenants for any actual expenses in excess of our estimates or reimburse tenants if our collected estimates exceed our actual operating expenses . the net reimbursed operating expenses are included in revenues as expense recoveries . we have certain tenants with absolute net leases . under these lease agreements , the tenant is responsible for operating and building expenses . for absolute net leases , we do not recognize operating expense or expense recoveries . interest income on real estate loans and other . represents interest income on mezzanine loans , term loans , change in fair value of derivative liabilities , and third party property management income .
| interest income on real estate loans and other increased $ 2.8 million , or 264.0 % , for the year ended december 31 , 2015 as compared to the year ended december 31 , 2014 . the increase primarily resulted from $ 1.5 million of additional interest earned on the company 's loan investments and $ 0.8 million of amortized tenant improvement income during the year ended december 31 , 2015 . 46 expenses total expenses increased by $ 59.1 million , or 102.0 % , for the year ended december 31 , 2015 as compared to the year ended december 31 , 2014 . an analysis of selected expenses follows . interest expense . interest expense for the year ended december 31 , 2015 was $ 10.6 million compared to $ 6.9 million for the year ended december 31 , 2014 , representing an increase of $ 3.7 million , or 54.0 % . the $ 3.7 million increase was the result of a $ 0.9 million increase in interest on new mortgage debt and $ 3.0 million increase resulting from outstanding balances , non-use fees and amortization of deferred financing costs on our revolving line of credit , partially offset by a $ 0.2 million decrease in interest on mortgage debt due to pay-downs of existing debt . general and administrative . general and administrative expenses increase d $ 3.5 million or 30.3 % , from $ 11.4 million during the year ended december 31 , 2014 to $ 14.9 million during the year ended december 31 , 2015 . the increase was primarily the result of additional salaries and benefits expenses totaling $ 3.5 million ( including non-cash share compensation of $ 1.1 million ) . other increases in administrative costs were offset by the absence of a one-time charge related to the $ 1.8 million shared services amendment which occurred during 2014. operating expenses . operating expenses increase d $ 20.9 million or 205.6 % , from $ 10.2 million during the year ended december 31 , 2014
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seek to optimize our existing assets and pursue third-party volumes . we intend to enhance the profitability of our existing and future assets by increasing throughput volumes from pbf energy , attracting third-party volumes , improving operating efficiencies and managing costs . maintain safe , reliable and efficient operations . we are committed to maintaining and improving the safety , reliability , environmental compliance and efficiency of our operations . we seek to improve operating performance through our commitment to our preventive maintenance program and to employee training and development programs . we will continue to emphasize safety in all aspects of our operations . 61 how we evaluate our operations our management uses a variety of financial and operating metrics to analyze our segment performance . these metrics are significant factors in assessing our operating results and profitability and include but are not limited to volumes , including terminal and storage volumes ; operating and maintenance expenses ; and ebitda and distributable cash flow . we define ebitda and distributable cash flow below . volumes . the amount of revenue we generate primarily depends on the volumes of crude oil that is throughputted at our terminaling operations and operable shell capacity at our storage facility . the throughput volumes are primarily affected by the supply of and demand for crude oil and refined products in the markets served directly or indirectly by our assets . shell capacity is mainly impacted by scheduled and unplanned maintenance at our toledo storage facility . although pbf energy has committed to minimum volumes under certain commercial agreements described above , our results of operations will be impacted by : pbf energy 's utilization of our assets in excess of its minimum volume commitments ; our ability to identify and execute accretive acquisitions and organic expansion projects , and capture pbf energy 's incremental volumes or third-party volumes ; and our ability to increase throughput volumes at our facilities and provide additional ancillary services at those terminals . operating and maintenance expenses . our management seeks to maximize the profitability of our operations by effectively managing operating and maintenance expenses . these expenses are comprised primarily of labor expenses , outside contractor expenses , utility costs , insurance premiums , repairs and maintenance expenses and related property taxes . these expenses generally remain relatively stable across broad ranges of throughput volumes and shell capacity but can fluctuate from period to period depending on the mix of activities performed during that period and the timing of these expenses . we will continue to manage our maintenance expenditures on our terminals and tank farm by scheduling maintenance overtime to avoid significant variability in our maintenance expenditures and to minimize their impact on our cash flow . ebitda and distributable cash flow . we define ebitda as net income ( loss ) before net interest expense , income tax expense , depreciation and amortization expense . we define distributable cash flow as ebitda plus non-cash unit-based compensation expense , less net cash paid for interest , maintenance capital expenditures and income taxes , to analyze our performance . distributable cash flow does not reflect changes in working capital balances . distributable cash flow and ebitda are not presentations made in accordance with gaap . ebitda and distributable cash flow are not measures prescribed by gaap ( “ non-gaap ” ) but are supplemental financial measures that management and external users of our consolidated financial statements , such as industry analysts , investors , lenders and rating agencies , may use to assess : our operating performance as compared to other publicly traded partnerships in the midstream energy industry , without regard to historical cost basis or , in the case of ebitda , financing methods ; the ability of our assets to generate sufficient cash flow to make distributions to our unitholders ; our ability to incur and service debt and fund capital expenditures ; and the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities . we believe that the presentation of ebitda provides useful information to investors in assessing our financial condition and results of operations . we believe that the presentation of distributable cash flow will provide useful information to investors as it is a widely accepted financial indicator used by investors to compare partnership performance and provides investors with an enhanced perspective of the operating performance of our assets and the cash our business is generating . ebitda and distributable cash flow should not be considered alternatives to 62 net income , operating income , cash from operations or any other measure of financial performance or liquidity presented in accordance with gaap . ebitda and distributable cash flow have important limitations as analytical tools because they exclude some but not all items that affect net income and net cash provided by operating activities . additionally , because ebitda and distributable cash flow may be defined differently by other companies in our industry , our definition of ebitda may not be comparable to similarly titled measures of other companies , thereby diminishing its utility . ebitda and distributable cash flows are reconciled to net income ( loss ) in “ management 's discussion and analysis of financial condition and results of operations - results of operations. ” factors affecting the comparability of our financial results our future results of operations may not be comparable to our historical results of operations for the reasons described below : revenues . there are differences in the way our predecessor historically reported revenues for services provided to pbf energy and the way we record revenues subsequent to the closing of the offering and effective date of the acquisitions from pbf . story_separator_special_tag our assets have historically been a part of the integrated operations of pbf energy , and the operation of our assets , did not generate third-party or inter-entity revenue , with the exception of the delaware city products pipeline . prior to august 2013 , dpc generated third party revenue by charging fees for transporting refined products pursuant to an agreement with morgan stanley capital group . upon termination of this contract , only inter-entity revenue from dcr was recognized . following the closing of the offering and effective dates of the acquisitions from pbf , revenues are generated from the commercial agreements that we entered into with pbf holding under which we receive revenues for logistics services . these contracts contain minimum volume commitments and fees that are indexed for inflation . general and administrative expenses . historically , our general and administrative expenses included direct monthly charges for the management and operation of our logistics assets and certain expenses allocated by pbf energy for general corporate services , such as treasury , accounting and legal services . these expenses were allocated to us based on the nature of the expenses and our proportionate share of employee time and headcount . following the annual increase pursuant to the terms of the original omnibus agreement , as amended by the a & r omnibus agreement and the second a & r omnibus agreement , the annual fee pbf energy charges us was reduced to $ 2.2 million per year effective as of january 1 , 2015. on may 15 , 2015 , the annual fee was increased to $ 2.35 million in connection with the delaware city products pipeline and truck rack acquisition . additionally , we reimburse our general partner and its affiliates , including subsidiaries of pbf energy , for the salaries and benefits costs of employees who devote more than 50 % of their time to us , which is currently estimated to be approximately $ 2.5 million annually . we also generally expect to incur approximately $ 4.5 million of incremental annual general and administrative expense as a result of being a publicly traded partnership . for more information about such fees and services , please read “ item 1. business - agreements with pbf energy - omnibus agreement. ” financing . we have made , and intend to make , cash distributions to our unitholders at a minimum distribution rate of $ 0.30 per unit per quarter ( $ 1.20 per unit on an annualized basis ) . as a result , we expect to fund future capital expenditures primarily from the sale of u.s. treasury or other investment grade securities used as collateral to secure obligations under our term loan , external sources including borrowings under our revolving credit facility , and issuances of equity and debt securities . in connection with the closing of the offering , we entered into the revolving credit facility and the term loan . in connection with the acquisitions from pbf and additional capital spending , we amended and restated the terms of our revolving credit facility to increase the maximum availability under the facility from $ 275.0 million to $ 325.0 million . on may 12 , 2015 , the partnership and its wholly-owned subsidiary pbf logistics finance corporation , closed on the offering of $ 350.0 million aggregate principal amount of the 2023 notes . we received net proceeds from the 2023 notes offering of approximately $ 343.0 million , after deducting the initial purchasers ' discount and offering expenses . we used the net proceeds to pay $ 88.0 million of the cash consideration payable by us in the delaware city products pipeline and truck rack acquisition and to repay $ 255.0 million of the outstanding indebtedness under the revolving credit facility . we also used $ 20.1 million of cash on hand to pay down the revolving credit facility prior to the completion of 63 the delaware city products pipeline and truck rack acquisition . in addition , in connection with the delaware city products pipeline and truck rack acquisition , we reborrowed $ 24.5 million under the revolving credit facility to pay the remaining portion of the cash consideration and related transaction costs . at december 31 , 2015 , we had $ 24.5 million of borrowings and $ 2.0 million of letters of credit outstanding under the revolving credit facility , $ 234.2 million outstanding under the term loan and $ 350.0 million outstanding under the 2023 notes . other factors that will significantly affect our results supply and demand for crude oil and refined products . we generate revenue by charging fees for receiving and handling , processing , transferring and storing crude oil and refined products . all of our revenues are derived from fee-based commercial agreements with subsidiaries of pbf energy with initial terms of seven to ten years , which enhances the stability of our cash flows . the volume of crude oil and refined products that are throughputted depends substantially on pbf energy 's refining margins . refining margins are dependent mostly upon the price of crude oil or other refinery feedstocks and the price of refined products . factors driving the prices of petroleum based commodities include supply and demand for crude oil , gasoline and other refined products . supply and demand for these products depend on numerous factors outside of our control , including changes in domestic and foreign economies , weather conditions , domestic and foreign political affairs , production levels , logistics constraints , availability of imports , marketing of competitive fuels , crude oil price differentials and government regulation . please read “ item 1a . risk factors ” in this form 10-k. acquisition opportunities . we may acquire additional logistics assets from pbf energy or third parties . under the third a & r omnibus agreement , subject to certain exceptions , we have a right of first offer on
| our net income for the year ended december 31 , 2014 increased $ 32.2 million , or 223.9 % , to $ 17.8 million from a net loss of $ 14.4 million for the year ended december 31 , 2013. the increase in net loss was primarily due to the following : an increase in revenues of $ 50.9 million to $ 59.4 million attributable to the effect of the new commercial agreements with pbf energy ; partially offset by the following : ◦ an increase in operating and maintenance expenses of $ 8.8 million , or 50.6 % , mainly related to higher repairs and maintenance and contract labor expenses ; ◦ an increase in general and administrative expenses of $ 5.7 million , or 234.5 % , as a result of increased cost allocations of certain direct employee costs , additional expenses related to being a publicly traded partnership and expenses associated with pbfx unit-based compensation ; ◦ an increase in depreciation and amortization expenses of $ 1.4 million , or 45.7 % , related to new assets , including the dcr west rack and the new crude storage tank at the toledo storage facility , which were placed in service in 2014 ; ◦ an increase in interest expense , net of $ 2.3 million which was attributable to the interest costs associated with the term loan and revolving credit facility , partially offset by interest income associated with our marketable securities ; and ◦ an increase in amortization of loan fees of $ 0.4 million due to the amortization of capitalized debt issuance costs associated with the term loan and revolving credit facility . operating segments we review operating results in two reportable segments : ( i ) transportation and terminaling and ( ii ) storage . decisions concerning the allocation of resources and assessment of operating performance are made based on this segmentation . management measures the operating performance of each of its reportable segments based on the segment operating income . segment operating income is defined as net sales less operating expenses and depreciation and amortization . general and administrative expenses not
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permanently or temporarily enjoining , barring , suspending or otherwise limiting , his involvement in any type of business , securities , futures , commodities , investment , banking , savings and loan , or insurance activities , or to be associated with persons engaged in any such activity ; ● been found by a court of competent jurisdiction in a civil action or by the securities and exchange commission or the commodity futures trading commission to have violated a federal or state securities or commodities law , and the judgment has not been reversed , suspended , or vacated ; ● been the subject of , or a party to , any federal or state judicial or administrative order , judgment , decree , or finding , not subsequently reversed , suspended or vacated ( not including any settlement of a civil proceeding among private litigants ) , relating to an alleged violation of any federal or state securities or commodities law story_separator_special_tag the following discussion and analysis of the results of operations and financial condition for the fiscal years ended july 31 , 2014 and 2013 and should be read in conjunction with lightlake 's financial statements , and the notes to those financial statements that are included elsewhere in this report . story_separator_special_tag the company 's drug development program for binge eating disorder . the company has identified suitable centers in the united states . lightlake also is looking to commence phase ii trials to investigate an opioid antagonist-based treatment for bulimia nervosa at king 's college london , uk , as the company is confident that it can apply the same science to develop a solution for this condition . in working with king 's college , which has an internationally renowned eating disorder unit , the company believes that it would considerably strengthen the company 's already distinguished research and development team . at this time , lightlake can not provide investors with any assurance that the company will be able to obtain sufficient funding to meet the company 's obligations over the next twelve months . the company anticipates that additional funding will be required in the form of debt financing and or equity financing from the sale of the company 's common stock and or in the form of financing from the sale of interests in the company 's prospective products . the company does not have any arrangements in place for any future funding . the company may also seek to obtain short-term loans from the company 's officers and directors to meet the company 's short-term funding needs . the company has no material commitments for capital expenditures as of july 31 , 2014. critical accounting policies and estimates lightlake believes that the following critical policies affect the company 's more significant judgments and estimates used in preparation of the company 's consolidated financial statements . lightlake prepares its financial statements in conformity with generally accepted accounting principles in the united states of america . these principals require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period . management believes that these estimates are reasonable and have been discussed with the company 's board of directors ; however , actual results could differ from those estimates . lightlake issues restricted stock to consultants for various services and employees for compensation . cost for these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued , whichever is measurable more reliably measurable . the value of the common stock is measured at the earlier of : ( i ) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached or ( ii ) the date at which the counterparty 's performance is complete . lightlake issues options and warrants to consultants , directors , and officers as compensation for services . these options and warrants are valued using the black-scholes model , which focuses on the current stock price and the volatility of moves to predict the likelihood of future stock moves . this method of valuation is typically used to accurately price stock options and warrants based on the price of the underlying stock . long-lived assets such as property , equipment and identifiable intangibles are reviewed for impairment whenever facts and circumstances indicate that the carrying value may not be recoverable . when required impairment losses on assets to be held and used are recognized based on the fair value of the asset . the fair value is determined based on estimates of future cash flows , market value of similar assets , if available , or independent appraisals , if required . if the carrying amount of the long-lived asset is not recoverable from its undiscounted cash flows , an impairment loss is recognized for the difference between the carrying amount and fair value of the asset . when fair values are not available , the company estimates fair value using the expected future cash flows discounted at a rate commensurate with the risk associated with the recovery of the assets . the company did not recognize any impairment losses for any periods presented . 12 fair value estimates used in preparation of the consolidated financial statements are based upon certain market assumptions and pertinent information available to management . the respective carrying value of certain on-balance-sheet financial instruments approximated their fair values . these financial instruments include cash , accounts payable and due to related parties . fair values were assumed to approximate carrying values for these financial instruments since they are short-term in nature and their carrying amounts approximate fair values or they are receivable or payable on demand . the fair value of lightlake 's story_separator_special_tag permanently or temporarily enjoining , barring , suspending or otherwise limiting , his involvement in any type of business , securities , futures , commodities , investment , banking , savings and loan , or insurance activities , or to be associated with persons engaged in any such activity ; ● been found by a court of competent jurisdiction in a civil action or by the securities and exchange commission or the commodity futures trading commission to have violated a federal or state securities or commodities law , and the judgment has not been reversed , suspended , or vacated ; ● been the subject of , or a party to , any federal or state judicial or administrative order , judgment , decree , or finding , not subsequently reversed , suspended or vacated ( not including any settlement of a civil proceeding among private litigants ) , relating to an alleged violation of any federal or state securities or commodities law story_separator_special_tag the following discussion and analysis of the results of operations and financial condition for the fiscal years ended july 31 , 2014 and 2013 and should be read in conjunction with lightlake 's financial statements , and the notes to those financial statements that are included elsewhere in this report . story_separator_special_tag the company 's drug development program for binge eating disorder . the company has identified suitable centers in the united states . lightlake also is looking to commence phase ii trials to investigate an opioid antagonist-based treatment for bulimia nervosa at king 's college london , uk , as the company is confident that it can apply the same science to develop a solution for this condition . in working with king 's college , which has an internationally renowned eating disorder unit , the company believes that it would considerably strengthen the company 's already distinguished research and development team . at this time , lightlake can not provide investors with any assurance that the company will be able to obtain sufficient funding to meet the company 's obligations over the next twelve months . the company anticipates that additional funding will be required in the form of debt financing and or equity financing from the sale of the company 's common stock and or in the form of financing from the sale of interests in the company 's prospective products . the company does not have any arrangements in place for any future funding . the company may also seek to obtain short-term loans from the company 's officers and directors to meet the company 's short-term funding needs . the company has no material commitments for capital expenditures as of july 31 , 2014. critical accounting policies and estimates lightlake believes that the following critical policies affect the company 's more significant judgments and estimates used in preparation of the company 's consolidated financial statements . lightlake prepares its financial statements in conformity with generally accepted accounting principles in the united states of america . these principals require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period . management believes that these estimates are reasonable and have been discussed with the company 's board of directors ; however , actual results could differ from those estimates . lightlake issues restricted stock to consultants for various services and employees for compensation . cost for these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued , whichever is measurable more reliably measurable . the value of the common stock is measured at the earlier of : ( i ) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached or ( ii ) the date at which the counterparty 's performance is complete . lightlake issues options and warrants to consultants , directors , and officers as compensation for services . these options and warrants are valued using the black-scholes model , which focuses on the current stock price and the volatility of moves to predict the likelihood of future stock moves . this method of valuation is typically used to accurately price stock options and warrants based on the price of the underlying stock . long-lived assets such as property , equipment and identifiable intangibles are reviewed for impairment whenever facts and circumstances indicate that the carrying value may not be recoverable . when required impairment losses on assets to be held and used are recognized based on the fair value of the asset . the fair value is determined based on estimates of future cash flows , market value of similar assets , if available , or independent appraisals , if required . if the carrying amount of the long-lived asset is not recoverable from its undiscounted cash flows , an impairment loss is recognized for the difference between the carrying amount and fair value of the asset . when fair values are not available , the company estimates fair value using the expected future cash flows discounted at a rate commensurate with the risk associated with the recovery of the assets . the company did not recognize any impairment losses for any periods presented . 12 fair value estimates used in preparation of the consolidated financial statements are based upon certain market assumptions and pertinent information available to management . the respective carrying value of certain on-balance-sheet financial instruments approximated their fair values . these financial instruments include cash , accounts payable and due to related parties . fair values were assumed to approximate carrying values for these financial instruments since they are short-term in nature and their carrying amounts approximate fair values or they are receivable or payable on demand . the fair value of lightlake 's
| included in these net losses was issuance of stock based compensation to officers , directors and outside consultants for services rendered to lightlake in the amount of $ 9,003,582 in 2014 and $ 6,871,362 during the same period in 2013. lightlake has not attained profitable operations and is dependent upon obtaining financing to pursue its objectives and further certain planned initiatives . in their report on the company 's financial statements at july 31 , 2014 and july 31 , 2013 , the company 's auditors raised substantial doubt about the company 's ability to continue as a going concern . liquidity and capital resources lightlake 's cash balance at july 31 , 2014 was $ 254,770 together with $ 3,378,725 outstanding liabilities . the company 's management believes that the company 's current cash balance will not be sufficient to fund the company 's operations for the next twelve months . as a result , the company will need to seek additional funding in the near future . the company currently does not have a specific plan of how it will obtain such funding ; however , the company anticipates that additional funding will be in the form of debt financing and or equity financing from the sale of the company 's common stock and or in the form of financing from the sale of interests in the company 's prospective products . however , during the year ended july 31 , 2014 , the company received funding amounting to $ 661,470. additionally , during the year ended july 31 , 2014 , the company received a commitment for $ 3,000,000 of investment . during the year ended july 31 , 2013 , the company received investments totaling $ 750,000. at this time , lightlake can not provide investors with any assurance that it will be able to obtain sufficient funding from debt financing and or the sale of its common stock and or the sale of interests in the company 's prospective products to meet its obligations over the next twelve months . the company does not have any arrangements in place for any future financing . the company may also seek to obtain short-term loans from its officers and directors to meet its short-term funding
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litigation : on march 6 , 2015 , a complaint was filed in united states district court for the central district of california by jason feola , individually and as a representative of a putative class consisting of purchasers of the company 's common stock between march 15 , 2012 and february 11 , 2015 , against appliance recycling centers of america , inc. and certain current and former officers of the company . mr. feola , pursuant to terms of his retainer agreement with the rosen law firm , certified that he purchased 240 shares of the company 's common stock for $ 984 in total consideration story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read in conjunction with “ item 8. financial statements and supplementary data. ” certain information contained in the discussion and analysis set forth below and elsewhere in this annual report , including information with respect to our plans and strategy for our business and related financing , includes forward-looking statements that involve risk and uncertainties . in evaluating such statements , you should specifically consider the various factors identified in this annual report that could cause results to differ materially from those expressed in such forward-looking statements , including matters set forth in “ item 1a . risk factors. ” overview we operate two reportable segments : recycling and retail . our recycling segment includes all income generated from collecting , recycling and installing appliances for utilities and other customers and includes a significant portion of our byproduct revenue , which is primarily generated through the recycling of appliances . our retail segment is comprised of income generated from the sale of appliances through appliancesmart ® stores and includes a small portion of our byproduct revenues from collected appliances . our business components are uniquely positioned in the industry to work together to provide a full array of appliance-related services . appliancesmart operates eighteen company-owned stores , sells new appliances directly to consumers and provides affordable energy star ® options for energy efficiency appliance replacement programs . aap and our fifteen rpcs process appliances at end of life to remove environmentally damaging substances and produce byproducts for sale in north america . 19 revenues and earnings in our recycling segment are impacted by seasonal variances , with the second and third quarters generally having higher levels of revenues and earnings . this seasonality is due primarily to our utility customers supporting more marketing and advertising during the spring and summer months . our customers tend to promote the recycling programs more aggressively during the warmer months because they believe more people want to clean up their garages and basements during that time of the year . our recycling segment typically operates three types of programs : 1. fees charged for collecting and recycling appliances for utilities and other sponsors of energy efficiency programs . 2. fees charged for recycling and replacing old appliances with new energy star ® appliances for energy efficiency programs sponsored by utilities . 3. income generated through the processing of recyclable appliances purchased at our rpcs by selling the raw material separated during the recycling process . our retail segment is similar to many other retailers in that it is seasonal in nature . historically , the fourth quarter is our weakest quarter in terms of both revenues and earnings . we believe this is primarily because the fourth quarter includes several holidays during which consumers tend to focus less on purchasing major household appliances . we derive revenues from the sale of carbon offsets created by the destruction of ozone-depleting cfcs captured at our arca and aap regional processing centers . we expect to create carbon offsets and derive revenues in the future through california 's market , but can not predict the amount or frequency of carbon offset sales . carbon offset sales are dependent on market conditions , including demand and acceptable market prices . during the year ended december 31 , 2016 , the combination of arca and aap recognized $ 3.0 million in carbon offset revenues compared to $ 0.8 million during the year ended january 2 , 2016. we monitor specific economic factors such as retail trends , consumer confidence , manufacturing by the major appliance companies , sales of existing homes and mortgage interest rates as key indicators of industry demand , particularly in our retail segment . competition in the home appliance industry is intense in the four retail markets we serve . this includes competition not only from independent retailers , but also from such major retailers as sears , best buy , the home depot and lowe 's . we also closely monitor the metals and various other scrap markets because of the type of components recovered in our recycling process . this includes monitoring the american metal market and the regions throughout the u.s. where we have our recycling centers . reporting period . we report on a 52- or 53-week fiscal year . our 2016 fiscal year ( “ 2016 ” ) ended on december 31 , 2016 , and included 52 weeks . our 2015 fiscal year ( “ 2015 ” ) ended on january 2 , 2016 , and included 52 weeks . 20 story_separator_special_tag serif ; margin : 0pt 0 ; text-align : justify '' > as of december 31 , 2016 , we had total cash on hand of $ 968 and an additional $ 3,234 of available borrowing under the pnc bank revolver loan . story_separator_special_tag as we continue to pursue strategic transactions to expand and grow our business , we regularly monitor capital market conditions and may raise additional funds through borrowings or public or private sales of debt or equity securities . the amount , nature and timing of any borrowings or sales of debt or equity securities will depend on our operating performance and other circumstances ; our then-current commitments and obligations ; the amount , nature and timing of our capital requirements ; any limitations imposed by our current credit arrangements ; and overall market conditions . cash flows during the 52 weeks ended december 31 , 2016 , cash provided by operations was $ 2,659 , compared to cash used in operations of $ 3,409 during the 52 weeks ended january 2 , 2016. the increase in cash provided by operations of $ 6,068 as compared to the prior period ; was primarily due to a decrease in net loss of $ 2,167 , an increase in amortization of deferred financing costs $ 78 , an increase in deferred income taxes $ 515 , an increase in other $ 20 , an increase in changes in current assets and liabilities of $ 3,365 ; partially offset by a decrease in share based compensation of $ 71 and a decrease in depreciation and amortization of $ 6. an increase in cash provided by changes in current assets and liabilities of $ 3,365 was provided from a decrease in accounts receivable $ 1,596 , a decrease in inventories $ 1,062 , a decrease in income taxes receivable $ 1,546 and a decrease in other current assets of $ 101 ; partially offset by a decrease in cash provided by accounts payable and accrued expenses of $ 940. cash used in investing activities was $ 412 and $ 949 for the 52 weeks ended december 31 , 2016 and the 52 weeks ended january 2 , 2016 , respectively . the $ 537 decrease in cash used in investing activities , as compared to the prior period , is primarily attributable to a decrease in purchases of property and equipment of $ 29 , a decrease in restricted cash of $ 500 , a decrease in other investing activities $ 15 ; partially offset by a decrease in the proceeds from the sale of property and equipment $ 7. cash used by financing activities was $ 3,224 and provided by financing activities of $ 3,012 for the 52 weeks ended december 31 , 2016 and the 52 weeks ended january 2 , 2016 , respectively . the $ 6,236 decrease in cash provided/used by financing activities , as compared to the prior period , was attributable to increased payments on the line of credit $ 5,766 , increased payments on debt obligations $ 184 , decrease in new loan proceeds for debt obligations of $ 125 , increase in debt issuance costs of $ 148 ; partially offset by an increase in tax deficiency related to share-based compensation of $ 11 , and a decrease from the proceeds from issuance of common stock of $ 24 . 24 sources of liquidity we utilize cash on hand and cash generated from operations and have funds available to us under our revolving loan facility with pnc bank to cover normal and seasonal fluctuations in cash flows and to support our various growth initiatives . our cash and cash equivalents are carried at cost and consist primarily of demand deposits with commercial banks . pnc bank revolver arca may borrow funds for operations under the pnc bank revolver loan subject to availability as described in note 6. on december 31 , 2016 and january 2 , 2016 – we had $ 3,234 and $ 1,382 of additional borrowing availability on the pnc bank revolver , respectively . maximum borrowing under the pnc bank revolver is $ 15 million . a total of approximately $ 750 of letters of credit was outstanding at december 31 , 2016. the weighted average interest rate for the period of january 2 , 2016 through december 31 , 2016 was 9.00 % . we borrowed $ 96,900 and repaid $ 99,235 on the pnc bank revolver during the 52 weeks ended december 31 , 2016 ; leaving an outstanding balance on the pnc revolver of $ 10,333 and $ 12,668 at december 31 , 2016 and january 2 , 2016 , respectively . as disclosed by the company in item 2.01 of its current report on form 8-k filed on january 31 , 2017 , the company sold and leased back its compton building over an initial lease term of six months which can be terminated with a 30 day notice . the net proceeds from the sale were used to reduce the outstanding balance under our revolving credit agreement to $ 5,752. future sources of cash ; new acquisitions , products and services we may require additional debt financing and or capital to finance new acquisitions , refinance existing indebtedness or other strategic investments in our business . other sources of financing may include stock issuances and additional loans ; or other forms of financing . any financing obtained may further dilute or otherwise impair the ownership interest of our existing stockholders . off balance sheet arrangements and contractual obligations other than operating leases , we do not have any off balance sheet financing . a summary of our operating lease obligations by fiscal year is included in “ note 9. commitments and contingencies ” of the notes to consolidated financial statements included in “ item 8. financial statements and supplementary data.
| gross profit increases were partially offset by the following decreases in gross profit as compared to the prior year period . retail boxed $ 662 or 5.7 % , retail unboxed $ 1,262 or 18.3 % , extended warranties , net $ 163 or 16.7 % , replacement appliances $ 3,170 or 41.2 % . gross profit margin as a percentage of sales were flat for retail unboxed and extended warranties , net . gross profit margin as a percentage of sales were improved for retail service , parts and accessories 73.6 % vs. 51.2 % , recycling , byproducts and carbon offset 27.4 % vs. 1.0 % , replacement appliances 33.6 % vs. 31.4 % , and retail delivery -125.5 % vs. -173.7 % . gross profit margin as a percentage of sales declined for retail boxed 27.0 % vs. 28.6 % . selling , general and administrative expense selling , general and administrative expense decreased $ 342 or 1.2 % , for the 52 weeks ended december 31 , 2016 as compared to the 52 weeks ended january 2 , 2016. the decrease in selling , general and administrative expense was primarily attributable to cost saving overhead measures by aap and the reduction of retail 's advertising and occupancy expense offset by operating new arca recycling centers . operating income as a result of the factors described above , operating loss of $ 545 for the 52 weeks ended december 31 , 2016 , represented an improvement of $ 3,559 over the comparable prior 52 week period of $ 4,104 . 22 interest expense , net interest expense net increased $ 127 or 9.8 % , for the 52 weeks ended december 31 , 2016 as compared to the 52 weeks ended january 2 , 2016 primarily due to increased rates of interest paid on the pnc bank line of credit . other income and expense other income and expense increased $ 400 or 160.0 % , for the 52 weeks ended december 31 , 2016 as compared to the 52 weeks ended january 2 , 2016. the increase in other income and expense was primarily the result of
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adjusted ebitda should not be considered a substitute for results prepared in accordance with u.s. gaap and should not be considered an alternative to net income attributable to horizon global , which is the most directly comparable financial measure to adjusted ebitda that is prepared in accordance with u.s. gaap . adjusted ebitda , as determined and measured by horizon global , should also not be compared to similarly titled measures reported by other companies . the company also uses operating profit ( loss ) to measure stand-alone segment performance . adjusted ebitda is defined as net income attributable to horizon global before interest expense , income taxes , depreciation and amortization , and before certain items , as applicable , such as severance , restructuring , relocation and related business disruption costs , impairment of goodwill and other intangibles , non-cash stock compensation , certain product liability and litigation claims , acquisition and integration costs , gains ( losses ) on business divestitures and other assets , board transition support and non-cash unrealized foreign currency remeasurement costs . adjusted ebitda for our operating segments for the twelve months ended december 31 , 2020 is as follows : replace_table_token_1_th 28 adjusted ebitda for our operating segments for the twelve months ended december 31 , 2019 is as follows : replace_table_token_2_th 29 segment information as a result of the company 's sale of its apac segment in 2019 , the company 's operating segments are horizon americas and horizon europe‑africa . apac results are reported separately as a discontinued operation in our consolidated financial statements for all periods presented . see note 4 , discontinued operations , and note 18 , segment information , included in item 8 , “ financial statements and supplementary data , ” within this annual report on form 10-k , for additional information . financial information for our operating segments for the twelve months ended december 31 , 2020 and 2019 is as follows : replace_table_token_3_th 30 story_separator_special_tag roman ' , sans-serif ; font-size:10pt ; font-weight:400 ; line-height:120 % '' > see below for a discussion of operating results by segment . horizon americas net sales by sales channel , in thousands , for horizon americas are as follows : replace_table_token_4_th net sales increased $ 9.7 million , or 2.6 % , to $ 382.4 million during the twelve months ended december 31 , 2020 , as compared to $ 372.7 million during the twelve months ended december 31 , 2019 , primarily attributable to higher volumes in the aftermarket and e-commerce sales channels despite the covid-19 pandemic . the increase was also due to a $ 3.1 million reduction in sales returns and allowances in the twelve months ended december 31 , 2020 , as compared with the twelve months ended december 31 , 2019. the increase was partially offset by lower sales volumes in the automotive oem and retail sales channels , which were more negatively impacted by the covid-19 pandemic . 32 horizon americas ' gross profit increased $ 24.3 million , or 33.9 % , to $ 95.9 million , or 25.1 % of net sales , during the twelve months ended december 31 , 2020 , as compared to $ 71.6 million , or 19.2 % of net sales , during the twelve months ended december 31 , 2019. gross profit was impacted by the changes in sales detailed above , as well as the following : – $ 13.3 million lower scrap costs and inventory reserves as a result of more effective inventory management ; and – $ 8.9 million favorable manufacturing costs ; partially offset by : – $ 1.2 million higher outbound freight costs . sg & a expenses decreased $ 13.7 million to $ 67.8 million , or 17.7 % of net sales , during the twelve months ended december 31 , 2020 , as compared to $ 81.5 million , or 21.9 % of net sales , during the twelve months ended december 31 , 2019. the decrease in sg & a expenses was attributable to the following : – $ 6.5 million prior-year charge related to the abandonment of leased equipment in its kansas city location ; – $ 4.8 million lower litigation and other administrative costs ; and – $ 3.6 million lower distribution center lease , operating and support costs ; partially offset by : – $ 2.6 million higher personnel and other variable compensation costs . horizon americas ' operating profit increased $ 38.4 million to an operating profit of $ 28.0 million , or 7.3 % of net sales , during the twelve months ended december 31 , 2020 , as compared to an operating loss of $ ( 10.4 ) million , or ( 2.8 ) % of net sales , during the twelve months ended december 31 , 2019. operating margin increased primarily due to the operational results detailed above . horizon americas ' adjusted ebitda increased $ 30.0 million to $ 38.4 million during the twelve months ended december 31 , 2020 , as compared to adjusted ebitda of $ 8.4 million during the twelve months ended december 31 , 2019. adjusted ebitda increased primarily due to the operational results detailed above . horizon europe-africa net sales by sales channel , in thousands , for horizon europe‑africa are as follows : replace_table_token_5_th net sales decreased $ 38.8 million , or 12.2 % , to $ 278.9 million during the twelve months ended december 31 , 2020 , as compared to $ 317.7 million during the twelve months ended december 31 , 2019 , primarily attributable to lower volumes in the automotive oem , automotive oes and industrial sales channels , which were negatively impacted by the covid-19 pandemic in the twelve months ended december 31 , 2020. net sales of horizon europe-africa were also negatively impacted by $ 2.1 million related to the sale of its non-automotive business in the first quarter 2019. partially offsetting the decrease in sales were increased sales in the aftermarket sales channel despite the covid-19 pandemic as well as $ 5.5 million of favorable currency translation . story_separator_special_tag 33 horizon europe-africa 's gross profit increased $ 0.1 million , or 0.4 % , to $ 24.7 million , or 8.9 % of net sales , during the twelve months ended december 31 , 2020 , from $ 24.6 million , or 7.7 % of net sales , during the twelve months ended december 31 , 2019. the increase in gross profit margin reflects the changes in sales detailed above . additionally , gross profit was impacted by the following : – $ 6.5 million favorable labor costs , including the payroll reimbursement costs received in the twelve months ended december 31 , 2020 under terms of government payroll reimbursement programs , which includes the kug ( as defined in the liquidity and capital resources section below ) ; – $ 5.0 million lower scrap costs and inventory reserves as a result of more effective inventory management ; – $ 4.0 million favorable manufacturing costs ; – $ 2.5 million lower freight costs ; and – $ 0.9 million of favorable currency translation . sg & a expenses decreased $ 5.0 million to $ 33.1 million , or 11.9 % of net sales , during the twelve months ended december 31 , 2020 , as compared to $ 38.1 million , or 12.0 % of net sales , during the twelve months ended december 31 , 2019. the decrease in sg & a expenses was primarily attributable to the following : – $ 2.6 million lower personnel and variable compensation costs , including the payroll reimbursement costs received in the twelve months ended december 31 , 2020 under terms of government payroll reimbursement programs , which includes the kug ; – $ 1.3 million lower warehouse expense , litigation and other administrative costs ; – $ 0.6 million lower bad debt expense ; and – $ 0.5 million of favorable currency translation . horizon europe-africa 's operating profit improved $ 3.7 million to an operating loss of $ ( 8.4 ) million , or ( 3.0 ) % of net sales , during the twelve months ended december 31 , 2020 , as compared to an operating loss of $ ( 12.1 ) million , or ( 3.8 ) % of net sales , during the twelve months ended december 31 , 2019. operating margin improved primarily due to the operational results described above . horizon europe-africa 's adjusted ebitda increased $ 5.9 million to $ 8.7 million during the twelve months ended december 31 , 2020 , as compared to adjusted ebitda of $ 2.8 million during the twelve months ended december 31 , 2019. adjusted ebitda increased primarily due to the operational results described above . corporate expenses corporate expenses included in operating loss decreased $ 8.2 million to $ 26.5 million during the twelve months ended december 31 , 2020 , as compared to $ 34.7 million during the twelve months ended december 31 , 2019. the decrease was primarily attributable to the following : – $ 5.3 million prior-year charge related to lease abandonment and leasehold improvements for the company 's departure of its headquarters lease ; – $ 2.1 million of prior-year charges related to the separation agreement reached with our former chief executive officer and other severance costs ; – $ 3.8 million of additional costs incurred in the prior-year comparable period related to professional service fees and other costs associated with new debt issuance , amendments , and modifications and related structure changes ; and – $ 2.2 million lower discretionary and administrative support costs ; partially offset by : – $ 4.0 million higher personnel and variable compensation costs . corporate adjusted ebitda was $ ( 20.7 ) million during the twelve months ended december 31 , 2020 , which was lower by $ 1.2 million , as compared to adjusted ebitda of $ ( 19.5 ) million during the twelve months ended december 31 , 2019. adjusted ebitda declined primarily due to the higher personnel and variable compensation costs , partially offset by the lower discretionary and administrative support costs , as described above . 34 liquidity and capital resources our capital and working capital requirements are funded through a combination of cash on hand , cash flows from operations and various borrowings and factoring arrangements described below , including our asset-based revolving credit facility ( as defined below ) . as of december 31 , 2020 and 2019 , we had $ 18.2 million and $ 8.7 million , respectively , of cash and cash equivalents held at foreign subsidiaries . there may be country specific regulations which may restrict or result in increased costs in the repatriation of these funds . in march 2020 , the company , as guarantor , entered into a loan and security agreement ( the “ loan agreement ” ) with encina business credit , llc ( “ encina ” ) , as agent for the lenders party thereto , and horizon global americas inc. and cequent towing products of canada ltd. , as borrowers ( the “ abl borrowers ” ) . the loan agreement provides for an asset-based revolving credit facility ( the “ revolving credit facility ” ) in the maximum aggregate principal amount of $ 75.0 million subject to customary borrowing base limitations contained therein , and may be increased at the abl borrowers ' request in increments of $ 5.0 million , up to a maximum of five times over the life of the revolving credit facility , for a total increase of up to $ 25.0 million . as of december 31 , 2020 , the company had availability of $ 38.4 million under the revolving credit facility and $ 26.8 million of cash and cash equivalents in the united states . as of december 31 , 2020 and 2019 , total cash and availability was $ 83.4 million and $ 44.9 million , respectively . the company defines cash and availability as cash and cash equivalents and amounts of cash accessible but undrawn from credit facilities .
| the improved gross margin was primarily due to improved operating efficiencies and favorable sales mix , which more than offset the negative impacts of the covid-19 pandemic and the related declines in sales volume and impacts on operational performance . selling , general and administrative ( “ sg & a ” ) expenses decreased $ 26.8 million , primarily attributable to lower distribution center lease , operating and support costs in horizon americas , as a result of a prior-year $ 6.5 million charge related to the abandonment of leased equipment . in horizon europe‑africa , lower administrative and personnel costs were realized as a result of prior-year restructuring and business rationalization projects , and the reimbursement of certain payroll costs as part of government payroll reimbursement programs . additionally , lower corporate expenses were primarily attributable to a prior-year $ 5.3 million charge related to lease abandonment and leasehold improvements for the company 's departure of its former headquarters lease and $ 2.1 million of prior-year charges related to the separation agreement reached with our former chief executive officer and other severance costs . operating margin ( operating profit ( loss ) as a percentage of net sales ) was ( 1.0 ) % and ( 8.3 ) % during the twelve months ended december 31 , 2020 and 2019 , respectively . operating profit improved $ 50.3 million , or 87.9 % , to an operating loss of $ ( 6.9 ) million during the twelve months ended december 31 , 2020 , as compared to an operating loss of $ ( 57.2 ) million during the twelve months ended december 31 , 2019 , primarily as a result of the operational results detailed above . other expense , net decreased $ 4.9 million to $ 0.5 million during the twelve months ended december 31 , 2020 , as compared to $ 5.4 million during the twelve months ended december 31 , 2019 , primarily attributable to the $ 3.6 million loss on sale related to the company 's divestiture of its non-automotive business in horizon europe‑africa in the twelve months ended december 31 , 2019 , as well as $ 0.9 million of higher
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for additional information , refer to our current report on form 8-k filed with the sec on may 15 , 2013. on july 1 , 2013 , we entered into an employment agreement with jonathan p. foster , pursuant to which mr. foster would continue his service , on a permanent basis , as our chief financial officer effective september 1 , 2013. as previously disclosed , mr. foster has been serving as chief financial officer since march 16 , 2012 under a consulting agreement , as amended . for additional information , refer to our current report on form 8-k filed with the sec on july 8 , 2013. on july 17 , 2013 , ryan morris , a member of our board , delivered a letter to the special committee regarding a good faith indication of interest by meson capital partners lp and mr. morris to acquire the company for between $ 1.85 and $ 2.00 per share in cash ( the morris letter ) . on july 18 , 2013 , the special committee considered the morris letter and issued a written response ( the special committee response ) . the special committee believed that the management team , under the leadership of the company 's new ceo , eric steen , will meet the challenges presented by the center for medicare and medicaid services ( cms ) competitive bidding and will develop new opportunities for growth creating value for shareholders . the special committee continued to believe that the value of the company was above the proposed offer range of $ 1.85 to $ 2.00 per share . however , the special committee was prepared to agree to a reasonable period of exclusivity for due diligence and dialogue to better understand and address mr. morris ' concerns regarding future risks and to help him to potentially increase the value of his proposal . in addition , the special committee requested confirmation of mr. morris ' stated financing sources to support his proposal . for additional information , refer to our current report on form 8-k filed with the sec on july 19 , 2013. on july 31 , 2013 , the board issued an open letter to shareholders . in this letter , the board announced the following : 1 ) the special committee of the company , after long and careful deliberation and in the best interest of all shareholders , terminated the consideration of a potential sale of the company ; 2 ) following thorough discussions with the special committee through the company 's investment banking firm , houlihan lokey , 25 mr. morris and his potential financing partners did not accept the offer made by the special committee in its special committee response ; 3 ) as such , the board unanimously consented to disband the special committee ; 4 ) effective immediately , wayne yetter , while remaining an independent board member , stepped down as chairman of the board and ryan morris resumed his position as executive chairman . for additional information , refer to our current report on form 8-k filed with the sec on july 31 , 2013. on august 14 , 2013 , the board approved a series of amendments to the company 's amended and restated 2007 stock incentive plan ( the 2007 plan ) . first , the amendments provide that the board 's compensation committee will determine the exercise price of any stock options or stock appreciation rights issued under the 2007 plan , which exercise price must be at or above the current market value for the company 's common stock on the date of grant . the market value of a share is defined as the average closing price of the company 's common stock on its principal stock exchange or , as applicable , the average mean of the closing bid and asked prices quoted on the principal market system for the company 's stock for the five ( 5 ) most recent trading days prior to the date of grant . second , the 2007 plan has been amended to specify that , except in connection with a reorganization , share split , recapitalization , merger or other similar corporate event , outstanding stock options or stock appreciation rights may not be repriced nor exchanged for either cash or a substitute award under the 2007 plan with a lower , or no , exercise price without stockholder approval . third , the amendments provide that restricted stock awards granted under the 2007 plan from and after the date of such amendment will reduce the total number of shares remaining available for the company to grant under the plan at a rate of two shares per one restricted share granted , and other awards will reduce the number of shares remaining at a rate of one share to one share under the award . finally , the amendments expressly provide that each 2007 plan participant is responsible for his/her own tax obligations in respect of awards under the 2007 plan , and that the company will not reimburse the participant for any such taxes . further , the plan now specifies that no stock options or other 2007 plan awards may be issued to a participant in order to cover all or any portion of a participant 's exercise price or tax withholding obligations ( i.e. , tax gross-ups ) in respect of awards under the 2007 plan . story_separator_special_tag for additional information and for a complete copy of the 2007 plan , as amended , refer to our current report on form 8-k filed with the sec ( the 2007 plan 8-k ) on august 15 , 2013. on october 3 , 2013 , we issued a current report on form 8-k that we had received offers to provide external infusion pumps and supplies in all nine of the metropolitan statistical areas ( msas ) put out to bid by cms as part of the announced timetable for competitive bidding round 1 recompete ( rd1rc ) from august 16 , 2012. since october 3 , 2013 , we have entered into contracts with cms for these respective msas effective january 1 , 2014. the impact of the reduced contract price from the current rates in these nine msas approximates $ 250,000 annually based on current volume in those respective msas . during 2013 , we felt the impact of the sequestration order approved by the president of united states on march 1 , 2013 , which effects medicare payments , reducing revenue quarterly by less than $ 0.1 million since that date . in the absence of any bipartisan agreement in the federal government with respect to the sequestration order generally or relief from sequestration applicable to medicare payments , this reduction will continue . in addition , the recent federal government shutdown in october 2013 had no impact on our business . infusystem holdings , inc. results of operations for the year ended december 31 , 2013 compared to the year ended december 31 , 2012 revenues our revenue for the year ended december 31 , 2013 was $ 62.3 million , a 6 % increase compared to $ 58.8 million for the year ended december 31 , 2012 , primarily in rental revenues . the increase in rental revenues of $ 2.5 million or 5 % is primarily related to the addition of larger customers , increased penetration into our existing customer accounts , the increase in the colorectal cancer and other cancer patients treated with the company 's services and the continuation of the revision by a major group of third party 26 payors in their claims processing guidelines . additionally , in 2013 , the company has added more payor plans under contract , the vast majority of which will continue to positively impact revenue . also during this year , we felt the impact of the sequestration from march 2013 , with a reduction of revenue by less than $ 0.1 million per quarter since that date . product sales increased by $ 0.9 million , or 18 % , due to the sales of inactive rental fleet and past opportunistic pump purchases . gross profit gross profit for the year ended december 31 , 2013 was $ 43.7 million , an increase of 2 % compared to $ 42.9 million in the prior year . it represented 70 % of revenues in the current year compared to 73 % in the prior year . the decrease in the gross margin as a percentage of revenue in 2013 was primarily related to an increase of document printing costs of $ 0.5 million , higher mix of sales versus rentals and lower margin on direct payor rentals . provision for doubtful accounts provision for doubtful accounts for the year ended december 31 , 2013 was $ 6.5 million , compared to $ 5.3 million for the year ended december 31 , 2012. it represented 10 % of 2013 revenues and 9 % of 2012 revenues . this increase is related to a higher percent of accounts receivable coming from patients versus third party payors . amortization of intangible assets amortization of intangible assets for the year ended december 31 , 2013 was $ 2.6 million , which was consistent with the prior year amount of $ 2.7 million . selling and marketing expenses for the year ended december 31 , 2013 , our selling and marketing expenses were $ 9.7 million compared to $ 9.9 million for the year ended december 31 , 2012. the decrease in selling and marketing expenses for the twelve month period was mainly attributed to lower travel , entertainment and salaries and commissions . as compared to the prior year , these expenses decreased slightly from 17 % to 16 % of revenue . selling and marketing expenses during these periods consisted of sales salaries , commissions and associated fringe benefit and payroll-related items , marketing , share-based compensation , travel and entertainment and other miscellaneous expenses . 27 story_separator_special_tag revolving loan availability of $ 5.9 million and no amounts outstanding . the credit facility is collateralized by substantially all of the company 's assets and requires the company to comply with covenants , including but not limited to , financial covenants relating to the satisfaction , on a quarterly and annual basis for the duration of the credit facility , of a total leverage ratio , a fixed charge coverage ratio and an annual limit on capital expenditures , including capital leases . as of december 31 , 2013 , the company was in compliance with all such covenants and expects to be in compliance for the next 12 months . 29 the following is a description of these covenants . a ) the fixed charge coverage ratio is calculated in accordance with the agreement governing the credit facility . this covenant is first required to be reported as of march 31 , 2013 and has a minimum ratio at that time of 1.25:1. the required ratio varies quarterly for the remainder of the facility duration , from 1.25:1 to 2.00:1. b ) the leverage ratio is calculated in accordance with the agreement governing the credit facility .
| other income and expenses during the year ended december 31 , 2013 , we recorded interest expense of $ 3.5 million , compared to $ 3.3 million for the year ended december 31 , 2012. although interest rates under the debt in place in 2013 are higher than those last year , the increase is partially offset by the fact there are no longer ticking fees equal to 1 % of the aggregate amount outstanding in 2012. that amounted to $ 1.0 million alone in 2012 on our former credit facility . provision for income taxes during the year ended december 31 , 2013 , we recorded an income tax expense of $ 1.0 million compared to a benefit of $ 0.7 million for the year ended december 31 , 2012. the effective tax rate for the year ended december 31 , 2013 was 38.20 % , compared to 30.84 % for the year ended december 31 , 2012. the increase in effective tax rate is primarily due to the prior year reversal of certain reserves for uncertain tax positions and adjustments to our foreign income tax liability . refer to the discussion under summary of significant accounting policies income taxes included in note 2 and income taxes included in note 8 to our consolidated financial statements included in this annual report on form 10-k. 28 inflation management believes that there has been no material effect on our operations or financial condition as a result of inflation or changing prices of our ambulatory infusion pumps during the period from january 1 , 2012 through december 31 , 2013. liquidity and capital resources as of december 31 , 2013 , we had cash and cash equivalents of $ 1.1 million and $ 5.9 million of availability on the revolving line-of-credit compared to $ 2.3 million of cash and cash equivalents and $ 4.7 million of availability on the revolving line-of-credit at december 31 , 2012. the decrease in cash was primarily related to positive cash flows from operating activities offset by decreases in the company debt including lowered lease balances and lower term and revolving facility balances . cash provided by operating activities for the year ended december 31 , 2013 was $
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interest expense increased $ 3.0 million , or 13.2 % , in 2011 compared to 2010 , primarily due to an increase in the amounts outstanding during the year on our revolving credit facility that was used to partially finance the socla acquisition and interest incurred for all 2011 from the june 2010 issuance of $ 75.0 million of senior notes . see note 10 of notes to consolidated financial statements in this annual report on form 10-k , for additional information regarding financing arrangements . other expense ( income ) , net . other expense ( income ) , net increased $ 2.9 million in 2011 compared to 2010 , primarily because foreign currency transactions resulted in net losses in 2011 , while in 2010 net gains were recognized . income taxes . our effective rate for continuing operations decreased to 29.3 % in 2011 from 33.2 % in 2010. the primary cause of the decrease was due to the tax benefit realized in connection with the disposition of our twvc facility in china . net income from continuing operation . net income from continuing operations for 2011 was $ 64.4 million , or $ 1.72 per common share , compared to $ 63.1 million , or $ 1.69 per common share , for 2010. results for 2011 include net after-tax charges of $ 17.0 million or $ 0.46 per common share ; including goodwill and asset impairment charges of $ 0.35 , restructuring and other charge of $ 0.18 , acquisition and due diligence costs of $ 0.12 , a charge related to our former chief executive officer 's separation agreement of $ 0.11 , a pension curtailment loss of $ 0.02 , offset by a gain on the disposal of twvc of $ 0.30 and other net gains of $ 0.02 primarily related to earnout and legal adjustments . results for 2010 include net after-tax charges of $ 10.3 million or $ 0.28 per common share ; including restructuring charges of $ 0.26 , due diligence costs of $ 0.11 , and other charges of $ 0.05 , offset by a tax adjustment of $ 0.07 and a product liability and workers compensation accrual adjustment of $ 0.07. the appreciation of the euro and canadian dollar against the u.s. dollar in 2011 resulted in a positive impact on our operations of $ 0.07 per common share for 2011 compared to 2010. income ( loss ) from discontinued operations . income from discontinued operations in 2011 was primarily attributable to a reserve adjustment of $ 1.7 million , or $ 0.05 per common share , related to the fcpa investigation originally recorded in 2010. the adjustment reflects the final disposition of the fcpa investigation . see notes 3 and 14 of notes to consolidated financial statements for additional discussion of this matter . liquidity and capital resources 2012 cash flows in 2012 , we generated $ 131.9 million of cash from operating activities as compared to $ 127.4 million in 2011. we generated approximately $ 104.8 million of free cash flow ( a non-gaap financial measure , which we reconcile below , defined as net cash provided by continuing operating activities minus capital expenditures plus proceeds from sale of assets ) , compared to free cash flow of $ 105.6 million in 2011. free cash flow as a percentage of net income from continuing operations was 148.4 % in 2012 as compared to 164.0 % in 2011. in 2012 , we used $ 42.7 million of net cash for investing activities , including $ 17.5 million for the purchase of tekmar and $ 30.6 million of cash for capital equipment , partially offset by the proceeds from the sale of buildings and equipment of $ 3.5 million . we anticipate investing approximately $ 41.0 million in capital equipment in 2013 to improve our manufacturing capabilities . 31 in 2012 , we used $ 80.7 million of net cash from financing activities . our most significant cash outlays included $ 65.8 million for the repurchase of two million shares of class a common stock and $ 16.0 million to fund dividend payments . repayments of long-term debt related to amounts borrowed under our credit agreement in 2012 for operating purposes and repayments related to 2011 borrowings for the purchase of socla . on june 18 , 2010 , we entered into a credit agreement ( the credit agreement ) among the company , certain subsidiaries of the company who become borrowers under the credit agreement , bank of america , n.a. , as administrative agent , swing line lender and letter of credit issuer , and the other lenders referred to therein . the credit agreement provides for a $ 300 million , five-year , senior unsecured revolving credit facility which may be increased by an additional $ 150 million under certain circumstances and subject to the terms of the credit agreement . the credit agreement has a sublimit of up to $ 75 million in letters of credit . borrowings outstanding under the credit agreement bear interest at a fluctuating rate per annum equal to ( i ) in the case of eurocurrency rate loans , the british bankers association libor rate plus an applicable percentage , ranging from 1.70 % to 2.30 % , determined by reference to our consolidated leverage ratio plus , in the case of certain lenders , a mandatory cost calculated in accordance with the terms of the credit agreement , or ( ii ) in the case of base rate loans and swing line loans , the highest of ( a ) the federal funds rate plus 0.5 % , ( b ) the rate of interest in effect for such day as announced by bank of america , n.a . as its `` prime rate , '' and ( c ) the british bankers association libor rate plus 1.0 % , plus an applicable percentage , ranging from 0.70 % to story_separator_special_tag interest expense increased $ 3.0 million , or 13.2 % , in 2011 compared to 2010 , primarily due to an increase in the amounts outstanding during the year on our revolving credit facility that was used to partially finance the socla acquisition and interest incurred for all 2011 from the june 2010 issuance of $ 75.0 million of senior notes . see note 10 of notes to consolidated financial statements in this annual report on form 10-k , for additional information regarding financing arrangements . other expense ( income ) , net . other expense ( income ) , net increased $ 2.9 million in 2011 compared to 2010 , primarily because foreign currency transactions resulted in net losses in 2011 , while in 2010 net gains were recognized . income taxes . our effective rate for continuing operations decreased to 29.3 % in 2011 from 33.2 % in 2010. the primary cause of the decrease was due to the tax benefit realized in connection with the disposition of our twvc facility in china . net income from continuing operation . net income from continuing operations for 2011 was $ 64.4 million , or $ 1.72 per common share , compared to $ 63.1 million , or $ 1.69 per common share , for 2010. results for 2011 include net after-tax charges of $ 17.0 million or $ 0.46 per common share ; including goodwill and asset impairment charges of $ 0.35 , restructuring and other charge of $ 0.18 , acquisition and due diligence costs of $ 0.12 , a charge related to our former chief executive officer 's separation agreement of $ 0.11 , a pension curtailment loss of $ 0.02 , offset by a gain on the disposal of twvc of $ 0.30 and other net gains of $ 0.02 primarily related to earnout and legal adjustments . results for 2010 include net after-tax charges of $ 10.3 million or $ 0.28 per common share ; including restructuring charges of $ 0.26 , due diligence costs of $ 0.11 , and other charges of $ 0.05 , offset by a tax adjustment of $ 0.07 and a product liability and workers compensation accrual adjustment of $ 0.07. the appreciation of the euro and canadian dollar against the u.s. dollar in 2011 resulted in a positive impact on our operations of $ 0.07 per common share for 2011 compared to 2010. income ( loss ) from discontinued operations . income from discontinued operations in 2011 was primarily attributable to a reserve adjustment of $ 1.7 million , or $ 0.05 per common share , related to the fcpa investigation originally recorded in 2010. the adjustment reflects the final disposition of the fcpa investigation . see notes 3 and 14 of notes to consolidated financial statements for additional discussion of this matter . liquidity and capital resources 2012 cash flows in 2012 , we generated $ 131.9 million of cash from operating activities as compared to $ 127.4 million in 2011. we generated approximately $ 104.8 million of free cash flow ( a non-gaap financial measure , which we reconcile below , defined as net cash provided by continuing operating activities minus capital expenditures plus proceeds from sale of assets ) , compared to free cash flow of $ 105.6 million in 2011. free cash flow as a percentage of net income from continuing operations was 148.4 % in 2012 as compared to 164.0 % in 2011. in 2012 , we used $ 42.7 million of net cash for investing activities , including $ 17.5 million for the purchase of tekmar and $ 30.6 million of cash for capital equipment , partially offset by the proceeds from the sale of buildings and equipment of $ 3.5 million . we anticipate investing approximately $ 41.0 million in capital equipment in 2013 to improve our manufacturing capabilities . 31 in 2012 , we used $ 80.7 million of net cash from financing activities . our most significant cash outlays included $ 65.8 million for the repurchase of two million shares of class a common stock and $ 16.0 million to fund dividend payments . repayments of long-term debt related to amounts borrowed under our credit agreement in 2012 for operating purposes and repayments related to 2011 borrowings for the purchase of socla . on june 18 , 2010 , we entered into a credit agreement ( the credit agreement ) among the company , certain subsidiaries of the company who become borrowers under the credit agreement , bank of america , n.a. , as administrative agent , swing line lender and letter of credit issuer , and the other lenders referred to therein . the credit agreement provides for a $ 300 million , five-year , senior unsecured revolving credit facility which may be increased by an additional $ 150 million under certain circumstances and subject to the terms of the credit agreement . the credit agreement has a sublimit of up to $ 75 million in letters of credit . borrowings outstanding under the credit agreement bear interest at a fluctuating rate per annum equal to ( i ) in the case of eurocurrency rate loans , the british bankers association libor rate plus an applicable percentage , ranging from 1.70 % to 2.30 % , determined by reference to our consolidated leverage ratio plus , in the case of certain lenders , a mandatory cost calculated in accordance with the terms of the credit agreement , or ( ii ) in the case of base rate loans and swing line loans , the highest of ( a ) the federal funds rate plus 0.5 % , ( b ) the rate of interest in effect for such day as announced by bank of america , n.a . as its `` prime rate , '' and ( c ) the british bankers association libor rate plus 1.0 % , plus an applicable percentage , ranging from 0.70 % to
| organic sales into the oem market in 2012 decreased by $ 6.2 million , or 2.2 % , compared to 2011. the decline was primarily due to decreased sales in the nordic region of $ 6.2 million from lower demands by heating pump and electrical heating manufacturers , lower sales in france and italy of $ 3.5 million and $ 1.4 million , respectively , due to the economic slowdown , and a reduction in our pre-insulated piping lines of $ 2.3 million . declines were offset by increased sales of $ 8.4 million related to our drains product line . the net decrease in sales due to foreign exchange was primarily due to the depreciation of the euro and the canadian dollar against the u.s. dollar . we can not predict whether these currencies will appreciate or depreciate against the u.s. dollar in future periods or whether future foreign exchange rate fluctuations will have a positive or negative impact on our net sales . acquired net sales in emea and asia related to the socla acquisition and in north america were due to tekmar . 25 gross profit . gross profit and gross profit as a percent of net sales ( gross margin ) for 2012 and 2011 were as follows : replace_table_token_7_th consolidated gross margin was fairly stable in 2012 as compared to 2011 , but varied by geography . in north america , gross margin declined due to non-commodity cost increases as well as manufacturing inefficiencies driven by pre-production costs and outsourcing costs caused by certain u.s. plants transitioning to lead free production . north america gross margin was also affected by product mix as diy sales grew faster than wholesale sales and there were selective price concessions to meet market competition . north america gross margin increased during the second half of 2012 as lead free related costs abated . emea gross margin increased as compared to 2011 , partially due to acquisition accounting charges of $ 4.7 million made in 2011 in connection with the socla acquisition and partially due to better product mix and improved pricing in 2012. selling , general and administrative expenses . selling , general and administrative expenses , or sg & a expenses , for 2012 increased $ 7.2 million , or 1.9 % , compared to 2011. the increase in sg & a expenses was attributable to
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because of such low margins , price fluctuations occurring in the futures markets may create profits and losses that are greater , in relation to the amount invested , than are customary in other forms of investments . the minimum amount of margin required in connection with a particular futures contract is set from time to time by the exchange on which such contract is traded , and may be modified from time to time by the exchange during the term of the contract . “ variation margin ” is assessed daily to reflect changes in the value of the position . brokerage firms carrying accounts for traders in futures contracts may not accept lower , and generally require higher , amounts of margin as a matter of policy in order to afford further protection for themselves . margin requirements are computed each day by a commodity broker . when the market value of a particular open futures contract position changes to a point where the margin on deposit does not satisfy maintenance margin requirements , a margin call is made by the commodity broker . if the margin call is not met within a reasonable time , the broker may close out the fund 's position . with respect to the managing owner 's trading , only the managing owner , and not the fund or its shareholders personally , will be subject to margin calls . position limits and or accountability levels the fund has not reached position limits with respect to the 2020 and 2019 reporting periods . net asset value nav means the total assets of the fund , including , but not limited to , all commodity futures contracts , cash and investments less total liabilities of the fund , each determined on the basis of u.s. generally accepted accounting principles ( “ u.s . gaap ” ) , consistently applied under the accrual method of accounting . all open commodity futures contracts will be calculated at their then current market value , which will be based upon the settlement price for that particular commodity futures contract traded on the applicable primary exchange on the date with respect to which nav is being determined . securities for which market quotations are not readily available or became unreliable are valued at fair value as determined in good faith following procedures approved by the managing owner . the amount of any distribution is a liability of the fund from the day when the distribution is declared until it is paid . nav per share is the nav of the fund divided by the number of outstanding shares . market risk trading in futures contracts involves the fund entering into contractual commitments to purchase a particular commodity at a specified date and price . the market risk associated with the fund 's commitments to purchase commodities is limited to the gross or face amount of the contracts held . the fund 's exposure to market risk is also influenced by a number of factors including the volatility of interest rates and foreign currency exchange rates , the liquidity of the markets in which the contracts are traded and the relationships among the contracts held . the inherent uncertainty of the fund 's trading as well as the development of drastic market occurrences could ultimately lead to a loss of all or substantially all of the investors ' capital . credit risk when the fund enters into futures contracts , the fund is exposed to credit risk that the counterparty to the contract will not meet its obligations . the counterparty for futures contracts traded on united states and on most foreign futures exchanges is the clearing house associated with the particular exchange . in general , clearing houses are backed by their corporate members who may be required to share in the financial burden resulting from the nonperformance by one of their members and , as such , is designed to disperse and mitigate the credit risk posed by any other one member . in cases where the clearing house is not backed by the clearing members ( i.e . , some foreign exchanges ) , it may be backed by a consortium of banks or other financial institutions . there can be no assurance that any counterparty , clearing member or clearinghouse will meet its obligations to the fund . 23 the commodity broker , when acting as the fund 's futures commission merchant in accepting orders for the purchase or sale of domestic futures contracts , is required by cftc regulations to separately account for and segregate as belonging to the fund all assets of the fund relating to domestic futures trading . the commodity broker is not allowed to commingle such assets with other assets of the commodity broker . in addition , cftc regulations also require the commodity broker to hold in a secure account assets of the fund related to foreign futures trading . while the legal requirements are designed to protect the customers of futures commission merchants , a failure by the commodity broker to comply with those requirements would be likely to have a material adverse effect on the fund in the event that the commodity broker became insolvent or suffered other financial distress . liquidity the fund 's entire source of capital is derived from the fund 's offering of shares to authorized participants . the fund in turn allocates its net assets to commodity futures trading . a significant portion of the nav is held in united states treasury obligations , which may be used as margin for the fund 's trading in commodity futures contracts and united states treasury obligations , money market mutual funds , cash and t-bill etfs , if any , which may be used for cash management purposes . the percentage that united states treasury obligations bear to the total net assets will vary from period to period as the market values of the fund 's commodity interests change . story_separator_special_tag a portion of the fund 's united states treasury obligations is held for deposit with the commodity broker to meet margin requirements . all remaining cash , money market mutual funds , t-bill etfs , if any , and united states treasury obligations are on deposit with the custodian . interest earned on the fund 's interest-bearing funds and dividends from the fund 's holdings of money market mutual funds are paid to the fund . any dividends or distributions of capital gains received from the fund 's holdings of t-bill etfs , if any , are paid to the fund . the fund 's commodity futures contracts may be subject to periods of illiquidity because of market conditions , regulatory considerations or for other reasons . for example , u.s. futures exchanges and some foreign exchanges have regulations that limit the amount of fluctuation in futures contract prices that may occur during a single business day . these limits are generally referred to as “ daily price fluctuation limits ” or “ daily limits , ” and the maximum or minimum price of a contract on any given day as a result of these limits is referred to as a “ limit price ” . once a limit price has been reached in a particular contract , it is usually the case that no trades may be made at a different price than specified in the limit . the duration of limit prices generally varies . limit prices may have the effect of precluding the fund from trading in a particular contract or requiring the fund to liquidate contracts at disadvantageous times or prices . either of those outcomes could adversely affect the fund 's ability to pursue its investment objective . because the fund trades futures contracts , its capital is at risk due to changes in the value of futures contracts ( market risk ) or the inability of counterparties ( including the commodity broker and or exchange clearinghouses ) to perform under the terms of the contracts ( credit risk ) . on any business day , an authorized participant may place an order with the transfer agent to redeem one or more blocks of 100,000 shares ( “ creation units ” ) . redemption orders must be placed by 10:00 a.m. , eastern time . the day on which the managing owner receives a valid redemption order is the redemption order date . the day on which a redemption order is settled is the redemption order settlement date . as provided below , the redemption order settlement date may occur up to two business days after the redemption order date . redemption orders are irrevocable . the redemption procedures allow authorized participants to redeem creation units . individual shareholders may not redeem directly from the fund . instead , individual shareholders may only redeem shares in integral multiples of 100,000 and only through an authorized participant . unless otherwise agreed to by the managing owner and the authorized participant as provided in the next sentence , by placing a redemption order , an authorized participant agrees to deliver the creation units to be redeemed through dtc 's book-entry system to the fund no later than the redemption order settlement date as of 2:45 p.m. , eastern time , on the business day immediately following the redemption order date . upon submission of a redemption order , the authorized participant may request the managing owner to agree to a redemption order settlement date up to two business days after the redemption order date . by placing a redemption order , and prior to receipt of the redemption proceeds , an authorized participant 's dtc account is charged the non-refundable transaction fee due for the redemption order . redemption orders may be placed either ( i ) through the continuous net settlement ( “ cns ” ) clearing processes of the national securities clearing corporation ( the “ nscc ” ) ( the “ cns clearing process ” ) or ( ii ) if outside the cns clearing process , only through the facilities of the depository trust company ( “ dtc ” or the “ depository ” ) ( the “ dtc process ” ) , or a successor depository , and only in exchange for cash . by placing a redemption order , and prior to receipt of the redemption proceeds , an authorized participant 's dtc account is charged the non-refundable transaction fee due for the redemption order and such fee is not borne by the fund . capital resources the fund does not have any material commitments for capital expenditures as of the end of the latest fiscal period . the fund is unaware of any ( i ) anticipated known demands , commitments or capital expenditures ; ( ii ) material trends , favorable or unfavorable , in its capital resources ; or ( iii ) trends or uncertainties that will have a material effect on operations . 24 cash flows a primary cash flow activity of the fund is to raise capital from authorized participants through the issuance of shares . this cash is used to invest in united states treasury obligations , money market mutual funds and t-bill etfs , if any , and to meet margin requirements as a result of the positions taken in futures contracts to match the fluctuations of the index .
| summary of the dbiq-oy industrial metals tr and underlying index commodity returns for the years ended december 31 , 2020 and 2019 replace_table_token_6_th if the fund 's treasury income , money market income and t-bill etf income were to exceed the fund 's fees and expenses , the aggregate return on an investment in the fund would be expected to outperform the index and underperform the dbiq-oy industrial metals tr . the only difference between ( i ) the index ( the “ excess return index ” ) and ( ii ) the dbiq-oy industrial metals tr ( the “ total return index ” ) is that the excess return index does not include interest income from fixed income securities while the total return index does include such a component . thus , the difference between the excess return index and the total return index is attributable entirely to the interest income attributable to the fixed income securities reflected in the total return index . the total return index does not actually hold any fixed income securities . if the fund 's treasury income , money market income and t-bill etf income , if any , exceeds the fund 's fees and expenses , then the amount of such excess is expected to be distributed periodically . the market price of the shares is expected to closely track the excess return index . the aggregate return on an investment in the fund over any period is the sum of the capital appreciation or depreciation of the shares over the period , plus the amount of any distributions during the period . consequently , the fund 's aggregate return is expected to outperform the excess return index by the amount of the excess , if any , of the fund 's treasury income , money market income and t-bill etf income over its fees and expenses . as a result of the fund 's fees and expenses , however , the aggregate return on the fund is expected to underperform the total return index . if the fund 's fees and expenses were to exceed the fund 's treasury income , money market income and t-bill etf income , if any , the aggregate return on an investment in the fund is expected to underperform the excess return index .
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19 year ended december 31 , 2018 compared to year ended december 31 , 2017 service revenue service revenue consists primarily of fees collected for cloud telecommunications services , professional services , interest from sales-type leases , broadband internet services , website hosting , and web management services . service revenue increased 18 % or $ 1,621,000 , to $ 10,461,000 for the year ended december 31 , 2018 as compared to $ 8,840,000 for the year ended december 31 , 2017. cloud telecommunications service revenue increased 24 % or $ 1,842,000 , to $ 9,636,000 for the year ended december 31 , 2018 as compared to $ 7,794,000 for the year ended december 31 , 2017. web service revenue decreased 21 % or $ 221,000 , to $ 825,000 for the year ended december 31 , 2018 as compared to $ 1,046,000 for the year ended december 31 , 2017. product revenue product revenue consists primarily of fees collected for the sale of desktop phone devices and third party equipment . product revenue increased by 7 % or $ 100,000 , to $ 1,447,000 for the year ended december 31 , 2018 as compared to $ 1,347,000 for the year ended december 31 , 2017. product revenue fluctuates from one period to the next based on timing of installations . our typical customer installation is complete within 30 days . however , larger enterprise customers can take multiple months , depending on size and the number of locations . product revenue is recognized when products have been installed and services commence . we believe growth will initially be seen through increase in our backlog . loss before income taxes loss before income tax decreased 77 % or $ 714,000 to $ 208,000 for the year ended december 31 , 2018 as compared to $ 922,000 for the year ended december 31 , 2017. the decrease in loss before income tax is primarily due to an increase in revenue of $ 1,721,000 and a decrease in other expense of $ 186,000 , primarily related to a decrease in interest expense from the related party note payable which was substantially paid off in september 2017. this was offset by an increase in total operating expenses of $ 1,193,000. income tax provision we had an income tax provision of $ 15,000 for the year ended december 31 , 2018 compared to an income tax provision of $ 7,000 for the year ended december 31 , 2017. we had a pre-tax loss for the years ended december 31 , 2018 and 2017 of $ 208,000 and $ 922,000 , respectively , and a full valuation allowance on all of our deferred tax assets for the years ended december 31 , 2018 and 2017. use of non-gaap financial measures to evaluate our business , we consider and use non-generally accepted accounting principles ( non-gaap ) net income ( loss ) and adjusted ebitda as a supplemental measure of operating performance . these measures include the same adjustments that management takes into account when it reviews and assesses operating performance on a period-to-period basis . we consider non-gaap net income ( loss ) to be an important indicator of overall business performance because it allows us to evaluate results without the effects of share-based compensation , rent expense paid with common stock , and amortization of intangibles . we define ebitda as u.s. gaap net income ( loss ) before interest income , interest expense , other income and expense , provision for income taxes , and depreciation and amortization . we believe ebitda provides a useful metric to investors to compare us with other companies within our industry and across industries . we define adjusted ebitda as ebitda adjusted for share-based compensation , and rent expense paid with stock . we use adjusted ebitda as a supplemental measure to review and assess operating performance . we also believe use of adjusted ebitda facilitates investors ' use of operating performance comparisons from period to period , as well as across companies . in our march 5 , 2019 earnings press release , as furnished on form 8-k , we included non-gaap net loss , ebitda and adjusted ebitda . the terms non-gaap net loss , ebitda , and adjusted ebitda are not defined under u.s. gaap , and are not measures of operating income , operating performance or liquidity presented in analytical tools , and when assessing our operating performance , non-gaap net loss , ebitda , and adjusted ebitda should not be considered in isolation , or as a substitute for net loss or other consolidated income statement data prepared in accordance with u.s. gaap . some of these limitations include , but are not limited to : 20 ● ebitda and adjusted ebitda do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments ; ● they do not reflect changes in , or cash requirements for , our working capital needs ; ● they do not reflect the interest expense , or the cash requirements necessary to service interest or principal payments , on our debt that we may incur ; ● they do not reflect income taxes or the cash requirements for any tax payments ; ● although depreciation and amortization are non-cash charges , the assets being depreciated and amortized will be replaced sometime in the future , and ebitda and adjusted ebitda do not reflect any cash requirements for such replacements ; ● while share-based compensation is a component of operating expense , the impact on our financial statements compared to other companies can vary significantly due to such factors as the assumed life of the options and the assumed volatility of our common stock ; and ● other companies may calculate ebitda and adjusted ebitda differently than we do , limiting their usefulness as comparative measures . story_separator_special_tag we compensate for these limitations by relying primarily on our u.s. gaap results and using non-gaap net income ( loss ) , ebitda , and adjusted ebitda only as supplemental support for management 's analysis of business performance . non-gaap net income ( loss ) , ebitda and adjusted ebitda are calculated as follows for the periods presented . reconciliation of non-gaap financial measures in accordance with the requirements of regulation g issued by the sec , we are presenting the most directly comparable u.s. gaap financial measures and reconciling the unaudited non-gaap financial metrics to the comparable u.s. gaap measures . reconciliation of u.s. gaap net income/ ( loss ) to non-gaap net income/ ( loss ) ( unaudited ) replace_table_token_6_th 21 reconciliation of u.s. gaap net income/ ( loss ) to ebitda to adjusted ebitda ( unaudited ) replace_table_token_7_th critical accounting policies and estimates the consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the united states . the following accounting policies are the most critical in understanding our consolidated financial position , results of operations or cash flows , and that may require management to make subjective or complex judgments about matters that are inherently uncertain . goodwill – goodwill is tested for impairment using a fair-value-based approach on an annual basis ( december 31 ) and between annual tests if indicators of potential impairment exist . intangible assets - our intangible assets consist primarily of customer relationships and developed technology . the intangible assets are amortized following the patterns in which the economic benefits are consumed . we periodically review the estimated useful lives of our intangible assets and review these assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable . the determination of impairment is based on estimates of future undiscounted cash flows . if an intangible asset is considered to be impaired , the amount of the impairment will be equal to the excess of the carrying value over the fair value of the asset . contingent liabilities - contingent liabilities require significant judgment in estimating potential payouts . contingent considerations arising from business combinations require management to estimate future payouts based on forecasted results , which are highly sensitive to the estimates of discount rates and future revenues . these estimates can change significantly from period to period and reviewed each reporting period to establish the fair value of the contingent liability . for additional information on use of estimates , see summary of significant accounting policies in the notes to the consolidated financial statements . story_separator_special_tag font-size : 13px '' > other income/ ( expense ) other income/ ( expense ) primarily relates to the allocated portions of interest expense , offset by sublease rental income . net other expense decreased 103 % or $ 188,000 to $ 5,000 of net other income for the year ended december 31 , 2018 as compared to net other expense of $ ( 183,000 ) for the year ended december 31 , 2017. the decrease is due to a decrease in allocated interest expense of $ 177,000 primarily related to the related party note payable , which was substantially paid off in september 2017 and an increase in other income of $ 11,000 , which is primarily related to sublease rental income . operating results of our web services segment ( in thousands ) replace_table_token_11_th 26 quarterly financial information replace_table_token_12_th replace_table_token_13_th year ended december 31 , 2018 compared to year ended december 31 , 2017 service revenue service revenue is generated primarily through website hosting , professional web management services , and extended payment term agreements ( eptas ) . web services revenue decreased 21 % or $ 221,000 , to $ 825,000 for the year ended december 31 , 2018 as compared to $ 1,046,000 for the year ended december 31 , 2017. the decrease in service revenue is primarily due to a decrease in hosting revenue of $ 181,000 and a $ 40,000 decrease in epta revenue due to decrease in outstanding receivables . cost of service revenue cost of service revenue consists primarily of bandwidth , customer service costs , and credit card processing fees . cost of service revenue increased 12 % or $ 13,000 , to $ 119,000 for the year ended december 31 , 2018 as compared to $ 106,000 for the year ended december 31 , 2017. the increase in cost of revenue is primarily related to an increase in customer service costs of $ 20,000 , offset by a decrease in credit card fees of $ 5,000 and a decrease in web domain costs of $ 2,000 , both directly related to decrease in revenue . 27 research and development research and development expenses primarily consist of salaries and benefits , and related expenses which are attributable to the development of our website development software products . research and development expenses decreased 4 % or $ 1,000 , to $ 25,000 for the year ended december 31 , 2018 as compared to $ 26,000 for the year ended december 31 , 2017. the decrease was primarily related to a reduction in the allocation of salaries and benefits expenses . general and administrative general and administrative expenses consist of salaries and benefits for executives , administrative personnel , legal , rent , accounting , other professional services , and other administrative corporate expenses .
| however , larger enterprise customers can take multiple months , depending on size and the number of locations . product revenue is recognized when products have been installed and services commence . we believe growth will initially be seen through increases in our backlog . 24 backlog backlog represents the total contract value of all contracts signed , less revenue recognized from those contracts as of december 31 , 2018 and 2017. below is a table which displays the cloud telecommunications segment revenue backlog as of december 31 , 2018 and 2017 , which we expect to recognize as revenue within the next thirty-six to sixty months ( in thousands ) : cloud telecommunications services backlog as of december 31 , 2018 $ 23,029 cloud telecommunications services backlog as of december 31 , 2017 $ 19,871 cost of service revenue cost of service revenue consists primarily of fees we pay to third-party telecommunications carriers and software providers , broadband internet fees , and costs related to installations and customer support salaries and benefits . cost of service revenue increased 14 % or $ 362,000 , to $ 2,973,000 for the year ended december 31 , 2018 as compared to $ 2,611,000 for the year ended december 31 , 2017. the increase in cost of service revenue was primarily due to an increase in salaries and benefits of $ 174,000 as a result of an increase in customer support headcount , an increase in costs related to installations of $ 54,000 , an increase in stock options expense of $ 43,000 , an increase in credit card processing fees of $ 39,000 , an increase in bandwidth costs of $ 38,000 , and a $ 14,000 increase in freight . these increases are directly related to the growth in monthly recurring revenue . cost of product revenue cost of product revenue consists of the costs associated with desktop phone devices , inventory costs , and the purchase of third party equipment . cost of product revenue increased 32 %
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overall , we experienced a 5 % increase in emerging market local currency sales during 2019 versus the prior year , which included 9 % local currency 33 sales growth in china . within china , we continue to redeploy resources and sales and marketing efforts to the faster-growing segments of pharma , food manufacturing , chemical , and environment . we believe the long-term growth of these segments will be favorably impacted by the chinese government 's emphasis on science , high-value industries , product quality , and food safety . we expect our laboratory and product inspection businesses will particularly benefit from these segments . we also continue to invest and add sales and marketing resources to pursue growth in under-penetrated emerging markets . however , emerging market sales can be volatile . while chinese market conditions are currently favorable , there is uncertainty , including the potential impact of prolonged international trade disputes . the chinese economy has historically been volatile and market conditions may change unfavorably due to various factors . extending our technology lead . we continue to focus on product innovation . in the last three years , we spent approximately 5 % of net sales on research and development . we seek to accelerate product replacement cycles , as well as improve our product offerings and their capabilities with additional integrated technologies and software which also support our pricing differentiation . in addition , we aim to create value for our customers by having an intimate knowledge of their processes via our significant installed product base . expanding our margins . we continue to strive to improve our margins by more effectively pricing our products and services and optimizing our cost structure . for example , sophisticated data analytic tools provide us new insights to further refine our price strategies and processes . we also focus on reallocating resources and better aligning our cost structure to support our investments in market penetration initiatives , higher-growth areas , and opportunities for margin improvement . we have also initiated various cost reduction programs over the past few years . we have also implemented global procurement and supply chain management programs over the last several years aimed at lowering supply costs , and have increased our focus on these programs with of our sterndrive initiative . sterndrive is our global operational excellence program for continuous improvement efforts within our supply chain , manufacturing , and back-office operations . blue ocean is also an important enabler of our various margin expansion initiatives . our move to standardized business processes , systems , and data structures throughout our global organization provides greater data transparency and faster access to real-time data . our cost leadership and productivity initiatives are also focused on continuously improving our invested capital efficiency , such as reducing our working capital levels , increasing our order to cash cycle and ensuring appropriate returns on our expenditures . pursuing strategic acquisitions . we seek to pursue `` bolt-on '' acquisitions that may leverage our global sales and service network , respected brand , extensive distribution channels , and technological leadership . we have identified life sciences , product inspection , and process analytics as three key areas for acquisitions . for example , during 2017 , we acquired the shares of biotix , inc. , a u.s.-based manufacturer and distributor of plastic consumables associated with pipettes , including tips , tubes , and reagent reservoirs used in the life sciences market , for an initial cash payment of $ 105 million plus additional cash consideration of $ 10 million that was paid in the first quarter of 2019. results of operations — consolidated net sales net sales were $ 3.0 billion for the year ended december 31 , 2019 , compared to $ 2.9 billion in 2018 and $ 2.7 billion in 2017 . this represents an increase of 2 % in 2019 and 8 % in 2018 in u.s. dollars and an increase of 5 % and 6 % in local currencies , respectively . net sales were reduced by 1 % in 2019 related to a significant decline in food retailing . the biotix acquisition contributed approximately 1 % to local currency sales in 2018. global market conditions were favorable during 2019 , and we continue to benefit from the execution of our global sales and marketing programs , our innovative product portfolio , and 34 investments in our field resources . however , we remain cautious due to uncertainty in the global macroeconomic environment . as previously mentioned , the wuhan coronavirus also creates uncertainties and risks and we expect our sales in china may decline during the first quarter of 2020. in 2019 , our net sales by geographic destination increased in u.s. dollars 5 % in the americas and 3 % in asia/rest of world and decreased 2 % in europe . in local currencies , our net sales by geographic destination increased in 2019 by 6 % in the americas , 3 % in europe , and 6 % in asia/rest of world . net sales in the americas was reduced by 2 % related to a significant decline in food retailing sales primarily due to unfavorable market conditions and the timing of project activity . a discussion of sales by operating segment is included below . as described in note 3 to our consolidated financial statements , our net sales comprise product sales of precision instruments and related services . service revenues are primarily derived from repair and other services , including regulatory compliance qualification , calibration , certification , preventative maintenance , and spare parts . net sales of products increased 2 % in u.s. dollars and 4 % in local currencies during 2019 and increased 8 % and 6 % in u.s. dollars and in local currencies in 2018 . story_separator_special_tag the biotix acquisition contributed approximately 1 % to our net sales of products during 2018. service revenue ( including spare parts ) increased 4 % in u.s. dollars and 7 % in local currencies in 2019 and increased 8 % and 6 % in u.s. dollars and in local currencies in 2018 . net sales of our laboratory products and services , which represented approximately 52 % of our total net sales in 2019 , increased 5 % in u.s. dollars and 7 % in local currencies during 2019 . the local currency increase in net sales of our laboratory-related products during 2019 includes solid growth in most product categories , especially analytical instruments , process analytics , and pipettes . net sales of our industrial products and services , which represented approximately 41 % of our total net sales in 2019 , increased 2 % in u.s. dollars and 4 % in local currencies during 2019 . the local currency increase in net sales of our industrial-related products during 2019 includes strong growth in core industrial products , and strong project activity in transportation and logistics . net sales of our food retailing products and services , which represented approximately 7 % of our total net sales in 2019 , decreased 11 % in u.s. dollars and 8 % in local currencies during 2019 . the decline in food retailing is primarily due to unfavorable market conditions and the timing of project activity . gross profit gross profit as a percentage of net sales was 57.9 % for 2019 , compared to 57.4 % for 2018 and 57.8 % for 2017 . gross profit as a percentage of net sales for products was 60.4 % for 2019 , compared to 60.3 % for 2018 and 61.1 % for 2017 . gross profit as a percentage of net sales for services ( including spare parts ) was 49.0 % for 2019 , compared to 47.0 % for 2018 and 46.1 % for 2017 . the increase in gross profit as a percentage of net sales for 2019 reflects favorable price realization and productivity , partially offset by tariff costs and initial costs associated with new product introductions . in 2018 , the u.s. government enacted tariffs on certain products imported from china . the tariffs became effective at various points during 2018 and the first half of 2019. we estimate the associated annualized cost increase is approximately $ 25 million ( assuming a 25 % tariff rate ) . we continue to implement various actions to mitigate the effect of these tariffs . 35 research and development and selling , general , and administrative expenses research and development expenses as a percentage of net sales were 4.8 % for both 2019 and 2018 , and 4.7 % for 2017 . research and development expenses in u.s. dollars increased 2 % in 2019 and 11 % in 2018 , and in local currencies increased 5 % in 2019 and 9 % in 2018 , relating to increased project activity . selling , general , and administrative expenses as a percentage of net sales were 27.2 % for 2019 , compared to 27.7 % for 2018 and 28.9 % for 2017 . selling , general , and administrative expenses increased 1 % in u.s. dollars and 3 % in local currencies in 2019 and increased 2 % and 1 % in u.s. dollars and local currencies in 2018 , respectively . the increase during 2019 includes investments in our field sales organization and growth initiatives , offset in part by benefits from our cost savings initiatives . amortization expense amortization expense was $ 49.7 million in 2019 , compared to $ 47.5 million and $ 42.7 million in 2018 and 2017 , respectively . the increase in amortization expense is primarily related to our investments in information technology , including the company 's blue ocean program . restructuring charges during the past few years , we initiated various cost reduction measures . for the year ended december 31 , 2019 , we have incurred $ 15.8 million of restructuring expenses which primarily comprise employee-related costs . see note 15 and note 19 to our consolidated financial statements for a summary of restructuring activity during 2019 . other charges ( income ) , net other charges ( income ) , net consisted of net income of $ 6.2 million , $ 21.8 million , and $ 9.9 million in 2019 , 2018 , and 2017 , respectively . other charges ( income ) , net includes non-service pension costs ( benefits ) , net ( gains ) losses from foreign currency transactions and hedging activities , interest income , and other items . non-service pension benefits were $ 4.8 million , $ 6.2 million , and $ 4.0 million in 2019 , 2018 , and 2017 , respectively . other charges ( income ) , net in 2018 also includes a one-time gain of $ 18.7 million associated with the settlement of the biotix acquisition contingent consideration , as well as a one-time legal charge of $ 3 million . other charges ( income ) , net in 2017 includes $ 1.7 million of acquisition costs and a one-time gain of $ 3.4 million relating to the sale of a facility in switzerland in connection with our initiative to consolidate certain swiss operations into a new facility . interest expense and taxes interest expense was $ 37.4 million for 2019 , compared to $ 34.5 million for 2018 and $ 32.8 million for 2017 . our reported tax rate was 17.7 % during 2019 , compared to 21.4 % and 34.5 % during 2018 and 2017 , respectively . the 2019 reported tax rate includes a net benefit of $ 15.8 million associated with swiss tax reform described below . the 2018 and 2017 reported tax rates include charges of $ 3.6 million and $ 72 million , respectively , associated with the tax cuts and jobs act described below .
| 42 taxes we are subject to taxation in many jurisdictions throughout the world . our effective tax rate and tax liability will be affected by a number of factors , such as changes in law , the amount of taxable income in particular jurisdictions , the tax rates in such jurisdictions , tax treaties between jurisdictions , the extent to which we transfer funds between jurisdictions , and earnings repatriations between jurisdictions . generally , the tax liability for each taxpayer within the group is determined either ( i ) on a non-consolidated/non-combined basis or ( ii ) on a consolidated/combined basis only with other eligible entities subject to tax in the same jurisdiction , in either case without regard to the taxable losses of non-consolidated/non-combined affiliated legal entities . environmental matters we are subject to environmental laws and regulations in the jurisdictions in which we operate . we own or lease a number of properties and manufacturing facilities around the world . like many of our competitors , we have incurred , and will continue to incur , capital and operating expenditures and other costs in complying with such laws and regulations . we are currently involved in , or have potential liability with respect to , the remediation of past contamination in certain of our facilities . a former subsidiary of mettler-toledo , llc known as hi-speed checkweigher co. , inc. was one of two private parties ordered by the new jersey department of environmental protection , in an administrative consent order signed on june 13 , 1988 , to investigate and remediate certain ground water contamination at a property in landing , new jersey . after the other party under this order failed to fulfill its obligations , hi-speed became solely responsible for compliance with the order . residual ground water contamination at this site is now within a classification exception area which the department of environmental protection has approved and within which the company oversees monitoring of the decay
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net income from continuing operations for 2013 , was $ 185.0 million or $ 4.87 per diluted share , compared with $ 161.8 million or $ 4.33 per diluted share in 2012 . the increase in revenue included incremental sales from acquisitions of $ 172.0 million , as well as organic growth . our 2013 net income attributable to teledyne was $ 185.0 million or $ 4.87 per diluted share , compared with $ 164.1 million or $ 4.39 per diluted share in 2012 . net income for 2013 and 2012 also included net discrete tax benefits of $ 21.3 million and $ 5.4 million , respectively . with the recent acquisitions in 2013 and the 2012 acquisition of lecroy and the 2011 acquisition of dalsa , as well as growth in our commercial markets , our business mix has continued to evolve . for 2013 , teledyne ' s sales were approximately 73 % to commercial customers and 27 % to the u.s. government . this has changed from about 68 % commercial and 32 % government in 2012 . our international sales also increased to 44 % of total sales in 2013 , compared with 39 % in 2012 . we have worked to transform our product portfolio into that of a high technology industrial company that is less dependent on u.s. government business . recent acquisitions the company spent $ 128.2 million , $ 389.2 million and $ 366.7 million on acquisitions in 2013 , 2012 and 2011 , respectively . on october 22 , 2013 , a subsidiary of teledyne acquired cdl for $ 21.8 million in cash , net of cash acquired . cdl is h eadquartered in aberdeen , scotland , is a leading supplier of subsea inertial navigation systems and motion sensors for a variety of marine applications . cdl had sales of £9.9 million for its fiscal year ended december 31 , 2012 and is part of the instrumentation segment . on august 30 , 2013 , a subsidiary of teledyne acquired cetac for $ 26.4 million . teledyne paid a $ 0.4 million purchase price adjustment in the fourth quarter . cetac , headquartered in omaha , nebraska is a designer and manufacturer of automated sample handling and sample introduction equipment for laboratory instrumentation . cetac had sales of $ 24.0 million for its fiscal year ended december 31 , 2012 , and is part of the instrumentation segment . on july 8 , 2013 , a subsidiary of teledyne purchased the remaining 49 % interest in nova sensors that it did not already own for $ 4.9 million . nova sensors produces compact short-wave and mid-wave infrared cameras and operates within the digital imaging segment . 29 on may 8 , 2013 , a subsidiary of teledyne acquired axiom , for an initial payment of $ 4.0 million , net of cash acquired , with an additional $ 1.3 million expected to be paid in equal installments over three years . axiom is located in the netherlands and is a fabless semiconductor company that develops high-performance cmos mixed-signal integrated circuits and is part of the digital imaging segment . on march 1 , 2013 , a subsidiary of teledyne acquired all the outstanding shares of reson for $ 69.7 million , net of cash acquired . reson , headquartered in slangerup , denmark , provides multibeam sonar systems and specialty acoustic sensors for hydrography , global marine infrastructure and offshore energy operations . reson had sales of 50.8 million for its fiscal year ended december 31 , 2012 and is part of the instrumentation segment . also in 2013 , the company spent $ 1.4 million on the purchase of a product line . on august 3 , 2012 , teledyne acquired the stock of lecroy for $ 301.3 million , net of cash acquired . lecroy , headquartered in chestnut ridge , new york is a leading supplier of oscilloscopes , protocol analyzers and signal integrity test solutions . lecroy had sales of $ 178.1 million for its fiscal year ended june 30 , 2011 and is part of the instrumentation segment . also on august 3 , 2012 , a subsidiary of teledyne acquired the parent company of pdm neptec for $ 7.4 million in cash , net of cash acquired . pdm neptec , located in hampshire , united kingdom , is part of the instrumentation segment and operates as teledyne impulse-pdm ltd. pdm neptec had sales of £5.5 million for its fiscal year ended march 31 , 2012. on july 2 , 2012 , a subsidiary of teledyne acquired blueview for $ 16.3 million in cash , net of cash acquired . blueview , located in seattle , washington , is part of the instrumentation segment and operates as teledyne blueview , inc. blueview had sales of $ 7.1 million for its fiscal year ended december 31 , 2011. on april 2 , 2012 , teledyne acquired a majority interest in the parent company of optech for $ 27.9 million , net of cash acquired . the purchase increased teledyne 's ownership percentage to 51 % from the original 19 % interest purchased in the first quarter of 2011. with the april 2012 purchase , we now consolidate optech 's financial results into teledyne 's results with an appropriate adjustment for the minority ownership . at the time of the purchase , the value of optech 's total equity was based on the same per share price as those shares purchased by teledyne to obtain the majority interest in 2012 and the value of the non-controlling interest was 49 % of optech ' s total equity and was equal to $ 49.8 million . the minority ownership of optech was $ 47.3 million and $ 49.8 million at december 29 , 2013 and december 30 , 2012 , respectively . optech had sales of cad $ 54.7 million for its fiscal year ended march 30 , 2012 and is reported as part of the digital imaging segment . story_separator_special_tag on february 25 , 2012 , teledyne acquired varisystems for $ 34.9 million , net of cash acquired . teledyne paid a $ 1.4 million purchase price adjustment in the second quarter of 2012. varisystems , headquartered in calgary , alberta , canada , is a leading supplier of custom harsh environment interconnects used in energy exploration and production . varisystems had sales of cad $ 27.5 million for its fiscal year ended may 31 , 2011 and is part of the instrumentation segment . in 2011 , the company acquired the stock of dalsa for an aggregate purchase price of $ 339.5 million in cash . dalsa designs and manufactures digital imaging products , primarily consisting of high performance sensors , cameras and software for use in industrial , scientific , medical and professional applications products , as well as specialty semiconductors and micro electro mechanical systems ( “ mems ” ) . in addition to the acquisition of dalsa in 2011 , the company completed the acquisition of a majority interest in nova sensors for total consideration of $ 5.1 million in cash and a 19 % minority interest in optech for $ 18.9 million . we also bought the remaining minority interest in energy systems for $ 3.2 million in 2011. see note 3 to our consolidated financial statements for additional information about our recent acquisitions . 30 our fiscal year is determined based on a 52- or 53-week convention ending on the sunday nearest to december 31. fiscal years 2013 , 2012 and 2011 each contained 52 weeks . the following is our financial information for 2013 , 2012 and 2011 ( in millions , except per-share amounts ) : 2013 2012 2011 sales $ 2,338.6 $ 2,127.3 $ 1,941.9 costs and expenses cost of sales 1,500.0 1,379.1 1,290.7 selling , general and administrative expenses 598.3 505.1 424.0 total costs and expenses 2,098.3 1,884.2 1,714.7 income before other income and expense and income taxes 240.3 243.1 227.2 interest and debt expense , net ( 20.4 ) ( 17.8 ) ( 16.2 ) other income , net 4.1 2.9 0.6 income from continuing operations before income taxes 224.0 228.2 211.6 provision for income taxes ( a ) 39.5 65.4 69.5 income from continuing operations including noncontrolling interest 184.5 162.8 142.1 discontinued operations , net of income taxes — 2.3 113.1 net income 184.5 165.1 255.2 noncontrolling interest 0.5 ( 1.0 ) — net income attributable to teledyne $ 185.0 $ 164.1 $ 255.2 income from continuing operations including noncontrolling interest $ 184.5 $ 162.8 $ 142.1 noncontrolling interest 0.5 ( 1.0 ) — net income from continuing operations 185.0 161.8 142.1 discontinued operations , net of income taxes — 2.3 113.1 net income attributable to teledyne $ 185.0 $ 164.1 $ 255.2 basic earnings per common share : continuing operations $ 4.96 $ 4.41 $ 3.88 discontinued operations — 0.06 3.09 basic earnings per common share $ 4.96 $ 4.47 $ 6.97 diluted earnings per common share : continuing operations $ 4.87 $ 4.33 $ 3.81 discontinued operations — 0.06 3.03 diluted earnings per common share $ 4.87 $ 4.39 $ 6.84 ( a ) fiscal years 2013 , 2012 and 2011 include net discrete tax benefits of $ 21.3 million , $ 5.4 million and $ 2.4 million , respectively . our businesses are divided into four business segments : instrumentation , digital imaging , aerospace and defense electronics and engineered systems . our four business segments and their respective percentage contributions to our total sales in 2013 , 2012 and 2011 are summarized in the following table : replace_table_token_5_th 31 story_separator_special_tag style= '' vertical-align : bottom ; padding-left:2px ; padding-top:2px ; padding-bottom:2px ; '' > ( 22.8 ) % segment operating profit and other segment income 277.9 279.8 ( 0.7 ) % corporate expense ( 37.6 ) ( 36.7 ) 2.5 % interest and debt expense , net ( 20.4 ) ( 17.8 ) 14.6 % other income , net 4.1 2.9 41.4 % income from continuing operations before income taxes 224.0 228.2 ( 1.8 ) % provision for income taxes ( a ) 39.5 65.4 ( 39.6 ) % income from continuing operations including noncontrolling interest 184.5 162.8 13.3 % discontinued operations , net of income taxes — 2.3 * net income 184.5 165.1 11.8 % noncontrolling interest 0.5 ( 1.0 ) * net income attributable to teledyne $ 185.0 $ 164.1 12.7 % * not meaningful ( a ) fiscal years 2013 and 2012 include net discrete tax benefits of $ 21.3 million and $ 5.4 million , respectively , we reported 2013 sales of $ 2,338.6 million , compared with sales of $ 2,127.3 million for 2012 , an increase of 9.9 % . net income from continuing operations was $ 185.0 million ( $ 4.87 per diluted share ) for 2013 , compared with net income from continuing operations of $ 161.8 million ( $ 4.33 per diluted share ) for 2012 , an increase of 14.3 % . net income for 2013 and 2012 also included net discrete tax benefits of $ 21.3 million and $ 5.4 million , respectively . net income attributable to teledyne , including discontinued operations , was $ 185.0 million ( $ 4.87 per diluted share ) for 2013 , compared with $ 164.1 million ( $ 4.39 per diluted share ) for 2012 . the increase in sales in 2013 , compared with 2012 , reflected higher sales in both the instrumentation and aerospace and defense electronics segments , partially offset by lower sales in both the engineered systems and digital imaging segments . sales in the instrumentation segment reflected $ 178.4 million of incremental sales from recent acquisitions , as well as higher organic sales for marine products . increased sales of test and measurement instrumentation of $ 103.6 million reflected the full year contribution from the lecroy acquisition . sales of marine products increased by $ 106.7 million and included incremental sales of $ 65.3 million from recent acquisitions . sales in the aerospace and defense electronics segment primarily reflected increased sales of $ 19.3
| results of operations 2013 compared with 2012 sales 2013 2012 % change ( in millions ) instrumentation $ 1,022.8 $ 804.7 27.1 % digital imaging 414.8 415.9 ( 0.3 ) % aerospace and defense electronics 625.1 605.3 3.3 % engineered systems 275.9 301.4 ( 8.5 ) % total sales $ 2,338.6 $ 2,127.3 9.9 % operating profit and other segment income 2013 2012 % change ( in millions ) instrumentation $ 162.0 $ 146.0 11.0 % digital imaging 28.2 24.8 13.7 % aerospace and defense electronics 65.7 80.5 ( 18.4 ) % engineered systems 22.0 28.5 < td
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we would also need to determine that such acquisitions were an appropriate use of our available capital at such time . generally , we would benefit from economies of scale if we were able to increase the size of our servicing portfolio . finally , our servicing revenues in recent years have benefited significantly from our participation in the federal government 's hamp loan modification program . hamp expired on december 31 , 2016 , although borrowers , who have requested assistance or to whom an offer of assistance has been extended as of that date , will have until september 30 , 2017 to finalize their modification . accordingly , even though we will continue to receive certain trailing fees , such as hamp success fees to the extent that a borrower remains current in any agreed upon loan modification , we anticipate that our servicing revenues will be significantly and adversely affected by the expiration of the hamp program . hamp fees accounted for $ 110.3 million , or 9 % of total servicing segment revenues in 2016 , and $ 135.0 million , or 8 % of total servicing segment revenues in 2015. story_separator_special_tag evaluating and executing on adjustments to our capital structure and exploring other strategic options . msr amortization and valuation adjustments , including both fair value 45 adjustments and impairment charges , decreased $ 57.7 million due to portfolio runoff and the effect of msr sales offset in part by an impairment charge of $ 17.3 million . interest expense for 2015 decreased as compared to 2014 primarily as a result of reductions in the value of the nrz financing liability based on the run-off of the underlying msr servicing portfolio and a decrease in interest on the sstl as a result of principal repayments during 2015 , including required and voluntary prepayments from proceeds of sales of msrs . these decreases were offset in part by additional debt issuance costs resulting from amendments to the sstl in 2015 and the accelerated recognition of deferred debt issuance costs and unamortized discount resulting from the sstl prepayments . interest expense for 2015 also included a full twelve months of interest expense on the $ 350.0 million senior unsecured notes that we issued in may 2014. although we incurred a pre-tax loss of $ 129.9 million for the year ended december 31 , 2015 , we recognized income tax expense of $ 116.9 million due to recording a $ 97.1 million provision to establish valuation allowances in connection with deferred tax assets in our u.s. and usvi tax jurisdictions . additional income tax expense was recorded in connection with uncertain tax positions and undistributed earnings of foreign subsidiaries . 46 financial condition summary the following table summarizes our consolidated balance sheets at december 31. replace_table_token_8_th changes in the composition and balance of our assets and liabilities during 2016 are principally attributable to loans held for investment and financing liabilities , which increased as a result of our reverse mortgage securitizations accounted for as secured financings . match funded liabilities declined during 2016 consistent with lower advances and match funded advances on a declining servicing portfolio . total equity declined during 2016 as a result of the net loss we incurred for the year and our repurchase of 991,985 shares of ocwen 's common stock during the first quarter . segment results of operations servicing we earn contractual monthly servicing fees pursuant to servicing agreements ( which are typically payable as a percentage of upb ) as well as ancillary fees , including hamp fees , float earnings , reo referral commissions , speedpay ® fees and late fees , in connection with owned msrs . we also earn fees under both subservicing and special servicing arrangements with 47 banks and other institutions that own the msrs . we typically earn these fees either as a percentage of upb or on a per loan basis . per loan fees typically vary based on delinquency status . loan resolutions because we recognize servicing fees as revenue when the fees are earned , loan resolution activities are important to our financial performance . we recognize delinquent servicing fees and late fees as revenue when we collect cash on resolved loans , where permitted . loan resolution activities address the pipeline of delinquent loans and generally lead to ( i ) modification of the loan terms , ( ii ) repayment plan alternatives , ( iii ) a discounted payoff of the loan ( e.g. , a “ short sale ” ) or ( iv ) foreclosure or deed-in-lieu-of-foreclosure and sale of the resulting reo . loan modifications must be made in accordance with the applicable servicing agreement as such agreements may require approvals or impose restrictions upon , or even forbid , loan modifications . to select the best loan modification option for a borrower , we perform a structured analysis , using a proprietary model , of all options using information provided by the borrower as well as external data , including recent broker price opinions to value the mortgaged property . our proprietary model includes , among other things , an assessment of re-default risk . because the majority of our loan modifications have been in connection with the hamp loan modification program , its expiration on december 31 , 2016 , will significantly , and adversely , affect our servicing revenue and the financial performance of our servicing segment in future periods if we are unable to replace hamp with other modification programs . we estimate the balance of deferred servicing fees related to delinquent borrower payments was $ 380.2 million , $ 458.7 million and $ 527.6 million , respectively at december 31 , 2016 , 2015 and 2014 . we are contractually obligated to remit to nrz all deferred servicing fees collected in connection with msrs underlying rights to msrs . however , under our agreements with nrz , in addition to base servicing fees , we are entitled to performance fees that increase to the extent we collect deferred servicing fees . story_separator_special_tag as such , the majority of the deferred servicing fees collected are recognized by us as additional revenue without a corresponding increase in interest expense related to the nrz financing liability . advance obligation as a servicer , we are generally obliged to advance funds in the event borrowers are delinquent on their monthly mortgage related payments . we advance principal and interest ( p & i advances ) , taxes and insurance ( t & i advances ) and legal fees , property valuation fees , property inspection fees , maintenance costs and preservation costs on properties that have been foreclosed ( corporate advances ) . for loans in non-agency securitization trusts , if we determine that our p & i advances can not be recovered from the projected future cash flows , we generally have the right to cease making p & i advances , declare advances , where permitted including t & i and corporate advances , in excess of net proceeds to be non-recoverable and , in most cases , immediately recover any such excess advances from the general collection accounts of the respective trust . with t & i and corporate advances , we continue to advance if net future cash flows exceed projected future advances without regard to advances already made . most of our advances have the highest reimbursement priority ( i.e. , they are “ top of the waterfall ” ) so that we are entitled to repayment from respective loan or reo liquidation proceeds before any interest or principal is paid on the bonds that were issued by the trust . in the majority of cases , advances in excess of respective loan or reo liquidation proceeds may be recovered from pool-level proceeds . the costs incurred in meeting these obligations consist principally of the interest expense incurred in financing the servicing advances . most , but not all , subservicing agreements provide for more rapid reimbursement of any advances from the owner of the servicing rights . nrz effectively funds advances on loans for which we have sold the rights to msrs because nrz is contractually required to buy the advances we make on those loans under our agreements with nrz . hud note sales we participate in hud 's asset sale programs for non-performing loans insured by fha ( hud note sales ) , the majority of which are associated with the aged delinquent portfolio loan sale ( adpls ) program . hud note sales programs are alternatives to the normal conveyance claim process in which a servicer must complete the foreclosure process and then convey the vacant , and potentially rehabilitated , home to fha . under each sale , the assignment of the loan to hud by the servicer accelerates the receipt of claim proceeds by the servicer , significantly shortening the foreclosure and claim timelines and reducing related servicer expenses . hud accepts and pools the resulting uninsured loans for resale through an auction process . the cancellation of the fha insurance by hud and sale of the uninsured loan delays the foreclosure process and gives the borrower more time and another chance to avoid foreclosure , options that may not have been feasible while the loans were insured . adpls differs from other hud loan sale programs , in which ocwen has participated on a smaller scale , in that the loans targeted for approval are over three years delinquent . significant variables aggregate upb . servicing and subservicing fees are generally expressed as a percentage of upb . during the past two years , aggregate upb has declined as a result of msr sales , portfolio run-off in excess of new originations and restrictions on our ability to acquire msrs under our regulatory settlements . 48 operating efficiency . our operating results are heavily dependent on our ability to scale our operations to cost-effectively and efficiently perform servicing activities in accordance with our servicing agreements . to the extent we are unable to process a high volume of transactions consistently and systematically , the cost of our servicing activities increases and has a negative impact on our operating results . to the extent we are unable to complete servicing activities in accordance with the requirements of our servicing agreements , we may incur additional costs or fail to recover otherwise reimbursable costs and advances . delinquencies . delinquencies impact our results of operations and operating cash flows . delinquencies affect the timing of revenue recognition because we recognize servicing fees as earned , which is generally upon collection of payments from the borrower . non-performing loans are also more expensive to service because the loss mitigation activities that we must undertake to keep borrowers in their homes or to foreclose , if necessary , are more costly than the activities required to service a performing loan . these loss mitigation activities include increased contact with the borrower for collection and the development of forbearance plans or loan modifications by highly skilled associates who command higher compensation as well as the higher compliance costs associated with these , and similar , activities . while the higher cost is somewhat offset by ancillary fees , for severely delinquent loans or loans that enter the foreclosure process the incremental revenue opportunities are generally not sufficient to cover our increased costs . in addition , when borrowers are delinquent , the amount of funds that we are required to advance to the investors increases . we incur significant costs to finance those advances . we utilize servicing advance financing facilities , which are asset-backed ( i.e. , match funded liabilities ) securitization facilities , to finance a portion of our advances and the fees retained by nrz for loans where we have sold the rights to msrs vary based on the level of outstanding advances they have purchased . as a result , increased delinquencies result in increased interest expense . prepayment speed . the rate at which upb declines for a pool , or pools of loans , can have a significant impact on our business .
| excluding msr amortization and valuation adjustments and monitor expenses , expenses for 2016 were $ 196.1 million , or 16 % , lower than the prior year . this decline reflects our progress implementing cost improvement initiatives . compensation and benefits expense declined $ 33.7 million , or 8 % , in 2016 as average headcount declined by 9 % , including an 11 % reduction in u.s.-based headcount . the decline in headcount occurred principally in our servicing business where headcount declined by 14 % , including a 28 % reduction in the u.s. technology and communications expense declined $ 44.4 million , or 29 % , primarily as a consequence of our decision to reduce our dependence on third-party service providers and bring a greater proportion of our technology services in-house . the decline in technology and communications expense was offset in large part by an increase in technology-related compensation and benefits expense . occupancy and equipment expense declined by $ 32.7 million , or 29 % , largely because of the effect of the decline in the size of the servicing portfolio on various expenses , including postage and other delivery services , and the effect of the declines in headcount . professional services expense , excluding monitor expenses , was $ 2.6 million , or 1 % , lower in 2016 as compared to 2015 . professional services expense for 2016 includes $ 68.1 million of charges in connection with legal and regulatory matters . monitor expenses increased $ 31.8 million , or 64 % , primarily as a result of costs related to the ca auditor , whose appointment has now been terminated . monitor expenses have declined over the course of 2016 from a peak of $ 30.0 million in the first quarter to $ 8.5 million in the fourth quarter . professional services expense for 2015 included $ 25.1 million of financial and legal advisory fees incurred in connection with evaluating adjustments to our capital
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other income , net of other expenses was $ 0.6 million for the year ended december 31 , 2015 , a decrease of $ 0.1 million from $ 0.7 million for the year ended december 31 , 2014 . other income in 2015 includes $ 0.2 million from the sales of lots . other income in 2014 included a $ 0.6 million gain realized from the sale of certain land tracts not directly associated with our core homebuilding operations . 37 operating income and net income . operating income for the year ended december 31 , 2015 was $ 79.7 million , an increase of $ 37.3 million , or 88.0 % , from $ 42.4 million for the year ended december 31 , 2014 . net income for the year ended december 31 , 2015 was $ 52.8 million , an increase of $ 24.6 million , or 87.3 % , from $ 28.2 million for the year ended december 31 , 2014 . the increases are primarily attributed to a 44.5 % increase in homes closed , a higher average sales price and improved leverage realized during 2015 as compared to 2014. year ended december 31 , 2014 compared to the year ended december 31 , 2013 homes sales . our home sales revenues and closings by division for the years ended december 31 , 2014 and 2013 were as follows ( dollars in thousands ) : replace_table_token_8_th home sales revenues for the year ended december 31 , 2014 were $ 383.3 million , an increase of $ 223.2 million , or 139.4 % , from $ 160.1 million for the year ended december 31 , 2013. the increase in home sales revenues is primarily due to a 121.8 % increase in homes closed and an increase in the average selling price per home during the year ended december 31 , 2014 as compared to the year ended december 31 , 2013. we closed 2,356 homes during the year ended december 31 , 2014 , as compared to 1,062 homes closed during the year ended december 31 , 2013. this increase in home closings was largely due to more active communities in 2014 and the gtis acquisition that was completed in november 2013. the average selling price per home closed during the year ended december 31 , 2014 was $ 162,677 , an increase of $ 11,955 , or 7.9 % , from the average selling price per home of $ 150,722 for the year ended december 31 , 2013. this increase in the average selling price per home was primarily due to changes in product mix and a favorable pricing environment . management and warranty fees . management and warranty fees for the year ended december 31 , 2013 were $ 2.7 million . management and warranty fees were received from the lgi/gtis joint ventures through november 2013 when the company acquired the joint venture interests that it did not own prior to such date . total home closings on a combined basis for the lgi/gtis joint ventures were 555 for the period january 1 , 2013 to november 13 , 2013. there were no management and warranty fees for the year ended december 31 , 2014 as the lgi/gtis joint ventures have been consolidated since the gtis acquisitions . cost of sales and gross margin ( home sales revenues less cost of sales ) . cost of sales increased for the year ended december 31 , 2014 to $ 280.5 million , an increase of $ 159.2 million , or 131.2 % , from $ 121.3 million for the year ended december 31 , 2013. this increase is primarily due to a 121.8 % increase in homes closed during 2014 as compared to 2013. gross margin for the year ended december 31 , 2014 was $ 102.8 million , an increase of $ 64.0 million , or 165.3 % , from $ 38.7 million for the year ended december 31 , 2013. gross margin as a percentage of home sales revenues was 26.8 % for the year ended december 31 , 2014 and 24.2 % for the year ended december 31 , 2013. the increase in gross margin as a percentage of home sales revenues reflects the higher average homes sales prices offset by increased construction costs and higher lot costs for the year ended december 31 , 2014 as compared to the year ended december 31 , 2013. selling expenses . selling expenses as a percentage of home sales revenues were 9.6 % and 9.9 % for the years ended december 31 , 2014 and 2013 , respectively . the decrease of selling expenses as a percentage of home sales revenues was primarily due to the operating leverage realized from our salaried sales personnel during the year ended december 31 , 2014 compared to the year ended december 31 , 2013. selling expenses for the year ended december 31 , 2014 were $ 36.7 million , an increase of $ 20.9 million , or 132.6 % , from $ 15.8 million for the year ended december 31 , 2013. sales commissions increased to $ 14.7 million for the year ended december 31 , 2014 from $ 6.0 million during that same period in the prior year largely due to a 121.8 % increase in homes closed during the year ended december 31 , 2014 as compared to the year ended december 31 , 2013. advertising and direct mail costs increased to $ 8.6 million during the year ended december 31 , 2014 from $ 3.3 million for the same period in the prior year primarily due to the increase in the number of active communities in 2014 as compared to 2013 . 38 general and administrative . general and administrative expenses as a percentage of home sales revenues were 6.2 % and 8.5 % for the years ended december 31 , 2014 and 2013 , respectively . story_separator_special_tag the decrease in general and administrative expenses as a percentage of home sales revenues reflects leverage realized from the increase in home sales revenues in 2014 and less accounting and professional expenses incurred during 2014 as compared to those incurred in 2013 in connection with the reorganization transactions and financial reporting for the ipo . general and administrative expenses for the year ended december 31 , 2014 were $ 23.7 million , an increase of $ 10.1 million , or 74.5 % , from $ 13.6 million for the year ended december 31 , 2013. the increase in the amount of general and administrative expenses during the year ended december 31 , 2014 as compared to the year ended december 31 , 2013 is primarily attributable to additional employees added during 2014 to support the increased number of active communities and the higher number of home closings . income from unconsolidated joint ventures . our share of income from the lgi/gtis joint ventures for the year ended december 31 , 2013 was $ 4.3 million . we acquired our joint venture partner 's interests in the lgi/gtis joint ventures on november 13 , 2013 in the gtis acquisitions . gain on remeasurement of interests in lgi/gtis joint ventures . a gain of $ 6.4 million was recognized by the company for the year ended december 31 , 2013 on the remeasurement of our predecessor 's equity interests in the lgi/gtis joint ventures in connection with the gtis acquisitions . other income . other income , net of other expenses was $ 0.7 million for the year ended december 31 , 2014 , an increase of $ 0.7 million from $ 0.02 million for the year ended december 31 , 2013. the increase in other income reflects the gain realized from the sale of land not directly associated with our core homebuilding operations . ( income ) loss attributable to non-controlling interests . the loss attributable to non-controlling interests for the year ended december 31 , 2013 was $ 0.6 million . during the year ended december 31 , 2013 , the losses are related to the initial operations of lgi fund iii holdings , llc formed in march 2013. operating income and net income . operating income for the year ended december 31 , 2014 was $ 42.4 million , an increase of $ 26.0 million , or 158.6 % , from $ 16.4 million for the year ended december 31 , 2013. net income for the year ended december 31 , 2014 was $ 28.2 million , an increase of $ 6.5 million , or 30.0 % , from $ 21.7 million for the year ended december 31 , 2013. the increases are primarily attributed to a 121.8 % increase in homes closed during 2014 as compared to 2013 , and offset by the ( i ) $ 6.4 million gain on remeasurement of our interests in the lgi/gtis joint ventures in connection with the gtis acquisitions recorded in 2013 , ( ii ) $ 4.3 million of our share of income from the lgi/gtis joint ventures in 2013 , and ( iii ) increase in income tax expense reported in 2014 . 39 unaudited pro forma financial information the following unaudited pro forma statements of operations have been developed by applying pro forma adjustments to our audited statements of operations for the year ended december 31 , 2013 and audited financial statements of the lgi/gtis joint ventures . the unaudited pro forma statements of operations for the year ended december 31 , 2013 give effect to the gtis acquisitions as if they had occurred on january 1 , 2012. the pro forma adjustments are based upon certain assumptions that we believe are reasonable under the circumstances . the pro forma financial data is presented for informational purposes only . the pro forma financial data does not purport to represent what our results of operations would have been had the gtis acquisitions actually occurred on the date indicated and does not purport to project our results of operations for any future period . the pro forma financial statements should be read in conjunction with the information contained in other sections of this annual report including “ selected financial data , ” in our historical audited financial statements and related notes thereto , and other sections of this “ management 's discussion and analysis of financial condition and results of operations ” appearing elsewhere in this annual report . all pro forma adjustments and their underlying assumptions are described more fully in the notes to our pro forma statements of operations . the unaudited pro forma financial information has been prepared to give effect to the gtis acquisitions in accordance with asc topic 805 , “ business combinations ” , ( “ asc 805 ” ) . a fair value step-up adjustment of approximately $ 7.4 million was recorded to the real estate inventory and certain lot option contracts in connection with the gtis acquisitions . the pro forma adjustments do not reflect cost of sales related to the step-up adjustment since the step-up does not have a continuing impact on our results of operations due to the short-term impact on our financial performance . all pro forma adjustments and their underlying assumptions are described more fully in the notes to the pro forma statements of operations . 40 unaudited pro forma statement of operations for the year ended december 31 , 2013 replace_table_token_9_th ( 1 ) this column is a combination of the financial statements of lgi-gtis holdings , llc , lgi-gtis holdings ii , llc , lgi-gtis holdings iii , llc and lgi-gtis holdings iv , llc , for the period january 1 , 2013 through november 13 , 2013. notes to unaudited pro forma statement of operations for year ended december 31 , 2013 ( a ) eliminates our predecessor 's equity in the income of the lgi/gtis joint ventures . ( b ) reflects amortization of the $ 0.7 million marketing related intangible asset ( i.e. , trade name rights ) recorded in the gtis acquisitions .
| 34 results of operations the following table sets forth our results of operations for the periods indicated : replace_table_token_6_th ( 1 ) earnings per share is presented for the years ended december 31 , 2015 and 2014 and the period from november 13 , 2013 ( date of closing of ipo ) to december 31 , 2013. see note 11- “ equity ” to our consolidated financial statements included in part ii , item 8 of this annual report for calculation of earnings per share . ( 2 ) gross margin is home sales revenues less cost of sales . ( 3 ) calculated as a percentage of home sales revenues . ( 4 ) adjusted gross margin is a non-gaap financial measure used by management as a supplemental measure in evaluating operating performance . we define adjusted gross margin as gross margin less capitalized interest and adjustments resulting from the application of purchase accounting included in the cost of sales . our management believes this information is useful because it isolates the impact 35 that capitalized interest and purchase accounting adjustments have on gross margin . however , because adjusted gross margin information excludes capitalized interest and purchase accounting adjustment , which have real economic effects and could impact our results , the utility of adjusted gross margin information as a measure of our operating performance may be limited . in addition , other companies may not calculate adjusted gross margin information in the same manner that we do . accordingly , adjusted gross margin information should be considered only as a supplement to gross margin information as a measure of our performance . please see “ —non-gaap measures—adjusted gross margin ” for a reconciliation of adjusted gross margin to gross margin , which is the gaap financial measure that our management believes to be most directly comparable . ( 5 ) adjusted ebitda is a non-gaap financial measure used by management as a supplemental measure in evaluating operating performance . we define adjusted ebitda as net income before ( i ) interest expense , ( ii ) income taxes , ( iii ) depreciation and amortization , ( iv ) capitalized interest charged to the cost of sales , ( v ) other income , net and ( vi ) adjustments resulting from the application of purchase accounting . our management believes that the presentation of adjusted ebitda provides useful information to investors regarding our results of operations because it assists both investors and management in analyzing and benchmarking
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for periods prior to the spin-off , the combined consolidated historical financial statements have been prepared on a “ carve-out ” basis from ashford trust 's consolidated financial statements using the historical results of operations , cash flows , assets and liabilities attributable to the eight initial properties we acquired from ashford trust in connection with the spin-off and include allocations of income , expenses , assets and liabilities from ashford trust . these allocations reflect significant assumptions , and the financial statements do not fully reflect what our financial positions , results of operations and cash flows would have been had we been a stand-alone publicly traded company owning the eight initial properties during all periods presented . as a result , historical financial information is not necessarily indicative of our future results of operations , financial positions and cash flows . as an example of allocations relating to the “ carve out ” presentation , we note that corporate general and administrative expense and certain indirect costs have been allocated . corporate general and administrative expense represents an allocation of certain ashford trust corporate general and administrative costs including salaries and benefits , stock based compensation , legal and professional fees , rent expense and office expenses . any expenses that were determined to be directly related to any hotel property or specific transaction were allocated directly to the related hotel . however , any indirect costs were allocated pro rata across all hotels owned by ashford trust , including the eight initial properties contributed to us , based on the gross investment value for all such hotels . indirect costs are primarily attributable to certain ownership costs related to specific hotel properties but paid by ashford trust . indirect costs are included in “ other expenses ” in the combined consolidated financial statements . additionally , interest income reflects earnings on amounts held as reserves by lenders and property managers . key indicators of operating performance we use a variety of operating and other information to evaluate the operating performance of our business . these key indicators include financial information that is prepared in accordance with gaap as well as other financial measures that are 71 non-gaap measures . in addition , we use other information that may not be financial in nature , including statistical information and comparative data . we use this information to measure the operating performance of our individual hotels , groups of hotels and or business as a whole . we also use these metrics to evaluate the hotels in our portfolio and potential acquisitions to determine each hotel 's contribution to cash flow and its potential to provide attractive long-term total returns . these key indicators include : occupancy-occupancy means the total number of hotel rooms sold in a given period divided by the total number of rooms available . occupancy measures the utilization of our hotels ' available capacity . we use occupancy to measure demand at a specific hotel or group of hotels in a given period . adr-adr means average daily rate and is calculated by dividing total hotel rooms revenues by total number of rooms sold in a given period . adr measures average room price attained by a hotel and adr trends provide useful information concerning the pricing environment and the nature of the customer base of a hotel or group of hotels . we use adr to assess the pricing levels that we are able to generate . revpar-revpar means revenue per available room and is calculated by multiplying adr by the average daily occupancy . revpar is one of the commonly used measures within the hotel industry to evaluate hotel operations . revpar does not include revenues from food and beverage sales or parking , telephone or other non-rooms revenues generated by the property . although revpar does not include these ancillary revenues , it is generally considered the leading indicator of core revenues for many hotels . we also use revpar to compare the results of our hotels between periods and to analyze results of our comparable hotels ( comparable hotels represent hotels we have owned for the entire period ) . revpar improvements attributable to increases in occupancy are generally accompanied by increases in most categories of variable operating costs . revpar improvements attributable to increases in adr are generally accompanied by increases in limited categories of operating costs , such as management fees and franchise fees . revpar changes that are primarily driven by changes in occupancy have different implications for overall revenues and profitability than changes that are driven primarily by changes in adr . for example , an increase in occupancy at a hotel would lead to additional variable operating costs ( including housekeeping services , utilities and room supplies ) and could also result in increased other operating department revenue and expense . changes in adr typically have a greater impact on operating margins and profitability as they do not have a substantial effect on variable operating costs . occupancy , adr and revpar are commonly used measures within the lodging industry to evaluate operating performance . revpar is an important statistic for monitoring operating performance at the individual hotel level and across our entire business . we evaluate individual hotel revpar performance on an absolute basis with comparisons to budget and prior periods , as well as on a regional and company-wide basis . adr and revpar include only rooms revenue . rooms revenue comprised approximately 74 % of our total revenue for the year ended december 31 , 2013 and is dictated by demand ( as measured by occupancy ) , pricing ( as measured by adr ) and our available supply of hotel rooms . we also use ffo , affo , ebitda , adjusted ebitda and hotel ebitda as measures of the operating performance of our business . see “ non-gaap financial measures. story_separator_special_tag ” principal factors affecting our results of operations the principal factors affecting our operating results include overall demand for hotel rooms compared to the supply of available hotel rooms , and the ability of our third-party management companies to increase or maintain revenues while controlling expenses . demand . the demand for lodging , including business travel , is directly correlated to the overall economy ; as gdp increases , lodging demand increases . historically , periods of declining demand are followed by extended periods of relatively strong demand , which typically occurs during the growth phase of the lodging cycle . following the recession that commenced in 2008 , the lodging industry has experienced improvement in fundamentals , including demand , which has continued through 2013. we believe improvements in the economy will continue to benefit the lodging industry and hotel operating results for several years to come . supply . the development of new hotels is driven largely by construction costs , the availability of financing and expected performance of existing hotels . we expect that our adr , occupancy and revpar performance will be impacted by macroeconomic factors such as national and local employment growth , personal income and corporate earnings , gdp , consumer confidence , office vacancy rates and business relocation decisions , airport and other business and leisure travel , new hotel construction , the pricing strategies of competitors and currency fluctuations . in addition , our adr , occupancy and revpar performance are dependent on the continued success of the marriott and hilton brands . 72 revenue . substantially all of our revenue is derived from the operation of hotels . specifically , our revenue is comprised of : rooms revenue-occupancy and adr are the major drivers of rooms revenue . rooms revenue accounts for the substantial majority of our total revenue . food and beverage revenue-occupancy and the type of customer staying at the hotel are the major drivers of food and beverage revenue ( i.e. , group business typically generates more food and beverage business through catering functions when compared to transient business , which may or may not utilize the hotel 's food and beverage outlets or meeting and banquet facilities ) . other hotel revenue-occupancy and the nature of the property are the main drivers of other ancillary revenue , such as telecommunications , parking and leasing services . hotel operating expenses . the following presents the components of our hotel operating expenses : rooms expense-these costs include housekeeping wages and payroll taxes , reservation systems , room supplies , laundry services and front desk costs . like rooms revenue , occupancy is the major driver of rooms expense and , therefore , rooms expense has a significant correlation to rooms revenue . these costs can increase based on increases in salaries and wages , as well as the level of service and amenities that are provided . food and beverage expense-these expenses primarily include food , beverage and labor costs . occupancy and the type of customer staying at the hotel ( i.e. , catered functions generally are more profitable than restaurant , bar or other on-property food and beverage outlets ) are the major drivers of food and beverage expense , which correlates closely with food and beverage revenue . management fees-base management fees are computed as a percentage of gross revenue . incentive management fees generally are paid when operating profits exceed certain threshold levels . other hotel expenses-these expenses include labor and other costs associated with the other operating department revenues , as well as labor and other costs associated with administrative departments , franchise fees , sales and marketing , repairs and maintenance and utility costs . most categories of variable operating expenses , including labor costs such as housekeeping , fluctuate with changes in occupancy . increases in occupancy are accompanied by increases in most categories of variable operating expenses , while increases in adr typically only result in increases in limited categories of operating costs and expenses , such as franchise fees , management fees and credit card processing fee expenses which are based on hotel revenues . thus , changes in adr have a more significant impact on operating margins than changes in occupancy . story_separator_special_tag other operating expenses . other expense increased $ 2.8 million , or 4.7 % , to $ 61.8 million in 2013. hotel operating expenses consist of direct expenses from departments associated with revenue streams and indirect expenses associated with support departments and incentive management fees . direct expenses increased $ 64,000. direct expenses represented 1.8 % of total hotel revenue for both 2013 and 2012. indirect expenses and incentive management fees increased $ 2.7 million in 2013. the increase in indirect expenses is primarily attributable to higher incentive management fees , general , administrative and marketing costs and bad debt expense related to a modification of rent terms at the capital hilton . management fees . base management fees increased $ 639,000 , or 6.8 % , to $ 10.0 million in 2013 as a result of higher hotel revenue in 2013. property taxes , insurance and other . property taxes , insurance and other increased $ 1.5 million , or 14.8 % , to $ 11.8 million in 2013. the increase was primarily due to higher property taxes at two hotel properties as a result of higher assessed values in 2013. depreciation and amortization . depreciation and amortization increased $ 1.3 million , or 4.4 % , to 30.9 million in 2013 , primarily due to a major renovation at the hilton la jolla torrey pines during 2012 and early 2013. advisory services fee . we recorded an advisory services fee of $ 1.0 million to ashford advisor in 2013 , which was comprised of a base advisory fee of $ 878,000 , reimbursable overhead of $ 53,000 and internal audit reimbursements of $ 116,000. no incentive management fee was paid for 2013 in connection with our advisory agreement with ashford advisor . transaction costs .
| rooms revenue in our seattle hotels was $ 3.7 million higher in 2013 when compared to 2012 , due primarily to higher room rates and a 393 basis point increase in occupancy at the seattle courtyard downtown . rooms revenue at the marriott legacy town center increased $ 1.3 million primarily as a result of higher room rates of 7.0 % . rooms revenue at the capital hilton increased $ 885,000 which was primarily attributable to the presidential inauguration in 2013. rooms revenue increased $ 752,000 at the hilton la jolla torrey pines , which was primarily attributable to the completion of a major renovation earlier in 2013. food and beverage revenue . food and beverage revenues from our hotels increased $ 51,000 , or 0.1 % , to $ 50.8 million in 2013. this increase was primarily attributable to increases at the san francisco courtyard downtown , the seattle marriott waterfront and the capital hilton , offset by lower food and beverage revenue at the plano marriott legacy town center and the hilton la jolla torrey pines , which were both negatively affected as a result of major renovations . other revenue . other hotel revenue , which consists mainly of telecommunications , parking and rentals , increased $ 1.4 million , or 14.3 % , to $ 11.0 million in 2013. this increase was primarily attributable to higher rental income at the capital hilton , the seattle courtyard downtown and the philadelphia courtyard downtown as well as higher other revenue at the hilton la jolla torrey pines in 2013 as a result of its major renovation . other revenue . other non-hotel revenue was $ 22,000 in 2013. there was no other revenue in 2012. rooms expense . rooms expense increased $ 2.9 million , or 7.8 % , to $ 39.9 million in 2013 primarily due to higher rooms revenue . rooms margin was 76.8 % for 2013 compared to 77.0 % for 2012. food and beverage expense . food and beverage
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our revenue is reported net of the wholesale cost for underlying products and services . in this report , we refer to this net revenue as revenue. for the years ended december 31 , 2013 , 2012 and 2011 , our north america and international segments generated the following revenue : replace_table_token_5_th sources of revenue transactions . in both of our segments , we derive revenue from transactions and the related revenue per transaction . as illustrated in the diagram below , a transaction is defined as a purchase by a customer . our customers include holders of our card products and those of our partners , for whom we manage card programs , members of our proprietary networks who are provided access to our products and services and commercial businesses to whom we provide workforce payment productivity solutions . revenue from transactions is derived from our merchant and network relationships , as well as our customers and partners . through our merchant and network relationships we primarily offer fuel , vehicle maintenance , food , fuel , toll and transportation cards and vouchers or lodging services to our customers . 37 the following diagram illustrates a typical card transaction flow , but may also be applied to our vehicle maintenance , lodging and food , fuel , toll and transportation card and voucher products , substituting transactions for gallons . this representative model may not include all of our businesses . illustrative transaction flow from our customers and partners , we derive revenue from a variety of program fees , including transaction fees , card fees , network fees and charges , which can be fixed fees , cost plus a mark-up or based on a percentage discount from retail prices . our programs include other fees and charges associated with late payments and based on customer credit risk . from our merchant and network relationships , we derive revenue mostly from the difference between the price charged to a customer for a transaction and the price paid to the merchant or network for the same transaction , as well as network fees and charges in certain businesses . as illustrated in the table below , the price paid to a merchant or network may be calculated as ( i ) the merchant 's wholesale cost of the product plus a markup ; ( ii ) the transaction purchase price less a percentage discount ; or ( iii ) the transaction purchase price less a fixed fee per unit . the following table presents an illustrative revenue model for transactions with the merchant , which is primarily applicable to fuel based product transactions , but may also be applied to our vehicle maintenance , lodging and food , fuel , toll and transportation card and voucher products , substituting transactions for gallons . this representative model may not include all of our businesses . illustrative revenue model for fuel purchases ( unit of one gallon ) replace_table_token_6_th 38 set forth below are our sources of revenue for the years ended december 31 , 2013 , 2012 and 2011 , expressed as a percentage of consolidated revenues : replace_table_token_7_th 1 although we can not precisely calculate the impact of fuel price spreads and the absolute price of fuel on our consolidated revenues , we believe these percentages approximate their relative impacts . revenue per transaction . set forth below is revenue per transaction information for the years ended december 31 , 2013 , 2012 and 2011 : replace_table_token_8_th 1 adjusted revenues is a non-gaap financial measure defined as revenues , net less merchant commissions . we believe this measure is a more effective way to evaluate our revenue performance . we use adjusted revenues as a basis to evaluate our revenues , net of the commissions that are paid to merchants to participate in our card programs . adjusted revenues is a supplemental non-gaap financial measures of operating performance . see the heading entitled management 's use of non-gaap financial measures. revenue per transaction is derived from the various revenue types as discussed above and can vary based on geography , the relevant merchant relationship , the payment product utilized and the types of products or services purchased , the mix of which would be influenced by our acquisitions , organic growth in our business , and the overall macroeconomic environment , including fluctuations in foreign currency exchange rates . revenue per transaction per customer changes as the level of services we provide to a customer increases or decreases , as macroeconomic factors changes and as adjustments are made to merchant and customer rates . see results of operations for further discussion of transaction volumes and revenue per transaction . from 2012 to 2013 , total transactions increased from 303.8 million to 327.5 million , an increase of 23.7 million or 7.8 % . we experienced an increase in transactions in our north america and international segments primarily due to organic growth in certain payment programs and the impact of the acquisitions completed in 2013 and the full year impact of acquisitions completed in 2012. from 2011 to 2012 , total transactions increased from 214.8 million to 303.8 million , an increase of 89.0 million or 41.4 % . we experienced an increase in transactions in our north america and international segments primarily 39 due to organic growth in certain payment programs and the impact of the acquisitions completed in 2012 and the full year impact of acquisitions completed in 2011. revenue per transaction in our international segment has historically run higher than in our north america segment . included in revenue per transactions is the impact of recent acquisitions . revenue per transaction on a consolidated basis has been significantly impacted by acquisitions in our international segment from 2011 through 2013 and , to a lesser degree , our north american acquisition in 2013. in 2011 , we acquired efectivale in mexico and allstar business solutions limited ( allstar ) in the u.k. , both in our international segment . story_separator_special_tag while the acquired businesses represent good profit margin businesses , they have lower revenue per transaction products in comparison to our other businesses . the impact of these acquisitions on revenue per transaction was partially offset by the impact of acquisitions completed in 2012. in 2012 , we acquired a russian fuel card business and ctf technologies , inc. ( ctf ) , both in our international segment , which have higher revenue per transaction products in comparison to our other businesses . in 2013 , we acquired several businesses in our international segment ; fleetcard in australia , cardlink in new zealand , vb servicos ( vb ) and db trans s.a. ( db ) in brazil and epyx in the u.k. certain of these international acquisitions have higher revenue per transaction products in comparison to our other international businesses , which when combined with the impact of 2012 acquisitions , contributes to the increase in transaction volumes and revenue per transaction in our international segment in 2013 over 2012. we also acquired nextraq in the u.s in 2013 which has a higher revenue per transaction product in comparison to our other north american businesses . this added to higher transaction volumes and revenue per transaction in our north american segment in 2013 over 2012 , in addition to organic growth . sources of expenses we incur expenses in the following categories : merchant commissions in certain of our card programs , we incur merchant commissions expense when we reimburse merchants with whom we have direct , contractual relationships for specific transactions where a customer purchases products or services from the merchant . in the card programs where it is paid , merchant commissions equal the difference between the price paid by us to the merchant and the merchant 's wholesale cost of the underlying products or services . processing our processing expense consists of expenses related to processing transactions , servicing our customers and merchants , bad debt expense and cost of goods sold related to our hardware sales in certain businesses . selling our selling expenses consist primarily of wages , benefits , sales commissions ( other than merchant commissions ) and related expenses for our sales , marketing and account management personnel and activities . general and administrative our general and administrative expenses include compensation and related expenses ( including stock-based compensation ) for our executive , finance and accounting , information technology , human resources , legal and other administrative personnel . also included are facilities expenses , third-party professional services fees , travel and entertainment expenses , and other corporate-level expenses . depreciation and amortization our depreciation and amortization expenses include depreciation of property and equipment , consisting of computer hardware and software ( including proprietary software development amortization expense ) , card-reading equipment , furniture , fixtures , vehicles and buildings and leasehold improvements related to office space . our amortization expenses include intangible assets related to customer and vendor relationships , trade names and trademarks and non-compete agreements . we are amortizing intangible assets related to business acquisitions and certain private label contracts associated with the purchase of accounts receivable . other income , net other income , net includes foreign currency transaction gains or losses , revenue/costs from the sale of assets and other miscellaneous operating costs and revenue . 40 interest expense , net interest expense , net includes interest income on our cash balances and interest expense on our outstanding debt and excludes interest on our securitization facility . we have historically invested our cash primarily in short-term money market funds . provision for income taxes the provision for income taxes consists primarily of corporate income taxes related to profits resulting from the sale of our products and services in the united states and internationally . our worldwide effective tax rate is lower than the u.s. statutory rate of 35 % , due primarily to lower rates in foreign jurisdictions and foreign-sourced non-taxable income . adjusted revenues , ebitda , adjusted net income and adjusted net income per diluted share . set forth below are adjusted revenues , earnings before interest , taxes , depreciation and amortization ( ebitda ) , adjusted net income and diluted adjusted net income per share for the years ended december 31 , 2013 and 2012. replace_table_token_9_th we use adjusted revenues as a basis to evaluate our revenues , net of the commissions that are paid to merchants that participate in certain of our card programs . the commissions paid to merchants can vary when market spreads fluctuate in much the same way as revenues are impacted when market spreads fluctuate . thus , we believe this is a more effective way to evaluate our revenue performance on a consistent basis . we use ebitda , calculated as earnings before interest , taxes , depreciation and amortization and other income to eliminate the impact of certain non-core items during the period . we use adjusted net income and adjusted net income per diluted share to eliminate the effect of items that we do not consider indicative of our core operating performance on a consistent basis . adjusted revenues , ebitda , adjusted net income and adjusted net income per diluted share are supplemental non-gaap financial measures of operating performance . see the heading entitled management 's use of non-gaap financial measures. factors and trends impacting our business we believe that the following factors and trends are important in understanding our financial performance : fuel prices our fleet customers use our products and services primarily in connection with the purchase of fuel . accordingly , our revenue is affected by fuel prices , which are subject to significant volatility . a change in retail fuel prices could cause a decrease or increase in our revenue from several sources , including fees paid to us based on a percentage of each customer 's total purchase . changes in the absolute price of fuel may also impact unpaid account balances and the late fees and charges based on these amounts .
| on november 6 , 2012 , we entered into a second amendment to the credit agreement to increase our total borrowing capacity from $ 900 million to $ 1.4 billion , comprised of an increase to the term loan from $ 300 million to $ 550 million and an increase to the revolving line of credit from $ 600 million to $ 850 million . in addition , we increased the accordion feature from $ 150 million to $ 250 million . the interest rates on the amended credit agreement did not change . on march 20 , 2013 , we entered into a third amendment to the credit agreement to extend the term of the facility for an additional five years from the amendment date , with a new maturity date of march 20 , 2018 , separated the revolver into two tranches ( a $ 815 million revolving a facility and a $ 35 million revolving b facility ) , added a designated borrower in australia and another in new zealand , with the ability to borrow in local currency and u.s. dollars under the revolving b facility and removed a cap to allow for additional investments in certain business relationships . the revolving line of credit contains a $ 20 million sublimit for letters of credit , a $ 20 million sublimit for swing line loans and sublimits for multicurrency borrowings in euros , sterling , japanese yen , australian dollars and new zealand dollars . we refer to this facility as the credit facility in this report . the obligations of the borrowers under the credit agreement are guaranteed by us , as evidenced via an executed guaranty , in favor of bank of america , n.a . and the lenders . the obligations of the borrowers under the credit agreement are secured by a pledge of ( i ) 100 % of the issued and outstanding equity interests owned by us of each domestic subsidiary and ( 2 ) 66 % of the issued outstanding shares of equity interests entitled to vote and 100 % of the issued and outstanding equity interests not entitled to vote of each foreign subsidiary directly owned by us , as evidenced via an executed a pledge agreement , dated as of
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we retain an independent valuation firm to prepare ( a ) initial reports of the combined property value associated with each ground lease in our portfolio and ( b ) periodic updates of such reports . as reported in our current report on form 8-k filed on february 15 , 2018 , as of december 31 , 2017 , our estimated value bank is $ 989.2 million in aggregate and our estimated value bank per share is $ 54.38 . please review that 8-k for a discussion of the valuation methodology used and important limitations and qualifications of the calculation of value bank . see also `` risk factors - there can be no assurance that we will realize any incremental value from the value bank or that the market price of our common stock will reflect any value attributable thereto . '' market opportunity : we believe that there is a significant market opportunity for a dedicated provider of ground lease capital like us . we believe that the market for existing ground leases is fragmented with ownership comprised primarily of high net worth individuals , pension funds , life insurance companies , estates and endowments . however , while we intend to pursue acquisitions of existing ground leases , our investment thesis is predicated , in part , on what we believe is an untapped market opportunity to expand the use of ground leases to a broader component of the approximately $ 7.0 trillion institutional commercial property market in the united states . we intend to capture this market opportunity by utilizing multiple sourcing and origination channels , including manufacturing new ground leases with third-party owners and developers of commercial real estate and originating ground leases to provide capital for development and redevelopment . we further believe that ground leases generally represent an attractive source of capital for our tenants and may allow them to generate superior returns on their invested equity as compared to utilizing alternative sources of capital . we intend to draw on the extensive investment origination and sourcing platform of istar , the parent company of our manager , to actively promote the benefits of the ground lease structure to prospective ground lease tenants . organization safety , income & growth inc. ( `` original safety '' ) is a maryland corporation that was formed as a wholly-owned subsidiary of istar on october 24 , 2016. istar contributed a pre-existing portfolio of ground leases to original safety and sought third party capital to grow its ground lease business . a second entity , sigi acquisition , inc. ( `` sigi '' ) was capitalized on april 14 , 2017 by istar and two institutional investors . on april 14 , 2017 , original safety merged with and into sigi with sigi surviving the merger and being renamed safety , income & growth inc. references herein to us or we refer to original safety before such merger and to the surviving company of such merger thereafter . through these and other formation transactions , we ( i ) acquired istar 's entire ground lease portfolio consisting of 12 properties ( the `` initial portfolio '' ) , all of which were wholly-owned as of december 31 , 2016 , ( ii ) completed the $ 227 million 2017 secured financing ( refer to note 6 ) on march 30 , 2017 , ( iii ) issued 2,875,000 shares of our common stock to two institutional investors for $ 20.00 per share , or $ 57.5 million ( representing a 51 % ownership interest in us at such time ) , and 2,775,000 shares of our common stock to istar for $ 20.00 per share , or $ 55.5 million ( representing a 49 % ownership interest in us at such time ) , and ( iv ) paid $ 340.0 million in total consideration to istar for the initial portfolio . on june 27 , 2017 , we completed our initial public offering raising $ 205.0 million in gross proceeds and concurrently completed a $ 45.0 million private placement with istar . the initial public offering price was $ 20.00 per share . istar paid organization and offering costs in connection with these transactions , including commissions payable to the underwriters and other offering expenses . istar received no reimbursement for its payment of the organization and offering costs . we intend to elect to qualify as a real estate investment trust ( `` reit '' ) for u.s. federal income tax purposes , commencing with the tax year ending december 31 , 2017. we were structured as an umbrella partnership reit ( `` upreit '' ) . as such , all of our properties are owned by a subsidiary partnership , safety income and growth operating partnership lp ( the `` operating partnership '' ) , which is currently wholly-owned by us . the upreit structure may afford us with certain benefits as we seek to acquire properties from third parties who may want to defer taxes on the contribution of their ground leases to us . 40 executive overview we acquire , manage and capitalize ground leases and report our business as a single segment . we believe owning a portfolio of ground leases affords our investors the opportunity for safe , growing income . safety is derived from a ground lease 's super senior position in the commercial real estate capital structure . growth is realized through long-term leases with contractual periodic increases in rent . capital appreciation is realized though growth in the value of the land over time and when , at the end of the life of the lease , the commercial real estate property reverts back to us , as landlord , and we are able to realize the value of the leasehold , which may be substantial . story_separator_special_tag our leases share similarities with triple net leases in that typically we are not responsible for any operating or capital expenses over the life of the lease , making the management of our portfolio relatively simple , with limited working capital needs . our initial portfolio was comprised of 12 properties located in major metropolitan areas that were acquired or originated by istar over the past 20 years . all of the properties in our initial portfolio are subject to long-term leases consisting of seven ground leases and one master lease ( covering five properties ) that provide for contractual periodic rental escalations or percentage rent participations in gross revenues generated at the relevant properties . in june 2017 , we acquired two additional ground leases . the ground leases were purchased from third-party sellers for an aggregate purchase price of approximately $ 142.0 million . both transactions are well located urban developments , and based upon our estimate of net operating income at the properties upon stabilization , have significant coverage to the initial ground lease payment due under the leases , greater than 5.4x . we intend to grow our portfolio through future acquisitions and originations of ground leases and believe these transactions are indicative of some of the types of ground leases we are pursuing for acquisition and origination . we acquired the ground lease at 6201 hollywood boulevard , a 183,802 square foot land parcel subject to a long term ground lease located in los angeles , ca in the hollywood neighborhood adjacent to the hollywood/vine metro station . the land is improved with approximately 535 apartments , 71,200 square feet of retail space , 1,300 underground parking spaces , and signage facing hollywood boulevard . the ground lease had 87 years remaining on its term . we also acquired the ground lease at 6200 hollywood boulevard , a 143,151 square foot land parcel subject to a long term ground lease located in los angeles , ca in the hollywood neighborhood adjacent to the hollywood/vine metro station . the site is currently under construction ; once completed , it will be improved with approximately 507 apartments , 56,100 square feet of retail space , 1,237 underground parking spaces , and signage facing hollywood boulevard . the ground lease had 87 years remaining on its term . total development cost of these leasehold improvements is estimated to be $ 450 million , giving the projects a combined property value of approximately $ 600 million . the $ 450 million of leasehold improvements reverts back to us as lessor at the end of the lease , which we refer to as the value bank ( `` value bank '' ) . in august 2017 , we originated a ground lease at 3333 lifehope in atlanta , ga for a purchase price of $ 16.0 million . the property is being converted into a class-a medical office building . the ground lease has a term of 99 years and initial rent of $ 0.9 million , subject to annual increases of 2 % , and based upon the anticipated net operating income at the property upon stabilization , has coverage of more than 3.5x to the initial ground lease payment due under the lease . in addition , the ground lessee will construct a 185-space parking deck adjacent to the building scheduled to be completed in 2018 , which will be engineered to accommodate future development of the site . we have a right of first refusal to provide funding for up to 30 % of the construction cost of an additional 160,000 square feet of development on terms consistent with the ground lease . istar , our largest shareholder and manager , committed to provide a $ 24.0 million construction loan to the ground lessee with an initial term of one year for the renovation of the property . in october 2017 , we entered into a purchase agreement to acquire land subject to a ground lease on which a 301 unit , luxury multi-family project known as “ great oaks ” is currently being constructed in san jose , california . pursuant to the purchase agreement , we will purchase the ground lease on november 1 , 2020 from istar for $ 34.0 million . istar committed to provide a $ 80.5 construction loan to the ground lessee . the ground lease expires in 2116. we currently estimate that the ground rent coverage at the time of stabilization will be in excess of 5.0x , assuming that construction is completed on or before november 1 , 2020 . 41 our portfolio our portfolio is comprised of 15 properties located in 10 states with 11 tenants . our portfolio is comprised of 10 ground leases and a master lease ( relating to five hotel assets that we refer to as our “ park hotels portfolio ” ) that has many of the characteristics of a ground lease , including length of lease term , percentage rent participations , triple net terms and strong ground rent coverage . we acquired 12 of our properties prior to the completion of our initial public offering , and we acquired the remainder of our portfolio after the completion of our initial public offering . the tables below present an overview of our portfolio as of december 31 , 2017 , unless otherwise indicated ( $ in millions ) : replace_table_token_4_th _ ( 1 ) ground rent coverage is defined as the ratio of the underlying property 's noi to the annualized base rental payment due us . underlying property noi is defined as the trailing twelve month net operating income of the commercial real estate being operated at the property without giving effect to any rent paid or payable under our ground lease . net operating income is calculated as property-level revenues less property-level operating expenses as reported to us by the tenant , or as otherwise publicly available .
| interest expense was allocated to us by calculating our average net assets as a percentage of the average net assets in istar 's net lease business segment and multiplying that percentage by the interest expense allocated to istar 's net lease business segment . real estate expense was $ 1.5 million and $ 0.9 million during the years ended december 31 , 2017 and 2016 , respectively . during the year ended december 31 , 2017 , real estate expenses consisted primarily of non-cash rent expense related to the amortization of a below market lease asset at one of our hotel properties , recoverable property taxes at one of our properties and insurance , consulting and legal fees . during the year ended december 31 , 2016 , real estate expenses consisted primarily of recoverable property taxes at one of our properties . the increase in 2017 was primarily due to the non-cash rent expense related to the amortization of a below market lease asset at one of our hotel properties . depreciation and amortization was $ 7.3 million and $ 3.1 million during the years ended december 31 , 2017 and 2016 , respectively , and primarily relates to our ownership of the hotels under our master lease and our ownership of the structure at the buckler apartments property . beginning on april 14 , 2017 we accounted for the acquisition of the initial portfolio from istar in accordance with asc 805 and began recording depreciation based on the acquisition date fair values of the real estate and recognizing amortization expense resulting from in-place intangible lease assets . during the year ended december 31 , 2017 , general and administrative expenses include management fees ( which our manager is waiving payment of during the first year of the management agreement ) , stock-based compensation for equity awards granted to our directors who are not employees of our manager or istar , costs of operating as a public company and an allocation of expenses to us from
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comparing 2018 with 2017 , net interest and loan fee income increased $ 13.4 million due to higher average balances of investments ( up $ 270 million ) and higher yield on interest earning assets ( up 0.03 % ) , offset by lower average balances of loans ( down $ 106 million ) . the fte adjustment was lower in 2018 compared with 2017 mainly due to the reduced federal corporate tax rate as a result of enactment of the act . the yield on earning assets ( fte ) was 3.14 % in 2019 , 3.02 % in 2018 and 2.99 % in 2017. the net interest margin ( fte ) increased in 2019 , reflecting earning assets repriced to higher yields . the 2019 yield on earning assets ( fte ) reflected higher market interest rates which offset the impact of the reduced fte adjustment . the company 's funding cost was 0.03 % in 2019 compared with 0.04 % in 2018 and 2017. average balances of time deposits declined $ 64 million from 2017 to 2019 while lower-cost checking and savings deposits grew 3 % in the same period . average balances of checking and saving deposits accounted for 96.2 % of average total deposits in 2019 compared with 95.6 % in 2018 and 94.8 % in 2017 . - 21 - summary of average balances , yields/rates and interest differential the following tables present information regarding the consolidated average assets , liabilities and shareholders ' equity , the amounts of interest income earned from average interest earning assets and the resulting yields , and the amounts of interest expense incurred on average interest-bearing liabilities and the resulting rates . average loan balances include nonperforming loans . interest income includes reversal of previously accrued interest on loans placed on non-accrual status during the period and proceeds from loans on nonaccrual status only to the extent cash payments have been received and applied as interest income and accretion of purchased loan discounts . yields on tax-exempt securities and loans have been adjusted upward to reflect the effect of income exempt from federal income taxation at the federal statutory tax rate of 35 percent for 2017. due to the tax cuts and jobs act of 2017 , the federal tax rate is 21 percent for 2018 and 2019 ; as such , the upward adjustment to reflect the effect of income exempt from federal taxation is lower in 2019 and 2018 than in 2017. distribution of assets , liabilities & shareholders ' equity and yields , rates & interest margin replace_table_token_6_th ( 1 ) amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate . ( 2 ) net interest spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities . ( 3 ) net interest margin is computed by calculating the difference between interest income and expense , divided by the average balance of interest-earning assets . the net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits . - 22 - distribution of assets , liabilities & shareholders ' equity and yields , rates & interest margin replace_table_token_7_th ( 1 ) amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate . ( 2 ) net interest spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities . ( 3 ) net interest margin is computed by calculating the difference between interest income and expense , divided by the average balance of interest-earning assets . the net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits . [ the remainder of this page intentionally left blank ] - 23 - distribution of assets , liabilities & shareholders ' equity and yields , rates & interest margin replace_table_token_8_th ( 1 ) amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate . ( 2 ) net interest spread represents the average yield earned on interest-earning assets less the average rate incurred on interest-bearing liabilities . ( 3 ) net interest margin is computed by calculating the difference between interest income and expense , divided by the average balance of interest-earning assets . the net interest margin is greater than the net interest spread due to the benefit of noninterest-bearing demand deposits . [ the remainder of this page intentionally left blank ] - 24 - summary of changes in interest income and expense due to changes in average asset & liability balances and yields earned & rates paid the following tables set forth a summary of the changes in interest income and interest expense due to changes in average assets and liability balances ( volume ) and changes in average interest yields/rates for the periods indicated . changes not solely attributable to volume or yields/rates have been allocated in proportion to the respective volume and yield/rate components . summary of changes in interest income and expense replace_table_token_9_th ( 1 ) amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate . [ the remainder of this page intentionally left blank ] - 25 - summary of changes in interest income and expense replace_table_token_10_th ( 1 ) amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate . story_separator_special_tag provision for loan losses the company provided no provision for loan losses in 2019 and 2018. the company recorded a reversal of the provision for loan losses of $ 1.9 million in 2017. classified loans declined $ 3.8 million in 2019. nonaccrual loans were $ 4 million at december 31 , 2019 compared with $ 5 million at december 31 , 2018. these factors were reflected in management 's evaluation of credit quality , the level of the provision for loan losses in 2019 , and the adequacy of the allowance for loan losses at december 31 , 2019. for further information regarding credit risk , net credit losses and the allowance for loan losses , see the “ loan portfolio credit risk ” and “ allowance for loan losses ” sections of this report . [ the remainder of this page intentionally left blank ] - 26 - noninterest income components of noninterest income replace_table_token_11_th in 2019 , noninterest income decreased $ 741 thousand compared with 2018. income from service charges on deposit accounts decreased due to lower overdraft fees in 2019. other service charges decreased due to lower income from internet banking . debit card fees and financial services commissions decreased in 2019. merchant processing services increased due to successful sales efforts and higher transaction volumes and partially offset the decrease in noninterest income in 2019 compared with 2018. in 2018 , noninterest income decreased $ 8.5 million compared with 2017 primarily because 2017 results included $ 8.0 million in gains on sale of securities . service charges on deposit accounts decreased $ 1.1 million due to declines in fees for overdrafts , checking accounts and analyzed accounts . the decreases in other noninterest income were partially offset by an increase in merchant processing services fees of $ 1.2 million due to successful sales efforts and higher transaction volumes and a $ 585 thousand life insurance gain in 2018. noninterest expense components of noninterest expense replace_table_token_12_th in 2019 , noninterest expense decreased $ 7.9 million compared with 2018 primarily due to decreases in loss contingencies , salaries and related benefits , fdic insurance assessments , and intangible amortization . the 2019 loss contingencies include a $ 301 thousand increase in estimated customer refunds of revenue recognized prior to 2018 and a $ 252 thousand settlement to dismiss a lawsuit . although loss contingencies represent estimated liabilities , which are subject to revision , the company does not anticipate additional losses for either of these matters . salaries and related benefits decreased $ 1.9 million primarily due to employee attrition and lower incentives and employee benefit costs . amortization of intangibles decreased $ 1.4 million as assets are amortized on a declining balance method . fdic insurance assessments ( included in “ other noninterest expense ” ) decreased primarily due to application of the bank 's assessment credit described in part 1 , item 1 , “ premiums for deposit insurance ” . - 27 - in 2018 , noninterest expense decreased $ 852 thousand compared with 2017. the 2018 noninterest expense included a $ 3.5 million mediated settlement to dismiss a lawsuit . the 2017 noninterest expense included a $ 5.5 million loss contingency and a $ 625 thousand impairment of low income housing limited partnership investments due to enactment of the act . the 2017 loss contingency represents the company 's estimated refunds to customers of revenue recognized in prior years . salaries and related benefits increased $ 1.5 million primarily due to the annual merit increase cycle and higher incentives and employee benefit costs . professional fees increased $ 681 thousand due to higher legal and consulting fees . amortization of intangibles decreased $ 1.2 million as assets are amortized on a declining balance method . provision for income tax the company 's income tax provision was $ 24.8 million in 2019 compared with $ 19.4 million in 2018 and $ 37.1 million in 2017 , representing effective tax rates of 23.6 % , 21.4 % and 42.6 % , respectively . the effective tax rate ( fte ) was 26.8 % in 2019 , 26.0 % in 2018 and 49.7 % in 2017. the higher effective tax rate ( fte ) in 2019 compared with 2018 is due to lower levels of tax-exempt interest income and stock compensation tax deductions in 2019. the tax provisions ( fte ) for 2019 and 2018 include tax benefits of $ 435 thousand and $ 737 thousand , respectively , for tax deductions from the exercise of employee stock options which exceed related compensation expenses recognized in the financial statements . in 2019 , the company decreased unrecognized tax benefits by $ 909 thousand related to settlements with taxing authorities . the settlements incorporated amended tax returns for which the company had recognized a deferred tax asset in the amount of $ 1,003 thousand . the 2017 income tax provision included a $ 12.3 million charge to re-measure the company 's net deferred tax asset triggered by enactment of the tax cuts and jobs act of 2017. the book tax provisions for 2018 and 2017 include tax benefits of $ 737 thousand and $ 698 thousand , respectively , for tax deductions from the exercise of employee stock options which exceed related compensation expenses recognized in the financial statements . the lower effective tax rate for 2018 compared with 2017 reflects a reduction in the federal corporate tax rate as a result of enactment of the act and the tax-exempt nature of a $ 585 thousand life insurance policy gain . investment securities portfolio the company maintains an investment securities portfolio consisting of securities issued by the u.s. treasury , u.s. government sponsored entities , agency and non-agency mortgage backed securities , state and political subdivisions , corporations , and other securities . management has managed the investment securities portfolio in response to changes in deposit and loan volumes .
| market interest rates declined considerably following the recession of 2008 and 2009. interest rates remained historically low through 2016 as the monetary policy of the federal open market committee ( the “ fomc ” ) was highly accommodative . during this period , management avoided originating long-dated , low-yielding loans given the potential impact of such assets on forward earning potential ; as a result , loans declined and investment securities increased . the changed composition of the earning assets and low market interest rates pressured the net interest margin to lower levels . the fomc began removing monetary stimulus in december 2016 and increased the federal funds rate by 2.00 % to 2.50 % through june 2019 , although longer-term rates did not increase by a similar magnitude . the increase in market interest rates benefited the company 's earning asset yields until the fomc cut the federal funds rate in july 2019 by 0.25 % , in september 2019 by 0.25 % and in october by 0.25 % . - 19 - the funding source of the company 's earning assets is primarily customer deposits . the company 's long-term strategy includes maximizing checking and savings deposits as these types of deposits are lower-cost and less sensitive to changes in interest rates compared to time deposits . the average 2019 volume of checking and savings deposits was 96.2 % of average total deposits . credit quality remained solid with nonperforming assets totaling $ 4.9 million at december 31 , 2019 and net chargeoffs of $ 1.9 million in 2019. the company did not recognize a provision for loan losses in 2019. the company presents its net interest margin and net interest income on an fte basis using the current statutory federal tax rate . management believes the fte basis is valuable to the reader because the company 's loan and investment securities portfolios contain a relatively large portion of municipal loans and securities that are federally tax exempt . the company 's tax exempt loans and securities
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changes in the prepayment speed and discount rate assumptions have the most significant impact on the fair value of servicing assets . servicing fee income , which is reported on the income statement as other income , is recorded for fees earned for servicing loans . the fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned . the amortization of servicing assets is netted against loan servicing fee income . late fees and ancillary fees related to loan servicing are not material . fair value of financial instruments asc topic 820 , fair value measurement ( “ asc 820 ” ) , defines fair value as the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date . the degree of management judgment involved in determining the fair value of assets and liabilities is dependent upon the availability of quoted market prices or observable market parameters . for financial instruments that trade actively and have quoted market prices or observable market parameters , there is minimal subjectivity involved in measuring fair value . when observable market prices and parameters are not available , management judgment is necessary to estimate fair value . in addition , changes in market conditions may reduce the availability of quoted prices or observable date . see note 13 of our consolidated financial statements as of december 31 , 2018 , included elsewhere in this report , for a complete discussion of fair value of financial assets and liabilities and their related measurement practices . stock-based compensation we grant stock options to purchase our common stock and restricted stock to our employees and directors under the 2010 equity incentive plan . additionally , we have outstanding options that were granted under option plans from which we no longer make grants . the benefits provided under all of these plans are subject to the provisions of accounting guidance related to share based payments . our results of operations for the calendar years ended december 31 , 2018 , 2017 and 2016 were impacted by the recognition of non-cash expense related to the fair value of our share based compensation awards . 60 the determination of fair value of stock-based payment awards on the date of grant using the black scholes model is affected by our stock price , as well as the input of other subjective assumptions . these assumptions include , but are not limited to , the expected term of stock options and our stock price volatility . our stock options have characteristics significantly different from those of traded options , and changes in the assumptions can materially affect the fair value estimates . current accounting guidance requires forfeitures to be estimated at the time of grant and revised , if necessary , in subsequent periods if actual forfeitures differ from those estimates . if actual forfeitures vary from our estimates , we will recognize the difference in compensation expense in the period the actual forfeitures occur . income taxes we use the asset and liability method of accounting for income taxes . 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 . 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 . if current available information raises doubt as to the realization of the deferred tax assets , a valuation allowance may be established . we consider the determination of this valuation allowance to be a critical accounting policy because of the need to exercise significant judgment in evaluating the amount and timing of recognition of deferred tax liabilities and assets , including projections of future taxable income . these judgments and estimates are reviewed on a continual basis as regulatory and business factors change . see note 8 of our consolidated financial statements as of december 31 , 2018 , included elsewhere in this report , for additional information . a valuation allowance for deferred tax assets may be required in the future if the amounts of taxes recoverable through loss carry backs decline , if we project lower levels of future taxable income , or we project lower levels of tax planning strategies . such valuation allowance would be established through a charge to income tax expense that would adversely affect our operating results . story_separator_special_tag roman ; font-size:10pt ; font-weight : normal ; font-style : normal ; text-transform : none ; font-variant : normal ; '' > total interest expense was $ 9.1 million in 2018 compared to $ 4.6 million in 2017 , an increase of $ 4.5 million , or 99.2 % . the increase was primarily due to increases in interest expense on deposits . interest expense on deposits was $ 9.0 million in 2018 compared to $ 4.5 million in 2017 , an increase of $ 4.5 million , or 99.2 % . this increase was primarily due to a 22.4 % increase in the average balance of interest-bearing deposits , coupled with a 62 basis point increase in the average interest rate paid . net interest margins for the years ended december 31 , 2018 and 2017 were 4.49 % and 4.61 % , respectively . provision for loan losses credit risk is inherent in the business of making loans . we establish an allowance for loan losses through charges to earnings , which are shown in the statements of operations as the provision for loan losses . specifically identifiable and quantifiable known losses are promptly charged off against the allowance . the provision for loan losses is determined by conducting a quarterly evaluation of the adequacy of our allowance for loan losses and charging the shortfall or excess , if any , to the current quarter 's expense . story_separator_special_tag this has the effect of creating variability in the amount and frequency of charges to earnings . the provision for loan losses and level of allowance for each period are dependent upon many factors , including loan growth , net charge-offs , changes in the composition of the loan portfolio , delinquencies , management 's assessment of the quality of the loan portfolio , the valuation of problem loans and the general economic conditions in our market area . the provision for loan losses was $ 1.27 million for the year ended december 31 , 2018 compared to $ 1.31 million for the year ended december 31 , 2017. the overall loss factors used in the year of 2018 were lower than those for the year of 2017 but this was offset by growth in the loan portfolio , but the required reserve for loan losses as a percentage of gross loans decreased for 2018 compared to 2017. our gross loans were $ 875.1 million at 2018 compared to $ 748.0 million at 2017 , an increase of $ 127.0 million , or 17.0 % . the allowance for loan losses as a percentage of loans held for investment was 1.10 % at december 31 , 2018 and 1.22 % at december 31 , 2017. noninterest income while interest income remains the largest single component of total revenues , noninterest income is also an important component . a portion of our noninterest income is associated with sba lending activity , consisting of gains on the sale of loans sold in the secondary market and servicing income from loans sold with servicing retained . other sources of noninterest income include loan servicing fees , service charges and fees , and gains on the sale of securities . noninterest income for the year ended december 31 , 2018 was $ 9.3 million , an increase of $ 343,000 , or 3.8 % , compared to $ 9.0 million for the year ended december 31 , 2017. the following table sets forth the various components of our noninterest income for the years ended december 31 , 2018 and 2017 : replace_table_token_5_th total gain on sale of loans was $ 4.9 million in the year ended december 31 , 2018 and 2017 . 64 gain on sale of sba loans totaled $ 4.8 million in the year ended december 31 , 2018 and 2017. we sold $ 85.7 million in sba loans with an average premium of 7.19 % in the year ended december 31 , 2018 compared to the sale of $ 66.2 million in sba loans with an average premium of 9.30 % in the same period of 2017. the significant decrease in average premium rates on sba loans sold in the secondary market was primarily due to accelerated prepayments of sba loans as more borrowers are refinancing sba loans to conventional loans with lower interest rates , which in turn shortens investors ' term and reducing investment value . other loans sold by us during both periods were immaterial . loan servicing income , net of amortization decreased by $ 49,000 to $ 1.1 million in 2018 compared to $ 1.1 million in 2017. the decrease in loan servicing income was due , in part , to a $ 106,000 increase in servicing asset amortization expense , offset by a $ 57,000 increase in servicing fees . our total sba loan servicing portfolio was $ 328.5 million as of december 31 , 2018 compared to $ 309.3 million as of december 31 , 2017. the increase in the servicing portfolio reflects the sales of sba loans in 2017. the servicing assets that result from the sales of sba loans with servicing retained are amortized over the expected term of the loans using a method approximating the interest method . servicing income generally declines as the respective loans are repaid . noninterest expense noninterest expense for the year ended december 31 , 2018 was $ 29.6 million compared to $ 26.3 million for the year ended december 31 , 2017 , an increase of $ 3.3 million , or 12.6 % . the following table sets forth the major components of our noninterest expense for the years ended december 31 , 2018 and 2017 : replace_table_token_6_th salaries and employee benefits expense for the year ended december 31 , 2018 was $ 18.2 million compared to $ 16.5 million for the year ended december 31 , 2017 , an increase of $ 1.7 million , or 10.5 % . this increase was attributable to an increase in the number of employees to support continued growth , annual salary adjustments , increased bonus and incentives and increased benefits costs . the average number of full-time equivalent employees was 143.1 in 2018 compared to 130.4 in 2017. occupancy and equipment expense for 2018 was $ 4.1 million compared to $ 3.9 million for 2017 , an increase of $ 193,000 , or 4.9 % . this increase was primarily due to the opening of our new branch in santa clara , california , which opened in the second quarter of 2018 , and the annual increase of rent under our other offices leases . data processing and communication expense for 2018 was $ 1.2 million compared to $ 1.3 million for 2017 , an increase of $ 92,000 , or 7.0 % . this decrease was primarily due a favorable terms and conditions received from the renegotiated contract with our core processing system in 2018 . 65 professional fees for 2018 were $ 921,000 compared to $ 589,000 for 2017 , an increase of $ 332,000 , or 56.3 % . the increase was due to an increase in legal fees and other professional services related to the completion of the company 's initial public offering of common stock in 2018. fdic insurance and regulatory assessment expense for 2018 was $ 405,000 compared to $ 377,000 for 2017 , an increase of $ 28,000 or 7.4 % .
| replace_table_token_3_th 62 increases and decreases in interest income and interest expense result from changes in average balances ( volume ) of interest-earning assets and interest-bearing liabilities , as well as changes in average interest rates . the following tables set forth the effects of changing rates and volumes on our net interest income during the period shown . information is provided with respect to ( i ) effects on interest income attributable to changes in volume ( change in volume multiplied by prior rate ) and ( ii ) effects on interest income attributable to changes in rate ( changes in rate multiplied by prior volume ) . change applicable to both volume and rate has been allocated to volume . replace_table_token_4_th net interest income for the year ended december 31 , 2018 was $ 41.0 million compared to $ 35.7 million for the year ended december 31 , 2017 , an increase of $ 5.2 million , or 14.7 % . this increase was primarily due to an 17.7 % increase in the average balance of interest-earning assets , coupled with a 29 basis point improvement in the average yield on interest-earning assets , offset by a 62 basis point increase in the average rate paid on interest-bearing liabilities . the increase in the average balance of interest-earning assets was primarily due to an increase in average loans outstanding . the company have used a portion of the proceeds received from the initial public offering to fund loans . the increase in the average yield on interest-earning assets was primarily due to cumulative market rate increases by the federal reserve of 100 basis points through four rate increases in each of december 2017 , march 2018 , june 2018 and september 2018. total interest income was $ 50.1 million in 2018 compared to $ 40.3 million in 2017 , an increase of $ 9.8 million , or 24.3 % . this increase was primarily due to an increase in interest earned on our loan portfolio . interest and fees on loans was $
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pursuant to the terms of the settlement agreement , we terminated , and agreed to convey to sk innovation , our entire interest in the cpo 4 prospect and we and sk innovation agreed to release any and all claims each may have against the other under the operating agreement with respect to the cpo 4 prospect . we were relieved of any and all obligations under past , present and future capital calls relating to the cpo 4 prospect , including accrued cash calls at december 31 , 2012 of $ 3,219,128. our balance sheet reflects a reduction in the cash call obligation and an increase in accumulated depletion , depreciation , amortization and impairment , each in the amount of $ 3,219,128. in conjunction with the termination of our interest in the cpo 4 block , during 2013 , we terminated a standby letter of credit obligation and $ 3,056,250 of funds posted as collateral to secure a standby letter of credit and previously recorded as restricted cash was returned to us . colombian developments – serrania , los picachos and macaya during 2013 , our capital investment expenditures in colombia related to the preparation and evaluation of our three concessions in colombia , which amount totaled $ 172,252. during 2014 , we anticipate drilling two test wells on the serrania concession , and have budgeted approximately $ 2.0 million as our share of capital costs in connection with these activities . in addition , we anticipate shooting approximately 83.6 kilometers of 2-d seismic on the los picachos concession and approximately 201.9 kilometers of 2-d seismic on the macaya concession during 2014. in connection with these seismic acquisitions , we have budgeted approximately $ 1.2 million as our share of costs in connection with the planned seismic shoots . the budget for all 3 blocks is contingent on conditions in the areas allowing operations . domestic developments with the termination of our interest in the cpo 4 prospect and improving economics in the u.s. energy sector , during the first half of 2013 , we began actively evaluating opportunities to invest and participate in domestic oil and gas prospects . our management team , led by our ceo , has evaluated numerous opportunities and is sourcing and evaluating additional domestic opportunities . during 2013 , we drilled and completed one domestic well , a 13,500 ' test of the cib haz sands in iberville parish , louisiana . the well was successfully drilled and completed and , in january 2014 , tested at 384 barrels of oil , 565 mcf of natural gas and no water . we own a 3 % working interest in the well and 618 acre lease block . 27 as of december 31 , 2013 , we had agreed to participate in 5 additional prospects , each of which has commenced drilling , or is expected to commence drilling during 2014 , as follows : ● in south texas , a 4,000 ' test of the lower hockley sand was drilled as a dry hole . the prospect is within a 179 acre lease block supported by 3-d seismic . a second similar prospect has been identified on the lease block . we will own a 7.2 % working interest in the well and acreage . ● in jefferson davis parish , louisiana , a 7,000 ' test of the cris h stringer and cris h sand was drilled and completed with the objective of gaining structure on existing productive oil wells . we will own a 10.9 % working interest in the well before payout and a 9.375 % working interest after payout . ● in vermilion parish , louisiana , a 15,000 ' test of the discorbis 1 , 2 , 3 , 4 and 5 sands is planned in a double upthrown fault closure . we will own a 1.5 % working interest in the test well and 450+ net acre lease block . ● in east baton rouge parish , louisiana , a 11,000 ' test of the bol mex and nonion struma 1 , 2 , 3 , 4 and 5 sands was drilled in a downthrown fault closure and is awaiting completion . the well was planned to test by-passed pay as well as untested sands in the fault block which produce in nearby fields . we will hold a 5 % working interest in the test well and 1,300+ net acre lease block . ● in south texas , a 5,700 ' test of the pettus and yegua sands on a 40 acre lease was drilled based on 3d seismic data and is awaiting testing and completion . we will hold a 25 % working interest in the test well . nearby wells produce oil and or natural gas from these zones . our costs for the above test wells are expected to total approximately $ 1.5 million . as of december 31 , 2013 , we had incurred $ 776,738 of drilling costs associated with the planned test wells . in february 2014 , we acquired a 13.33 % working interest before the casing point and a 10 % working interest after the casing point in a 320 acre prospect in jasper county , texas . a 11,950 foot test of the wilcox 3 and 4 sands is planned for early 2014. our acquisition and dry hole costs for the test well are estimated at $ 400,000. during the second quarter of 2013 , the operator of the crown paper # 1 well in the profit island field in east baton rouge parish , louisiana successfully carried out a recompletion of the well . we hold a 3.5475 % royalty interest in the well . story_separator_special_tag as a result of the recompletion , production from the well was down for the first half of 2013 but has increased since the middle of the second quarter of 2013. during 2013 , our royalties attributable to the well increased to $ 320,686 from $ 103,131 during the 2012. as of december 31 , 3013 , the well had achieved pay out . colombian tax during 2012 , we engaged our tax advisors in colombia to evaluate certain tax and other filings made in colombia by them and other advisors for 2009 , 2010 and 2011. our advisors identified inconsistencies between tax and non-tax filings with respect to equity investments made by us in colombia . based on guidance from our advisors , during 2012 we recorded a one-time foreign tax liability of $ 1,883,266 of which $ 1,693,085 was paid during 2013 and the remaining balance is expected to be paid over the next twelve months , relating primarily to a newly enacted colombian equity tax measure based on the equity of our colombian branch as of january 1 , 2011. tax refund during 2013 , we received a u.s. income tax refund of approximately $ 3.3 million attributable to the amendment of our 2010 federal tax return to carry back net operating losses from 2011 and 2012. management changes in july 2013 , our chief financial officer resigned to pursue other opportunities and we determined not to renew the employment agreement of our senior vice president of exploration on its expiration in august 2013. until a replacement is hired to fill the chief financial officer position , the functions of our chief financial officer will be handled by other employees and consultants . the senior vice president of exploration position is not expected to be filled at this time as that position was focused on the cpo 4 prospect in which we no longer hold an interest . 28 compensation expense in june 2013 , our shareholders approved an increase in the shares reserved for issuance under our 2008 equity incentive plan . with approval of the increase in shares reserved under the 2008 equity incentive plan , 915,525 options granted during 2012 became exercisable . in addition , in june 2013 , we granted 1,200,000 stock options to employees and 100,000 stock options to non-employee directors . as a result of such grants and approval of the increase in shares reserved under the plan and resulting exercisability of 2012 option grants , we recognized $ 482,969 of compensation expense during 2013 , in addition to stock compensation expense attributable to the amortization of unrecognized stock-based compensation from prior year grants . as a result of the changes in management noted above , our overhead is expected to decrease by more than $ 500,000 annually . additionally , 5,000 shares of restricted stock held by each of those officers was forfeited as of the date of termination of employment . similarly , unvested stock option grants to purchase an aggregate of 150,000 shares of common stock each terminated as of the date of termination of employment . production incentive compensation plan in august 2013 , our compensation committee adopted a production incentive compensation plan . the purpose of the plan is to encourage employees and consultants participating in the plan to identify and secure for our company participation in attractive oil and gas opportunities . under the production incentive compensation plan , the committee may establish one or more pools and designate employees and consultants to participate in those pools and designate prospects and wells , and a defined percentage of our revenues from those wells , to fund those pools . only prospects acquired on or after establishment of the plan , and excluding all prospects in colombia , may be designated to fund a pool . the maximum percentage of our share of revenues from a well that may be designated to fund a pool is 2 % ( the “ pool cap ” ) ; provided , however , that with respect to wells with a net revenue interest to the 8/8 of less than 73 % , the pool cap with respect to such wells shall be reduced on a 1-for-1 basis such that no portion of our revenues from a well may be designated to fund a pool if the nri is 71 % or less . designated participants in a pool will be assigned a specific percentage out of our revenues assigned to the pool and will be paid that percentage of such revenues from all wells designated to such pool and spud during that participant 's employment or services with houston american . in no event may the percentage assigned to our chief executive officer relative to any well within a pool exceed one-half of the applicable pool cap for that well . payouts of revenues funded into pools shall be made to participants not later than 60 days following year end , subject to the committee 's right to make partial interim payouts . participants will continue to receive their percentage share of revenues from wells included in a pool and spud during the term of their employment or service so long as we continue to be derive revenues from those wells even after termination of employment or services of the participant ; provided , however , that a participant 's interest in all pools shall terminate on the date of termination of employment or services where such termination is for cause . in the event of certain changes in control of our company , the acquirer or survivor of such transaction must assume all obligations under the plan ; provided , however , that in lieu of such assumption obligation , the committee may , at its sole discretion , assign overriding royalty interests in wells to substantially mirror the rights of participants under the plan . similarly , the committee may , at any time , assign overriding royalty interests in wells in settlement of obligations under the plan .
| joint venture expenses totaled $ 0 in 2013 compared to $ 3,244 in 2012. joint venture expenses represent our allocable share of the indirect field operating and region administrative expenses billed by hupecol . the decrease in joint venture expenses was attributable to reduced allocated administrative costs following the march 2012 divestiture of assets operated by hupecol . depreciation and depletion expense . depreciation and depletion expense decreased by 63 % to $ 24,954 in 2013 from $ 66,971 in 2012. the decrease in depreciation and depletion was due to the 2012 sale of assets discussed above . gain ( loss ) on sale of oil and gas properties . the sale of our indirect interests in hupecol cuerva , llc and post-closing price adjustments related to the sale resulted in a gain of $ 387,314 during 2012 and a gain of $ 45,475 during 2013. impairment expense . termination of our testing and completion efforts on , and abandonment of , three test wells on our cpo 4 block resulted in impairment expense of $ 46,235,574 during 2012 . 32 general and administrative expenses . general and administrative expense decreased by 32 % to $ 3,417,292 in 2013 from $ 5,027,024 in 2012. the change in general and administrative expense reflects a combination of ( 1 ) a decrease in non-cash stock based compensation ( down $ 509,396 ) reflecting lower stock price and a resulting lower value of equity grants , and ( 2 ) decreased cash compensation ( down $ 553,213 ) attributable to elimination of bonuses paid during 2013 and the termination of two officers . bad debt expense . bad debt expense decreased to $ 86,507 in 2013 from $ 3,951,370 in 2012. bad debt expense in 2013 related to our inability to obtain reimbursement of expenses disbursed by hupecol , from an escrow held on our behalf , to pay certain operating expenses of the purchaser of hdc , llc . bad debt expense in 2012 related to gulf
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w e expect to report data from skyrocket early in the second quarter of 2020. in addition , we are in a license and collaboration with takeda pharmaceutical company limited ( “ takeda ” ) to jointly develop and commercialize tak-935 , which we have licensed from takeda and refer to as ov935 ( soticlestat ) . we are initially studying ov935 for those suffering from severe and often intractable forms of dee , including dravet syndrome , lennox-gastaut syndro me ( “ lgs ” ) and cdkl5 deficiency disorder and duplication 15q , or dup15q , syndrome . each of these disorders either has limited or no therapeutic options . we completed a phase 1b/2a clinical trial of ov935 in a mixed group of adults with dee and announced the results in december 2018. the trial achieved its primary endpoint of safety and tolerability , dose proportional reduction in a potential plasma biomarker called 24hc , and a robust reduction in seizure frequency ( 61 % at day 92 ) , with two patients becoming seizure-free at the end of the treatment period . following this trial , we reported the initial data from the endymion phase 2 open-label extension study of ov935 in six study subjects who previously completed our 12-week phase 1b/2a clinical trial of ov935 in adults with dee . the longer-term data from endymion out to 48 weeks suggest increased seizure reduction with prolonged treatment of ov935 and is consistent with the believed mechanism of action of ov935 . median seizure frequency reductions were 84 % following 25 to 36 weeks ( n=6 ) and 90 % following 37 to 48 weeks ( n=4 ) of treatment . in general , a greater reduction in seizure frequency was observed in those with higher baseline seizure frequency . ov935 is currently in multiple phase 2 clinical trials and we expect to report data in these trials in 2020. the fda has granted orphan drug designation for ov935 for the treatment of dravet syndrome and lgs . ovid and takeda continue to enroll study subjects in two additional clinical trials : a phase 2 clinical trial in pediatric patients with dravet syndrome or lgs ( elektra ) and a phase 2 clinical trial in pediatric patients with cdkl5 deficiency disorder or dup15q syndrome ( arcade ) . further , all study subjects who have completed the arcade and elektra trials have the opportunity to enroll in the endymion trial and to date all study subjects have enrolled in endymion . additionally , takeda elected to initiate a placebo-controlled trial of tak-935 to treat study subjects with chronic complex regional pain syndrome , or crps . this trial will look at the efficacy , safety and tolerability of tak-935 as an adjunctive therapy in participants with crps . pursuant to our agreement with takeda , we have a one-time right to opt into this program but until we exercise our opt in rights we are not responsible for funding this trial . we also have early research programs exploring ov329 in infantile spasm/rare epilepsies and ov881 as a potential microrna gene therapy for the treatment of angelman syndrome . since our inception in april 2014 , we have devoted substantially all of our efforts to organizing and planning our business , building our management and technical team , acquiring operating assets and raising capital . we have not generated any revenue and have funded our business primarily through the sale of our capital stock . through december 31 , 2019 , we have raised net proceeds of $ 228.6 million from the sale of our convertible preferred stock and our common stock . as of december 31 , 2019 , we had $ 76.7 million in cash , cash equivalents and short-term investments . we recorded net losses of $ 60.5 million and $ 52.0 million for the years ended december 31 , 2019 and 2018 , respectively . as of december 31 , 2019 , we had an accumulated deficit of approximately $ 213.2 million . we expect to continue to incur significant expenses and increasing operating losses for at least the next several years . our net losses may fluctuate significantly from period to period , depending on the timing of our planned clinical trials and expenditures on our 76 other research and development and commercial development activities . we expect our expenses will increase substantially over time as we : continue the ongoing and planned preclinical and clinical development of our drug candidates ; build a portfolio of drug candidates through the acquisition or in-license of drugs , drug candidates or technologies ; initiate preclinical studies and clinical trials for any additional drug candidates that we may pursue in the future ; seek marketing approvals for our current and future drug candidates that successfully complete clinical trials ; establish a sales , marketing and distribution infrastructure to commercialize any drug candidate for which we may obtain marketing approval ; develop , maintain , expand and protect our intellectual property portfolio ; implement operational , financial and management systems ; and attract , hire and retain additional administrative , clinical , regulatory and scientific personnel . recent events in november and december 2019 , we sold 4,003,000 shares of our common stock and 2,890,888 shares of our common stock pursuant to the atm agreement ( as defined below ) at a price per share of $ 2.50 and $ 4.5001 , respectively , for aggregate net proceeds of $ 22.3 million after deducting sales agent commissions and other offering expenses payable by us . financial operations overview revenue we have not generated any revenue from commercial drug sales and do not expect to generate any revenue unless or until we obtain regulatory approval of and commercialize one or more of our current or future drug candidates . in the future , we may also seek to generate revenue from a combination of research and development payments , license fees and other upfront or milestone payments . story_separator_special_tag research and development expenses research and development expenses consist primarily of costs incurred for our research activities , including our product discovery efforts and the development of our product candidates , which include , among other things : fees related to the acquisition of the rights to ov101 and ov935 ; employee-related expenses , including salaries , benefits and stock-based compensation expense ; fees paid to consultants for services directly related to our drug development and regulatory effort ; expenses incurred under agreements with contract research organizations , as well as contract manufacturing organizations and consultants that conduct preclinical studies and clinical trials ; costs associated with preclinical activities and development activities ; costs associated with technology and intellectual property licenses ; milestone payments and other costs under licensing agreements ; and depreciation expense for assets used in research and development activities . costs incurred in connection with research and development activities are expensed as incurred . costs for certain development activities , such as clinical trials , are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment , clinical site activations or other information provided to us by our vendors . research and development activities are and will continue to be central to our business model . we expect our research and development expenses to increase for the foreseeable future as we advance our current and future drug candidates through preclinical studies and clinical trials . the process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time-consuming . it is difficult to determine with certainty the duration and costs of any preclinical study or clinical trial that we may conduct . the duration , costs and timing of clinical trial programs and development of our current and future drug candidates will depend on a variety of factors that include , but are not limited to , the following : number of clinical trials required for approval and any requirement for extension trials ; per patient trial costs ; 77 number of patients who participate in the clinical trials ; number of sites included in the clinical trials ; countries in which the clinical trial is conducted ; length of time required to enroll eligible patients ; number of doses that patients receive ; drop-out or discontinuation rates of patients ; potential additional safety monitoring or other studies requested by regulatory agencies ; duration of patient follow-up ; and efficacy and safety profile of the drug candidate . in addition , the probability of success for any of our current or future drug candidates will depend on numerous factors , 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 drug candidate , as well as an assessment of each drug candidate 's commercial potential . general and administrative expenses general and administrative expenses consist primarily of employee-related expenses , including salaries , benefits and stock-based compensation expense , related to our executive , finance , business development and support functions . other general and administrative expenses include costs associated with operating as a public company described below , travel expenses , conferences , professional fees for auditing , tax and legal services and facility-related costs . we expect that general and administrative expenses will increase in the future as we increase our headcount to support our continued research and development and potential commercialization of our product candidates . interest income interest income consists of interest income earned on our cash and cash equivalents maintained in money market funds and short-term investments that were maintained in u.s. treasury notes . story_separator_special_tag style= '' background-color : # ffffff ; '' > net cash provided by financing activities of $ 86.5 million for the year ended december 31 , 2019 was primarily due to the net proceeds from the february offering , october offering and atm offering . net cash provided by financing activities of $ 0.3 million for the year ended december 31 , 2018 was primarily due to the proceeds from the exercise of stock options and purchases of shares under the 2017 employee stock purchase plan . contractual obligations and commitments as of december 31 , 2019 , we had no contractual obligations or commitments . we had no long-term debt , operating leases , or capital leases and no material non-cancelable purchase commitments with service providers , as we have generally contracted on a cancelable , purchase order basis . we excluded any potential contingent payments upon the achievement by us of clinical , regulatory and commercial events , as applicable , or royalty payments that we may be required to make under license agreements we have entered into with various entities pursuant to which we have in-licensed certain intellectual property as contractual obligations or commitments , including our license agreement with h. lundbeck a/s , our license agreement with northwestern , and our takeda collaboration . pursuant to these license agreements , we have agreed to make milestone payments up to an aggregate of $ 279.3 million upon the achievement of certain development , regulatory and sales milestones . we excluded these contingent payments given that the timing and amount , if any , of such payments can not be reasonably estimated at this time . see the section titled “ business—license and collaboration agreements—license agreement with h. lundbeck a/s ” , business—license and collaboration agreements— 80 northwestern license , ” and “ business—license and collaboration agreement s—license and collaboration agreement with takeda ” for additional information . off-balance sheet arrangements we did not have during the periods presented , and we do not currently have , any off-balance sheet arrangements , as defined in the rules and regulations of the sec .
| interest income interest income was $ 0.9 million for the year ended december 31 , 2019 and $ 1.0 million for the year ended december 31 , 2018. income taxes there was no provision for income taxes for the years ended december 31 , 2019 and 2018 because we have historically incurred operating losses and we maintain a full valuation allowance against our net deferred tax assets . the valuation allowance was approximately $ 76.5 million and $ 54.0 million at december 31 , 2019 and 2018 , respectively . liquidity and capital resources overview as of december 31 , 2019 , we had total cash , cash equivalents and short-term investments of $ 76.7 million as compared to $ 41.5 million as of december 31 , 2018. in february 2019 , we sold 13,993,778 shares of our common stock and 2,500 shares of series a convertible preferred stock at a public offering price of $ 2.00 and $ 2,000 per share , respectively , for net proceeds of $ 30.5 million , after deducting underwriting discounts and commissions and other offering expenses payable by us , or the february offering . in october and november 2019 , we sold 10,350,000 shares of our common stock , which included the full exercise of the underwriters ' option to purchase additional shares , and 4,000 shares of series a convertible preferred stock at a public offering price of $ 2.50 and $ 2,500 per share , respectively , for net proceeds of $ 33.5 million after deducting underwriting discounts and commissions and other offering expenses payable by us , or the october offering . in june 2018 , we entered into a sales agreement , or the atm agreement , with cowen and company , llc , or cowen , under which we may offer and sell in “ at the market offerings , ” from time to time at our sole discretion , shares of our common stock having an aggregate offering price
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here , we are positive on short-duration , well-structured single-borrower securitizations and loans ; in conduit deals we see better value in aaa rated bonds . during the fourth quarter of 2019 , the federal reserve continued monetary easing , reducing the fed funds rate a quarter point in october 2019. they also significantly increased liquidity in the repurchase agreement market through its open market operations . the yield curve steepened during the quarter , with 2-year treasury yields declining five basis points and 10-year yields increasing 25 basis points . we saw credit spreads and spreads on agency mbs tighten . although there was a modest benefit from declining interest rates , the spread widening on our agency cmbs portfolio overshadowed this benefit resulting in a slight decline in our book value of 0.5 % . critical accounting policies the consolidated financial statements include our accounts , those of our consolidated wholly-owned trs and certain variable interest entities ( “ vies ” ) in which we are the primary beneficiary . all intercompany amounts have been eliminated in consolidation . in accordance with gaap , our consolidated financial statements require the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties . in accordance with sec guidance , the following discussion addresses the accounting policies that we currently apply . our most critical accounting policies will involve decisions and assessments that could affect our reported assets and liabilities , as well as our reported revenues and expenses . we believe that all of the decisions and assessments upon which our consolidated financial statements have been based were reasonable at the time made and based upon information available to us at that time . for a review of recent accounting pronouncements that may impact our results of operations , refer note 2 - “ summary of significant accounting policies ” contained in this annual report on form 10-k. valuation of financial instruments we disclose the fair value of our financial instruments according to a fair value hierarchy ( levels i , ii , and iii , as defined below ) . asc 820 `` fair value measurements and disclosures '' establishes a framework for measuring fair value and expands financial statement disclosure requirements for fair value measurements . asc 820 further specifies a hierarchy of valuation techniques , which is based on whether the inputs into the valuation technique are observable or unobservable . the hierarchy is as follows : level i — quoted prices in active markets for identical assets or liabilities . level ii — quoted prices for similar assets and liabilities in active markets ; quoted prices for identical or similar instruments in markets that are not active ; and model-derived valuations whose inputs are observable or whose significant value drivers are observable . level iii — prices are determined using significant unobservable inputs . in situations where quoted prices or observable inputs are unavailable , for example , when there is little or no market activity for an investment at the end of the period , unobservable inputs may be used . the level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety . transfers between levels are determined by us at the end of the reporting period . mortgage-backed securities and other securities our mortgage-backed securities and other securities portfolio primarily consists of agency rmbs , non-agency rmbs , agency cmbs , non-agency cmbs , abs and other real estate related assets . these investments are recorded in accordance with 33 asc 320 , “ investments - debt and equity securities , ” asc 325-40 , “ beneficial interests in securitized financial assets ” or asc 310-30 , “ loans and debt securities acquired with deteriorated credit quality. ” we have chosen to make a fair value election pursuant to asc 825 , “ financial instruments ” for our mortgage-backed securities and other securities portfolio . electing the fair value option allows us to record changes in fair value in the consolidated statements of operations as a component of “ unrealized gain ( loss ) , net. ” if we purchase securities with evidence of credit deterioration , we will analyze to determine if the guidance found in asc 310-30 , “ loans and debt securities acquired with deteriorated credit quality ” is applicable . we evaluate securities for other-than-temporary impairment ( “ otti ” ) on at least a quarterly basis . the determination of whether a security is other-than-temporarily impaired involves judgments , estimates and assumptions based on subjective and objective factors . as a result , the timing and amount of an otti constitutes an accounting estimate that may change materially over time . when the fair value of an investment security is less than its amortized cost at the balance sheet date , the security is considered impaired , and the impairment is designated as either “ temporary ” or “ other-than-temporary. ” when a security is impaired , an otti is considered to have occurred if ( i ) if we intend to sell the security ( i.e. , a decision has been made as of the reporting date ) or ( ii ) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis . if we intend to sell the security or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis , the entire amount of the impairment loss , if any , is recognized in earnings as otti and the cost basis of the security is adjusted to its fair value . story_separator_special_tag additionally , for securities accounted for under asc 325-40 an otti is deemed to have occurred when there is an adverse change in the expected cash flows to be received and the fair value of the security is less than its carrying amount . in determining whether an adverse change in cash flows occurred , the present value of the remaining cash flows , as estimated at the initial transaction date ( or the last date previously revised ) , is compared to the present value of the expected cash flows at the current reporting date . the estimated cash flows reflect those a “ market participant ” would use and are discounted at a rate equal to the current yield used to accrete interest income . any resulting otti adjustments are reflected in “ other than temporary impairment ” in our consolidated statements of operations . increases in interest income may be recognized on a security on which we have previously recorded an otti charge if the cash flow of such security subsequently improves . in addition , unrealized losses on our agency securities , with explicit guarantee of principal and interest by the governmental sponsored entity ( `` gse '' ) , are not credit losses but rather were due to changes in interest rates and prepayment expectations . these securities would not be considered other than temporarily impaired provided we did not intend to sell the security . residential whole loans investments in residential whole loans are recorded in accordance with asc 310-20 , `` nonrefundable fees and other costs . '' we have chosen to make the fair value election pursuant to asc 825 for our entire residential whole-loan portfolio . residential whole loans are recorded at fair value with periodic changes in fair market value being recorded in earnings as a component of `` unrealized gain ( loss ) , net . '' all other costs incurred in connection with acquiring residential whole loans or committing to purchase these loans are charged to expense as incurred . on a quarterly basis , we evaluate the collectability of both interest and principal of each loan , if circumstances warrant , to determine whether such loan is impaired . a loan is impaired when , based on current information and events , it is probable that we will be unable to collect all amounts due according to the existing contractual terms . when a loan is impaired , we do not record an allowance for loan loss as we have elected the fair value option . however , income recognition is suspended for loans 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 income and principal becomes doubtful . when the ultimate collectability of the principal of an impaired loan is in doubt , all payments are applied to principal under the cost recovery method . when the ultimate collectability of the principal of an impaired loan is not in doubt , contractual interest is recorded as interest income when received , under the cash basis method until an accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed . a loan is written off when it is no longer realizable and or legally discharged . residential bridge loans for the bridge loans acquired prior to october 25 , 2017 , we did not elect the fair value option pursuant to asc 825 and accordingly these loans are recorded at their principal amount outstanding , net of any premium or discount in the consolidated 34 balance sheets . commencing with purchases subsequent to october 25 , 2017 , we decided to elect the fair value option pursuant to asc 825 to be consistent with the accounting of our other investments , which are all carried at fair value . these loans are recorded at fair value with periodic changes in fair market value being recorded in earnings as a component of `` unrealized gain ( loss ) , net '' . all other costs incurred in connection with acquiring the residential bridge loans or committing to purchase these loans are charged to expense as incurred . a loan is impaired when , based on current information and events , it is probable that we will be unable to collect all amounts due according to the existing contractual terms . we evaluate each of residential bridge loans on a quarterly basis . these loans are individually specific as they relate to the borrower , collateral type , interest rate , ltv and term as well as geographic location . we evaluate the collectability of both principal and interest of each loan . when a loan is impaired , the impairment is then measured based on fair value of the collateral , since these loans are collateral dependent . upon measurement of impairment , we record an allowance to reduce the carrying value of the loan with a corresponding charge to net income for those loans that we did not elect the fair value option . significant judgments are required in determining impairment , including assumptions regarding the value of the loan , the value of the underlying collateral and other provisions such as guarantees . we will not record an allowance for loan loss for the residential bridge loans that company has elected the fair value option . income recognition is suspended for loans 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 income and principal becomes doubtful . when the ultimate collectability of the principal of an impaired loan is in doubt , all payments are applied to principal under the cost recovery method .
| the increase in interest income for the year ended december 31 , 2019 as compared to the year ended december 31 , 2018 was primarily the result of an overall higher yielding investment portfolio . the weighted average yield increased to 4.70 % for the year ended december 31 , 2019 from 4.51 % for the year ended december 31 , 2018 . our credit sensitive investments contributed approximately $ 159.2 million or 73.3 % to interest income for the period . under the current market conditions , we expect to continue to increase our investments in residential whole loans , commercial loans , non-agency cmbs and opportunistically invest in agency cmbs and agency rmbs . interest expense interest expense increased from $ 138.2 million for the year ended december 31 , 2018 to $ 150.3 million for the year ended december 31 , 2019 . our higher borrowing costs reflect : ( i ) higher interest rates on our repurchase agreements in 2019 coupled with higher costs associated with financing our credit-sensitive investments , which generally have higher interest rates ; ( ii ) the issuance of an additional $ 90.0 million aggregate principal amount of 6.75 % convertible senior unsecured notes in 2019 ; and ( iii ) an increase in the average outstanding securitized debt of $ 347.3 million from the consolidation of the arroyo trust and mrcd trust . our average cost of funds on our repurchase agreements increased from 2.66 % for the year ended december 31 , 2018 to 3.14 % for the year ended december 31 , 2019 . we utilize interest rate swaps to mitigate our interest rate exposure . however , since we do not apply hedge accounting the reduction in interest expense is reflected in `` gain ( loss ) on derivatives , net . '' other income ( loss ) , net realized gain ( loss ) on investments , net realized gain ( loss ) on investments represents the net gain ( loss ) on sales or settlements from our investment portfolio . our manager regularly
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on july 9 , 2012 , the company signed a definitive agreement pursuant to which the company will merge into multiband corporation ( “ multiband ” ) and will effectively continue to operate as a subsidiary of multiband in its mdu business segment . originally , multiband was to have issued 4.3 million shares of its common stock for all issued and outstanding shares of mdu communications common stock , with certain potential adjustments . on september 17 , 2012 , multiband amended its offer to a cash-for-stock offer with a total cash payout of $ 12.9 million . terms are still being negotiated and conditions precedent still exist . assuming the remaining conditions precedent can be satisfied , the company will submit the merger to a vote of the stockholders at the soonest practicable date . multiband , as a whole , operates with 3,700 employees in 33 states with 33 field offices . the companies anticipate the merger to close in january or february 2013 , subject to company stockholder approval . for further information please review the company 's 8-k filed with the securities and exchange commission on july 10 , 2012. to assist the company in assessing its future strategic plans , the company previously retained the investment advisory firm of berkery , noyes & co. ( “ bn ” ) . bn is representing the company in the merger with multiband , in the asset sales with access media 3 , inc. and continues to advise the company in financing , merger and divestiture related discussions . the company makes no representations that the above-mentioned merger will result in a closed transaction . the company does not expect its revenues , available cash and remaining availability under its credit facility to be sufficient to cover estimated liquidity needs for the next twelve months . without additional funding sources , significant asset sales , or a merger , the company forecasts that its capital may be depleted sometime during its first or second fiscal quarter of 2013. to conserve capital , the company has been actively pursuing a number of initiatives intended to reduce costs , including layoffs , reductions in benefits , limitation on travel , scaled back marketing efforts , restricted stock for forfeited salary and across-the-board employee salary reductions . the company 's goal is to maintain operations only and is no longer deploying services into new properties unless the cost of the system is funded by the property . although these measures assist in conserving cash , the company 's ability to continue to operate is dependent on the ability to raise additional capital , sell a significant number of assets , or enter into a merger , however , there can be no assurance that these efforts will be successful . additionally , the company will be facing maturity and repayment of its $ 30 million credit facility on june 30 , 2013 . 18 use of non-gaap financial measures the company uses the performance gauge of ebitda ( as adjusted by the company ) to evidence earnings exclusive of mainly noncash events , as is common in the technology , and particularly the cable and telecommunications , industries . ebitda ( as adjusted ) is an important gauge because the company , as well as investors who follow this industry frequently , use it as a measure of financial performance . the most comparable gaap reference is simply the removal from the company 's net income ( or loss ) of interest , depreciation , amortization and noncash charges related to its shares , warrants and stock options . the company adjusts ebitda by then adding back any provision for bad debts and inventory reserves . ebitda ( as adjusted ) is not , and should not be considered , an alternative to income from operations , net income , net cash provided by operating activities , or any other measure for determining our operating performance or liquidity , as determined under accounting principles generally accepted in the united states of america . ebitda ( as adjusted ) also does not necessarily indicate whether cash flow will be sufficient to fund working capital , capital expenditures or to react to changes in our industry or the economy generally . for the years ended september 30 , 2012 and 2011 , the company reported ebitda ( as adjusted ) of $ 4,089,180 and $ 3,758,862 , respectively . the following table reconciles the comparative ebitda ( as adjusted ) of the company to its consolidated net loss as computed under accounting principles generally accepted in the united states of america : replace_table_token_4_th 19 results of operations for the years ended september 30 , 2012 and 2011 replace_table_token_5_th net loss . primarily as a result of the matters discussed below , and noncash charges for the years ended september 30 , 2012 and 2011 of $ 7,267,992 and $ 8,447,675 , respectively , the company reported a net loss of $ 6,391,049 and $ 7,356,910 for the years ended september 30 , 2012 and 2011 , respectively . revenues . revenue for the year ended september 30 , 2012 decreased 2 % to $ 27,305,201 , compared to revenue of $ 27,880,132 for the year ended september 30 , 2011. this decrease in recurring revenue is mainly attributable to the sale/transfer of twenty six properties and subscribers during the fiscal year . revenue has been derived , as a percent , from the following sources : replace_table_token_6_th dth revenue continued to increase due mainly to an increase in apru and the conversion of certain properties from low average revenue private cable subscribers to directv service subscribers , which conversely explains the decrease in private cable programming revenue , in addition to several of the properties sold during the fiscal year were private cable systems . the decrease in installation and other revenue was due to higher revenue received in the year ended september 30 , 2011 from the directv connected properties program . the company expects revenues to continue to decline during fiscal 2013. direct costs . story_separator_special_tag direct costs are comprised of programming costs , monthly recurring internet broadband circuits and costs relating directly to installation services . direct costs increased to $ 13,475,920 for the year ended september 30 , 2012 , as compared to $ 12,719,041 for the year ended september 30 , 2011. direct costs are linked to the type of subscribers the company adds . choice and exclusive dth directv subscribers have no associated programming cost and therefore little to no direct cost , while dth dish subscribers , private cable and broadband subscribers have associated programming and circuit costs and therefore a higher direct cost . the acquisition of attvs dish subscribers ( whereby the company incurs the full programming cost ) in early fiscal 2012 , contributed to the increase in direct costs over the year ended september 30 , 2011. direct costs are expected to remain constant or decrease during fiscal 2013 as the company maintains current operations only or continues to sell certain properties and subscribers . 20 sales expenses . sales expenses were $ 1,393,292 and $ 1,477,150 for the years ended september 30 , 2012 and 2011 , respectively . the company expects these expenses to remain fairly constant or decrease slightly during fiscal 2013 as the company maintains current operations only , sales and marketing efforts are scaled back and sales personnel becoming primarily responsible for account maintenance and asset sale transition . customer service and operating expenses . customer service and operating expenses are comprised of expenses related to the company 's call center , technical support , project management and general operations . customer service and operating expenses were $ 6,175,216 and $ 6,124,063 for the years ended september 30 , 2012 and 2011 , respectively . the slight increase was primarily in connection with one-time expenses associated with the outsourcing of call center functions . customer service and operating expenses are expected to remain constant or decrease during fiscal 2013 as the company maintains current operations only or continues to sell certain properties and subscribers . a breakdown of customer service and operating expenses is as follows : replace_table_token_7_th call center expenses increased due to the outsourcing reasons mentioned above . property system maintenance is generally proportional to the number of properties the company services ( not necessarily the number of subscribers ) , so the decrease was primarily due to cost reductions and a slightly lower number of properties due to property sales , transfers and non-renewals , which also resulted in lower general operations expenses . additionally , the company wrote-off obsolete fixed assets during the year ended september 30 , 2012 in the amount of $ 97,933 , which is reported in customer service and operating expenses . story_separator_special_tag includes certain events of default , including nonpayment of obligations , bankruptcy and change of control . borrowings will generally be available subject to a borrowing base and to the accuracy of all representations and warranties , including the absence of a material adverse change and the absence of any default or event of default . 22 the company did not incur or record a provision or benefit for income taxes for the years ended september 30 , 2012 and 2011 due to the net loss . the net operating loss carry forward expires on various dates through 2032 , therefore , the company should not incur cash needs for income taxes for the foreseeable future . as of september 30 , 2012 , the company had available cash and remaining available credit facility , collectively , of $ 563,574. based on current projections , the company does not expect its available cash , estimated revenues and remaining credit facility to be sufficient to cover liquidity needs for the next twelve months . without additional funding sources , proceeds from asset sales , or a merger , the company forecasts that its available capital will be depleted sometime during its first or second fiscal quarter of 2013. additionally , the company will be facing maturity and repayment of its $ 30 million credit facility on june 30 , 2013. in order for the company to continue operations and to fully implement its business plan , it needs to raise additional capital or merge . the company has been actively pursuing various initiatives aimed at resolving its need for additional capital , namely asset sales or a merger . asset sale negotiations have met with some success for certain assets , but have not yet resulted in larger asset sales . the company has previously discussed and disclosed the option of merger as a viable alternative to continue its business operations and growth . in furtherance thereof , on july 9 , 2012 , the company executed a merger agreement with multiband corporation , whereby the company would effectively become an operating subsidiary of multiband corporation . although several conditions precedent still exist , the company is working toward closing the merger in january or february 2013. the company 's ability to close asset sales or to consummate the merger remains uncertain . unless the company is able , in the near-term , to raise additional capital or enter into a merger , there is substantial doubt about the company 's ability to continue as a going concern . cash position . at september 30 , 2012 and 2011 , the company had cash and cash equivalents of $ 104,124 and $ 84,747 , respectively . the company maintains little cash , as revenues are deposited against the balance of the credit facility to reduce interest cost . during the year ended september 30 , 2012 , the company increased the amount borrowed against the credit facility by $ 1,388,395. based on current projections , the company does not expect its available cash , estimated revenues and remaining credit facility to be sufficient to cover liquidity needs for the next twelve months .
| during the year ended september 30 , 2012 , the company sold ( i ) three properties and subscribers and certain related property and equipment to charter communications , for total proceeds of $ 273,526 ( $ 906 per subscriber ) resulting in a net gain of $ 208,883 , ( ii ) two properties and subscribers and certain related property and equipment to summit broadband , for total proceeds of $ 198,000 ( $ 1,000 per subscriber ) resulting in a net gain of $ 187,924 , ( iii ) fifteen properties and subscribers and certain related property and equipment to access media 3 , inc. , for total proceeds of $ 1,625,377 ( $ 625 per subscriber ) resulting in a net gain of $ 1,124,607 , and ( iv ) as part of the connected properties initiative with directv , the company sold directv six properties and certain related plant and equipment for total proceeds of $ 145,811 resulting in a gain of $ 90,769. during the year ended september 30 , 2011 , the company sold subscribers and certain related property and equipment to comcast of california ix , inc. the gain on the sale was $ 60,416 on total proceeds of $ 89,651. additionally , as part of the connected properties transfer initiative with directv , the company transferred one property for total proceeds of $ 22,650 and a gain of $ 13,690 . 21 other noncash charges . depreciation and amortization expenses decreased from $ 7,370,275 during the fiscal year ended september 30 , 2011 to $ 6,326,242 during the fiscal year ended september 30 , 2012 , a 3 % decrease as a percent of revenue . the decrease is indicative of large capital expenditures in prior periods becoming fully depreciated . interest expense for 2012 and 2011 included noncash charges of $ 387,261 and $ 358,093 , respectively , for the amortization of deferred finance costs and debt discount . other income , net . during the year ended september 30 , 2012 , interest expense increased to $ 3,599,498 from interest expense of $ 3,026,190 for the year ended september 30 , 2011 , due mainly to increased credit facility borrowing . liquidity and capital resources during the years ended september 30 , 2012 and 2011 , the company recorded net losses of $ 6,391,049 and $ 7,356,910 , respectively . company operations used net cash of $ 907,523 and $ 235,063 during the years ended september 30 , 2012 and 2011 , respectively . at september 30 , 2012 , the company had an accumulated deficit of $ 74,699,163. on september 11 , 2006 , the company entered into a loan and security agreement with fcc , llc , d/b/a first capital , and full circle funding , lp for a senior secured $ 20 million
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our commitment to profitable growth also resulted in the discontinuation of certain routes and reduced service in our network throughout 2012. ancillary revenue initiatives our ancillary revenue initiatives are focused on increasing high margin revenue streams . our evenmore product continued to be successful throughout 2012. we reconfigured our embraer 190 fleet , converting eight seats per aircraft to evenmore space seats . additionally , we began selling evenmore speed , our expedited security option , on a standalone basis in most of our u.s. domestic locations . during 2012 , we introduced a new badge to our trueblue frequent flyer program called mosaic , which is designed to recognize and reward our most loyal customers . the program 's enhancements include early boarding and a free second checked bag , among many others . we also launched a new co-branded credit card exclusively for residents of puerto rico , where we are the largest carrier , which will allow residents to enjoy the full benefits of our trueblue loyalty program . outlook for 2013 as we enter 2013 , we believe we are well positioned to build upon our 2012 performance . we aim to deliver improved year over year margins and increased returns for our shareholders . our 2013 plan aims to achieve these goals and assumes we are able to maintain our competitive cost advantage and build upon our high-value network . we plan to introduce new service as well as expand our portfolio of commercial airline partnerships during 2013. we continuously look to expand our other ancillary revenue opportunities , including our evenmore product offering and improving our trueblue loyalty program . we also remain committed to strengthening our balance sheet and prudently investing in infrastructure and product enhancements to enable us to reap future benefits . for the full year , we estimate our operating capacity to increase approximately 5.5 % to 7.5 % over 2012 with the net addition of three airbus a320 aircraft and seven embraer 190 aircraft to our operating fleet . we will also take delivery of our first four airbus a321 aircraft in the latter part of 2013. the entry into service date of the airbus a321 will depend on the timing and successful completion of the faa certification process . assuming fuel prices of $ 3.24 per gallon , net of our fuel hedging activity , our cost per available seat mile for 2013 is expected to increase by 1.5 % to 3.5 % over 2012. this expected increase is primarily a result of continued maintenance cost pressures associated with the aging of our fleet . additionally , salaries , wages and benefits are expected to increase due to the increasing tenure of our crewmembers combined with efforts to maintain competitiveness of our compensation packages . story_separator_special_tag increased to 5.6 years as of december 31 , 2012 resulting in an increase to average wages and benefits per full-time equivalent employees . as a result of increased wages , our guaranteed 5 % retirement contribution , which we refer to as retirement plus , to all of our eligible crewmembers increased by $ 3 million . our increased profitability resulted in $ 3 million of profit sharing expense to be paid to our crewmembers in march 2013. during 2012 , we also introduced a retirement advantage program , providing an additional 3 % retirement contribution for certain of our faa-licensed crewmembers , which resulted in $ 4 million of increased expense . maintenance materials and repairs maintenance materials and repairs are generally expensed when incurred unless covered by a long-term flight hour services contract . because the average age of our aircraft of 6.7 years is relatively young , all of our aircraft currently require less maintenance than the fleet of many of our competitors . as our fleet ages , our maintenance costs will increase significantly , both on an absolute basis and as a percentage of our unit costs , as older aircraft require additional , more expensive repairs over time . in addition to the increase in operating aircraft and the aging of our fleet , several aircraft coming off of warranty contributed to higher maintenance costs in 2012. additionally , one of our key engine and component repair maintenance providers liquidated during the first quarter of 2012. we believe the overall impact of the liquidation was approximately $ 10 million in more costly repairs while we found alternative providers . during the third and fourth quarter of 2012 , we engaged new maintenance providers to replace the liquidated provider . these new maintenance providers will provide similar services at competitive rates . we are also working on a long-term maintenance agreement for our embraer 190 aircraft components , which are currently not covered under a maintenance agreement . we believe expanding the scope of our maintenance services covered under long-term agreements will help us to better manage and predict maintenance costs over time . we are continuously exploring opportunities to mitigate and level the increase in maintenance expense , including by improving operational efficiencies . we also continue to work with our various maintenance repair partners and manufacturers ; most recently we entered into an agreement to mitigate the risk of cost overruns associated with our embraer 190 heavy maintenance checks . we expect the rate of increase in maintenance expense to lessen in the next few years as the heavy maintenance hurdle from our mid-2000 aircraft deliveries subsides and we benefit from new maintenance agreements for both our a320 and e190 fleets . other operating expenses other operating expenses consist of purchased services ( including expenses related to fueling , ground handling , skycap , security and janitorial services ) , insurance , personnel expenses , cost of goods sold to other airlines by livetv , professional fees , passenger refreshments , supplies , bad debts , communication costs and taxes other than payroll and fuel taxes . during 2012 , we had several non-recurring items impacting other operating expenses . story_separator_special_tag livetv terminated a customer contract resulting in a gain of approximately $ 8 million . we sold two embraer 190 aircraft and six spare aircraft engines resulting in a gain of approximately $ 10 million . income taxes our effective tax rate was 39 % in 2012 compared to 41 % in 2011 . our effective tax rate differs from the statutory income tax rate primarily due to state income taxes and the non-deductibility of certain items for tax purposes as well as the relative size of these items to our 2012 pre-tax income of $ 209 million and our 2011 pre-tax income of $ 145 million . the rate decrease was attributable to reductions in certain non-deductible items and the relative size of these items to our pre-tax income . 33 year 2011 compared to year 2010 we reported net income of $ 86 million in 2011 compared to net income of $ 97 million in 2010. in 2011 , we had operating income of $ 322 million , a decrease of $ 11 million over 2010 , and an operating margin of 7.1 % , down 1.7 points from 2010. diluted earnings per share were $ 0.28 for 2011 compared to diluted earnings per share of $ 0.31 for 2010. we generated consistent unit revenue growth throughout the year by managing our network and balancing the seasonality created by our highly leisure focused business . we complemented our leisure travel markets with higher yielding business markets and capitalized on key growth regions , primarily boston and the caribbean , which resulted in increased capacity . our on-time performance , defined by the dot as arrivals within 14 minutes of schedule , was 73.3 % in 2011 compared to 75.7 % in 2010. our on-time performance throughout the year and on a year-over-year basis remained challenged by our significant operations in the northeast united states . 2011 vs 2010 highlights during the first quarter of 2011 , the winter storm season was extremely severe . the operational impact of the severe storm season pressured our casm , excluding fuel , and negatively impacted our completion factor . during the third quarter of 2011 , hurricane irene severely impacted our operations as its path travelled directly through the core of our network . flights were suspended in new york and boston , resulting in approximately 1400 cancellations over a three day period . operating capacity increased approximately 7 % to 37.23 billion available seat miles in 2011. average fares for the year increased 10 % over 2010 to $ 155 , which also resulted in an increase of $ 14 million in associated credit card fees . operating expenses per available seat mile increased 13 % to 11.23 cents . excluding fuel , our cost per available seat mile increased 0.9 % in 2011. invested in five new owned embraer 190 aircraft and four new owned airbus a320 aircraft , all of which were debt financed . opened seven new cities in 2011. total departures increased 8 % . extended the leases on four aircraft during 2011 at lower rates . the average age of our fleet increased to 6.1 years , and as of december 31 , 2011 , our oldest operating aircraft had an age of 12.1 years . in 2010 , we had several items impacting other operating expenses which did not recur in 2011 . ◦ we incurred approximately $ 13 million in one-time implementation expenses related to our new customer service system . ◦ we recorded a $ 6 million one-time impairment expense related to the intangible assets and other costs associated with developing an air to ground connectivity capability . ◦ we paid a $ 5 million rescheduling fee in connection with the deferral of aircraft . early extinguishment of $ 39 million par value of our 6.75 % series a convertible debt due 2039 resulted in $ 6 million in losses recorded in interest income and other . 34 operating revenues replace_table_token_12_th passenger revenues increased 20 % mainly attributable to the capacity increase along with the increase in yield . revenue from our even more space seats increased $ 36 million as a result of increased capacity and revised pricing . other revenue increased 15 % as a result of a $ 17 million increase in marketing related revenues as well as an $ 18 million increase in revenues from certain passenger related fees such as change fees and excess baggage . livetv third party revenues increased approximately $ 14 million . operating expenses replace_table_token_13_th aircraft fuel and hedging aircraft fuel expense increased 49 % , and represented approximately 40 % of our total operating expenses . average fuel cost per gallon increased 38 % to $ 3.17 compared to $ 2.29 in 2010 , resulting in $ 461 million of higher fuel expense . additionally , we consumed 39 million more gallons of aircraft fuel , resulting in $ 88 million of higher fuel expense . we hedged approximately 43 % of our total 2011 fuel consumption . we recorded $ 3 million in effective fuel hedge gains , which offset fuel expense , versus $ 3 million in effective fuel hedge losses during 2010 , which were an increase to fuel expense . accounting ineffectiveness on fuel derivatives classified as cash flow hedges resulted in losses of $ 2 million in each of 2011 and 2010 , recorded in interest income and other . we are unable to predict what the amount of ineffectiveness will be related to 35 these instruments , or the potential loss of hedge accounting which is determined on a derivative-by-derivative basis , due to the volatility in the forward markets for these commodities . salaries , wages and benefits the increase in salaries , wages and benefits was primarily due to a 5 % increase in the number of average number of full-time equivalent employees needed to support our profitable growth plans . the increasing seniority levels of our crewmembers combined with pay and benefit increases also contributed to higher expense .
| operating capacity increased approximately 8 % to 40.08 billion available seat miles in 2012. average fares for the year increased 2 % to $ 157 , which also resulted in an increase of $ 4 million in associated credit card fees . operating expenses per available seat mile increased 2 % to 11.49 cents . excluding fuel , our cost per available seat mile increased 3 % in 2012. invested in four new owned embraer 190 aircraft and seven new owned airbus a320 aircraft . eight of these aircraft were debt financed . commenced service to five new cities during 2012. total departures increased 9 % . extended the leases on three aircraft during 2012 at lower rates . the average age of our fleet increased to 6.7 years , and as of december 31 , 2012 , our oldest operating aircraft had an age of 13.1 years . early extinguishment of approximately $ 220 million in principal of long-term debt resulted in a net of $ 1 million in losses recorded in interest income and other . operating revenues replace_table_token_10_th we derive our revenue primarily from transporting passengers on our aircraft . passenger revenue accounted for 91 % of our total operating revenues for the year ended december 31 , 2012 . revenues generated from international routes , including 31 puerto rico , accounted for 26 % of our total passenger revenues in 2012 . revenue is recognized either when transportation is provided or after the ticket or customer credit expires . we measure capacity in terms of available seat miles , which represents the number of seats available for passengers multiplied by the number of miles the seats are flown . yield , or the average amount one passenger pays to fly one mile , is calculated by dividing passenger revenue by revenue passenger miles . we attempt to increase passenger revenue primarily by increasing our yield per flight which produces higher revenue per available seat mile , or rasm . our objective is to optimize our fare mix to increase our overall average fare while continuing to provide our customers with competitive fares . passenger revenue also
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although the bank manages other risks , such as credit quality and liquidity risk , in the normal course of business management considers interest rate risk to be its most significant market risk that could potentially have the largest material effect on the bank 's financial condition and results of operations . the bank does not maintain a trading account for any class of financial instruments nor does it engage in hedging activities . furthermore , the bank is not subject to foreign currency exchange rate risk or commodity price risk . qualitative aspects of market risk . the bank 's principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates . the bank has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the difference between asset and liability maturities and interest rates . the principal element in achieving this objective is to increase the interest rate sensitivity of the bank 's interest-earning assets by retaining in its portfolio , short-term loans and loans with interest rates subject to periodic adjustments . the bank relies on retail deposits as its primary source of funds . as part of its interest rate risk management strategy , the bank promotes transaction accounts and certificates of deposit with terms of up to five years . the bank has adopted a strategy that is designed to substantially match the interest rate sensitivity of assets relative to its liabilities . the primary elements of this strategy involve originating arm loans for its portfolio , maintaining residential construction loans as a portion of total net loans receivable because of their generally shorter terms and higher yields than other one- to four-family residential mortgage loans , matching asset and liability maturities , investing in short-term securities , and originating fixed-rate loans for retention or sale in the secondary market while retaining the related msrs . sharp increases or decreases in interest rates may adversely affect the bank 's earnings . management of the bank monitors the bank 's interest rate sensitivity through the use of a model provided by fimac solutions , llc ( “ fimac ” ) , a company that specializes in providing interest rate risk and balance sheet management services to the financial services industry . based on a rate shock analysis prepared by fimac based on data at september 30 , 2017 , an immediate increase in interest rates of 100 basis points would increase the bank 's projected net interest income by approximately 4.2 % , primarily because a larger portion of the bank 's interest rate sensitive assets than interest rate sensitive liabilities would reprice within a one year period . conversely , an immediate decrease in interest rates of 100 basis points would decrease the bank 's projected net interest income by approximately 7.7 % . see “ quantitative aspects of market risk ” below for additional information . management has sought to sustain the match between asset and liability maturities and rates , while maintaining an acceptable interest rate spread . pursuant to this strategy , the bank actively originates adjustable-rate loans for retention in its loan portfolio . fixed-rate mortgage loans with maturities greater than seven years generally are originated for the immediate or future resale in the secondary mortgage market . although the bank has sought to originate arm loans , the ability to originate such loans depends to a great extent on market interest rates and borrowers ' preferences . in lower interest rate environments , borrowers often prefer fixed-rate loans . consumer , commercial business and construction loans typically have shorter terms and higher yields than permanent residential mortgage loans , and accordingly reduce the bank 's exposure to fluctuations in interest rates . at september 30 , 2017 , the consumer , commercial business and construction portfolios amounted to $ 42.2 million , $ 44.4 million and $ 168.5 million , or 5.4 % , 5.7 % and 21.5 % of total loans receivable , respectively . 54 quantitative aspects of market risk . the model provided for the bank by fimac estimates the changes in net portfolio value ( `` npv '' ) and net interest income in response to a range of assumed changes in market interest rates . the model first estimates the level of the bank 's npv ( market value of assets , less market value of liabilities , plus or minus the market value of any off-balance sheet items ) under the current rate environment . in general , market values are estimated by discounting the estimated cash flows of each instrument by appropriate discount rates . the model then recalculates the bank 's npv under different interest rate scenarios . the change in npv under the different interest rate scenarios provides a measure of the bank 's exposure to interest rate risk . the following table is provided by fimac based on data at september 30 , 2017 . replace_table_token_26_th _ ( 1 ) does not include loan fees . ( 2 ) includes boli income , which is included in non-interest income in the consolidated financial statements . ( 3 ) no rates in the model are allowed to go below zero . given the relatively low level of market interest rates , a calculation for a decrease of greater than 200 basis points has not been prepared . computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions , including relative levels of market interest rates , loan repayments and deposit decay , and should not be relied upon as indicative of actual results . furthermore , the computations do not reflect any actions management may undertake in response to changes in interest rates . in the event of a 100 basis point decrease in interest rates , the bank would be expected to experience a 9.1 % decrease in npv and a 7.7 % decrease in net interest income . story_separator_special_tag in the event of a 100 basis point increase in interest rates , a 6.1 % increase in npv and a 4.2 % increase in net interest income would be expected . based upon the modeling described above , the bank 's asset and liability structure generally results in increases in net interest income and npv in a rising interest rate scenario and decreases in net interest income and npv in a declining interest rate scenario . as with any method of measuring interest rate risk , certain shortcomings are inherent in the method of analysis presented in the foregoing table . for example , although certain assets and liabilities may have similar maturities or periods to repricing , they may react in different degrees to changes in market interest rates . also , the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates , while interest rates on other types may lag behind changes in market rates . additionally , certain assets have features which restrict changes in interest rates on a short-term basis and over the life of the asset . further , in the event of a change in interest rates , expected rates of prepayments on loans and early withdrawals from certificates of deposit could possibly deviate significantly from those assumed in calculating the table . comparison of financial condition at september 30 , 2017 and september 30 , 2016 the company 's total assets increased by $ 60.64 million , or 6.8 % , to $ 952.02 million at september 30 , 2017 from $ 891.39 million at september 30 , 2016 . the increase was primarily attributable to increases in cash and cash equivalents and net loans receivable , which were partially offset by a decrease in certificates of deposit ( `` cds '' ) held for investment . net loans receivable increased by $ 27.22 million , or 4.1 % , to $ 690.36 million at september 30 , 2017 from $ 663.15 million at september 30 , 2016 , primarily as a result of increases in custom and owner/builder construction loans , commercial real estate loans , commercial construction loans and multi-family construction loans . these increases in net loans receivable were partially offset by an increase in the undisbursed portion of construction loans in process . 55 the company 's total liabilities increased by $ 46.47 million , or 5.8 % , to $ 841.02 million at september 30 , 2017 from $ 794.55 million at september 30 , 2016 primarily due to an increase in total deposits , which was partially offset by the repayment of all fhlb borrowings . total deposits increased by $ 76.36 million , or 10.0 % , to $ 837.90 million at september 30 , 2017 from $ 761.53 million at september 30 , 2016 , primarily as a result of increases in non-interest bearing , savings , money market , and now checking account balances . these increases were partially offset by a decrease in cd account balances . shareholders ' equity increased by $ 14.17 million , or 14.6 % , to $ 111.00 million at september 30 , 2017 from $ 96.83 million at september 30 , 2016 . the increase was primarily due to net income for the year ended september 30 , 2017 of $ 14.17 million and $ 2.50 million received from the exercise of a stock warrant to purchase 370,699 shares of the company 's common stock at an exercise price of $ 6.73 per share , which was partially offset by dividends paid to shareholders of $ 3.64 million . as of september 30 , 2017 , the company exceeded all regulatory capital requirements required for bank holding company regulatory purposes . for additional details see note 15 of the notes to consolidated financial statements contained in `` item 8. financial statements and supplementary data '' and `` item 1. business - regulation of the company - capital requirements . '' a more detailed explanation of the changes in significant balance sheet categories follows : cash and cash equivalents and cds held for investment : cash and cash equivalents and cds held for investment increased by $ 29.28 million , or 18.1 % , to $ 191.22 million at september 30 , 2017 from $ 161.94 million at september 30 , 2016 . the increase was due to a $ 39.25 million increase in total cash and cash equivalents which was partially offset by a $ 9.97 million decrease in cds held for investment . the company continued to maintain high levels of liquidity primarily for asset-liability management purposes . investment securities : investment securities decreased by $ 473,000 , or 5.3 % , to $ 8.38 million at september 30 , 2017 from $ 8.85 million at september 30 , 2016 . the decrease was primarily due to scheduled amortization and prepayments . for additional details on investment securities , see `` item 1. business - investment activities '' and note 3 to the consolidated financial statements contained in `` item 8. financial statements and supplementary data . '' fhlb stock : fhlb stock decreased by $ 1.10 million , or 49.8 % , to $ 1.11 million at september 30 , 2017 from $ 2.20 million at september 30 , 2016 , due to stock redemptions by the fhlb . the required investment in fhlb stock decreased primarily due to the decrease in fhlb borrowings . other investments : other investments increased by $ 3.00 million at september 30 , 2017 from none at september 30 , 2016 due to the company investing in the solomon hess sba loan fund llc . this investment is utilized to help satisfy compliance with the company 's community reinvestment act ( `` cra '' ) investment test requirements .
| net interest income is the difference between interest income , which is the income that the company earns on interest-earning assets , which are primarily loans and investments , and interest expense , the amount the company pays on its interest-bearing liabilities , which are primarily deposits and borrowings ( as needed ) . net interest income is affected by changes in the volume and mix of interest-earning assets , interest earned on those assets , the volume and mix of interest-bearing liabilities and interest paid on those interest-bearing liabilities . management attempts to match the re-pricing characteristics of the interest-earning assets and interest-bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve . the provision for ( recapture of ) loan losses is dependent on changes in the loan portfolio and management 's assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions . the allowance for loan losses reflects the amount that the company believes is adequate to cover probable credit losses inherent in its loan portfolio . net income is also affected by non-interest income and non-interest expenses . for the year ended september 30 , 2017 , non-interest income consisted primarily of service charges on deposit accounts , gain on sales of loans , atm and debit card interchange transaction fees , an increase in the cash surrender value of boli , servicing income on loans sold and other operating income . non-interest income is also increased by net recoveries on investment securities and reduced by net otti losses on investment securities , if any . non-interest expenses consisted primarily of salaries and employee benefits , premises and equipment , advertising , atm and debit card interchange transaction fees , postage and courier expenses , state and local taxes , professional fees , fdic insurance premiums , loan administration and foreclosure expenses , data processing and telecommunication expenses , deposit operation expenses and other non-interest expenses . non-interest income and non-interest expenses are affected by the growth of the company 's operations and
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additionally , we incurred $ 0.3 million of severance expense in fiscal 2009 related to a workforce alignment plan , implemented in order to reduce headcount and improve efficiency and productivity , which we did not incur in fiscal 2010. we expect r & d expenses to increase in fiscal 2012 from fiscal 2011 due to development projects for the cyberknife systems and tomotherapy systems . general and administrative expenses replace_table_token_11_th general and administrative expenses for fiscal 2011 increased $ 21.2 million from fiscal 2010. the increase was primarily attributable to $ 15.7 million of acquisition-related expenses ( including costs of severance , share-based compensation arising from acceleration of stock options and restricted stock awards for tomotherapy employees , fees to investment bankers , integration planning , legal and accounting services ) , higher employee related expense of $ 0.7 million , higher insurance expense of $ 0.4 million and increased travel expense of $ 0.3 million . additionally , we have incurred $ 5.1 million 85 for general and administrative expenses from our tomotherapy subsidiary , primarily consisting of $ 3.6 million in accelerated vesting of stock options and restricted stock awards , $ 0.9 million in employee related expenses and $ 0.2 million of consulting expense . general and administrative expenses for fiscal 2010 decreased by $ 0.8 million from fiscal 2009. the decrease was primarily attributable to a decrease of $ 1.3 million in severance and $ 1.9 million in share-based compensation as compared to fiscal 2009 , when we implemented a workforce alignment plan , in order to reduce headcount and improve efficiency and productivity . we increased efforts to control spending in 2010 resulting in the reduction of $ 1.2 million in contract labor , recruiting cost and rent . further , bad debt expense decreased $ 0.8 million year over year primarily due to the resolution of prior year reserves . the decrease in general and administrative expense was partially offset by a $ 4.3 million increase in consulting services , primarily legal and tax fees , associated with the strategic alliance negotiations with siemens and the shareholder lawsuit . we expect general and administrative expenses to increase in fiscal 2012 from fiscal 2011 due to the acquisition of tomotherapy . we expect to incur costs to integrate the general and administrative functions including severance costs , enterprise resource planning system consolidation expenses , legal entity consolidation and management , as well as higher ongoing costs for services such as insurance , accounting and tax due to the increased size of the company . other income , net replace_table_token_12_th nmnot meaningful other income , net for fiscal 2011 increased $ 2.3 million from fiscal 2010. the increase was primarily attributable to an increase of $ 4.1 million related to foreign currency transaction gains as a result of the appreciation of the euro-u.s. dollar foreign exchange rate and its effects on the remeasurement of balances denominated in euros . this was partially offset by a decrease in net interest income of $ 1.3 million due to lower average interest rates earned on amounts kept in interest bearing accounts during fiscal 2011 compared to fiscal 2010. other income , net for fiscal 2010 decreased $ 3.1 million from fiscal 2009. we recorded $ 1.8 million of interest income in fiscal 2010 , which represented a $ 2.1 million decline from fiscal 2009 due to a decrease in both the average daily balances kept in interest bearing accounts and the interest rates earned on amounts kept in those accounts during the year . interest income was offset by $ 1.7 million in foreign currency transaction loss resulting from the decline in the euro 's international conversion rate . provision for income taxes replace_table_token_13_th the provision for income taxes was higher in fiscal 2011 compared to fiscal 2010 due to $ 0.2 million of additional foreign taxes , primarily resulting from higher income in fiscal 2011 combined with a federal tax benefit of $ 0.9 million recorded in fiscal 2010 resulting from enactment of the worker , homeownership , and business assistance act of 2009 , which permits some relief from federal alternative minimum tax . 86 the provision for income taxes for fiscal 2010 decreased $ 59,000 from fiscal 2009 , resulting in a $ 4,000 net benefit . in fiscal 2010 , we recorded an increase in foreign taxes of $ 0.4 million as compared to the prior year as the result of changes in our jurisdictional mix of income . federal taxes reflected $ 0.7 million additional benefit compared to the prior year due to benefits we recognized as the result of the enactment of the worker , homeownership , and business assistance act of 2009 , which permits some relief from federal alternative minimum tax . as of june 30 , 2011 , we had federal and state net operating loss carryforwards of $ 116.1 million and $ 45.9 million , respectively , including $ 72.0 million federal net operating loss carryforwards and $ 18.0 million of state net operating loss carryforwards from the acquisition of tomotherapy . these federal and state net operating loss carryforwards are available to offset future taxable income , if any , in varying amounts and will begin to expire in 2019 for federal and 2015 for state purposes , respectively . such net operating loss carryforwards include tax benefits from employee option exercises in excess of the share-based compensation expense that has been recognized for those awards in accordance with accounting standards codification topic 718 , stock compensation . we will record approximately $ 7.3 million as a credit to additional paid-in capital if and when such excess benefits are ultimately realized . we also had federal and state research and development tax credit carryforwards of approximately $ 7.6 million and $ 7.5 million , respectively . if not utilized , the federal tax credit carryforwards will begin to expire in 2025 , while the state tax credits story_separator_special_tag additionally , we incurred $ 0.3 million of severance expense in fiscal 2009 related to a workforce alignment plan , implemented in order to reduce headcount and improve efficiency and productivity , which we did not incur in fiscal 2010. we expect r & d expenses to increase in fiscal 2012 from fiscal 2011 due to development projects for the cyberknife systems and tomotherapy systems . general and administrative expenses replace_table_token_11_th general and administrative expenses for fiscal 2011 increased $ 21.2 million from fiscal 2010. the increase was primarily attributable to $ 15.7 million of acquisition-related expenses ( including costs of severance , share-based compensation arising from acceleration of stock options and restricted stock awards for tomotherapy employees , fees to investment bankers , integration planning , legal and accounting services ) , higher employee related expense of $ 0.7 million , higher insurance expense of $ 0.4 million and increased travel expense of $ 0.3 million . additionally , we have incurred $ 5.1 million 85 for general and administrative expenses from our tomotherapy subsidiary , primarily consisting of $ 3.6 million in accelerated vesting of stock options and restricted stock awards , $ 0.9 million in employee related expenses and $ 0.2 million of consulting expense . general and administrative expenses for fiscal 2010 decreased by $ 0.8 million from fiscal 2009. the decrease was primarily attributable to a decrease of $ 1.3 million in severance and $ 1.9 million in share-based compensation as compared to fiscal 2009 , when we implemented a workforce alignment plan , in order to reduce headcount and improve efficiency and productivity . we increased efforts to control spending in 2010 resulting in the reduction of $ 1.2 million in contract labor , recruiting cost and rent . further , bad debt expense decreased $ 0.8 million year over year primarily due to the resolution of prior year reserves . the decrease in general and administrative expense was partially offset by a $ 4.3 million increase in consulting services , primarily legal and tax fees , associated with the strategic alliance negotiations with siemens and the shareholder lawsuit . we expect general and administrative expenses to increase in fiscal 2012 from fiscal 2011 due to the acquisition of tomotherapy . we expect to incur costs to integrate the general and administrative functions including severance costs , enterprise resource planning system consolidation expenses , legal entity consolidation and management , as well as higher ongoing costs for services such as insurance , accounting and tax due to the increased size of the company . other income , net replace_table_token_12_th nmnot meaningful other income , net for fiscal 2011 increased $ 2.3 million from fiscal 2010. the increase was primarily attributable to an increase of $ 4.1 million related to foreign currency transaction gains as a result of the appreciation of the euro-u.s. dollar foreign exchange rate and its effects on the remeasurement of balances denominated in euros . this was partially offset by a decrease in net interest income of $ 1.3 million due to lower average interest rates earned on amounts kept in interest bearing accounts during fiscal 2011 compared to fiscal 2010. other income , net for fiscal 2010 decreased $ 3.1 million from fiscal 2009. we recorded $ 1.8 million of interest income in fiscal 2010 , which represented a $ 2.1 million decline from fiscal 2009 due to a decrease in both the average daily balances kept in interest bearing accounts and the interest rates earned on amounts kept in those accounts during the year . interest income was offset by $ 1.7 million in foreign currency transaction loss resulting from the decline in the euro 's international conversion rate . provision for income taxes replace_table_token_13_th the provision for income taxes was higher in fiscal 2011 compared to fiscal 2010 due to $ 0.2 million of additional foreign taxes , primarily resulting from higher income in fiscal 2011 combined with a federal tax benefit of $ 0.9 million recorded in fiscal 2010 resulting from enactment of the worker , homeownership , and business assistance act of 2009 , which permits some relief from federal alternative minimum tax . 86 the provision for income taxes for fiscal 2010 decreased $ 59,000 from fiscal 2009 , resulting in a $ 4,000 net benefit . in fiscal 2010 , we recorded an increase in foreign taxes of $ 0.4 million as compared to the prior year as the result of changes in our jurisdictional mix of income . federal taxes reflected $ 0.7 million additional benefit compared to the prior year due to benefits we recognized as the result of the enactment of the worker , homeownership , and business assistance act of 2009 , which permits some relief from federal alternative minimum tax . as of june 30 , 2011 , we had federal and state net operating loss carryforwards of $ 116.1 million and $ 45.9 million , respectively , including $ 72.0 million federal net operating loss carryforwards and $ 18.0 million of state net operating loss carryforwards from the acquisition of tomotherapy . these federal and state net operating loss carryforwards are available to offset future taxable income , if any , in varying amounts and will begin to expire in 2019 for federal and 2015 for state purposes , respectively . such net operating loss carryforwards include tax benefits from employee option exercises in excess of the share-based compensation expense that has been recognized for those awards in accordance with accounting standards codification topic 718 , stock compensation . we will record approximately $ 7.3 million as a credit to additional paid-in capital if and when such excess benefits are ultimately realized . we also had federal and state research and development tax credit carryforwards of approximately $ 7.6 million and $ 7.5 million , respectively . if not utilized , the federal tax credit carryforwards will begin to expire in 2025 , while the state tax credits
| addition of service revenue for tomotherapy products . other revenue increased due to facility construction work that we managed for customers in fiscal 2011 . 82 total net revenue for fiscal 2010 decreased $ 12.0 million from fiscal 2009. during fiscal 2010 , 31 cyberknife systems were installed , of which 30 were sold and one was attributable to our shared ownership program , compared to 36 systems installed , including 35 sold and one attributable to our shared ownership program during fiscal 2009. not including our revenue recognized for systems sold under our platinum plan , we recognized $ 128.7 million of products revenue in fiscal 2010 , associated with 38 cyberknife systems sold . by comparison , during fiscal 2009 , we recognized products revenue of $ 123.7 million associated with 41 cyberknife systems , which included 39 units sold and two units purchased out of our shared ownership program . the increase in fiscal 2010 is due primarily to the remaining deferred revenue for units sold in prior periods recognized in fiscal 2010 in accordance with our revenue recognition policy and an increase in upgrades and accessories sold . excluding revenue recognized for systems sold under our platinum plan , we recognized non-platinum service revenue of $ 61.2 million for fiscal 2010 , which increased approximately $ 19.3 million from fiscal 2009 , due to the continued growth in our installed base under service plans . we recognized $ 28.9 million of revenue in fiscal 2010 from systems sold under our platinum plan , $ 12.6 million for products revenue and $ 16.3 million for services revenue . we recognized $ 60.1 million of revenue in fiscal 2009 from systems sold under our platinum plan , $ 35.6 million for products revenue and $ 24.5 million for services revenue . by the end of june 2010 , we had satisfied all upgrade delivery obligations on the 30 units sold under our
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we expect that any termination for convenience would not trigger contractual penalties and would likely be followed by an agreement for the orderly conclusion of the niaid-funded program . since commencing our operations in 1995 , we have devoted substantially all of our resources to the discovery and development of novel inhibitors and antibiotics for the treatment of infectious diseases . we have historically funded our operations primarily through the sale of convertible preferred stock , payments received under our collaborations and a government contract and our ipo . as of september 30 , 2014 , we had $ 131.8 million in cash and marketable securities . our revenue from our collaboration agreements has resulted in our reporting net income in each of our past six fiscal years . however , we had an accumulated deficit of $ 73.0 million as of september 30 , 2014 and have generated no royalties or other recurring revenue from product sales . we expect that our revenue in the near term will continue to be substantially dependent on our collaboration with abbvie and its continued advancement of our collaboration 's protease inhibitor candidates to regulatory approval and commercialization . given the schedule of potential regulatory approval milestone payments and the uncertain nature and timing of clinical development and regulatory approval , we can not be certain as to when or whether we will receive further milestone payments under our collaboration with abbvie . financial operations overview revenue since our inception , our revenue has been derived from two primary sources : collaboration agreements with pharmaceutical companies and one government research and development contract . we have not generated any revenue from product sales . we have entered into three significant collaboration agreements since 2006. in november 2006 , we entered into a collaboration agreement with abbvie and in february 2012 we entered into a collaboration agreement with novartis , which is being concluded in the last calendar quarter of 2014. in september 2011 , we entered into a contract with niaid , which has funded the preclinical and early clinical development of our bicyclolide antibiotic product candidate since then . the following table is a summary of revenue recognized from our collaboration agreements and our government contract for the years ended september 30 , 2014 , 2013 and 2012 : replace_table_token_6_th abbvie agreement since all of our research obligations under the abbvie agreement were concluded by june 30 , 2011 , all milestone payments received since then , have been recognized as revenue upon achievement of the milestone by abbvie . 59 during the year ended september 30 , 2013 , we earned and recognized as revenue a $ 15.0 million milestone payment based on abbvie 's initiation of dosing in a phase 3 clinical trial that included paritaprevir . during the year ended september 30 , 2014 , we earned and recognized as revenue a total of $ 40.0 million in milestone payments as a result of regulatory filings by abbvie with the fda and the ema for the first protease inhibitor product resulting from our collaboration with abbvie . under the terms of the abbvie agreement , we are eligible to receive additional future milestone payments totaling up to $ 155 million related to the successful development by abbvie of the first hcv treatment regimen incorporating one of our collaboration 's protease inhibitors . we are also eligible to receive annually tiered , double-digit royalties per product on abbvie 's net sales , if any , allocable to any one of our collaboration 's protease inhibitors . in october 2014 we entered into an amendment to our agreement with abbvie to finalize the net sales allocations for regimens containing paritaprevir , as well as for any regimen containing abt-493 . under the terms of this agreement , 30 % of net sales of a 3-daa regimen containing paritaprevir will be allocated to paritaprevir , and 45 % of net sales of a 2-daa regimen containing paritaprevir will be allocated to paritaprevir . for abt-493 , 50 % of net sales of a 2-daa regimen containing abt-493 will be allocated to abt-493 and for a 3-daa regimen containing abt-493 , 33 1 ⁄ 3 % of net sales will be allocated to abt-493 . if there is any active ingredient other than daa 's in any abt-493-containing regimen sold by abbvie , there will be a further adjustment to net sales based on the relative value of the non-daa ingredient . novartis agreement under the terms of the novartis agreement , we received an upfront payment of $ 34.4 million in february 2012 and a commitment to fund research at an agreed amount for one year . we recognized the upfront license payment upon receipt as we determined that the license to which the payment related and the research services were separable elements under the agreement that could be accounted for as each was delivered or provided . during the year ended september 30 , 2012 , revenue recognized under this agreement was $ 35.6 million , which consisted of the upfront license payment and research funding earned during that period . in january 2013 , we received an $ 11.0 million milestone payment based on novartis ' november 2012 initiation of dosing in a phase 1 clinical trial that included edp-239 . during the year ended september 30 , 2013 , we recognized $ 12.7 million of revenue under the novartis agreement , of which $ 11.0 million was attributed to license fees and $ 1.7 million was attributed to the performance of research services . no revenue was recognized under this agreement during the year ended september 30 , 2014. in september 2014 we entered into an agreement with novartis to return to us full rights to edp-239 and our ns5a program . we will not be eligible to receive any future milestones or other payments from novartis nor will we owe novartis any future payments except for any unused drug product that we may choose to buy from them . story_separator_special_tag niaid contract under the terms of the niaid contract and the initial authorization , niaid paid us research and development funding of approximately $ 14.0 million over an initial period of 30 months . the contract also contains six option periods , which in aggregate could extend the contract , at the option of niaid , up to an additional 30 months and provide us additional funding of up to $ 28.4 million . in august 2013 niaid agreed to provide additional funding of $ 9.2 million , thereby increasing total funding from niaid to approximately $ 23.5 million . we recognize revenue under this contract as the research and development services are performed . we recognized revenue of $ 7.7 million , $ 4.4 million and $ 6.1 million under this agreement during the years ended september 30 , 2014 , 2013 and 2012 , respectively . internal programs as our internal product candidates are currently in preclinical or early clinical development , we have not generated any revenue from product sales and do not expect to generate any revenue from product sales for at least the next several years . we expect that our revenue for the next several years will be derived primarily from payments under our current collaboration agreement with abbvie , payments under our niaid contract , and any additional collaborations or government contracts that we may enter into in the future . we can not provide assurance as to the timing of future milestone or royalty payments or government contract payments or that we will receive any of these payments at all . 60 operating expenses the following table summarizes our operating expenses for the years ended september 30 , 2014 , 2013 and 2012 : replace_table_token_7_th research and development expenses research and development expenses consist of costs incurred to conduct basic research , such as the discovery and development of novel small molecules as therapeutics . we expense all costs of research and development as incurred . these expenses consist primarily of : personnel costs , including salaries , related benefits and stock-based compensation for employees engaged in scientific research and development functions ; third-party contract costs relating to research , formulation , manufacturing , preclinical study and clinical trial activities ; third-party license fees ; laboratory consumables ; and allocated facility-related costs . project-specific expenses reflect costs directly attributable to our clinical development candidates and preclinical candidates nominated and selected for further development . remaining research and development expenses are reflected in research and drug discovery , which represents early-stage drug discovery programs . at any given time , we typically have several active early stage research and drug discovery projects . our internal resources , employees and infrastructure are not directly tied to any individual research or drug discovery project and are typically deployed across multiple projects . as such , we do not maintain information regarding costs incurred for our early-stage research and drug discovery programs on a project-specific basis . we expect that our research and development expenses will increase in the future as we advance our three independent hcv programs and our research and development efforts in other areas . our research and drug discovery programs are at an early stage ; therefore , the successful development of our product candidates is highly uncertain and may not result in approved products . completion dates and completion costs can vary significantly for each product candidate and are difficult to predict . given the uncertainty associated with clinical trial enrollments and the risks inherent in the development process , we are unable to determine the duration and completion costs of the current or future clinical trials of our product candidates or if , or to what extent , we will generate revenue from the commercialization and sale of any of our product candidates . we anticipate that we will make determinations as to which development programs to pursue and how much funding to direct to each program on an ongoing basis in response to the preclinical and clinical success of each product candidate , as well as ongoing assessments of the commercial potential of each product candidate . general and administrative expenses general and administrative expenses consist primarily of personnel costs , consisting of salaries , related benefits and stock-based compensation , of our executive , finance , business and corporate development and other 61 administrative functions . general and administrative expenses also include travel expenses , allocated facility-related costs not otherwise included in research and development expenses , directors ' and officers ' liability insurance premiums , and professional fees for auditing , tax and legal services , including legal expenses to pursue patent protection of our intellectual property . we expect that general and administrative expenses will increase in the future primarily due to planned expansion of our operating activities as well as potential additional costs associated with our operating as a growing public company . other income ( expense ) interest income . interest income consists of interest earned on our cash and investment balances . interest expense . interest expense consists of non-cash interest expense which is being accreted to the value of accrued third-party license fees over the term of the obligation . change in fair value of warrant liability and series 1 nonconvertible preferred stock . we have issued warrants for the purchase of our nonconvertible preferred stock and we have issued series 1 nonconvertible preferred stock that we believe are financial instruments that may require a transfer of assets because of the liquidation features of the underlying stock . therefore , we have classified these warrants and series 1 nonconvertible preferred stock as liabilities that we remeasure to fair value at each reporting period and we record the changes in the fair value of the warrants and the series 1 nonconvertible preferred stock as a component of other income ( expense ) .
| we did not have any revenue related to the abbvie collaboration during fiscal 2012. during the year ended september 30 , 2013 we also recognized revenue of $ 12.7 million under our collaboration with novartis , as a result of an $ 11.0 million milestone payment we received in january 2013 based on novartis ' initiation of dosing in a phase 1 clinical trial that includes edp-239 , and $ 1.7 million related to research services we provided . during the comparable period in 2012 , novartis paid us an upfront payment of $ 34.4 million and $ 1.1 million related to research services we provided , which we recognized as revenue during the period . government contract revenue was $ 4.4 million and $ 6.1 million during the years ended september 30 , 2013 and 2012 , respectively , related to our contract with niaid for the antibiotic program . research and development expenses . replace_table_token_10_th research and development expenses were $ 18.7 million in the year ended september 30 , 2014 , as compared to $ 16.8 million for the same period in 2013. the increase of $ 1.9 million year over year was due primarily to an increase of $ 2.2 million in expenses for our antibiotic program and $ 1.4 million for our early stage drug 66 discovery programs , partially offset by a decrease of $ 1.7 million in expenses related to our ns5a inhibitor program . we incurred preclinical and clinical expenses for the development of our lead antibiotic candidate as a result of the contract we entered into in september 2011 with niaid , which has funded our preclinical and early clinical development of this candidate . in fiscal 2014 we incurred higher research expenses in our early stage drug discovery programs due to an increase in both the number of preclinical studies and the related costs . our research costs related to our ns5a inhibitor program decreased as a result of our completing our research for novartis in august 2013. we had incurred expense for ns5a research to identify additional
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when a home is closed , we typically have not yet paid all incurred costs necessary to complete the home . as homes close , we compare the home construction budget to actual recorded costs to date to estimate the additional costs to be incurred from our subcontractors related to the home . we record a liability and a corresponding charge to cost of sales for the amount we estimate will ultimately be paid related to that home . we monitor the accuracy of such estimates by comparing actual costs incurred in subsequent months to the estimate . although actual costs to complete a home in the future could differ from our estimates , our method has historically produced consistently accurate estimates of actual costs to complete closed homes . inventory is recorded at cost , unless events and circumstances indicate that the carrying value of the land is impaired , at which point the inventory is written down to fair value as required by financial accounting standards board ( “ fasb ” ) accounting standards codification ( “ asc ” ) 360-10 , property , plant and equipment ( “ asc 360 ” ) . the company assesses inventory for recoverability on a quarterly basis if events or changes in local or national economic conditions indicate that the carrying amount of an asset may not be recoverable . in conducting our quarterly review for indicators of impairment on a community level , we evaluate , among other things , margins on sales contracts in backlog , the margins on homes that have been delivered , expected changes in margins with regard to future home sales over the life of the community , expected changes in margins with regard to future land sales , the value of the land itself as well as any results from third-party appraisals . from the review of all of these factors , we identify communities whose carrying values may exceed their estimated undiscounted future cash flows and run a test for recoverability . for those communities whose carrying values exceed the estimated undiscounted future cash flows and which are deemed to be impaired , the impairment recognized is measured by the amount by which the carrying amount of the communities exceeds the estimated fair value . due to the fact that the company 's cash flow models and estimates of fair values are based upon management estimates and assumptions , unexpected changes in market conditions and or changes in management 's intentions with respect to the inventory may lead the company to incur additional impairment charges in the future . for all of the categories listed below , the key assumptions relating to the valuations are dependent on project-specific local market and or community conditions and are inherently uncertain . because each inventory asset is unique , there are numerous inputs and assumptions used in our valuation techniques . market factors that may impact these assumptions include : historical project results such as average sales price and sales pace , if deliveries have occurred in the project ; competitors ' market and or community presence and their competitive actions ; project specific attributes such as location desirability and uniqueness of product offering ; potential for alternative product offerings to respond to local market conditions ; and current economic and demographic conditions and related trends and forecasts . these and other market factors that may impact project assumptions are considered by personnel in our homebuilding divisions as they prepare or update the forecasts for each community . quantitative and qualitative factors other than home sales prices could significantly impact the potential for future impairments . the sales objectives can differ between communities , even within a given sub-market . for example , facts and circumstances in a given community may lead us to price our homes with the objective of yielding a higher sales absorption pace , while facts and circumstances in another community may lead us to price our homes to minimize deterioration in our gross margins , although it may result in a slower sales absorption pace . furthermore , the key assumptions included in our estimated future undiscounted cash flows may be interrelated . for example , a decrease in estimated base sales price or an increase in home sales incentives may result in a corresponding increase in sales absorption pace or a reduction in base house costs . changes in our key assumptions , including estimated average selling price , construction and development costs , absorption pace ( reflecting any product mix change strategies implemented or to be implemented ) , selling strategies , alternative land uses ( including disposition of all or a portion of the land owned ) , or discount rates , could materially impact future cash flow and fair value estimates . 24 as of december 31 , 2014 , our projections generally assume a gradual improvement in market conditions . if communities are not recoverable based on estimated future undiscounted cash flows , the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets . the fair value of a community is estimated by discounting management 's cash flow projections using an appropriate risk-adjusted interest rate . as of december 31 , 2014 , we utilized discount rates ranging from 13 % to 16 % in our valuations . the discount rate used in determining each asset 's estimated fair value reflects the inherent risks associated with the related estimated cash flow stream , as well as current risk-free rates available in the market and estimated market risk premiums . our quarterly assessments reflect management 's best estimates . due to the inherent uncertainties in management 's estimates and uncertainties related to our operations and our industry as a whole as further discussed in “ item 1a . risk factors ” in part i of this annual report on form 10-k , we are unable to determine at this time if and to what extent continuing future impairments will occur . story_separator_special_tag additionally , due to the volume of possible outcomes that can be generated from changes in the various model inputs for each community , we do not believe it is possible to create a sensitivity analysis that can provide meaningful information for the users of our financial statements . land option or purchase agreements . in accordance with asc 810-10 , consolidation ( “ asc 810 ” ) , we analyze our land option or purchase agreements to determine whether the corresponding land seller is a variable interest entity ( “ vie ” ) and , if so , whether we are the primary beneficiary ( using an analysis similar to that described in note 1 of our consolidated financial statements within the description of our significant accounting policy for vies ) . although we do not have legal title to the optioned land , asc 810 requires a company to consolidate a vie if the company is determined to be the primary beneficiary . in cases where we are the primary beneficiary , even though we do not have title to such land , we are required to consolidate these purchase/option agreements and reflect such assets and liabilities as consolidated inventory not owned on our consolidated balance sheets . at both december 31 , 2014 and 2013 , we have concluded that we were not the primary beneficiary of any vies from which we are purchasing under land option or purchase agreements . please refer to note 1 of our consolidated financial statements and the “ off-balance sheet arrangements ” section below for additional information related to our off-balance-sheet arrangements . warranty reserves . we record warranty reserves to cover our exposure to the costs for materials and labor not expected to be covered by our subcontractors to the extent they relate to warranty-type claims . warranty reserves are established by charging cost of sales and crediting a warranty reserve for each home closed . the warranty reserves for the company 's home builder 's limited warranty ( “ hblw ” ) are established as a percentage of average sales price and adjusted based on historical payment patterns determined , generally , by geographic area and recent trends . factors that are given consideration in determining the hblw reserves include : ( 1 ) the historical range of amounts paid per average sales price on a home ; ( 2 ) type and mix of amenity packages added to the home ; ( 3 ) any warranty expenditures not considered to be normal and recurring ; ( 4 ) timing of payments ; ( 5 ) improvements in quality of construction expected to impact future warranty expenditures ; and ( 6 ) conditions that may affect certain projects and require a different percentage of average sales price for those specific projects . changes in estimates for warranties occur due to changes in the historical payment experience and differences between the actual payment pattern experienced during the period and the historical payment pattern used in our evaluation of the warranty reserve balance at the end of each quarter . actual future warranty costs could differ from our current estimated amount . our warranty reserves for our 30-year or 10-year transferable structural warranty programs are established on a per-unit basis . while the structural warranty reserve is recorded as each house closes , the sufficiency of the structural warranty per unit charge and total reserve is re-evaluated on an annual basis , with the assistance of an actuary , using our own historical data and trends , as well as industry-wide historical data and trends , and other project specific factors . the reserves are also evaluated quarterly and adjusted if we encounter activity that is not consistent with the historical experience used in the annual analysis . these reserves are subject to variability due to uncertainties regarding structural defect claims for products we build , the markets in which we build , claim settlement history , insurance and legal interpretations , among other factors . while we believe that our warranty reserves are sufficient to cover our projected costs , there can be no assurances that historical data and trends will accurately predict our actual warranty costs . please refer to note 1 of our consolidated financial statements for additional information related to our warranty reserves . self-insurance reserves . self-insurance reserves are made for estimated liabilities associated with employee health care , workers ' compensation , and general liability insurance . the reserves related to employee health care and workers ' compensation are based on historical experience and open case reserves . our workers ' compensation claims and our general liability claims are insured by a third party , except for workers compensation claims made in the state of ohio where the company is self-insured . the company records a reserve for general liability claims falling below the company 's deductible . the reserve estimate is based on an actuarial evaluation of our past history of general liability claims , other industry specific factors and specific event analysis . because of the high degree of judgment required in determining these estimated accrual amounts , actual future costs could differ 25 from our current estimated amounts . please refer to note 1 of our consolidated financial statements for additional information related to our self-insurance reserves . stock-based compensation . we measure and recognize compensation expense associated with our grant of equity-based awards in accordance with asc 718 , compensation-stock compensation ( “ asc 718 ” ) , which generally requires that companies measure and recognize stock-based compensation expense in an amount equal to the fair value of share-based awards granted under compensation arrangements over the related vesting period . as discussed further in notes 1 and 2 of our consolidated financial statements , we have granted share-based awards to certain of our employees and directors in the form of stock options , director stock units and performance share units ( “ psu 's ” ) .
| impacted by ( 1 ) our strategic growth and investment in new communities , ( 2 ) continued improvement in our mix of communities and better locations within each of our markets ; ( 3 ) our continued focus on controlling overall costs ; and ( 4 ) the strong performance of our financial services operations . however in 2014 , our new contracts declined 3 % , our active communities declined 4 % and our units in backlog declined 5 % as a result of a number of factors , including ( 1 ) reduced affordability in certain markets due to higher average sales prices , ( 2 ) tepid economic recovery and income growth , ( 3 ) delays in the opening of certain of our new communities , ( 4 ) a general lengthening of our community development cycle time , and ( 5 ) the imposition of lower loan limits on government-sponsored mortgages beginning in january 2014. while our new contracts and backlog units declined , our total sales value in backlog increased 4 % to $ 425 million and the related average sales price in backlog improved 9 % to $ 348,000 . summary of company financial results in 2014 in 2014 , we achieved net income to common shareholders of $ 45.9 million , or $ 1.65 per diluted share , which included ( 1 ) a $ 9.3 million accounting benefit from income taxes associated with the reversal of our remaining state deferred tax asset valuation allowance , ( 2 ) $ 3.5 million of pre-tax impairment charges and ( 3 ) $ 4.9 million in dividend payments made to holders of our series a preferred shares . this compares to net income to common shareholders of $ 145.6 million , or $ 5.24 per diluted share , in 2013 , which included ( 1 ) a $ 112.8 million accounting benefit from income taxes associated with the reversal of a majority of our deferred tax asset valuation
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the increases in our income from operations and adjusted ebitda for the year ended december 31 , 2012 are principally due to increases in the operating performance of our specialty hospital segment . we were able to increase our specialty hospital income from operations $ 22.8 million or 7.3 % and our specialty hospital adjusted ebitda $ 19.0 million or 5.2 % for the year ended december 31 , 2012 as compared to the year ended december 31 , 2011 . 50 net income attributable to holdings increased $ 40.4 million to $ 148.2 million for the year ended december 31 , 2012 compared to $ 107.8 million for the year ended december 31 , 2011. the increase resulted primarily from an increase in our income from operations described above , increases in our equity in earnings of unconsolidated subsidiaries principally related to our joint venture with the baylor health care system , or the `` baylor jv , '' and a reduction of interest expense . we also incurred a smaller loss on early retirement of debt related to the refinancing transactions completed in 2012 compared to the refinancing transactions completed in 2011. cash flow from operations provided $ 298.7 million of cash for the year ended december 31 , 2012 for holdings and $ 309.4 million of cash for the year ended december 31 , 2012 for select . the difference between holdings and select in cash flow from operations primarily relates to interest payments on holdings ' senior floating rate notes . year ended december 31 , 2011 for the year ended december 31 , 2011 , our net operating revenues increased 17.3 % to $ 2,804.5 million compared to $ 2,390.3 million for the year ended december 31 , 2010. this increase in net operating revenues resulted principally from a 23.1 % increase in our specialty hospital net operating revenue . the increase in our specialty hospital revenue is primarily due to the regency hospitals we acquired on september 1 , 2010. we had income from operations for the year ended december 31 , 2011 of $ 310.7 million compared to $ 236.1 million for the year ended december 31 , 2010. we had net income attributable to holdings for the year ended december 31 , 2011 of $ 107.8 million compared to $ 77.6 million for the year ended december 31 , 2010. our adjusted ebitda for the year ended december 31 , 2011 was $ 386.0 million compared to $ 307.1 million for the year ended december 31 , 2010. see the section entitled `` results of operations `` for a reconciliation of net income to adjusted ebitda . the increase in income from operations , net income and adjusted ebitda for the year ended december 31 , 2011 from the prior year resulted from the addition of the regency hospitals acquired on september 1 , 2010 and improved operating performance at our other specialty hospitals . holdings ' interest expense for the year ended december 31 , 2011 was $ 99.2 million compared to $ 112.3 million for the year ended december 31 , 2010. select 's interest expense for the year ended december 31 , 2011 was $ 81.2 million compared to $ 84.5 million for the year ended december 31 , 2010. the decrease in interest expense for both holdings and select is attributable to a reduction in our average interest rate that resulted from the expiration of interest rate swaps during 2010 that carried higher fixed interest rates , and lower interest rates on portions of the debt we refinanced on june 1 , 2011. cash flow from operations provided $ 217.1 million of cash for the year ended december 31 , 2011 for holdings and $ 240.1 million of cash for the year ended december 31 , 2011 for select . the difference between holdings and select in cash flow from operations primarily relates to interest payments on holdings ' 10 % senior subordinated notes and senior floating rate notes . regulatory changes the medicare program reimburses us for services furnished to medicare beneficiaries , which are generally persons age 65 and older , those who are chronically disabled , and those suffering from end stage renal disease . net operating revenues generated directly from the medicare program represented approximately 47 % , 48 % and 47 % of our consolidated net operating revenues for the years ended december 31 , 2010 , 2011 and 2012 , respectively . the medicare program reimburses our long term acute care hospitals , inpatient rehabilitation facilities and outpatient rehabilitation providers , using different payment methodologies . those payment methodologies are complex and are described elsewhere in this report under `` businessgovernment regulations . '' the following is a summary of some of the more significant healthcare regulatory changes that have affected our financial performance in the periods covered by this report or are likely to affect our financial performance and financial condition in the future . 51 medicare reimbursement of ltch services in the last few years , there have been significant regulatory changes affecting long term acute care hospitals that have affected our net operating revenues and , in some cases , caused us to change our operating models and strategies . we have been subject to regulatory changes that occur through the rulemaking procedures of the centers for medicare & medicaid services , or `` cms . '' historically , rule updates occurred twice each year . all medicare payments to our long term acute care hospitals are made in accordance with a prospective payment system specifically applicable to long term acute care hospitals , referred to as `` ltch-pps . '' proposed rules specifically related to ltchs are generally published in may , finalized in august and effective on october 1st of each year , coinciding with the start of the federal fiscal year . story_separator_special_tag the following is a summary of significant changes to the medicare prospective payment system for long term acute care hospitals which have affected our results of operations , as well as the policies and payment rates for fiscal year 2013 that affect our patient discharges and cost reporting periods beginning on or after october 1 , 2012. fiscal year 2011. on august 16 , 2010 , cms published the policies and payment rates for ltch-pps for fiscal year 2011 ( affecting discharges and cost reporting periods beginning on or after october 1 , 2010 through september 30 , 2011 ) . the standard federal rate for fiscal year 2011 was $ 39,600 , which was a decrease from the fiscal year 2010 standard federal rate of $ 39,897 in effect from october 1 , 2009 to march 31 , 2010 and the fiscal year 2010 standard federal rate of $ 39,795 that went into effect on april 1 , 2010. this update to the standard federal rate for fiscal year 2011 was based on a market basket increase of 2.5 % less a reduction of 2.5 % to account for what cms attributed as an increase in case-mix in prior periods that resulted from changes in documentation and coding practices less an additional market basket reduction of 0.5 % as mandated by the ppaca . the final rule established a fixed-loss amount for high cost outlier cases for fiscal year 2011 of $ 18,785 , which was an increase from the fiscal year 2010 fixed-loss amount of $ 18,425 in effect from october 1 , 2009 to march 31 , 2010 and the $ 18,615 that went into effect on april 1 , 2010. fiscal year 2012. on august 18 , 2011 , cms published the policies and payment rates for ltch-pps for fiscal year 2012 ( affecting discharges and cost reporting periods beginning on or after october 1 , 2011 through september 30 , 2012 ) . the standard federal rate for fiscal year 2012 was $ 40,222 , which was an increase from the fiscal year 2011 standard federal rate of $ 39,600. the update to the standard federal rate for fiscal year 2012 included a market basket increase of 2.9 % , less a productivity adjustment of 1.0 % , and less an additional market basket reduction of 0.1 % as mandated by the ppaca . the final rule established a fixed-loss amount for high cost outlier cases for fiscal year 2012 of $ 17,931 , which was a decrease from the fixed loss amount in the 2011 fiscal year of $ 18,785. fiscal year 2013. on august 1 , 2012 , cms published the final rule updating the policies and payment rates for ltch-pps for fiscal year 2013 ( affecting discharges and cost reporting periods beginning on or after october 1 , 2012 through september 30 , 2013 ) . two different standard federal rates apply during fiscal year 2013. the standard federal rate for discharges on or after october 1 , 2012 and before december 29 , 2012 was set at $ 40,916 and the standard federal rate for discharges on or after december 29 , 2012 for the remainder of fiscal year 2013 is $ 40,398 both of which are an increase from the fiscal year 2012 standard federal rate of $ 40,222. the update to the standard federal rate for fiscal year 2013 through december 28 , 2012 includes a market basket increase of 2.6 % , less a productivity adjustment of 0.7 % , and less an additional reduction of 0.1 % mandated by the ppaca . the standard federal rate for the period of december 29 , 2012 through the remainder of fiscal 2013 is further reduced by a portion of the one-time budget neutrality adjustment of 1.266 % , as discussed below . the final rule established a fixed-loss amount for high cost outlier cases for fiscal year 2013 of $ 15,408 , which is a decrease from the fixed loss amount in the 2012 fiscal year of $ 17,931 . 52 in the preamble to the proposed update to the medicare policies and payment rates for fiscal year 2013 , cms indicated that `` within the near future '' it may recommend revisions to the payment policies addressing patient-level and facility-level criteria . cms also indicated that these recommendations may render unnecessary the existing payment reductions for medicare patients admitted from a general acute care hospital in excess of the applicable admission thresholds . we can not predict whether cms will adopt additional patient-level and facility-level criteria in the future or , if adopted , how such criteria would affect the application of the 25 percent rule to our ltchs . medicare market basket adjustments the ppaca instituted a market basket payment adjustment to ltchs . in fiscal year 2014 , the market basket update will be reduced by 0.3 % . fiscal years 2015 and 2016 the market basket update will be reduced by 0.2 % . finally , in fiscal years 2017-2019 , the market basket update will be reduced by 0.75 % . the ppaca specifically allows these market basket reductions to result in less than a 0 % payment update and payment rates that are less than the prior year . 25 percent rule the 25 percent rule is a downward payment adjustment that applies to medicare patients discharged from ltchs who were admitted from a co-located hospital or a non-co-located hospital and caused the ltch to exceed the applicable percentage thresholds for discharged medicare patients . the schip extension act , as amended by the arra and the ppaca , has limited the application of the 25 percent rule , as described elsewhere in this report under `` businessgovernment regulations . '' cms adopted through regulations an additional one-year extension of relief from the full application of medicare admission thresholds .
| replace_table_token_16_th replace_table_token_17_th 66 year ended december 31 , 2012 compared to year ended december 31 , 2011 in the following discussion , we address the results of operations of select and holdings . with the exception of interest expense , other income ( expense ) , loss on early retirement of debt and income taxes , the results of operations of holdings are identical to those of select . therefore , discussion related to net operating revenues , operating expenses , adjusted ebitda , income from operations , equity in earnings ( losses ) of unconsolidated subsidiaries and non-controlling interest is identical for holdings and select . net operating revenues our net operating revenues increased by 5.2 % to $ 2,949.0 million for the year ended december 31 , 2012 compared to $ 2,804.5 million for the year ended december 31 , 2011. specialty hospitals . our specialty hospital net operating revenues increased by 4.9 % to $ 2,197.5 million for the year ended december 31 , 2012 compared to $ 2,095.5 million for the year december 31 , 2011. the growth in net operating revenue for the year ended december 31 , 2012 resulted from increases in patient volumes , increases in both medicare and non-medicare reimbursement rates and revenues generated from contracted labor services provided to the baylor jv . our patient days increased 1.1 % compared to the year ended december 31 , 2011 to 1,345,430 days for the year ended december 31 , 2012. our specialty hospital occupancy was 71 % for both the years ended december 31 , 2012 and 2011. our average net revenue per patient day was $ 1,534 for the year ended december 31 , 2012 compared to $ 1,497 for the year ended december 31 , 2011. for the year ended december 31 , 2012 , we experienced increases in both our medicare and non-medicare net revenue per patient day from the prior year . the increase in our medicare net revenue per patient day was due to increases in our medicare base rate . the increases in our non-medicare net revenue per patient day resulted from increases in our non-government payment rates that have occurred through
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international activity , which has been slower to fall than north american activity , appears to be approaching a bottom , which could be achieved in the first half of 2017. offshore activity , which has longer project cycle times and , in certain instances , more challenged economics , may continue to decline throughout 2017. low activity levels result in an oversupply of service capacity and capital equipment , creating challenging prospects for many of our customers in the form of reduced volumes and pricing pressures . in this environment , contractors have been hesitant to invest in their existing equipment to conserve as much capital as possible . equipment has been neglected and idle fleets have been stripped of parts to sustain assets that remains active . additionally , certain equipment becomes less desirable and obsolete as equipment manufacturers develop new technologies and produce more efficient equipment that improves efficiencies and lowers the marginal cost of supply for oil and gas operating companies . as a result , the industry may retire a significant portion of the installed base of capital equipment that existed at the beginning of this cyclical downturn , causing a sharp rebound in newbuild orders if commodity prices continue to recover and activity levels increase . our global customer base includes national oil companies , international oil companies , independent oil and gas companies , onshore and offshore service companies and others whose strategies and reactions to low commodity prices vary . likewise , we expect the slope and timing of revenue decline , stabilization and recovery will be different across our operating regions and our four business segments . elements of our wellbore technologies and rig aftermarket segments are expected to see a faster recovery as drilling of new wells increases , while a strong recovery for the more capital equipment oriented businesses within our completion & production solutions and rig systems segments may come later in the cycle . 34 throughout 2017 we will continue to focus on what we can control , in the form of sizing our operations with anticipated levels of activity while continuing to invest in developing and acquiring new products , technologies and operations that advance our longer term strategic goals . the company has a history of implementing cost-control measures and downsizing in response to depressed market conditions as well as cost effectively ramping operations to capitalize on rapidly increasing demand . the company remains optimistic regarding longer-term market fundamentals as existing oil and gas fields continue to deplete and numerous major projects to replenish supply have been deferred or canceled while global demand continues to grow . 35 results of operations years ended december 31 , 2016 and december 31 , 2015 the following table summarizes the company 's revenue and operating profit ( loss ) by operating segment in 2016 and 2015 ( in millions ) : replace_table_token_6_th rig systems revenue from rig systems for the year ended december 31 , 2016 was $ 2,386 million , a decrease of $ 4,578 million ( 65.7 % ) compared to the year ended december 31 , 2015. the decrease was due to lower land rig shipments and delayed delivery dates of certain offshore projects . operating loss from rig systems was $ 969 million for the year ended december 31 , 2016 , a decrease of $ 2,291 million ( 173.3 % ) compared to 2015. operating profit ( loss ) percentage decreased to ( 40.6 ) % , from 19.0 % in 2015. operating profit percentage decreased primarily due to lower volumes and a $ 972 million impairment charge incurred on the carrying value of goodwill during the third quarter of 2016. included in operating profit are other items related to costs associated with a voluntary early retirement plan established by the company during the first quarters of 2016 and 2015 , costs related to severance and facility closures , and asset write-downs . other items included in operating profit for rig systems were $ 218 million for the year ended december 31 , 2016 and $ 105 million for the year ended december 31 , 2015. the rig systems 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 . in light of the vote by the shareholders of sete brasil participacoes sa to authorize sete to file for bankruptcy , and a further decline in drilling activity during the first half of the year to record lows and the resulting effect on certain other customers , the company removed $ 2.1 billion of orders from its backlog in the first quarter of 2016. some of the contracts for these orders remain in place and are enforceable . if these customers obtain funding to continue their projects , the company may pursue resumption of construction and update the backlog accordingly . the capital equipment backlog was $ 2.5 billion at december 31 , 2016 , a decrease of $ 3.6 billion , or 59 % , from backlog of $ 6.1 billion at december 31 , 2015. numerous factors may affect the timing of revenue out of backlog . considering these factors , the company reasonably expects approximately $ 1.0 billion of revenue out of backlog in 2017 and approximately $ 1.5 billion of revenue out of backlog in 2018 and thereafter . at december 31 , 2016 , approximately 81 % of the capital equipment backlog was for offshore products and approximately 82 % of the capital equipment backlog was destined for international markets . story_separator_special_tag 36 rig aftermarket revenue from rig aftermarket for the year ended december 31 , 2016 was $ 1,416 million , a decrease of $ 1,099 million ( 43.7 % ) compared to the year ended december 31 , 2015. the decrease was due to lower global drilling activity which has caused customers to use existing inventories and components from idle and unused rigs to repair better utilized rigs rather than purchase new . operating profit from rig aftermarket was $ 229 million for the year ended december 31 , 2016 , a decrease of $ 423 million ( 64.9 % ) compared to 2015. operating profit percentage decreased to 16.2 % , from 25.9 % in 2015. operating profit percentage decreased primarily due to lower volumes and pricing pressure . included in operating profit are other items related to costs associated with a voluntary early retirement plan established by the company during the first quarters of 2016 and 2015 , costs related to severance and facility closures , and asset write-downs . other items included in operating profit for rig aftermarket were $ 65 million for the year ended december 31 , 2016 and $ 12 million for the year ended december 31 , 2015. wellbore technologies revenue from wellbore technologies for the year ended december 31 , 2016 was $ 2,199 million , a decrease of $ 1,519 million ( 40.9 % ) compared to the year ended december 31 , 2015. the decrease was due to lower drilling activity . operating loss from wellbore technologies was $ 770 million for the year ended december 31 , 2016 , a decrease of $ 803 million ( 51.0 % ) compared to the year ended december 31 , 2015. operating loss percentage decreased to 35.0 % from 42.3 % in 2015. operating loss decreased due to $ 1,658 million in goodwill and intangible asset impairment charges , which occurred in the fourth quarter of 2015 and did not repeat in 2016 , partially offset by a decrease in drilling activity . included in operating profit are other items related to costs associated with a voluntary early retirement plan established by the company during the first quarters of 2016 and 2015 , costs related to severance and facility closures , and asset write-downs . other items included in operating profit for wellbore technologies were $ 476 million for the year ended december 31 , 2016 and $ 117 million for the year ended december 31 , 2015. completion & production solutions revenue from completion & production solutions for the year ended december 31 , 2016 was $ 2,241 million , a decrease of $ 1,124 million ( 33.4 % ) compared to the year ended december 31 , 2015. the decrease was due to lower market activity . operating profit ( loss ) from completion & production solutions was $ ( 266 ) million for the year ended december 31 , 2016 compared to $ 187 million for 2015 , a decrease of $ 453 million ( 242.2 % ) . operating profit ( loss ) percentage decreased to ( 11.9 ) % from 5.6 % in 2015. this decrease was due to the overall decline in market activity . included in operating profit are other items related to costs associated with a voluntary early retirement plan established by the company during the first quarters of 2016 and 2015 ; costs related to severance and facility closures ; items related to acquisitions , such as transaction costs , the amortization of backlog and inventory that was stepped up to fair value during purchase accounting ; and asset write-downs . other items included in operating profit for completion & production solutions were $ 274 million for the year ended december 31 , 2016 and $ 101 million for the year ended december 31 , 2015. the completion & productions solutions 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 completion and production components or a signed contract related to a construction project . the capital equipment backlog was $ 818 million at december 31 , 2016 , a decrease of $ 151 million , or 16 % from backlog of $ 969 million at december 31 , 2015. numerous factors may affect the timing of revenue out of backlog . considering these factors , the company reasonably expects approximately $ 770 million of revenue out of backlog in 2017 and approximately $ 48 million of revenue out of backlog in 2018 and thereafter . at december 31 , 2016 , approximately 71 % of the capital equipment backlog was for offshore products and approximately 87 % of the capital equipment backlog was destined for international markets . eliminations eliminations in operating profit were $ 635 million for the year ended december 31 , 2016 compared to $ 978 million for the year ended december 31 , 2015. this change is primarily due to lower intersegment sales . sales from one segment to another generally are priced at estimated equivalent commercial selling prices ; however , segments originating an external sale are credited with the full profit to the company . eliminations include intercompany transactions conducted between the four reporting segments that are eliminated in consolidation . intercompany transactions within each reporting segment are eliminated within each reporting segment . 37 other income ( expense ) , net other income ( expense ) , net were expenses of $ 101 million for the year ended december 31 , 2016 compared to expenses of $ 123 million for the year ended december 31 , 2015. the decrease was primarily due to lower foreign exchange losses .
| excluding the other items from all periods , fourth quarter 2016 earnings ( losses ) per share excluding other items were $ ( 0.15 ) per fully diluted share , compared to $ ( 0.34 ) per fully diluted share in the third quarter of 2016 and earnings of $ 0.23 per fully diluted share in the fourth quarter of 2015. operating profit ( loss ) excluding other items was $ ( 72 ) million or ( 4.3 ) % of sales in the fourth quarter of 2016 , compared to $ ( 108 ) million or ( 6.6 ) % of sales in the third quarter of 2016 , and $ 141 million or 5.2 % of sales in the fourth quarter of 2015. segment performance rig systems the company 's rig systems segment generated $ 2.4 billion in revenue and $ 969 million in operating loss , or ( 40.6 ) % of revenue , during 2016. compared to the prior year , revenue decreased 66 % and operating profit dollars decreased 173 % . for the fourth quarter of 2016 , the segment generated $ 426 million in revenue and $ 81 million in operating loss , or ( 19.0 ) % of revenue . compared to the prior quarter , revenue decreased $ 44 million or 9 % , and operating loss decreased $ 881 million or 92 % . compared to the fourth quarter of 2015 , revenue decreased $ 589 million or 58 % , and operating profit decreased $ 227 million or 155 % . fourth quarter 2016 revenue out of backlog for the rig systems segment decreased 11 % sequentially and 62 % year-over-year on fewer shipments of land rigs and postponed delivery dates of some offshore projects . during the fourth quarter of 2016 , the segment received $ 115 million in new orders , primarily composed of discreet capital equipment components including top drives , blowout preventers and offshore cranes . year-end backlog for the segment was $ 2.5 billion , a 10 % decline sequentially and a 59 % decrease year-over-year .
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