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we also extended the maturity date of the agreement to september 29 , 2022 . the credit facility includes sublimits for the issuance of swingline loans and standby letters of credit . pursuant to an accordion feature story_separator_special_tag for a discussion of our base business calculations , see the results of operations section below . 2018 financial overview story_separator_special_tag demand , particularly in construction and renovation markets . the post-recession market environment from 2010 to 2018 was characterized by the cautious recovery of consumer spending , modest housing recovery and low inflation . however , in terms of homeowners investing in their existing homes , discretionary expenditures , including backyard renovations , flourished over this time period . we expect that new pool and irrigation construction levels will continue to grow incrementally , but we believe that consumer investments in outdoor living spaces beyond the swimming pool will generate greater growth over the next five years . although some constraints exist around residential construction activities , economic trends indicate that consumer spending has largely recovered , and we believe that we are well positioned to take advantage of both the market expansion and the inherent long term growth opportunities in our industry . additionally , recent regulation passed by the u.s. department of energy mandates all new and replacement motors and pumps for swimming pools must be variable speed by july 2021. this mandate , coupled with additional product developments and technological advancements , offers further growth opportunities over the next few years . while we estimate that new pool construction increased to approximately 80,000 new units in 2018 , construction levels are still down approximately 65 % compared to peak historical levels and down approximately 50 % from what we consider normal levels . favorable weather plays a role in industry growth by accelerating growth in any given year , while unfavorable weather impedes growth . for 2018 , we started the year off strong , but a delayed spring resulted in a later than normal start to the swimming pool season , and we finished the year with an earlier end based on weather trends . in contrast , in 2017 specifically , our industry experienced modestly favorable weather overall , despite the severe storms that impacted our industry in texas and florida in september and october . in 2016 , an earlier start to the swimming pool season due to warmer than usual temperatures and overall favorable weather throughout the rest of the year benefited the industry as a whole . in establishing our outlook each year , we base our growth assumptions on normal weather conditions and do not incorporate alternative weather predictions into our guidance . we established our initial outlook for 2019 based on reasonable expectations of organic market share growth , ongoing leverage of infrastructure and continuous process improvements . for 2019 , we expect the macroeconomic environment in the united states will be quite similar to 2018 . we expect to continue to gain market share through our comprehensive service and product offerings , which we continually diversify through internal sourcing initiatives and expansion into new markets . we also plan to broaden our geographic presence by opening 4 to 6 new sales centers in 2019 and by making selective acquisitions when appropriate opportunities arise . the following section summarizes our outlook for 2019 : we expect sales growth of 7 % to 9 % , impacted by the following factors and assumptions : ◦ normal weather patterns for 2019 ; ◦ continued growth from replacement , remodeling and construction activity and market expansion through newer product offerings like hardscapes and commercial pools ; ◦ inflationary product cost increases of approximately 3 % to 4 % ( or approximately 2 % above the historical average ) ; ◦ estimated 1 % growth from acquisitions completed throughout 2018 ; and ◦ same selling days in 2019 compared to 2018 , with one less day in the first quarter and one additional day in the third quarter in 2019 . by quarter , we expect shifts in our 2019 sales activity , which will affect sales growth comparisons to 2018 . for the first quarter of 2019 , we expect the loss of a selling day , a delayed easter and lower customer early buy sales to defer an estimated $ 20 million to $ 30 million of sales to the second and third quarters in 2019 . 22 we expect relatively neutral gross margin trends for the full year with higher gross margin growth in the first quarter of 2019 compared to 2018 due to projected benefits from our strategic inventory purchases in 2018 and expected lower customer early buy sales in the first quarter of 2019 . we expect gross margin growth to moderate substantially in the second and third quarters and become a difficult comparison in the fourth quarter of 2019 based on our 2018 results . we expect operating expenses will grow at approximately 60 % of the rate of our gross profit growth , reflecting inflationary increases and incremental costs to support our sales growth expectations . the main challenges in achieving this metric include managing people and facility costs in tight labor and real estate markets . however , we continue to see significant opportunity to leverage our existing infrastructure to achieve this goal . in 2019 , we expect our effective tax rate will approximate 25.5 % , excluding the impact of asu 2016-09. this projected rate is a reduction from our historical rate of approximately 38.5 % . our effective tax rate is dependent upon our results of operations and may change if actual results are different from our current expectations , particularly any significant changes in our geographic mix . due to asu 2016-09 requirements , we expect our effective tax rate will fluctuate from quarter to quarter , particularly in periods when employees elect to exercise their vested stock options or when restrictions on share-based awards lapse . story_separator_special_tag per diluted share ( based on the number of weighted average diluted shares outstanding for the year ended december 31 , 2018 ) . inventory obsolescence product inventories represent the largest asset on our balance sheet . our goal is to manage our inventory such that we minimize stock-outs to provide the highest level of service to our customers . to do this , we maintain at each sales center an adequate inventory of stock keeping units ( skus ) with the highest sales volumes . at the same time , we continuously strive to better manage our slower moving classes of inventory , which are not as critical to our customers and thus , inherently turn at slower rates . we classify products into 13 classes at the sales center level based on sales at each location over the expected sellable period , which is the previous 12 months for most products . all inventory is included in these classes , except for special order non-stock items that lack a sku in our system and products with less than 12 months of usage . the table below presents a description of these inventory classes : class 0 new products with less than 12 months usage classes 1-4 highest sales value items , which represent approximately 80 % of net sales at the sales center classes 5-12 lower sales value items , which we keep in stock to provide a high level of customer service class 13 products with no sales for the past 12 months at the local sales center level , excluding special order products not yet delivered to the customer null class non-stock special order items 24 there is little risk of obsolescence for products in classes 1-4 because products in these classes generally turn quickly . we establish our reserve for inventory obsolescence based on inventory classes 5-13 , which we believe represent some exposure to inventory obsolescence , with particular emphasis on skus with the least sales over the previous 12 months . the reserve is intended to reflect the value of inventory at net realizable value . we provide a reserve of 5 % for inventory in classes 5-13 and non-stock inventory as determined at the sales center level . we also provide an additional 5 % reserve for excess inventory in classes 5-12 and an additional 45 % reserve for excess inventory in class 13. we determine excess inventory , which is defined as the amount of inventory on hand in excess of the previous 12 months ' usage , on a company-wide basis . we also evaluate whether the calculated reserve provides sufficient coverage of the total class 13 inventory . in evaluating the adequacy of our reserve for inventory obsolescence , we consider a combination of factors including : the level of inventory in relation to historical sales by product , including inventory usage by class based on product sales at both the sales center and on a company-wide basis ; changes in customer preferences or regulatory requirements ; seasonal fluctuations in inventory levels ; geographic location ; and superseded products and new product offerings . we periodically adjust our reserve for inventory obsolescence as changes occur in the above-identified factors . at the end of each fiscal year , we prepare a hindsight analysis by comparing the prior year end obsolescence reserve balance to ( i ) current year inventory write-offs and ( ii ) the value of products with no sales for the past 12 months that remain in inventory . based on our hindsight analysis , we concluded that our prior year reserve was within a range of acceptable estimates and that our estimation methodology is appropriate . if the balance of our inventory reserve increased or decreased by 20 % at december 31 , 2018 , pretax income would change by approximately $ 1.5 million and earnings per share would change by approximately $ 0.03 per diluted share ( based on the number of weighted average diluted shares outstanding for the year ended december 31 , 2018 ) . vendor programs many of our vendor arrangements provide for us to receive specified amounts of consideration when we achieve any of a number of measures . these measures generally relate to the volume level of purchases from our vendors , or our net cost of products sold , and may include negotiated pricing arrangements . we account for vendor programs as a reduction of the prices of the vendor 's products and therefore a reduction of inventory until we sell the product , at which time we recognize such consideration as a reduction of cost of sales in our income statement . throughout the year , we estimate the amount earned based on our expectation of total purchases for the fiscal year relative to the purchase levels that mark our progress toward the attainment of various levels within certain vendor programs . we accrue vendor program benefits on a monthly basis using these estimates provided that we determine they are probable and reasonably estimable . our estimates for annual purchases , future inventory levels and sales of qualifying products are driven by our sales projections , which can be significantly impacted by a number of external factors including changes in economic conditions and weather . changes in our purchasing mix also impact our estimates , as certain program rates can vary depending on our volume of purchases from specific vendors . we continually revise these estimates throughout the year to reflect actual purchase levels and identifiable trends . as a result , our estimated quarterly vendor program benefits accrual may include cumulative catch-up adjustments to reflect any changes in our estimates between reporting periods . these adjustments tend to have a greater impact on gross margin in the fourth quarter since it is our seasonally slowest quarter and because the majority of our vendor arrangements are based on calendar year periods . we update our estimates for these arrangements at year end to reflect actual annual purchase levels .
| financial results we delivered solid results in 2018 . despite a later than normal start to the year , and an earlier end , we produced sales growth of 8 % in 2018 on top of sales growth of 8 % in 2017. our focus on organic growth , process discipline and value creation allowed us to convert this top line growth into operating income growth of 10 % over 2017 . base business sales grew 7 % over last year fueled by continued demand for discretionary products such as building materials , lighting and swimming pool equipment . gross profit in creased 8 % for the year ended december 31 , 2018 compared to 2017 . gross margin grew 10 basis points to 29.0 % for 2018 compared to 28.9 % in 2017 . we attribute much of the gross margin improvement to our execution of supply chain management initiatives in a higher than normal inflationary environment in our industry . selling and administrative expenses ( operating expenses ) in creased 7 % compared to 2017 , with base business operating expenses up 5 % over last year . the increase in base business operating expenses was primarily due to higher growth-driven labor and freight expenses , as well as greater facility-related costs . as a percentage of net sales , operating expenses declined 10 basis points . operating income for the year increased 10 % to $ 313.9 million , up from $ 284.4 million in 2017 . operating income as a percentage of net sales ( operating margin ) increased to 10.5 % in 2018 compared to 10.2 % in 2017 . both accounting standards update ( asu ) 2016-09 , improvements to employee share-based payment accounting , which we adopted on january 1 , 2017 , and u.s. tax reform enacted in december 2017 impacted our income tax provision in 2018 and 2017 .
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in august 2016 , the fasb issued asu 2016-15 , “ classification of certain cash receipts and cash payments ” which amends asc 230 “ statement of cash flows . ” this update will make eight targeted changes story_separator_special_tag business background we are a leading vertically-integrated global manufacturer and distributor of chemical products and a leading u.s. manufacturer of ammunition . our operations are concentrated in three business segments : chlor alkali products and vinyls , epoxy and winchester . all of our business segments are capital intensive manufacturing businesses . chlor alkali products and vinyls operating rates are closely tied to the general economy . each segment has a commodity element to it , and therefore , our ability to influence pricing is quite limited on the portion of the segment 's business that is strictly commodity . our chlor alkali products and vinyls segment is a commodity business where all supplier products are similar and price is the major supplier selection criterion . we have little or no ability to influence prices in the large , global commodity markets . our chlor alkali products and vinyls segment produces some of the most widely used chemicals in the world that can be upgraded into a wide variety of downstream chemical products used in many end-markets . cyclical price swings , driven by changes in supply/demand , can be abrupt and significant and , given capacity in our chlor alkali products and vinyls segment , can lead to very significant changes in our overall profitability . the epoxy segment consumes products manufactured by the chlor alkali products and vinyls segment . the epoxy segment 's upstream and midstream products are predominately commodity markets . we have little or no ability to influence prices in these large , global commodity markets . while competitive differentiation exists through downstream customization and product development opportunities , pricing is extremely competitive with a broad range of competitors across the globe . winchester also has a commodity element to its business , but a majority of winchester ammunition is sold as a branded consumer product where there are opportunities to differentiate certain offerings through innovative new product development and enhanced product performance . while competitive pricing versus other branded ammunition products is important , it is not the only factor in product selection . recent developments and highlights 2017 overview as a result of flooding from hurricane harvey , olin was forced to reduce production at its freeport , texas facility from late august through mid-october due to logistics constraints , customer outages and raw material availability . other olin plants that supply customers in texas were also impacted by hurricane harvey . olin 's 2017 results were reduced by $ 54.7 million associated with hurricane harvey representing incremental costs to continue operations , unabsorbed fixed manufacturing costs and reduced profits from lost sales . chlor alkali products and vinyls 2017 segment earnings were reduced by $ 27.0 million and epoxy 2017 segment earnings were reduced by $ 27.7 million associated with hurricane harvey . in 2017 , chlor alkali products and vinyls generated segment income of $ 405.8 million compared to $ 224.9 million for 2016 . chlor alkali products and vinyls segment income was higher than the prior year due to higher product prices of $ 385.5 million , primarily due to caustic soda , and increased volumes . partially offsetting these increases were higher costs from turnarounds and outages and electricity costs , primarily driven by natural gas prices . chlor alkali products and vinyls segment results were also negatively impacted by hurricane harvey . chlor alkali products and vinyls segment income included depreciation and amortization expense of $ 432.2 million and $ 418.1 million in 2017 and 2016 , respectively . caustic soda price indices increased since april 2016 and created positive product price momentum entering 2017. improved supply and demand dynamics in 2017 resulted in additional price increases throughout 2017. during 2017 , north america caustic soda price contract indices increased $ 140 per ton and the caustic soda export price index increased approximately $ 260 per ton . during november 2017 , a caustic soda price increase of $ 100 per ton was announced . this price increase is in the process of being implemented and while the extent to which this price increase is achieved is uncertain , the majority of the benefits , if realized , would impact first and second quarters 2018 results . in 2017 , epoxy generated segment loss of $ 11.8 million compared to segment income of $ 15.4 million for 2016 . epoxy segment results are lower than the prior year period primarily due to increased raw material costs , primarily benzene and propylene , partially offset by higher product prices and increased volumes . epoxy segment results were also negatively impacted by hurricane harvey . epoxy segment income included depreciation and amortization expense of $ 94.3 million and $ 90.0 million in 2017 and 2016 , respectively . 24 winchester reported segment income of $ 72.4 million for 2017 compared to $ 120.9 million for 2016 . winchester segment income declined from the prior year primarily due to a lower level of commercial demand for shotshell , pistol and rifle ammunition , a less favorable product mix and increased commodity and other material costs , partially offset by increased shipments to military customers and law enforcement agencies . winchester segment income included depreciation and amortization expense of $ 19.5 million and $ 18.5 million in 2017 and 2016 , respectively . the u.s. tax cuts and jobs act ( the 2017 tax act ) was enacted on december 22 , 2017 and included a broad range of provisions impacting the taxation of businesses . included within the provisions , the 2017 tax act reduces the u.s. federal corporate tax rate from 35 % to 21 % , requires companies to pay a one-time transition tax on unremitted earnings of foreign subsidiaries that were previously tax deferred and transitions the u.s. from a worldwide tax system to a modified territorial tax system . story_separator_special_tag we have three operating segments : chlor alkali products and vinyls , epoxy and winchester . the three operating segments reflect the organization used by our management for purposes of allocating resources and assessing performance . chlorine used in our epoxy segment is transferred at cost from the chlor alkali products and vinyls segment . sales and profits are recognized in the chlor alkali products and vinyls segment for all caustic soda generated and sold by olin . replace_table_token_4_th ( 1 ) earnings of non-consolidated affiliates are included in the chlor alkali products and vinyls segment results consistent with management 's monitoring of the operating segment . the earnings from non-consolidated affiliates were $ 1.8 million for the year ended december 31 , 2017 and $ 1.7 million for both the years ended december 31 , 2016 and 2015 . ( 2 ) the service cost and the amortization of prior service cost components of pension expense related to the employees of the operating segments are allocated to the operating segments based on their respective estimated census data . all other components of pension costs are included in corporate/other and include items such as the expected return on plan assets , interest cost and recognized actuarial gains and losses . ( 3 ) other corporate and unallocated costs for the year ended december 31 , 2017 included costs associated with the implementation of the information technology project of $ 5.3 million . ( 4 ) restructuring charges for the years ended december 31 , 2017 and 2016 were primarily associated with the march 2016 closure of 433,000 tons of chlor alkali capacity across three separate locations . for the year ended december 31 , 2016 , $ 76.6 million of these charges were non-cash asset impairment charges for equipment and facilities . restructuring charges for the years ended december 31 , 2017 , 2016 and 2015 also included costs associated with the relocation of our winchester centerfire ammunition manufacturing operations from east alton , il to oxford , ms which was completed during 2016 and permanently closing a portion of the becancour , canada chlor alkali facility in 2014 . ( 5 ) acquisition-related costs for the years ended december 31 , 2017 , 2016 and 2015 were related to the integration of the acquired business and consisted of advisory , legal , accounting and other professional fees . for the year ended 29 december 31 , 2015 acquisition-related costs also included $ 47.1 million of costs incurred as a result of the change in control , which created a mandatory acceleration of expenses under deferred compensation plans . ( 6 ) other operating income for the year ended december 31 , 2017 included a gain of $ 3.3 million from the sale of a former manufacturing facility . other operating income for the year ended december 31 , 2016 included an $ 11.0 million insurance recovery for property damage and business interruption related to a 2008 chlor alkali facility incident . other operating income for the year ended december 31 , 2015 included insurance recoveries for property damage and business interruption of $ 42.3 million related to the portion of the becancour , canada chlor alkali facility that has been shut down since late june 2014 and $ 3.7 million related to the mcintosh , al chlor alkali facility . ( 7 ) interest expense for the year ended december 31 , 2017 included $ 3.9 million of accretion expense related to the 2020 ethylene payment discount . interest expense was reduced by capitalized interest of $ 3.0 million , $ 1.9 million and $ 1.1 million for the years ended december 31 , 2017 , 2016 and 2015 , respectively . interest expense for the year ended december 31 , 2015 included acquisition financing expenses of $ 30.5 million . chlor alkali products and vinyls 2017 compared to 2016 chlor alkali products and vinyls sales for 2017 were $ 3,500.8 million compared to $ 2,999.3 million for 2016 , an increase of $ 501.5 million , or 17 % . the sales increase was primarily due to higher product prices ( $ 385.5 million ) and increased volumes ( $ 116.0 million ) . the higher product prices and increased volumes were primarily related to caustic soda and edc . chlor alkali products and vinyls sales volumes were negatively impacted by hurricane harvey . chlor alkali products and vinyls generated segment income of $ 405.8 million for 2017 compared to $ 224.9 million for 2016 , an increase of $ 180.9 million , or 80 % . chlor alkali products and vinyls segment income was higher due to higher product prices ( $ 385.5 million ) and increased volumes and a more favorable product mix ( $ 8.7 million ) . the higher product prices and increased volumes were primarily related to caustic soda and edc . these increases were partially offset by higher maintenance costs , unabsorbed fixed manufacturing costs and reduced profit from lost sales associated with turnarounds and outages ( $ 102.5 million ) and incremental costs to continue operations , unabsorbed fixed manufacturing costs and reduced profit from lost sales associated with hurricane harvey ( $ 27.0 million ) . electricity costs , primarily driven by higher natural gas prices ( $ 51.6 million ) , and operating costs ( $ 32.2 million ) were also higher compared to 2016. chlor alkali products and vinyls segment income included depreciation and amortization expense of $ 432.2 million and $ 418.1 million in 2017 and 2016 , respectively . 2016 compared to 2015 chlor alkali products and vinyls sales for 2016 were $ 2,999.3 million compared to $ 1,713.4 million for 2015 , an increase of $ 1,285.9 million , or 75 % . sales of the acquired chlor alkali business were $ 1,715.7 million compared to $ 373.0 million for 2015 , an increase of $ 1,342.7 million , which was primarily due to the inclusion of a full year of the acquired chlor alkali business .
| consolidated results of operations replace_table_token_3_th 2017 compared to 2016 sales for 2017 were $ 6,268.4 million compared to $ 5,550.6 million in 2016 , an increase of $ 717.8 million , or 13 % . chlor alkali products and vinyls sales increased by $ 501.5 million primarily due to higher caustic soda and edc product prices and increased volumes . epoxy sales increased by $ 264.4 million primarily due to higher product prices and increased volumes . both chlor alkali products and vinyls and epoxy sales volumes were negatively impacted by hurricane harvey . winchester sales decreased by $ 48.1 million primarily due to decreased shipments to commercial customers , partially offset by increased shipments to military customers and law enforcement agencies . gross margin increased $ 101.9 million , or 16 % , from 2016 . chlor alkali products and vinyls gross margin increased by $ 183.6 million , primarily due to higher caustic soda and edc product prices and increased volumes . partially offsetting these increases were higher electricity costs , primarily driven by higher natural gas prices , compared to 2016. epoxy gross margin decreased $ 26.6 million primarily due to increased raw material costs , primarily benzene and propylene , partially offset by higher product prices and increased volumes . both chlor alkali products and vinyls and epoxy gross margins were also negatively impacted by higher maintenance costs , unabsorbed fixed manufacturing costs and reduced profit from lost sales associated with turnarounds and outages and hurricane harvey . winchester gross margin decreased $ 52.9 million primarily due to lower commercial volumes , a less favorable product mix and increased commodity and other material costs . gross margin as a percentage of sales increased to 12 % in 2017 from 11 % in 2016. selling and administration expenses in 2017 increased $ 27.5 million , or 9 % , from 2016 .
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we are required to repay outstanding revolving loans under the revolving credit facility in full on june 8 , 2017. we are required to repay term loans in quarterly principal installments aggregating ( 1 ) 1.875 % of the original aggregate principal amount of the term loans during each of the four quarters beginning with the quarter ending september 30 , 2014 , and ( 2 ) 2.500 % of the original aggregate principal amount of the term loans during each of the remaining quarters prior to maturity on june 8 , 2017 , at which time the entire unpaid principal balance of the term loans is due and payable . 57 the following table summarizes the minimum annual principal payments and repayments of the revolving advances under the fifth amended credit agreement , the cash convertible story_separator_special_tag please read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included under item 8 of this annual report on form 10-k. trends in our business the following trends have contributed to the results of our consolidated operations , and we anticipate that they will continue to impact our future results : in the third quarter of 2015 , we began implementing the 2015 restructuring plan that the company committed to in october 2015 , which is intended to improve efficiency and deliver greater value to our customers . the 2015 restructuring plan , which we expect to improve efficiency and deliver greater value to our customers , is expected to be complete in 2016. in 2015 in connection with the 2015 restructuring plan , we incurred severance and benefit costs , consulting costs , lease termination costs , and fixed asset retirements . in addition , in august 2015 we closed one office , which resulted in employee severance and lease costs . we expect to incur a total of approximately $ 25 million in restructuring charges related to the 2015 restructuring plan , substantially all of which are expected to result in cash expenditures . we expect that the total charges will consist of approximately $ 10.5 million to $ 11.5 million of severance and other employee-related costs ; approximately $ 8 million to $ 9 million of lease termination costs ; and approximately $ 5.5 million to $ 6 million in consulting and other costs . we are moving from an organization focused on five customer end-markets to a structure centered on two primary businesses – network solutions and population health services . we believe that a decentralized structure allows a strengthened leadership team to create a strong customer focus in each business . as a part of our 2015 restructuring plan , we are undertaking a cost rationalization in our population health services business seeking to align our cost structure , allocation of capital and innovation cycle with the evolving dynamics of a proven customer market . the cost rationalization work includes a comprehensive portfolio review of solutions and services and should be complete in 2016. story_separator_special_tag font-family : arial ; color : # 000000 ; text-align : left '' > 2.4 % 2.4 % 2.4 % equity in loss from joint ventures ( 2.6 ) % — % — % loss before income taxes ( 4.6 ) % ( 1.4 ) % ( 2.1 ) % income tax benefit ( 0.5 ) % ( 0.6 ) % ( 0.8 ) % net loss ( 1 ) ( 4.1 ) % ( 0.7 ) % ( 1.3 ) % less : net loss attributable to non-controlling interest — % — % — % net loss attributable to healthways , inc. ( 1 ) ( 4.0 ) % ( 0.7 ) % ( 1.3 ) % ( 1 ) figures may not add due to rounding . revenues revenues for 2015 increased $ 28.4 million , or 3.8 % , over 2014 , primarily due to : an increase in the number of members eligible to participate in our fitness solutions , primarily due to increased enrollment in medicare advantage as well as growth in our customers ' membership ; an increase in average participation per member in our fitness solutions , primarily due to our initiatives to drive higher participation ; and the commencement of contracts with new customers and ramping revenues under existing contracts . these increases were in excess of the impact of contract terminations in 2014 and 2015 , including four health plan contracts in 2014 for our disease management solution ( the `` four terminated contracts '' ) , and the completion of short-term consulting engagements with certain customers during 2014 . 26 revenues for 2014 increased $ 78.9 million , or 11.9 % , over 2013 , primarily due to : the commencement of contracts with new customers and growth with existing customers ; and an increase in participation in our fitness solutions , as well as in the number of members eligible to participate in such solutions . these increases were somewhat offset by terminations of contracts with certain customers . cost of services cost of services ( excluding depreciation and amortization ) as a percentage of revenues for 2015 increased to 82.5 % compared to 80.6 % for 2014 , primarily due to the following : the impact of the four terminated contracts and the completion of certain short-term consulting engagements that were in effect during 2014 and carried a lower than average cost of services as a percentage of revenues ; and three customer contract renewals that changed certain contract terms and structure , resulting in lower contract margins in 2015 , but that provide us an opportunity to grow revenue and expand margins over the term of the contracts . these increases are partially offset by : improved operating leverage and efficiency gains ; and a decrease in support costs related to our technology platform , partially offset by recoupment of fees in 2014 related to certain supplier service level agreements . story_separator_special_tag financing activities during 2014 used $ 0.2 million in cash primarily due to net payments under the fifth amended credit agreement partially offset by the change in our cash overdraft position . credit facility on june 8 , 2012 , we entered into the fifth amended credit agreement . the fifth amended credit agreement provides us with a $ 125.0 million revolving credit facility that expires on june 8 , 2017 and includes a swingline sub facility of $ 20.0 million and a $ 75.0 million sub facility for letters of credit . the fifth amended credit agreement also provides a $ 200.0 million term loan facility that matures on june 8 , 2017 , $ 80.0 million of which remained outstanding at december 31 , 2015 , and an uncommitted incremental accordion facility of $ 100.0 million . borrowings under the fifth amended credit agreement generally bear interest at variable rates based on a margin or spread in excess of either ( 1 ) the one-month , two-month , three-month or six-month rate ( or with the approval of affected lenders , nine-month or twelve-month rate ) for eurodollar deposits ( `` libor '' ) or ( 2 ) the greatest of ( a ) the suntrust bank prime lending rate , ( b ) the federal funds rate plus 0.50 % , and ( c ) one-month libor plus 1.00 % ( the `` base rate '' ) , as selected by the company . the libor margin varies between 1.75 % and 3.00 % , and the base rate margin varies between 0.75 % and 2.00 % , depending on our leverage ratio . the fifth amended credit agreement also provides for an annual fee ranging between 0.30 % and 0.50 % of the unused commitments under the revolving credit facility . extensions of credit under the fifth amended credit agreement are secured by guarantees from all of the company 's active domestic subsidiaries and by security interests in substantially all of the company 's and such subsidiaries ' assets . on october 27 , 2015 , we entered into a seventh amendment to the fifth amended credit agreement ( the `` seventh amendment '' ) , which provides that the expense incurred by us in the following matters will be excluded from the calculation of consolidated ebitda for purposes of the fifth amended credit agreement : ( 1 ) operational improvement and restructuring charges incurred from july 1 , 2015 through march 31 , 2017 , not to exceed $ 27.5 million in the aggregate ; ( 2 ) cash severance charges in connection with the departure of our former chief executive officer during the quarter ended june 30 , 2015 not to exceed $ 2.2 million in the aggregate ; and ( 3 ) expense incurred in connection with the grant of certain cash inducement awards to our new chief executive officer in an aggregate amount not to exceed approximately $ 1.3 million . the seventh amendment also reduced the amount available for borrowing under the revolving credit facility from $ 200.0 million to $ 125.0 million . as of december 31 , 2015 , availability under the revolving credit facility totaled $ 68.3 million as calculated under the most restrictive covenant . 29 we are required to repay outstanding revolving loans under the revolving credit facility in full on june 8 , 2017. we are required to repay term loans in quarterly principal installments aggregating ( 1 ) 1.875 % of the original aggregate principal amount of the term loans during each of the four quarters beginning with the quarter ending september 30 , 2014 , and ( 2 ) 2.500 % of the original aggregate principal amount of the term loans during each of the remaining quarters prior to maturity on june 8 , 2017 , at which time the entire unpaid principal balance of the term loans is due and payable . we plan to refinance the fifth amended credit agreement in 2016. the fifth amended credit agreement contains financial covenants that require us to maintain , as defined , specified ratios or levels of ( 1 ) total funded debt to ebitda and ( 2 ) fixed charge coverage . the fifth amended credit agreement contains various other affirmative and negative covenants that are typical for financings of this type . among other things , the fifth amended credit agreement limits repurchases of our common stock and the amount of dividends that we can pay to holders of our common stock . a breach of any of these covenants could result in a default under the fifth amended credit agreement , in which event all amounts outstanding under the fifth amended credit agreement may become immediately due and payable and all commitments under the fifth amended credit agreement to extend further credit may be terminated . in addition , a payment default , including as a result of an acceleration following an event of default , under the fifth amended credit agreement or under our indenture for the cash convertible notes , could each trigger an event of default under the other debt instrument , which could result in the principal of and the accrued and unpaid interest on such debt becoming due and payable . in order to reduce our exposure to interest rate fluctuations on our floating rate debt obligations , we maintain interest rate swap agreements that effectively modify our exposure to interest rate risk by converting a portion of our floating rate debt to fixed obligations , thus reducing the impact of interest rate changes on future interest expense . under these agreements , we receive a variable rate of interest based on libor , and we pay a fixed rate of interest with an interest rate of 1.480 % plus a spread ( see note 6 to the consolidated financial statements ) .
| executive overview of results the key financial results for the year ended december 31 , 2015 are : revenues of $ 771.0 million for 2015 , up 3.8 % from $ 742.2 million for 2014 ; net loss of $ 30.9 million for 2015 compared to a net loss of $ 5.6 million for 2014 ; restructuring charges of $ 15.1 million in 2015 associated with our 2015 restructuring plan ; an impairment of our investment in a joint venture with gallup and a loss on the remaining investment commitment aggregating $ 19.6 million ; ceo transition-related expenses were incurred totaling $ 4.7 million associated with the termination in may 2015 of our former president and chief executive officer and transition to the newly appointed chief executive officer ; an increase in our valuation allowance for our deferred tax assets was recorded of $ 9.8 million due to management 's judgment that it is more likely than not that a portion of the deferred tax assets will not berealized ; and the sale of navvis healthcare , llc ( `` navvis '' ) in november 2015 resulted in a gain of $ 1.9 million .
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other than statements of historical facts , all statements which address activities , events , or developments that the company anticipates will or may occur in the future , including , but not limited to , such things as future capital expenditures , expansion , strategic plans , financial objectives , dividend payments , stock repurchases , growth of the company 's business and operations , including future cash flows , revenues , and earnings , and other such matters , are forward-looking statements . these forward-looking statements are based on many assumptions and factors which are detailed in the company 's filings with the u.s. securities and exchange commission . these forward-looking statements are based largely on our expectations and judgments and are subject to a number of risks and uncertainties , many of which are unforeseeable and beyond our control . for additional discussion on risks and uncertainties that may affect forward-looking statements , see “ risk factors ” in part i , item 1a . any changes in such assumptions or factors could produce significantly different results . the company undertakes no obligation to update forward-looking statements , whether as a result of new information , future events , or otherwise . business overview foot locker , inc. , through its subsidiaries , operates in two reportable segments — athletic stores and direct-to-customers . the athletic stores segment is one of the largest athletic footwear and apparel retailers in the world , with formats that include foot locker , kids foot locker , lady foot locker , champs sports , footaction , runners point , sidestep , and six:02. the direct-to-customers segment includes footlocker.com , inc. and other affiliates , including eastbay , inc. , and our international e - commerce businesses , which sell to customers through their internet and mobile sites and catalogs . the foot locker brand is one of the most widely recognized names in the markets in which we operate , epitomizing premium quality for the active lifestyle customer . this brand equity has aided our ability to successfully develop and increase our portfolio of complementary retail store formats , such as lady foot locker and kids foot locker , as well as footlocker.com , part of our direct-to-customer business . through various marketing channels and experiences , including social , digital , broadcast , and print media , as well as various sports sponsorships and events , we reinforce our image with a consistent message — namely , that we are the destination for premium athletically- inspired shoes and apparel with a wide selection of merchandise in a full-service environment . store profile replace_table_token_4_th 14 athletic stores we operated 3,310 stores in the athletic stores segment as of the end of 2017. the following is a brief description of the athletic stores segment 's operating businesses : foot locker — foot locker is a leading global youth culture brand that connects the sneaker obsessed consumer with the most innovative and culturally relevant sneakers and apparel . across all of our consumer touchpoints ( stores , websites , mobile apps , social media ) , foot locker enables consumers to fulfill their desire to be part of sneaker and youth culture . we curate special product assortments and marketing content that support s our premium position – from leading global brands such as nike , jordan , adidas , and puma , as well as new and emerging brands in the athletic and lifestyle space . we connect emotiona l l y with our consumers through a combination of global brand events and highly targeted and personalized experiences in local markets . foot locker 's 1,755 stores are located in 2 4 countries including 910 in the united states , puerto rico , u.s. virgin islands , and guam , 111 in canada , 636 in europe , and a combined 98 in australia and new zealand . our domestic stores have an average of 2,700 selling square feet and our international stores have an average of 1,600 selling square feet . kids foot locker — kids foot locker offers the largest selection of brand-name athletic footwear , apparel and accessories for children . our s tores , websites and social media channels feature products , content and experiences geared toward youth sneaker culture . of our 436 stores , 375 are located in the united states , puerto rico , and the u.s. virgin islands , 40 in europe , 19 in canada , and a combined 2 in australia and new zealand . these stores have an average of 1,700 selling square feet . lady foot locker — lady foot locker is a u.s. retailer of athletic footwear , apparel , and accessories dedicated to sneaker-obsessed young women . our stores provide premium sneakers and apparel , carefully selected to reflect the latest styles . lady foot locker operates 85 stores that are located in the united states and puerto rico . these stores have an average of 1,400 selling square feet . champs sports — champs sports is one of the largest mall-based specialty athletic footwear and apparel retailers in north america . with a focus on the lifestyle expression of sport , champs sports ' product categories include athletic footwear and apparel , and sport-lifestyle inspired accessories . this assortment allows champs sports to offer the best head-to-toe fashion stories representing the most powerful athletic brands , sports teams , and athletes in north america . of our 541 stores , 51 2 are located throughout the united states , puerto rico , and the u.s. virgin islands and 29 in canada . the champs sports stores have an average of 3,600 selling square feet . footaction — footaction is a north american athletic footwear and apparel retailer that offers the freshest , best edited selection of athletic lifestyle brands and looks . this banner is uniquely positioned at the intersection of sport and style , with a focus on authentic , premium product . story_separator_special_tag a s of the date of this form 10-k , we are continuing to evaluate the accounting for this legislation . w e continue to assemble and analyze all the information required to prepare and analyze these effects and await additional guidance from the u.s. treasury department , the irs or other standard-setting bodies . additionally , we continue to analyze other information . a ccordingly , we may record additional provisional amounts or adjustments to provisional amounts . any subsequent adjustment s will be recorded to tax expense in the quarter when the analysis is complete . see critical accounting policies within this item and note 1 7 , income taxes in “ item 8. consolidated financial statements and supplementary data ” for further details on u.s. tax reform . 16 reconciliation of non-gaap measures in addition to reporting the company 's financial results in accordance with gaap , the company reports certain financial results that differ from what is reported under gaap . in the following tables , we have presented certain financial measures and ratios identified as non-gaap such as sales excluding 53 rd week , earnings before interest and taxes ( “ ebit ” ) , adjusted ebit , adjusted ebit margin , adjusted income before income taxes , adjusted net income , adjusted net income margin , adjusted diluted earnings per share , return on invested capital ( “ roic ” ) , free cash flow , and net debt capitalization . we present these non-gaap measures because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excludi ng items that are not indicative of our core business or which affect comparability . in addition , these non-gaap measures are useful in assessing our progress in achieving our long-term financial objectives . additionally , we present certain amounts as excluding the effects of foreign currency fluctuations , which are also considered non-gaap measures . throughout the following discussions , where amounts are expressed as excluding the effects of foreign currency fluctuations , such changes are determined by translating all amounts in both years using the prior-year average foreign exchange rates . presenting amounts on a constant currency basis is useful to investors because it enables them to better understand the changes in our businesses that are not related to currency movements . fiscal year 2017 represents the fifty-three weeks ended february 3 , 2018. accordingly , certain non-gaap results have also been adjusted to exclude the effects of the 53 rd week to assist in comparability . we estimate the tax effect of the non-gaap adjustments by applying a marginal rate to each of the respective items . t he income tax items represent the discrete amount that affected the period . the non-gaap financial information is provided in addition to , and not as an alternative to , our reported results prepared in accordance with gaap . presented below is a reconciliation of gaap and non-gaap results discussed throughout this annual report on form 10-k. please see the non-gaap reconciliations for free cash flow and net debt capitalization in the “ liquidity and capital resources ” section . replace_table_token_5_th 17 replace_table_token_6_th ( 1 ) litigation and other charges for 2017 includes a pension litigation charge ( $ 178 million , or $ 111 million after-tax ) , severance and related costs ( $ 13 million , or $ 8 million after-tax ) , and non-cash impairment charges ( $ 20 million , or $ 14 million after-tax ) . the 2016 amount represents non-cash impairment charges of $ 6 million , or $ 5 million after-tax . the 2015 amount includes a charge of $ 100 million related to the pension litigation ( $ 61 million after-tax ) and non-cash impairment charges of $ 5 million ( $ 4 million after-tax ) . pension litigation - the company recorded pre-tax charges of $ 50 million and $ 128 million in connection with its u.s. retirement plan litigation during the second and fourth quarters of 2017 , respectively . the company had previously recorded a pre-tax charge for $ 100 million during 2015. these charges reflect the company 's revised estimate of its exposure for this matter , bringing the total pre-tax amount accrued to $ 278 million . the company has exhausted all of its legal remedies and will reform the pension plan as required by the court rulings . severance and related costs – the company recorded a pre-tax charge of $ 13 million during the third quarter of 2017 associated with the reorganization and the reduction of staff taken to improve efficiency . impairment charges – the company recognized pre-tax non-cash impairment charges totaling $ 20 million during the fourth quarter of 2017. these charges were associated with our six:02 , runners point , and sidestep businesses and primarily represented the write-down of store fixtures and leasehold improvements . the 2016 and 2015 amounts related to runners point and sidestep . ( 2 ) on december 22 , 2017 , the united states enacted tax reform legislation that included a broad range of business tax provisions . the recognized charge was based on current interpretation of the tax law changes and includes a $ 99 million tax liability for the mandatory deemed repatriation of foreign sourced net earnings and a corresponding change in our permanent reinvestment assertion under asc 740-30. the effect of remeasurement of our deferred tax assets and liabilities was not significant . our accounting for the new legislation is not complete and we have made reasonable estimates for some tax provisions . we exclude the discrete u.s. tax reform effect from our adjusted diluted eps as it does not reflect our ongoing tax obligations under u.s. tax reform . ( 3 ) during the fourth quarter of 2017 , the company determined that certain valuation allowances should be established against deferred tax assets associated with the runners point and sidestep stores and e-commerce businesses .
| overview of consolidated results the following represents our long-term objectives and our progress towards meeting those objectives . non-gaap results are presented for all the periods . please see “ reconciliation of non-gaap measures ” earlier in this section for further information relating to non-gaap measures , including why we believe they are useful and how they are calculated . replace_table_token_9_th highlights of our 2017 financial performance include : · despite a challenging retail year , the company remained highly profitable and our financial position is strong . we are well positioned for the future . · total sales increased 0.2 percent to a record $ 7,782 million , with the 53 rd week contributing $ 95 million of sales . footwear sales represented 82 percent of total sales for all periods presented . the overall comparable-sales gains of 6.9 percent in our direct-to-customer segment w as not enough to offset the declines experienced by our athletic store segment , which experienced a comparable-store sales decline of 4.7 percent . replace_table_token_10_th · sales of the direct-to-customers segment increased by 8.5 percent to $ 1,109 million , compared with $ 1,022 million in 2016 and increased 110 basis points as a percentage of total sales to 14.3 percent . the direct business has been steadily increasing as a percentage of total sales over the last several years , led by the continued growth and expansion into new geographies of our store banners ' e-commerce businesses . · gross margin , as a percentage of sales , decreased by 230 basis points to 31.6 percent in 2017. the decline was primarily driven by a decrease in our merchandise margin rate , reflecting a higher markdown rate as compared with the prior year . the 53 rd week contributed an improvement to the gross margin rate of 20 basis points .
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3 ) incorporated by reference from the registrant 's current report on form 8-k filed on september 24 , 2009 ( 4 ) incorporated by reference from the registrant 's current report on form 8-k filed on october 30 , 2009 ( 5 ) incorporated by reference from the registrant 's current report on form 8-k filed on march 16 , 2010 ( 6 ) incorporated by reference from the registrant 's current report on form 8-k filed on april 14 , 2010 ( 7 ) incorporated by reference from the registrant 's annual report on form 10-k filed on june 29 , 2010 ( 8 ) incorporated by reference from the registrant 's current report on form 8-k filed on november 3 , 2010 ( 9 ) incorporated by reference from the registrant 's quarterly report on form 10-q filed on february 14 , 2011 ( 10 ) incorporated by reference from the registrant 's current report on form 8-k filed on april 25 , 2011 ( 11 ) incorporated by reference from the registrant 's current report on form 8-k filed on may 19 , 2011 ( 12 ) incorporated by reference from the registrant 's current report on form 8-k filed on august 2 , 2011 ( 13 ) incorporated by reference from the registrant 's current report on form 8-k filed on october 21 , 2011 ( 14 ) incorporated by reference from the registrant 's current report on form 8-k filed on may 17 , 2012 56 signatures pursuant to the requirements of section 13 or 15 ( d ) of the securities exchange act of 1934 , the registrant has duly caused this report to be signed on its behalf by the undersigned , thereunto duly authorized . china jo-jo drugstores , inc. ( registrant ) date : july 2 , 2012 by : lei liu lei liu chief executive officer date : july 2 , 2012 by : ming zhao ming zhao chief financial officer in accordance with the exchange act , this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated . name title date story_separator_special_tag the following discussion and analysis of our results of operations and financial condition for fiscal years ended march 31 , 2012 and 2011 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this report . our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties , such as our plans , objectives , expectations and intentions . actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors , including those set forth under the “ risk factors , ” “ cautionary notice regarding forward-looking statements ” and “ description of business ” sections and elsewhere in this report . we use words such as “ anticipate , ” “ estimate , ” “ plan , ” “ project , ” “ continuing , ” “ ongoing , ” “ expect , ” “ believe , ” “ intend , ” “ may , ” “ will , ” “ should , ” “ could , ” “ predict ” and similar expressions to identify forward-looking statements . although we believe the expectations expressed in these forward-looking statements are based on reasonable assumptions within the bound of our knowledge of our business , our actual results could differ materially from those discussed in these statements . factors that could contribute to such differences include , but are not limited to , those discussed in the “ risk factors ” section of this report . we undertake no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future . our financial statements are prepared in us $ and in accordance with accounting principles generally accepted in the united states . see “ exchange rates ” below for information concerning the exchanges rates at which renminbi ( “ rmb ” ) were translated into us $ at various pertinent dates and for pertinent periods . overview we are a retailer and wholesale distributor of pharmaceutical and other healthcare products typically found in a retail pharmacy in the people 's republic of china ( “ prc ” or “ china ” ) . prior to acquiring jiuxin medicine in august 2011 we were primarily a retail pharmacy operator . our drugstores provide customers with a wide variety of medicinal products , including prescription and otc drugs , nutritional supplements , tcm products , personal care products , family care products , medical devices , as well as convenience products including consumable , seasonal and promotional items . in addition to these products , we have licensed doctors of both western medicine and tcm onsite for consultation , examination and treatment of common ailments at scheduled hours . since may 2010 , our retail business also includes an online drugstore that sells non-prescription otc drugs and nutritional supplements . in addition to our retail business , we operate a wholesale business distributing tcm herbs that we have been cultivating , and , through jiuxin medicine , third-party pharmaceutical products ( similar to those we carry in our own pharmacies ) primarily to trading companies throughout china . story_separator_special_tag recoverability is measured by comparing the asset 's net book value to the related projected undiscounted cash flows from these assets , considering a number of factors including past operating results , budgets , economic projections , market trends and product development cycles . if the net book value of the asset exceeds the related undiscounted cash flows , the asset is considered impaired , and a second test is performed to measure the amount of impairment loss . no significant indication of impairment noted as of march 31 , 2012. inventories we state our inventory at the lower of cost or market . cost is determined using the “ first in first out ” method . market is the lower of replacement cost or net realizable value . we carry out physical inventory counts on a monthly basis at each store and distribution location to ensure that the amounts reflected in the consolidated financial statements at each reporting period are properly stated and valued . we record write-downs to inventory for shrinkage losses and damaged merchandise that are identified during the inventory counts . the inventory write downs for the years ended march 31 , 2012 and 2011 have been immaterial . story_separator_special_tag in other instances . the significance of this decline has offset all previous quarterly increases during fiscal 2012. during the three months ended march 31 , 2012 , we also fully shifted our entire group sales previously recorded in our retail business to our wholesale business . in addition , our three store relocations during the fourth quarter of fiscal 2012 resulted in a $ 1.5 million period-over-period decline in sales . another reason for the decline of our fourth quarter retail sales on a year-to-year basis was the termination of our white liquor sales in fiscal 2012 , which contributed $ 3.4 million for the fourth quarter of fiscal 2011. despite the significant decline of our retail sales , however , we were able to make up lost grounds with our entry into , and expansion of , the wholesale business . as a result , our overall revenue for the year ended march 31 , 2012 increased from the prior year , and we believe we are in position to continue to grow our wholesale business to hedge against any further decline to our retail business , especially if jiuxin medicine can become qualified to supply to hospital-affiliated pharmacies . we intend , however , to remain competitive with our retail business , and plan to open more upscale , service-oriented pharmacies to further differentiate ourselves from our competitors . revenue from wholesale business the primary increase in our wholesale business was a result of our fourth quarter revenue of $ 17.3 million that constituted 61 % of our wholesale business for the year . this increase was a result of the sales of our self-cultivated tcm herbs of approximately $ 4.2 million , and $ 8.9 million of group sales that are now being handled through our wholesale business . part of our shift to wholesale business is in anticipation of capturing opportunities that may be created by upcoming medical reforms aimed at hospitals . coupled with new constraints on retail pharmacies ( such as the hangzhou government 's restriction on promotional activities ) , we hope to transform ourselves into a combined retail and wholesale operation in order to give us more operating flexibility and reduce our reliance on one primary revenue source . the significant decline in our retail business as discussed earlier has also reinforced our decision to shift some of our operating focus to our wholesales business , from which we may see bigger future growth potentials , especially if jiuxin medicine can become qualified to supply to hospital-affiliated pharmacies . in order to do so , jiuxin medicine must rapidly scale the volume of its business . accordingly , despite the good start of our wholesale business in fiscal 2012 , our focus in the near term will be to continue building jiuxin medicine 's wholesale business volume . 41 gross profit . our gross profit increased by $ 6,420,707 or 30.4 % from a year ago mainly due to increase in sales . our gross margin of 29.2 % is a slight decrease from 30.2 % a year ago mainly due to lower profit margin from jiuxin medicine 's wholesale activities . as our wholesale business continues to grow , we anticipate that our overall gross profit margin may continue to decline . the gross margin of our retail business was , on average , approximately 33.0 % and 30.2 % during the years ended march 31 , 2012 and 2011 , respectively . the gross margin , on average , of our wholesale business was 20.4 % and 0 % , respectively . our retail gross margin during the fourth quarter was 31 % as a result of the price controls placed on certain products by the government . our ability to maintain our margin will depend on the future regulations that the government places on retail pharmacies . the gross margin of our wholesale business improved during the fourth quarter as a result of several factors including the $ 4.2 million of tcm sales as a result of cultivating our herbs and the previously mentioned group transfer of group sales to from our retail pharmacies to our wholesale business . the margin for our harvested tcm sold during the fourth quarter of fiscal year 2012 was approximately 89 % while group sales typically reflect the margins we have in our retail business . sales and marketing expenses . our sales and marketing expenses increased by $ 3,659,495 or 75.6 % from a year ago as a result of increased rent , labor amortization costs , and promotion activities for our online pharmacy and wholesale business .
| results of operations the following table summarizes our results of operations for the fiscal years ended march 31 , 2012 and 2011. replace_table_token_4_th revenue . we had two revenue streams for the fiscal year ended march 31 , 2012 : ( i ) store and online retail sales of pharmaceutical and other healthcare products , and ( ii ) wholesale distribution of pharmaceutical and other healthcare products , as well as our self-cultivated tcm herbs , primarily to third-party pharmaceutical trading companies . included in our wholesale revenue are : ( i ) wholesales of pharmaceutical and healthcare products that we purchased from third-party manufacturers or suppliers , ( ii ) wholesales of our cultivated tcm herbs , ( iii ) direct group sales or sales to non-distributors . although the overall gross profit of our wholesale business is comparatively lower than that of our retail business , the volume of our wholesale business is significant . our total revenue for fiscal 2012 increased by $ 24,383,406 , or 34.8 % , from the prior fiscal year 's revenue . such increase was primarily due to the following reasons : 39 ( 1 ) during fiscal 2012 , we opened several new “ jiuzhou grand pharmacy ” drugstores and also started to expand our online drug sales . our retail store count increased to 61 as of march 31 , 2012 , from 53 stores a year ago . the increased number of stores brought new opportunities to sell our products and services to retail customers . retail sales accounted for about 70 % of our total revenue for the year ended march 31 , 2012. same-store sales decreased by approximately $ 7.0 million or 10.1 % , while our new stores contributed approximately $ 3.1 million to our revenue .
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our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors , including those discussed under item 1a , risk factors and elsewhere in this annual report on form 10-k. see also cautionary statement regarding forward-looking statements at the beginning of this form 10-k. 45 overview our digital marketing intelligence platform is comprised of proprietary databases and a computational infrastructure that measures , analyzes and reports on digital activity . the foundation of our platform is data collected from our comscore panel of approximately two million internet users worldwide who have granted us explicit permission to confidentially measure their internet usage patterns , online and certain offline buying behavior and other activities . by applying advanced statistical methodologies to our panel data , we project consumers ' online behavior for the total online population and a wide variety of user categories . this panel information is complemented by a unified digital measurement solution to digital audience measurement . unified digital measurement blends panel and server methodologies into a solution that provides a direct linkage and reconciliation between server and panel measurement . we deliver our digital marketing intelligence through our comscore media metrix product suite , our comscore marketing solutions products , our comscore mobile solutions and our comscore web analytics solutions . media metrix delivers digital media intelligence by providing an independent , third-party measurement of the size , behavior and characteristics of web site and online advertising network audiences among home , work and university internet users as well as insight into the effectiveness of online advertising . our marketing solutions products combine the proprietary information gathered from the comscore panel with the vertical industry expertise of comscore analysts to deliver digital marketing intelligence , including the measurement of online advertising effectiveness , customized for specific industries . we typically deliver our media metrix products electronically in the form of weekly , monthly or quarterly reports . customers can access current and historical media metrix data and analyze these data anytime online . our m : metrics products suite connects mobile consumer behavior , content merchandising , and device capabilities to provide comprehensive mobile market intelligence . customers can access our m : metrics data sets and reports anytime online . our marketing solutions products are typically delivered on a monthly , quarterly or ad hoc basis through electronic reports and analyses . our company was founded in august 1999. by 2000 , we had established a panel of internet users and began delivering digital marketing intelligence products that measured online browsing and buying behavior to our first customers . we also introduced netscore , our initial syndicated internet audience measurement product . we accelerated our introduction of new products in 2003 with the launch of plan metrix ( formerly aim 2.0 ) , qsearch , and the campaign r/f ( reach and frequency ) analysis system and product offerings that measure online activity at the local market level . by 2004 , we had built a global panel of approximately two million internet users . in that year , in cooperation with arbitron , we launched a service that provides ratings of online radio audiences . in 2005 , we expanded our presence in europe by opening an office in london . in 2006 , we continued to expand our measurement capabilities with the launch of world metrix , a product that provides worldwide data on digital media usage , and video metrix , our product that measures the audience for streaming online video . in 2007 , we completed our initial public offering and we also launched ten new products during that year , including campaign metrix , qsearch 2.0 , ad metrix , brand metrix , segment metrix and comscore marketer . during 2008 , we launched ad metrix-advertiser view , a tool for agencies and publishers designed to support their media buying and selling activities and supply their competitive intelligence needs , plan metrix , the second generation of our media planning product , and extended web measurement , which allows the tracking of distributed web content across third party sites , such as video , music , gaming applications , widgets and social media . beginning in summer 2009 , the panel information has been complemented by comscore media metrix 360 , a unified digital measurement solution to digital audience measurement that blends panel and server methodologies into an approach that provides a direct linkage and reconciliation between server and panel measurement . we have complemented our internal development initiatives with select acquisitions . on june 6 , 2002 , we acquired certain media metrix assets from jupiter media metrix , inc. through this acquisition , we acquired certain internet audience measurement services that report details of web site usage and visitor demographics . on july 28 , 2004 , we acquired the outstanding stock of denaro and associates , inc , otherwise known as q2 brand intelligence , inc. or q2 , to improve our ability to provide our customers more robust survey research integrated with our underlying digital marketing intelligence platform . on january 4 , 2005 , we acquired the assets and assumed certain liabilities of surveysite inc. , or surveysite . through this acquisition , we acquired proprietary internet-based data-collection technologies and increased our customer penetration and revenues in the survey business . on may 28 , 2008 , we acquired the outstanding stock of m : metrics , inc. to expand our abilities to provide our customers a more 46 robust solution for the mobile medium . in the middle of november 2009 , we acquired certifica , inc. , a leader in web measurement in latin america , as part of our global expansion . certifica maintains offices and sales resources in six latin american countries , which we hope will provide a platform to enhance our business in that region . story_separator_special_tag through our marketing solutions products , we deliver digital marketing intelligence relating to specific industries , such as automotive , consumer packaged goods , entertainment , financial services , media , pharmaceutical , retail , technology , telecommunications and travel . this marketing intelligence leverages our global consumer panel and extensive database to deliver information unique to a particular customer 's needs on a recurring schedule , as well as on a continual-access basis . our marketing solutions customer agreements typically include a fixed fee with an initial term of at least one year . we also provide these products on a non-subscription basis as described under project revenues below . in addition , we generate subscription-based revenues from survey products that we sell to our customers . in conducting our surveys , we generally use our global internet user panel . after questionnaires are distributed to the panel members and completed , we compile their responses and then deliver our findings to the customer , who also has ongoing access to the survey response data as they are compiled and updated over time . these data include responses and information collected from the actual survey questionnaire and can also include behavioral information that we passively collect from our panelists . if a customer contractually commits to having a survey conducted on a recurring basis , we classify the revenues generated from such survey products as subscription-based revenues . our contracts for survey services typically include a fixed fee with terms that range from two months to one year . on july 1 , 2010 , we completed our acquisition of nexius , inc. , resulting in additional revenue sources , including software licenses , professional services ( including implementation , training and customized consulting services ) , and maintenance and technical support contracts . our arrangements generally contain multiple elements , consisting of the various service offerings . we recognize software license arrangements that include significant modification and customization of the software in accordance with financial accounting standards board accounting standards codification , or asc 985-605 , software recognition and asc 605-35 , revenue recognition-construction-type and certain production-type contracts , typically using the completed contract period method . we currently do not have vendor specific objective evidence , or vsoe , for the multiple deliverables and account for all elements in these arrangements as a single unit of accounting , recognizing the entire arrangement fee as revenue over the service period of the last delivered element . during the period of performance , billings and costs ( to the extent they are recoverable ) are accumulated on the balance sheet , but no profit or income is recorded before user acceptance of the software license . to the extent estimated costs are expected to exceed revenue we accrue for costs immediately . on august 31 , 2010 , we completed our acquisition of nedstat , resulting in additional revenue sources , including software subscriptions , server calls , and professional services ( including training and consulting ) . our 48 arrangements generally contain multiple elements , consisting of the various service offerings , with revenue recognition occurring ratably over the remaining subscription term after all elements have commenced delivery . project revenues we generate project revenues by providing customized information reports to our customers on a nonrecurring basis through comscore marketing solutions and nedstat products . for example , a customer in the media industry might request a custom report that profiles the behavior of the customer 's active online users and contrasts their market share and loyalty with similar metrics for a competitor 's online user base . if this customer continues to request the report beyond an initial project term of at least nine months and enters into an agreement to purchase the report on a recurring basis , we begin to classify these future revenues as subscription-based . 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 accounting principles generally accepted in the u.s. the preparation of these financial statements requires us to make estimates , assumptions and judgments that affect the amounts reported in our consolidated financial statements and the accompanying notes . we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances . actual results may differ from these estimates . while our significant accounting policies are described in more detail in the notes to our consolidated financial statements included in part ii , item 8 of this annual report on form 10-k , we believe the following accounting policies to be the most critical to the judgments and estimates used in the preparation of our consolidated financial statements . revenue recognition we recognize revenues when the following fundamental criteria are met : ( i ) persuasive evidence of an arrangement exists , ( ii ) delivery has occurred or the services have been rendered , ( iii ) the fee is fixed or determinable , and ( iv ) collection of the resulting receivable is reasonably assured . we generate revenues by providing access to our online database or delivering information obtained from our database , usually in the form of periodic reports . revenues are typically recognized on a straight-line basis over the period in which access to data or reports is provided , which generally ranges from three to 24 months . we also generate revenues through survey services under contracts ranging in term from two months to one year . our survey services consist of survey and questionnaire design with subsequent data collection , analysis and reporting . we recognize revenues on a straight-line basis over the estimated data collection period once the survey questionnaire design has been delivered . any change in the estimated data collection period results in an adjustment to revenues recognized in future periods . certain of our arrangements contain multiple elements , consisting of the various services we offer .
| results of operations the following table sets forth selected consolidated statements of operations data as a percentage of total revenues for each of the periods indicated . replace_table_token_8_th 54 year ended december 31 , 2010 compared to year ended december 31 , 2009 and year ended december 31 , 2009 compared to year ended december 31 , 2008 revenues replace_table_token_9_th total revenues increased by approximately $ 47.3 million during the year ended december 31 , 2010 as compared to the year ended december 31 , 2009. the revenue growth was substantially due to increased sales to our existing customer base as a result of both organic growth and acquisitions . in addition , our customer base continued to grow as compared to the prior year . our total customer base grew by a net increase of 479 customers from 1,273 at december 31 , 2009 to 1,752 at december 31 , 2010. the increase in our customer base included 238 related to businesses acquired in 2010. included in total revenues for the year ended december 31 , 2010 was approximately $ 28.0 million related to businesses that were acquired during the year ended december 31 , 2010 and the fourth quarter of 2009. sales to existing customers totaled $ 154.1 million during the year ended december 31 , 2010 which was an increase of $ 40.7 million over the prior year . we attribute $ 21.6 million of this increase to continued growth in comscore product suite sales and $ 19.1 million to the businesses we acquired during 2010 and the fourth quarter of 2009. during the year ended december 31 , 2010 , revenues from new customers were $ 20.8 million , an increase of approximately $ 6.5 million from the prior year . we attribute this increase to the businesses we acquired during 2010 and the fourth quarter of 2009. revenues from customers outside of the u.s. totaled approximately $ 32.7
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overview cree , inc. ( cree , we , our , or us ) is a leading innovator of lighting-class light emitting diode ( led ) products , lighting products and semiconductor products for power and radio-frequency ( rf ) applications . our products are targeted for applications such as indoor and outdoor lighting , video displays , transportation , electronic signs and signals , power supplies , inverters and wireless systems . 25 our led products consist of led components , led chips , and silicon carbide ( sic ) materials . our success in selling led products depends upon our ability to offer innovative products and to enable our customers to develop and market led-based products that successfully compete against other led-based products and drive led adoption against traditional lighting products . our lighting products primarily consist of led lighting systems and bulbs . we design , manufacture and sell lighting fixtures and lamps for the commercial , industrial and consumer markets . in addition , we develop , manufacture and sell power and rf devices . our power products are made from sic and provide increased efficiency , faster switching speeds and reduced system size and weight over comparable silicon-based power devices . our rf devices are made from gallium nitride ( gan ) and provide improved efficiency , bandwidth and frequency of operation as compared to silicon or gallium arsenide ( gaas ) . the majority of our products are manufactured at our production facilities located in north carolina , wisconsin , and china . we also use contract manufacturers for certain aspects of product fabrication , assembly and packaging . we operate research and development facilities in north carolina , california , wisconsin , india , and china ( including hong kong ) . cree , inc. is a north carolina corporation established in 1987 , and our headquarters are in durham , north carolina . for further information about our consolidated revenue and earnings , please see our consolidated financial statements included in item 8 of this annual report . reportable segments our three reportable segments are : led products lighting products power and rf products reportable segments are components of an entity that have separate financial data that the entity 's chief operating decision maker ( codm ) regularly reviews when allocating resources and assessing performance . our codm is the chief executive officer . our codm does not review inter-segment transactions when evaluating segment performance and allocating resources to each segment , and inter-segment transactions are not included in our segment revenue disclosure . as such , total segment revenue is equal to our consolidated revenue . our codm reviews gross profit as the lowest and only level of segment profit . as such , all items below gross profit in the consolidated statements of income must be included to reconcile the consolidated gross profit to our consolidated income before income taxes . for financial results by reportable segment , please refer to note 13 , “ reportable segments , ” in our consolidated financial statements included in item 8 of this annual report . industry dynamics and trends there are a number of industry factors that affect our business which include , among others : overall demand for products and applications using leds . our potential for growth depends significantly on the adoption of leds within the general lighting market and our ability to affect this rate of adoption . although the market for led lighting has grown in recent years , adoption of leds for general lighting is relatively low and faces significant challenges before widespread adoption . demand also fluctuates based on various market cycles , a continuously evolving led industry supply chain and demand dynamics in the market . these uncertainties make demand difficult to forecast for us and our customers . intense and constantly evolving competitive environment . competition in the led and lighting industry is intense . many companies have made significant investments in led development and production equipment . traditional lighting companies and new entrants are investing in led-based lighting products as led adoption has gained momentum . traditional lighting companies have taken steps to try and limit access to their sales channels , including lighting agents and distributors . product pricing pressures exist as market participants often undertake pricing strategies to gain or protect market share , increase the utilization of their production capacity and open new applications to led-based solutions . to remain competitive , market participants must continuously increase product performance and reduce costs . to address these competitive pressures , we have invested in research and development 26 activities to support new product development and to deliver higher levels of performance and lower costs to differentiate our products in the market . technological innovation and advancement . innovations and advancements in led , power and rf technologies continue to expand the potential commercial application for our products , particularly in the general illumination , power electronics and wireless markets . however , new technologies or standards could emerge or improvements could be made in existing technologies that could reduce or limit the demand for our products in certain markets . regulatory actions concerning energy efficiency . many countries have already instituted or have announced plans to institute government regulations and programs designed to encourage or mandate increased energy efficiency , in some cases even banning forms of incandescent lighting , which are advancing the adoption of more energy efficient lighting solutions such as leds . government agencies are also involved in setting standards for led lighting , which can affect market acceptance and the availability of rebates from government agencies or third parties such as utilities . while this trend is generally positive , these regulations are affected by changing political priorities and evolving technical standards which can modify or limit the effectiveness of these new regulations . intellectual property issues . market participants rely on patented and non-patented proprietary information relating to product development , manufacturing capabilities and other core competencies of their business . story_separator_special_tag our consolidated gross profit increased 28 % to $ 523.3 million in fiscal 2013 from $ 409.5 million in fiscal 2012 . our consolidated gross margin increased to 38 % in fiscal 2013 from 35 % in fiscal 2012 . these consolidated gross profit and gross margin increases were due to the improvements in led products and power and rf products , primarily due to higher volume of units sold , factory cost reductions , the introduction of new lower cost products , and higher factory utilization . led products segment gross profit and gross margin our led products gross profit was $ 381.0 million , $ 344.6 million , and $ 290.6 million for fiscal 2014 , 2013 , and 2012 , respectively . led products gross margin was 46 % , 43 % , and 38 % for fiscal 2014 , 2013 , and 2012 , respectively . led products gross profit increased 11 % to $ 381.0 million in fiscal 2014 from $ 344.6 million in fiscal 2013 , and led products gross margin increased to 46 % in fiscal 2014 from 43 % in fiscal 2013 . led products gross profit and gross margin increased during fiscal 2014 due to higher revenue , factory cost reductions , the introduction of new lower cost products and higher factory utilization . these benefits more than offset the asp decline in fiscal 2014 as compared to fiscal 2013 . led products gross profit increased 19 % to $ 344.6 million in fiscal 2013 from $ 290.6 million in fiscal 2012 , and led products gross margin increased to 43 % in fiscal 2013 from 38 % in fiscal 2012 . led products gross profit and gross margin increased during fiscal 2013 due to factory cost reductions , the introduction of new lower cost products and higher factory utilization . these benefits more than offset the asp decline in fiscal 2013 as compared to fiscal 2012 . 30 lighting products segment gross profit and gross margin lighting products gross profit was $ 197.3 million , $ 148.9 million , and $ 103.4 million for fiscal 2014 , 2013 , and 2012 , respectively . lighting products gross margin was 28 % , 30 % , and 31 % for fiscal 2014 , 2013 , and 2012 , respectively . lighting products gross profit increased 32 % to $ 197.3 million in fiscal 2014 from $ 148.9 million in fiscal 2013 , due to growth in led lighting products sales . lighting products gross margin decreased to 28 % in fiscal 2014 from 30 % in fiscal 2013 , primarily due to changes in product mix driven primarily by higher sales of consumer lighting products , which have lower gross margins . lighting products gross profit increased 44 % to $ 148.9 million in fiscal 2013 from $ 103.4 million in fiscal 2012 , primarily due to an increase in the number of overall units sold . lighting products gross margin decreased to 30 % in fiscal 2013 from 31 % in fiscal 2012 , primarily due to a change in product mix . power and rf products segment gross profit and gross margin power and rf products gross profit was $ 60.7 million , $ 48.1 million , and $ 32.1 million for fiscal 2014 , 2013 , and 2012 , respectively . power and rf products gross margin was 56 % , 54 % , and 44 % for fiscal 2014 , 2013 , and 2012 , respectively . power and rf products gross profit increased 26 % to $ 60.7 million in fiscal 2014 from $ 48.1 million in fiscal 2013 . power and rf products gross margin increased to 56 % in fiscal 2014 from 54 % in fiscal 2013 . power and rf products gross profit and gross margin increases were due primarily to higher revenue , factory cost reductions , increased factory utilization , and introduction of new lower cost products . these benefits more than offset the asp decline in fiscal 2014 as compared to fiscal 2013 . power and rf products gross profit increased 50 % to $ 48.1 million in fiscal 2013 from $ 32.1 million in fiscal 2012 . power and rf products gross margin increased to 54 % in fiscal 2013 from 44 % in fiscal 2012 . power and rf products gross profit and gross margin increases were due primarily to factory cost reductions , increased factory utilization , and higher sales of new lower cost products . these benefits more than offset the asp decline in fiscal 2013 as compared to fiscal 2012 . unallocated costs unallocated costs were $ 20.2 million , $ 18.5 million , and $ 16.6 million for fiscal 2014 , 2013 , and 2012 , respectively . these costs consisted primarily of manufacturing employees ' stock-based compensation , expenses for profit sharing and quarterly or annual incentive plans and matching contributions under our 401 ( k ) plan . these costs were not allocated to the reportable segments ' gross profit because our codm does not review them regularly when evaluating segment performance and allocating resources . unallocated costs increased by $ 1.8 million in fiscal 2014 and by $ 1.9 million in fiscal 2013 as compared to fiscal 2013 and fiscal 2012 , respectively , primarily attributable to higher incentive and stock-based compensation incurred as a result of improved business performance year over year . for further information on the allocation of costs to segment gross profit , refer to note 13 , “ reportable segments , ” in our consolidated financial statements included in item 8 of this annual report . research and development research and development expenses include costs associated with the development of new products , enhancements of existing products and general technology research . these costs consisted primarily of employee salaries and related compensation costs , occupancy costs , consulting costs and the cost of development equipment and supplies .
| results of operations the following table sets forth certain consolidated statement of income data for the periods indicated ( in thousands , except per share amounts and percentages ) : replace_table_token_4_th 28 revenue revenue was comprised of the following ( in thousands , except percentages ) : replace_table_token_5_th our consolidated revenue increased 19 % to $ 1.6 billion in fiscal 2014 from $ 1.4 billion in fiscal 2013 . this year-over-year increase was due to higher sales across all three of our reportable segments , but driven primarily by the 43 % increase in lighting products . lighting products revenue increased due to an overall increase in the number of units sold , including new product introductions , partially offset by a reduction in the average selling prices , or asp . our consolidated revenue increased 19 % to $ 1.4 billion in fiscal 2013 from $ 1.2 billion in fiscal 2012 . this year-over-year increase was due to higher sales across all three of our reportable segments , but driven primarily by the 48 % increase in lighting products . lighting products revenue increased primarily due to an increase in sales of existing products , the sales of new and re-designed products introduced during the fiscal year , and the recognition of revenue from the ruud lighting acquisition for a full fiscal year . led products segment revenue led products revenue represented the largest portion of our revenue with approximately 51 % , 58 % , and 65 % of our total revenue for fiscal 2014 , 2013 , and 2012 , respectively . led products revenue was $ 833.7 million , $ 801.5 million , and $ 756.9 million for fiscal 2014 , 2013 , and 2012 , respectively . led products revenue increased 4 % to $ 833.7 million in fiscal 2014 from $ 801.5 million in fiscal 2013 .
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warrants a summary of warrant exercisable into common stock as of june 30 , 2020 , and changes during year ended is presented below : replace_table_token_11_th f-12 stock options and stock based compensation paramount 's 2015 and 2016 stock incentive and compensation plan , which is shareholder-approved , permits the grant of share options and shares to its employees for up to 2.169 million shares of common stock . option awards are generally granted with an exercise price equal to the market price of paramount 's stock at the date of grant and have contractual lives of 5 years . to better align the interests of its key executives and employees with those of its shareholders a significant portion of those share option awards will vest contingent upon meeting certain stock price appreciation performance goals . option and share awards provide for accelerated vesting if there is a change in control ( as defined in the employee share option plan ) . during the year-ended june 30 , 2020 , the company granted 690,000 stock options to employees , directors and consultants with a strike price of $ 1.00 . each option carries a 5 year term . options received by senior management and directors will vest and become exercisable on achieving the following performance conditions : 1 ) ½ upon the completion of the grassy mountain project feasibility study and 2 ) ½ on the issuance of mining permits for the grassy mountain project by the state of oregon . options received by employees and consultants will vest and become exercisable as follows : 1/3 on the first anniversary of the date of grant , 1/3 on the second anniversary of the date of grant and 1/3 on the third anniversary of the date of grant . there were no option granted for the year-ended june 30 , 2019. the fair value for these options was calculated using the black-scholes option valuations method . the weighted average assumptions used for the fiscal years ending june 30 , 2020 and 2019 were as follows : 2020 2019 weighted average risk-free interest rate 1.60 % n/a weighted-average volatility 61.00 % n/a expected dividends 0.00 n/a weighted average expected term ( years ) 5 n/a weighted average fair value $ 0.39 n/a a summary of option activity under the stock incentive and compensation plan as of june 30 , 2020 , and changes during the year then ended is presented below . replace_table_token_12_th a summary of the status of paramount 's non-vested options as of june 30 , 2020 and changes during the year ended june 30 , 2020 is presented below . replace_table_token_13_th as of june 30 , 2020 and 2019 , there was $ 153,802 and $ 108,003 respectively of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the employee share option plan . that cost is expected to be recognized f-13 over a weighted-average period of 1.05 years . the total fair value of s hares vested during the years ended june 30 , 2020 and 2019 , was $ 202,121 and $ nil , respectively . note 6. debt convertible debt june 30 , 2020 june 30 , 2019 current non-current current non-current 2019 secured convertible notes $ — $ 5,477,690 $ — $ — less story_separator_special_tag financial condition and results of operations . overview we are a company engaged in the business of acquiring , exploring and developing precious metal projects in the united states of america . paramount owns advanced stage exploration projects in the states of nevada and oregon . we enhance the value of our projects by implementing exploration and engineering programs that are likely to expand and upgrade known mineralized material to reserves . the following discussion updates our outlook and plan of operations for the foreseeable future . it also analyzes our financial condition and summarizes the results of our operations for the years ended june 30 , 2020 and 2019 and compares each year 's results to the results of the prior year . operating highlights : in june 2020 , the company closed a non-brokered registered direct offering and a concurrent best efforts agency offering in canada ( the “ offerings ” ) of 4,807,700 shares of its common stock at a price of $ 1.04 per common stock for aggregate gross proceeds of $ 5.0 million . in may 2020 , the company entered into an controlled equity offering sm sales agreement ( “ sales agreement ” ) with cantor fitzgerald & co. and canaccord genuity llc ( together , the “ agents ” ) , pursuant to which the company may issue and sell shares of its common stock from time to time through the agents for aggregate sales proceeds of up to $ 8,000,000 , subject to the offering limitations currently applicable to the company under general instruction i.b.6 . of form s-3 . sales of the company 's common stock through the agents will be made by any method that is deemed to be an “ at-the-market ” equity offering as defined in rule 415 promulgated under the securities act of 1933 , as amended . as of june 30 , 2020 , we sold 372,742 shares of common stock under the sales agreement at an average approximate price of $ 1.17 per share for gross proceeds of $ 436,783. after deducting transaction fees and commissions and all other costs , we received net proceeds of $ 312,518. in february 2020 , the company submitted a revised poo to the blm outlining the company 's plans to build and operate the proposed grassy mountain underground gold mine located in malheur county , eastern oregon . the blm will review the poo for completeness , which is expected to take 30 days , and will subsequently provide the company with comments , if any . story_separator_special_tag the programs planned include : 1 ) a review of all geological , geochemical and geophysical data for the purposes of generating targets for exploration drilling to locate additional higher-grade mineralization in the close proximity of the original sleeper pit or in the large mining claim package owned by the company . ; ( 2 ) evaluate the various successful metallurgical tests , previously conducted on the sulfide bearing mineralized material in order to optimize the best economic alternatives and increase the number of gold ounces produced in a proposed mining scenario . this could include bio or alkaline oxidation in a heap leach scenario , flotation and oxidation and gold recoveries from concentrates . ; and ( 3 ) update the resource estimation and preliminary economic assessment with the best alternatives identified for the project . these exploration programs are expected to cost approximate $ 0.5 million to $ 0.75 million . the company is also budgeting $ 0.75 million for claim management and general and administration expenses at the sleeper gold project . if all exploration programs are completed the total budget for fiscal year ended june 30 , 2021 will be approximately $ 1.25 to $ 1.50 million . frost project : the company will implement an initial reverse circulation drill program to test historical drill results and additional selective targets . the estimated budget to complete the drill program , assay lab testing and geological model is approximately $ 0.5 million . comparison of operating results for the year ended june 30 , 2020 as compared to june 30 , 2019 story_separator_special_tag align= '' left '' > cash used to purchase computer equipment of $ 4,719 ; cash received from equity financings , convertible debt financing and issuance of a promissory note of $ 10,120,401. we anticipate our twelve-month cash expenditures for our fiscal year ending june 30 , 2021 to be as follows : $ 1.8 million on corporate administration expenses ( expenses include executive management and employee salaries , legal , audit , marketing and other general and administrative expenses ) $ 1.25 million to $ 1.50 million on the sleeper gold project ( exploration programs , expenses include reclamation costs , employee salary and benefits , and land holding costs ) $ 2.4 million on the grassy mountain project and frost project ( expenses include consulting fees , land holding costs and general and administration expenses , environmental impact statement preparation , and costs associated with the state of oregon permit revised cpa ) our anticipated expenditures will be funded by our cash on hand and other capital resources . historically , we and other similar exploration and development public companies have accessed capital through equity financing arrangements or by the sale of royalties on its mineral properties . if , however we are unable to obtain additional capital or financing , our exploration and development activities will be significantly adversely affected . contractual obligations the following table summarizes our obligations and commitments as of june 30 , 2020 to make future payments under certain contracts , aggregated by category of contractual obligation , for specified time periods : replace_table_token_4_th critical accounting policies management considers the following policies to be most critical in understanding the judgments that are involved in preparing the company 's consolidated financial statements and the uncertainties that could impact the results of operations , financial condition and cash flows . our financial statements are affected by the accounting policies used and the estimates and assumptions made by management during their preparation . management believes the company 's critical accounting policies are those related to mineral property acquisition costs , exploration and development cost , stock-based compensation , derivative accounting and foreign currency translation . estimates the company prepares its consolidated financial statements and notes in conformity to united states generally accepted accounting principles ( “ u.s . gaap ” ) and requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the reported amounts of revenue and expenses during the reporting period . on an ongoing basis , management evaluates these estimates , including those related to allowances for doubtful accounts receivable and long-lived assets . management bases these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances , the results of which form the basis of making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . mineral property acquisition costs the company capitalizes the cost of acquiring mineral properties and will amortize these costs over the useful life of a property following the commencement of production or expense these costs if it is determined that the mineral property has no future economic value or the properties are sold or abandoned . costs include cash consideration and the fair market value of shares issued on the acquisition of mineral properties . properties acquired under option agreements , whereby payments are made at the sole discretion of the company , are recorded in the accounts of the specific mineral property at the time the payments are made . 27 the amounts recorded as mineral properties reflect actual cost s incurred to acquire the properties and do not indicate any present or future value of economically recoverable reserves . exploration expenses we record exploration expenses as incurred . when we determine that precious metal resource deposit can be economically and legally extracted or produced based on established proven and probable reserves , further exploration expenses related to such reserves incurred after such a determination will be capitalized . to date , we have not established any proven or probable reserves and will continue to expense exploration costs as incurred . asset retirement obligation the fair value of the company 's asset retirement obligation ( “ aro ” ) is measured by discounting the
| results of operations we did not earn any revenue from mining operations for the years ended june 30 , 2020 and 2019. during the year ended june 30 , 2020 , we completed various activities and milestones as described above in operating highlights . other normal course of business activities included filing annual mining claim fees with the blm , reclamation work at the sleeper mine site and on-going reviews of its mining claims were completed . net loss our net loss for the year ended june 30 , 2020 was $ 6,430,141 compared to a net loss of $ 5,970,048 in the previous year . the increase of approximately 8 % is fully described below . we will continue to incur losses for the foreseeable future as we continue with our planned exploration and development programs . 25 expenses exploration and land holding costs for the year ended june 30 , 2020 , exploration expenses were $ 4,201,138 compared to $ 3,558,663 in the prior year . this represents an increase of 18 % or $ 642,475. in the current fiscal year , the company submitted the consolidated mining permit application with the state of oregon and submitted a revised poo for its grassy mountain project . it also continued to work on its previously announced feasibility study for the grassy mountain project . total exploration expenses at grassy mountain during the year were $ 3,348,180 . included were expenses of $ 723,279 related to the company 's reclamation activities at the sleeper project to reclaim various water collection ponds from the past mining operation . these reclamation expenses are reimbursed from funds held in a commutation account as part of the company 's insurance program for outstanding reclamation and environmental obligations at the sleeper gold project . for the year ended june 30 , 2019 , the company developed mine design plans required to satisfy permit application requirements at the grassy mountain project .
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carolina re is also the cedent on a stop loss reinsurance treaty with jrg re . basis of presentation and principles of consolidation the consolidated financial statements are prepared in accordance with u.s. generally accepted accounting principles ( “ gaap ” ) , which vary in some story_separator_special_tag the following discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties , including those described under the heading “ risk factors. ” actual results may differ materially from those contained in any forward-looking statements . you should read this discussion and analysis together with our audited consolidated financial statements and related notes included elsewhere in this form 10-k. overview james river group holdings , ltd. is a bermuda-based holding company . we own and operate a group of specialty insurance and reinsurance companies with the objective of generating compelling returns on tangible equity while limiting underwriting and investment volatility . we seek to accomplish this by earning profits from insurance and reinsurance underwriting and generating meaningful risk-adjusted investment returns , while managing our capital . for the year ended december 31 , 2020 , approximately 70.2 % of our group-wide gross written premiums originated from the u.s. e & s lines market including business assumed by our casualty reinsurance segment . we also have a specialty admitted insurance business in the united states . we intend to concentrate substantially all of our underwriting in casualty insurance and reinsurance , and for the year ended december 31 , 2020 , we derived 97.0 % of our group-wide gross written premiums from casualty insurance and reinsurance . we focus on writing business in specialty markets where our underwriters have particular expertise and where we have long-standing distribution relationships ; maintaining a strong balance sheet with appropriate reserves ; monitoring reinsurance recoverables carefully ; managing our investment portfolio actively without taking undue risk ; using technology to monitor trends in our business ; responding rapidly to market opportunities and challenges ; and actively managing our capital . we report our business in four segments : excess and surplus lines , specialty admitted insurance , casualty reinsurance and corporate and other . the excess and surplus lines segment offers e & s commercial lines liability and property insurance in every u.s. state , the district of columbia , puerto rico and the u.s. virgin islands through james river insurance and its wholly-owned subsidiary , james river casualty . james river insurance and james river casualty are both non-admitted carriers . non-admitted carriers writing in the e & s market are not bound by most of the rate and form regulations imposed on standard market companies , allowing them flexibility to change the coverage terms offered and the rate charged without the time constraints and financial costs associated with the rate and form filing process . in 2020 , the average account in this segment ( excluding commercial auto policies ) generated annual gross written premiums of approximately $ 24,000. the excess and surplus lines segment distributes primarily through wholesale insurance brokers . members of our management team have participated in this market for over three decades and have long-standing relationships with the wholesale agents who place e & s lines accounts . the excess and surplus lines segment produced 55.6 % of our gross written premiums and 69.6 % of our net written premiums for the year ended december 31 , 2020. the specialty admitted insurance segment focuses on niche classes within the standard insurance markets , such as workers ' compensation coverage for building trades , healthcare employees , light manufacturing and other light-to-medium hazard risks in select u.s. states and fronting business , where we retain a small percentage of the risk and seek to earn fee income by allowing other carriers and producers to use our licensure , ratings , expertise and infrastructure . through falls lake national and its subsidiaries , this segment has admitted licenses and the authority to write excess and surplus lines insurance in 50 states and the district of columbia and distributes through a variety of sources , including independent retail agents , program administrators and mgas . the specialty admitted insurance segment produced 32.5 % of our gross written premiums and 9.2 % of our net written premiums for the year ended december 31 , 2020. the casualty reinsurance segment provides proportional and working layer casualty reinsurance to third parties and to our u.s.-based insurance subsidiaries . typically , we structure our reinsurance contracts ( also known as treaties ) as quota share arrangements , with loss mitigating features , such as commissions that adjust based on underwriting results . we frequently include risk mitigating features in our working layer excess of loss treaties , such as paid reinstatements , which allow the ceding company to capture a greater percentage of the profits should the business prove more profitable than expected , or alternatively , with additional premiums should the business incur higher than expected losses . we believe these structures best align our interests with the interests of our cedents . on a net premium volume basis , treaties with loss mitigation features including sliding scale ceding commissions represented 68.3 % of the net premiums written by our casualty reinsurance segment during 2020. we typically do not assume large individual risks in our casualty reinsurance segment , nor do we write property catastrophe reinsurance . most of the underlying policies assumed by our casualty reinsurance segment have a $ 1.0 million per occurrence limit , and we typically assume only a portion of that exposure . we believe this structure reduces volatility in our underwriting results . we do not assume stand-alone third-party property business at our casualty reinsurance segment , but we do have a small amount of assumed business with ancillary property exposure . 72.1 % of gross premiums written by our 71 casualty reinsurance segment during 2020 were general liability accounts . the casualty reinsurance segment distributes through reinsurance brokers . story_separator_special_tag the company 's gross reserve for losses and loss adjustment expenses by segment are summarized as follows : replace_table_token_14_th the company 's net reserve for losses and loss adjustment expenses prior to the $ 335,000 allowance for credit losses on reinsurance recoverables at december 31 , 2020 was $ 1,386.1 million . of this amount , 55.3 % relates to ibnr . the company 's net reserve for losses and loss adjustment expenses by segment are summarized as follows : replace_table_token_15_th our reserve committees consist of our chief actuary , chief executive officer , chief operating officer , chief financial officer , and chief accounting officer . additionally , the presidents , chief financial officers and chief actuaries of each of our three insurance segments are also members of the reserve committee for their respective segments . the reserve committees meet quarterly to review the actuarial recommendations made by each chief actuary and use their best judgment to determine the best estimate to be recorded for the reserve for losses and loss adjustment expenses on our quarterly balance sheet . the reserve committee believes that using judgment to supplement the actuarial recommendations is necessary to arrive at a best estimate given the nature of the business that we write and the limited operating experience of the casualty reinsurance segment , the fronting and program business in the specialty admitted insurance segment and the commercial auto underwriting division in the excess and surplus lines segment . the process of estimating the reserve for losses and loss adjustment expenses requires a high degree of judgment and is subject to a number of variables . in establishing the quarterly actuarial recommendation for the reserve for losses and loss adjustment expenses , our internal actuaries estimate an initial expected ultimate loss ratio for each of our product lines by accident year ( or for our casualty reinsurance segment , on a contract by contract basis ) . input from our underwriting and claims departments , including premium pricing assumptions and historical experience , are considered by our internal actuaries in estimating the initial expected loss ratios . our actuaries generally utilize five actuarial methods in their estimation process for the reserve for losses and loss adjustment expenses . these five methods utilize , to varying degrees , the initial expected loss ratio , detailed statistical analysis of past claims reporting and payment patterns , claims frequency and severity , paid loss experience , industry loss experience , and changes in market conditions , policy forms , exclusions , and exposures . the five actuarial methods that we use in our reserve estimation process are : expected loss method the expected loss method multiplies earned premiums by an initial expected loss ratio . incurred loss development method the incurred loss development method uses historical loss reporting patterns to estimate future loss reporting patterns . in this method , our actuaries apply historical loss reporting patterns to develop incurred loss development factors that are applied to current reported losses to calculate expected ultimate losses . 73 paid loss development method the paid loss development method is similar to the incurred loss development method , but it uses historical loss payment patterns to estimate future loss payment patterns . in this method , our actuaries apply historical loss payment patterns to develop paid loss development factors that are applied to current paid losses to calculate expected ultimate losses . bornhuetter-ferguson incurred loss development method the bornhuetter-ferguson incurred loss development method divides the projection of ultimate losses into the portion that has already been reported and the portion that has yet to be reported . the portion that has yet to be reported is estimated as the product of premiums earned for the accident year , the initial expected ultimate loss ratio and an estimate of the percentage of ultimate losses that are unreported at the valuation date . bornhuetter-ferguson paid loss development method the bornhuetter-ferguson paid loss development method is similar to the bornhuetter-ferguson incurred loss development method , except this method divides the projection of ultimate losses into the portion that has already been paid and the portion that has yet to be paid . the portion that has yet to be paid is estimated as the product of premiums earned for the accident year , the initial expected ultimate loss ratio and an estimate of the percentage of ultimate losses that are unpaid at the valuation date . different reserving methods are appropriate in different situations , and our actuaries use their judgment and experience to determine the weighting of the methods detailed above to use for each accident year and each line of business and , for our casualty reinsurance segment , on a contract by contract basis . for example , the current accident year has very little incurred and paid loss development data on which to base reserve projections . as a result , we rely heavily on the expected loss method in estimating reserves for the current accident year . we generally set our initial expected loss ratio for the current accident year consistent with our pricing assumptions . we believe that this is a reasonable and appropriate reserving assumption for the current accident year since our pricing assumptions are actuarially driven and since we expect to make an acceptable return on the new business that we write . if actual loss emergence is better than our initial expected loss ratio assumptions , we will experience favorable development , and if it is worse than our initial expected loss ratio assumptions , we will experience adverse development . conversely , sufficient incurred and paid loss development is available for our oldest accident years , so more weight is given to the incurred loss development method and the paid loss development method than the expected loss method . the bornhuetter-ferguson incurred loss development and paid loss development methods blend features of the expected loss method and the incurred and paid loss development methods . the bornhuetter-ferguson methods are typically used for the more recent prior accident years .
| underwriting results the following table compares our combined ratios by segment : replace_table_token_23_th excess and surplus lines segment results for the excess and surplus lines segment are as follows : replace_table_token_24_th ( 1 ) underwriting profit is a non-gaap measure . see “ reconciliation of non-gaap measures ” for a reconciliation to income before tax and for additional information . ( 2 ) underwriting results include gross fee income of $ 1.6 million and $ 9.1 million for the years ended december 31 , 2020 and 2019 , respectively . the loss ratios of 76.7 % and 84.4 % for the years ended december 31 , 2020 and 2019 include $ 59.4 million and $ 51.2 million ( 14.3 and 8.2 percentage points , respectively ) of net adverse development in our loss estimates for prior accident years . the net adverse reserve development included $ 91.4 million and $ 57.4 million , respectively , of adverse development in the commercial auto line of business that was primarily related to rasier , which was terminated effective december 31 , 2019. the net adverse reserve development for commercial auto was partially offset by net favorable development on prior accident years in our core e & s divisions of $ 32.0 million and $ 6.2 million for the years ended december 31 , 2020 and 2019 , respectively , and a reduction of the 2020 accident year loss ratio for core e & s to reflect a significant decline in claims frequency experienced in the most recent year . 84 the expense ratio for this segment increased from 12.5 % in 2019 to 21.0 % for 2020 due to the termination of the rasier commercial auto business effective december 31 , 2019 ( the rasier business carried higher loss ratios , but lower expense ratios ) . this was partially offset by a 28.1 % increase in core e & s net earned premiums including in lines that have meaningful ceding commissions .
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the risk-free interest rate assumption is based upon observed interest rates on the united states government securities appropriate for the expected term of our employee stock story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read together with `` selected consolidated financial data '' and our audited consolidated financial statements and accompanying notes included elsewhere in this filing . this discussion contains forward-looking statements , based on current expectations and related to our plans , estimates , beliefs and anticipated future financial performance . these statements involve risks and uncertainties and our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors , including those set forth under `` risk factors , '' `` forward-looking statements '' and elsewhere in this filing . overview we believe we are the leading global provider of commercial mobile wi-fi internet solutions and indoor das services for carriers . our software applications and solutions enable individuals to access our extensive global wi-fi networks that cover more than one million hotspots . we manage and operate an indoor das network which contains 8,400 nodes . our offerings provide compelling cost and performance advantages to our customers and partners . we grew revenue from $ 106.7 million in 2013 to $ 119.3 million in 2014 , an increase of 11.8 % . we grew revenue from $ 102.5 million in 2012 to $ 106.7 million in 2013 , an increase of 4.1 % . we generated a net loss attributable to common stockholders of $ 19.5 million in 2014 compared to $ 4.0 million in 2013. adjusted ebitda decreased from $ 23.8 million in 2013 to $ 20.3 million in 2014 , a decrease of 14.7 % . for a discussion of adjusted ebitda and a reconciliation of net ( loss ) income attributable to common stockholders to adjusted ebitda , see footnote 1 to `` selected financial data '' in part ii , item 6. the proliferation of smartphones , tablet computers , laptops and other wi- fi enabled devicesin conjunction with the increased mobile consumption of streaming media , social networking , downloading large email attachments and video callinghas created a demand for high-speed , high-bandwidth internet access in public places both large and small . these data intensive activities are driving a global surge in mobile internet data traffic that is expected to increase 10 times between 2014 and 2019 , according to cisco 's visual networking index . we believe these trends present us with opportunities to generate significant growth in revenue and profitability . 32 critical accounting policies and estimates the preparation of financial statements in conformity with gaap and rules and regulations of the united states securities and exchange commission ( `` sec '' ) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities , as well as the disclosure of contingent assets and liabilities , at the date of the financial statements . such estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period . although we believe these estimates are reasonable , actual results could differ from these estimates . on a regular basis , we evaluate our assumptions , judgments and estimates . we also discuss our critical accounting policies and estimates with the audit committee of the board of directors . we believe that the assumptions and estimates associated with revenue recognition , business combinations , goodwill , measuring recoverability of long-lived assets , stock-based compensation and income taxes have the greatest potential impact on our consolidated financial statements . therefore , we believe the accounting policies discussed below are paramount to understanding our historical and future performance , as these policies relate to the more significant areas involving our management 's judgments , assumptions and estimates . revenue recognition we generate revenue from several sources including : ( i ) retail and military customers under subscription plans for month-to-month network access that automatically renew , and retail and military single-use access from sales of hourly , daily or other single-use access plans , ( ii ) das customers that are telecom operators under long-term contracts for access to our das at our managed and operated locations , ( iii ) arrangements with wholesale wi-fi customers that provide software licensing , network access , and or professional services fees , and ( iv ) display advertisements and sponsorships on our walled garden sign-in pages . software licensed by our wholesale wi-fi platform services customers can only be used during the term of the service arrangements and has no utility to them upon termination of the service arrangement . we recognize revenue when an arrangement exists , services have been rendered , fees are fixed or determinable , no significant obligations remain related to the earned fees and collection of the related receivable is reasonably assured . subscription fees from retail and military customers are paid monthly in advance and revenue is deferred for the portions of monthly recurring subscription fees collected in advance . we provide refunds for our retail and military services on a case-by-case basis . these amounts are not significant and are recorded as contra-revenue in the period the refunds are made . subscription fee revenue is recognized ratably over the subscription period . revenue generated from retail and military single-use access is recognized when access is provided . revenue generated from access to our das networks consists of build-out fees and recurring access fees under certain long-term contracts with telecom operators . build-out fees paid upfront are generally deferred and recognized ratably over the term of the estimated customer relationship period , once the build-out is complete . periodically , we install and sell wi-fi and das networks to customers where we do not have service contracts or remaining obligations beyond the installation of those networks and we recognize build-out fees for such projects as revenue when the installation work is completed and the network has been accepted by the customer . story_separator_special_tag if the fair value of the reporting unit exceeds its carrying amount , goodwill is considered not impaired ; otherwise , there is an indication that goodwill may be impaired and the amount of the loss , if any , is measured by performing step two . under step two , the impairment loss , if any , is measured by comparing the implied fair value of the reporting unit goodwill with the carrying amount of goodwill . at december 31 , 2014 and 2013 , we tested our goodwill for impairment using a market based approach and no impairment was identified as the fair value of our sole reporting unit was substantially in excess of its carrying amount . to date , we have not recorded any goodwill impairment charges . measuring recoverability of long-lived assets we perform an impairment review of long-lived assets held and used whenever events or changes in circumstances indicate that the carrying value may not be recoverable . factors we consider important that could trigger an impairment review include , but are not limited to , significant under-performance relative to projected future operating results , significant changes in the manner of our use of the acquired assets or our overall business and or product strategies and significant industry or economic trends . when we determine that the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of these indicators , we determine the recoverability by comparing the carrying amount of the asset to net future undiscounted cash flows that the asset is expected to generate or other indices of fair value . we would then recognize an impairment charge equal to the amount by which the carrying amount exceeds the fair market value of the asset . stock-based compensation stock-based compensation consists of stock options and restricted stock units ( `` rsus '' ) , which are granted to employees and non-employees . we recognize compensation expense equal to the grant date fair value on a straight-line basis , net of estimated and actual forfeitures , over the employee requisite service period . the grant date fair value of our stock option awards is determined using the black-scholes option pricing model . income taxes income taxes are provided based on the liability method , which results in income tax assets and liabilities arising from temporary differences . temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years . the liability method requires the effect of tax rate changes on current and accumulated deferred income taxes to be reflected in the period in which the rate change was enacted . the liability method also requires that deferred tax assets be reduced by a valuation allowance unless it is more likely than not that the assets will be realized . 35 we may recognize the tax benefit from uncertain tax positions only if it is at least more likely than not that the tax position will be sustained on examination by the taxing authorities , based on the technical merits of the position . the tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50 % likelihood of being realized upon settlement with the taxing authorities . we establish valuation allowances when necessary to reduce deferred tax assets to the amounts expected to be realized . we evaluate the need for , and the adequacy of , valuation allowances based on the expected realization of our deferred tax assets . the factors used to assess the likelihood of realization include historical earnings , our latest forecast of taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets . our effective tax rates are primarily affected by changes in our valuation allowances , the amount of our taxable income or losses in the various taxing jurisdictions in which we operate , the amount of federal and state net operating losses and tax credits , the extent to which we can utilize these net operating loss carryforwards and tax credits and certain benefits related to stock option activity . recent accounting pronouncements information regarding recent accounting pronouncements is contained in note 2 `` significant accounting policies '' to the accompanying consolidated financial statements included in part ii , item 8 , which is incorporated herein by this reference . key business metrics in addition to monitoring traditional financial measures , we also monitor our operating performance using key performance indicators . in 2014 , we updated our presentation of revenue sources to differentiate our individual users based on the nature of the usersretail users who purchase internet access at our managed and operated hotspots and select partner locations or military users who purchase internet access or iptv services for individual use on u.s. military bases . accordingly , we have disaggregated our subscribers between our retail and military users . we have also removed monthly churn , which was defined as the number of subscribers who canceled their subscriptions in a given month , expressed as a percentage of the average subscribers in that month , as a key performance indicator as we no longer view monthly churn as a key business metric . our key performance indicators follow : replace_table_token_9_th subscribers retail and subscribers military . this metric represents the number of paying customers who are on a month-to-month subscription plan at a given period end . connects . this metric shows how often individuals connect to our global wi-fi network in a given period . the connects include retail and wholesale customers in both customer pay locations and customer free locations where we are a paid service provider or receive sponsorship or promotion fees .
| results of operations the following tables set forth our results of operations for the specified periods . replace_table_token_10_th depreciation and amortization expense depreciation expense increased $ 8.5 million , or 44.9 % , in 2014 , as compared to 2013 , primarily due to increased depreciation and amortization expense from our increased fixed assets for our das projects , wi-fi networks , and software development in 2014. depreciation expense increased $ 3.0 million , or 18.7 % , in 2013 , as compared to 2012 , primarily due to increased depreciation and amortization expense from our increased fixed assets for our das projects , wi-fi networks , and software development in 2013. the increase in 2013 was offset by $ 1.3 million from a short term das build-out project that was completed during 2012. depreciation expense included $ 0.1 million of expenses related to awg , which was acquired in october 2013 . 40 stock-based compensation expense stock-based compensation expense increased $ 2.7 million , or 59.0 % , in 2014 , as compared to 2013 , primarily due to a $ 2.8 million increase in stock-based compensation expenses for rsus granted to our employees and directors in 2014. we are shifting our share-based compensation from stock options to rsus , which generally vest over a specified service period . during 2014 , we also issued performance-based rsus to executive personnel . we recognize stock-based compensation expense for performance-based rsus when we believe that it is probable that the performance objectives will be met . stock-based compensation expense increased $ 1.8 million , or 64.8 % , in 2013 , as compared to 2012 , primarily due to $ 1.8 million of stock-based compensation expenses for rsus granted to our employees and directors in 2013. the following table sets forth our results of operations for the specified periods as a percentage of our revenue for those periods .
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milestone payments may be required , for example , upon approval of the product for marketing by a regulatory agency , and the company may be required to make royalty payments based upon a percentage of net sales of the product . the expenditures required under these arrangements in any period may be material and are likely to fluctuate from period to period . these arrangements story_separator_special_tag you should read the following discussion in conjunction with the consolidated financial statements and the notes to consolidated financial statements included elsewhere in this annual report on form 10-k. this discussion contains forward-looking statements within the meaning of federal securities laws . such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in such forward-looking statements , including those discussed in the section risk factors in part i item 1a of this annual report on form 10-k. please see part i , item 1 businesscollaboration and license agreements and note 6 to our audited consolidated financial statements appearing elsewhere in this annual report on form 10-k for more information relating to such arrangements . recent developments merger of galena biopharma , inc. , or galena and sellas life sciences group ltd. on december 29 , 2017 , we completed the business combination with private sellas , in accordance with the terms of the merger . we refer to this business combination throughout this annual report on form 10-k as the merger . as a result of the merger , our business is now substantially comprised of the business of private sellas , and although we are are considered the legal acquiror of private sellas , for accounting purposes , private sellas is considered have acquired our company in the merger . consequently , the merger is accounted for as a reverse acquisition and our financial statements are now those of private sellas . immediately prior to the merger , we effected a 1-for-30 reverse stock split of our outstanding common stock . under the terms of the merger agreement , we issued shares of our common stock to private sellas ' securityholders at an exchange ratio of 43.9972 shares of our common stock in exchange for each common share of private sellas outstanding immediately prior to the merger . we also assumed all of the restricted stock units , or rsus issued and outstanding under the private sellas stock incentive plan # 1 , and all of the issued and outstanding warrants of private sellas . accordingly , such rsus will now be settled in , and such warrants now are exercisable for , shares of our common stock . accordingly , immediately after the merger , there were approximately 5,766,891 shares of our common stock outstanding , with the former private sellas securityholders owning approximately 67.5 % of our fully diluted common stock , and our pre-merger securityholders owning the remaining approximately 32.5 % . upon completion of the merger , we changed our name from galena biopharma , inc. to sellas life sciences group , inc and our common stock began trading on the nasdaq capital market under a new ticker symbol sls on january 2 , 2018 , and our financial statements became those of private sellas . private placement of series a 20 % convertible preferred stock and warrants in march 2018 , we entered into a securities purchase agreement with investors pursuant to which we agreed to sell to the investors , in a private placement pursuant to rule 4 ( a ) ( 2 ) and regulation s under the securities act of 1933 , as amended , an aggregate of 10,700 shares of our newly-created non-voting series a convertible preferred and warrants to acquire an aggregate 1,383,631 shares of our common stock at an aggregate purchase price of $ 10.7 million . the series a convertible preferred is initially convertible into 1,844,835 shares of our common stock based on an initial conversion price of $ 5.80 per share , the conversion price of the series a convertible preferred and the exercise price of the warrants are both subject to adjustment for certain transactions affecting our securities ( such as stock dividends , stock splits , and the like ) . until consummation of a qualified offering ( as such term is defined in the applicable documents ) , the conversion price and exercise price ( for a one-year period after consummation of such qualified offering ) are also subject to anti-dilution price protection in the event of non-exempt equity issuances at a price per share lower than the then applicable conversion or exercise price , as the case may be . if we have not consummated a qualified offering on or before september 9 , 2018 ( the six month anniversary of the first closing ) , on each of the six month anniversary of the first and the second closings , the conversion price is reduced to the lesser of ( x ) the then applicable conversion price , ( y ) $ 3.00 ( subject to adjustment for forward and reverse stock splits and the like ) and ( z ) the lowest volume weighted average price , or vwap , or for any trading day during the five trading days immediately following each such adjustment date . 89 at the first closing of the of the private placement on march 9 , 2018 , we issued an aggregate 5,987 shares of series a convertible preferred and warrants to acquire 774,186 shares of our common stock for aggregate gross proceeds of $ 6.0 million . the second closing of the remaining 4,713 shares of series a convertible preferred and warrants to acquire an aggregate of 609,445 shares of our common stock , for aggregate gross proceeds of $ 4.7 million , will occur within five business days of receipt of necessary stockholder approval under the applicable rules and regulations of the nasdaq stock market llc . story_separator_special_tag under the terms of the current amended and restated msk license agreement , we agreed to pay minimum royalty payments in the amount of $ 0.1 million each year commencing in 2015 and research funding costs of $ 0.2 million in each year and for three years commencing in january 2016. we also agreed to pay msk a mid-six digit amount over a one year period in exchange for msk 's agreement to further amend and restate the msk license agreement in october 2017. in addition , to the extent certain development and commercial milestones are achieved , we also agreed to pay msk up to $ 17.4 million in aggregate milestone payments for each licensed product , and for each additional patent licensed product , up to $ 2.8 million in additional milestone payments . we also agreed to pay msk a tiered royalty in the mid-single digits in the event of commercial sales of any licensed products and agreed to raise $ 25.0 million in gross proceeds no later than december 31 , 2018. in the event we do not raise such amount by december 31 , 2018 , msk may terminate the license agreement after complying with the notice and cure periods of the agreement , or msk may elect to receive additional shares of our capital stock in an amount equal to 1.5 % of our then fully diluted share capital , which would stay the right to terminate for a period of time . unless terminated earlier in accordance with its terms , the msk license agreement as amended and restated , will continue on a country-by-country and licensed product-by-licensed product basis , until the later of : ( a ) expiration of the last valid claim embracing such licensed product ; ( b ) expiration of any market exclusivity period granted by law with respect to such licensed product ; or ( c ) ten ( 10 ) years from the first commercial sale in such country . for additional information on our collaboration arrangement with msk , please read note 6 , collaborative and license agreements , to our consolidated financial statements included in this report . merck & co. , inc. in september 2017 , we entered into a clinical trial collaboration and supply agreement through a merck subsidiary , whereby we agreed with the merck subsidiary to collaborate on a research program to evaluate gps as it is administered in combination with their pd1 blocker pembrolizumab ( keytruda ) in a phase 1/2 clinical trial enrolling patients in up to five cancer indications , including both hematologic malignancies and solid tumors . the phase 1/2 clinical trial will utilize a combination of gps plus pembrolizumab ( keytruda ) in patients with wt1+ relapsed or refractory tumors . specifically , the study is expected to explore the following cancer indications : colorectal ( arm enriched in but not exclusive to patients with microsatellite instability-low ) , ovarian , small cell lung , triple-negative breast , and aml . this study will assess the efficacy and safety of the combination , comparing overall response rates and immune response markers achieved with the combination compared to prespecified rates based on those seen with pemrolizumab alone in comparable patient populations . the trial is anticipated to begin in the third quarter of 2018 ( pending funding availability ) . advaxis , inc. in february 2017 , we entered into a research and development collaboration agreement with advaxis , inc. whereby we agreed to collaborate in a research program to evaluate , through a proof of principle trial , or pop trial , a clinical candidate comprised of the combination of advaxis ' proprietary lm-based antigen delivery technology and gps , our wt1 peptide . unless terminated earlier in accordance with its terms , the advaxis agreement will expire upon the earlier of : ( a ) completion of the pop trial , ( b ) a decision by the parties to cease further development of the clinical candidate or ( c ) early termination pursuant to the terms of the advaxis agreement . 91 the advaxis agreement provides for cost-sharing between the parties , with advaxis being responsible for the costs of performing the research activities and filing any ind , cost-sharing for preparation of the ind , and us being responsible for the costs ( exclusive of product costs ) of conducting the pop trial . we also agreed to make certain non-refundable milestone payments to advaxis having an aggregate amount of up to $ 108.0 million , upon meeting certain clinical , regulatory and commercial milestones . in addition , if net sales exceed certain targets , we agreed to make non-refundable sales milestone payments up to $ 250.0 million and royalty payments based on specific royalty rates , with a maximum rate capped at a percentage rate in the low double digits if net sales exceed $ 1.0 billion . the university of texas m. d. anderson cancer center and the henry m. jackson foundation for the advancement of military medicine , inc. in conjunction with the merger and the acquisition of neuvax , we acquired rights and assumed obligations under a license agreement among apthera and mdacc and hjf which grants exclusive worldwide rights to a united states patent covering the nelipepimut-s peptide and several united states and foreign patents and patent applications covering methods of using the peptide as a vaccine . biovascular , inc. license agreement in conjunction with the merger , we acquired worldwide rights to anagrelide cr formulation , gale-401 , through our acquisition and mills became a wholly owned subsidiary , mills . gale-401 contains the active ingredient anagrelide , an fda-approved product that has been in use since the late 1990s for the treatment of mpns . mills holds an exclusive license to develop and commercialize anagrelide cr formulation , pursuant to the license agreement and its amendment with biovascular . story_separator_special_tag and have funded substantially all of our operations through proceeds of private placements and convertible notes .
| components of our results of operations research and development expense research and development expense consists of expenses incurred in connection with the discovery and development of our product candidates . we expense research and development costs as incurred . these expenses include : expenses incurred under agreements with cros , as well as investigative sites and consultants that conduct our preclinical studies and clinical trials ; manufacturing expenses ; outsourced professional scientific development services ; employee-related expenses , which include salaries , benefits and stock-based compensation ; payments made under a third-party assignment agreement , under which we acquired intellectual property ; expenses relating to regulatory activities , including filing fees paid to regulatory agencies ; laboratory materials and supplies used to support our research activities ; and allocated expenses , utilities and other facility-related costs . 92 the successful development of our current and future product candidates is highly uncertain . at this time , we can not reasonably estimate or know the nature , timing and costs of the efforts that will be necessary to complete the remainder of the development of , or when , if ever , material net cash inflows may commence from any current or future product candidates . this uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials , which vary significantly over the life of a project as a result of many factors , including : the number of clinical sites included in the trials ; the length of time required to enroll suitable patients the number of patients that ultimately participate in the trials ; the number of doses patients receive ; the duration of patient follow-up ; the results of our clinical trials ; the expenses associated with manufacturing ; the receipt of marketing approvals ; and the commercialization of current and future product candidates . our expenditures are subject to additional uncertainties , including the terms and timing of regulatory approvals .
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our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors , including those set forth in the section of this annual report entitled “ risk factors. ” overview our mission is to revolutionize vertical industry businesses by providing great software and services . to that end , today we offer industry-specific , cloud-based business software solutions , services and data analytics to the real estate market , which comprises a significant majority of our revenue , and , to a lesser extent , to the legal market . we were formed in 2006 with a vision to revolutionize the way that small and medium-sized businesses , or smbs , grow and compete by enabling their digital transformation . in 2008 , we entered the real estate market with our first product , appfolio property manager , a property management solution designed to address the unique operational and business requirements of property management companies . in 2012 , we entered the legal market with the acquisition of mycase , a legal practice and case management solution primarily for small law firms . recognizing that our customers and their stakeholders would benefit from additional business-critical services , we launched a series of value+ services beginning in 2009. through our market validation approach and ongoing investment in product development , we continuously update our software solutions with new and innovative core functionality and value+ services , as well as assess opportunities in adjacent markets and new verticals . 36 our real estate software solutions provide our property manager customers with a system of record to automate essential business processes , a system of engagement to enhance business interactions between our customers and their clients and other stakeholders , and a system of intelligence to leverage data to predict and optimize business workflows in order to enable superior customer experiences and increase efficiency across our customers ' businesses . we also provide software solutions to the legal market that enable law firms to administer their practice and manage their caseloads more efficiently by centralizing case details and communications in a single system . we have focused on growing our revenue by increasing the size of our customer base in the markets we serve , increasing the number of units under management , introducing new or expanded value+ services , retaining customers , and increasing the adoption and utilization of our value+ services by new and existing customers . to date , we have experienced rapid revenue growth due to our investments in research and product development , sales and marketing , customer service and support , and infrastructure . we intend to continue to invest in growth across our organization as we expand in our current markets , adjacent markets and into new verticals . these investments to grow our business will continue to increase our costs and operating expenses on an absolute basis . many of these investments will occur in advance of our realization of revenue or any other benefit , which will make it difficult to determine if we are allocating our resources efficiently . we expect our operating margins will improve over the long term , but this trend may be interrupted from time to time as a result of accelerated investment opportunities occurring in advance of realization of revenue . we have managed , and plan to continue to manage , our business towards the achievement of long-term growth that we believe will positively impact long-term stockholder value , and not towards the realization of short-term financial or business metrics , or short-term stockholder value . accordingly , if opportunities arise that might cause us to sacrifice our performance with respect to short-term financial or business metrics , but that we believe are in the best interests of our stockholders in the long term , we will take those opportunities . our property management software solution for the real estate market provides property managers of various sizes ( including third-party managers , owner-operators and real estate investors ) innovative tools and services designed to streamline their property management businesses . our software solution serves a variety of property types , including single- and multi-family residential , commercial , community association , and student housing , and is continuously evolving to help our customers more effectively market , manage and grow their businesses . core functionality addresses key operational issues , including accounting and business analytics and management , marketing and leasing functionality , and communications with key stakeholders , among others . further , we recently released appfolio property manager plus , a new tier of our property management software solution with an expanded suite of capabilities designed to enable our customers to obtain insights and make strategic decisions to drive performance of their businesses at scale . today our real estate property manager customers directly and indirectly account for more than 90 % of our annual revenue . we define our real estate property manager customer base as the number of customers subscribing to our core solutions . customer count and property manager units under management are presented in the table below : replace_table_token_2_th our legal software solution , mycase , enables small law firms to administer their practices and manage their caseloads more efficiently . mycase is continuously evolving to help our customers more effectively market , manage and grow their businesses , and contains core functionality that addresses key operational issues , including managing calendars , contacts and documents , time tracking , billing and collections , communicating with clients and sharing sensitive and privileged materials . our legal customers directly and indirectly account for less than 10 % of our annual revenue . we define our legal customer base as the number of customers subscribing to our core solutions , exclusive of free trial periods . legal customer count is summarized in the table below : replace_table_token_3_th 37 key components of results of operations revenue we charge our customers on a subscription basis for our core solutions and certain of our value+ services . story_separator_special_tag our research and product development efforts are focused on enhancing the ease of use and functionality of our existing software solutions by adding new core functionality , value+ services and other improvements , as well as developing new products and services . we capitalize the portion of our software development costs that meets the criteria for capitalization . amortization of capitalized software development costs is included in depreciation and amortization expense . we intend to continue to invest in research and product development as we continue to introduce new core functionality , roll out new value+ services , develop new products and services , and expand into adjacent markets and new verticals . general and administrative . general and administrative expense consists of personnel-related costs ( including salaries , a majority of total incentive-based compensation , benefits , and stock-based compensation ) for employees in our executive , finance , information technology , human resources , corporate development , legal and administrative organizations . in addition , general and administrative expense includes fees for third-party professional services ( including audit , legal , tax , and consulting services ) , transaction costs related to business combinations , other corporate expenses , and allocated shared costs . we intend to continue to incur incremental general and administrative costs associated with supporting the growth of our business . depreciation and amortization . depreciation and amortization expense includes depreciation of property and equipment , amortization of capitalized software development costs and amortization of intangible assets . we depreciate or amortize property and equipment , software development costs and intangible assets over their expected useful lives on a straight-line basis , which approximates the pattern in which the economic benefits of the assets are consumed . as we expand our facilities footprint and increase our base of employees , we expect to have increased property and equipment expenditures and incremental depreciation expense . in addition , as we continue to invest in our research and product development organization and the development or acquisition of new technology , we expect to have increased capitalized software development costs and incremental amortization . interest income , net . interest income includes interest earned on investment securities , amortization and accretion of the premium and discounts paid from the purchase of investment securities , and interest earned on notes receivable and on cash deposited in our bank accounts . interest expense includes interest paid on outstanding borrowings under the credit agreement with wells fargo , as administrative agent , and the lenders that are parties thereto , or the credit agreement . 39 story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; font-style : italic ; '' > commitments and contingencies of our consolidated financial statements included elsewhere in this annual report for additional information regarding legal fees and settlement costs included in cost of revenue ( exclusive of depreciation and amortization ) . as a percentage of revenue , cost of revenue ( exclusive of depreciation and amortization ) was 38.7 % for fiscal 2018 , compared to 38.4 % for fiscal 2017. the change in cost as a percentage of revenue was related to the relative pace of growth in our value+ services compared to other types of revenue , and the related costs associated with those revenues . the slight increase in costs as a percentage of revenue was also impacted by improvements due to price increases for our solutions , and improvements from volume-based pricing with our third-party service partners , offset by an increase in legal fees and costs associated with settling a litigation matter . cost of revenue , excluding the litigation expense , would have improved as a percent of revenue . fiscal 2017 compared to fiscal 2016 cost of revenue ( exclusive of depreciation and amortization ) expense was $ 55.3 million for fiscal 2017 , compared to $ 44.6 million for fiscal 2016 , an increase of $ 10.7 million , or 24 % . the increase in cost was attributed to the 36 % increase in revenue over the same period . the increase was primarily driven by an increase in third-party costs of $ 7.0 million associated with the 42 % increase in our value+ services due to incremental adoption and utilization of those services , a $ 2.3 million increase in personnel-related investments to support the increased number of customers and growth of our business , and a $ 1.3 million increase in allocated and other costs , driven by expanded facilities , it and other expenses incurred in support of our growth . as a percentage of revenue , cost of revenue ( exclusive of depreciation and amortization ) was 38.4 % for fiscal 2017 , compared to 42.3 % for fiscal 2016. the change in cost as a percentage of revenue was related to the relative pace of growth in our value+ services compared to other types of revenue , and the related costs associated with those revenues . the improvement in costs as a percentage of revenue was primarily driven by our ability to increase revenue with a more moderate increase in personnel-related costs , and a slight improvement in pricing with our third-party service providers as we continue to grow . sales and marketing replace_table_token_8_th fiscal 2018 compared to fiscal 2017 sales and marketing expense was $ 33.3 million for fiscal 2018 , compared to $ 28.7 million for fiscal 2017 , an increase of $ 4.6 million , or 16 % . the increase was driven by increases in advertising and promotion costs of $ 1.7 million , sales and marketing personnel-related costs of $ 1.5 million , and allocated and other costs of $ 1.4 million , driven by expanded facilities , it and other expenses supporting our growth .
| results of operations for the years ended december 31 , 2018 , 2017 and 2016 the following table presents our results of operations for the periods presented in dollars ( in thousands ) and as a percentage of revenue : replace_table_token_4_th ( 1 ) the following table presents stock-based compensation expense included in each respective expense category : replace_table_token_5_th 40 revenue replace_table_token_6_th fiscal 2018 compared to fiscal 2017 total revenues were $ 190.1 million for the fiscal year ended december 31 , 2018 , or fiscal 2018 , compared to $ 143.8 million for the fiscal year ended december 31 , 2017 , or fiscal 2017 , an increase of $ 46.3 million , or 32 % . core solutions revenue was $ 70.5 million for fiscal 2018 , compared to $ 57.1 million for fiscal 2017 , an increase of $ 13.4 million , or 23 % . value+ services revenue was $ 113.1 million for fiscal 2018 , compared to $ 80.8 million for fiscal 2017 , an increase of $ 32.3 million , or 40 % . other revenue was $ 6.5 million for fiscal 2018 , compared to $ 5.8 million for fiscal 2017 , an increase of $ 0.7 million , or 12 % . the increase in revenue was mainly attributed to the growth in the number of property manager customers and units under management . combining new customer acquisition and strong customer renewal rates , we experienced a 20 % year over year increase in the number of property management units under management resulting from a 11 % year over year increase in the number of property manager customers utilizing our core solutions . in addition , property managers , residents , applicants , and owners increased usage of our value+ services platforms during that period . in each of fiscal 2018 and fiscal 2017 , we derived more than 90 % of our revenue from our real estate property manager customers .
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the options have a term of ten years and an exercise price equal to the fair market value of the common stock on the date of grant . the initial option vests and becomes exercisable with respect to 1,471 of the shares subject to the option on the grant date . the option vests and becomes exercisable with respect to the remaining 1,471 of the shares subject to the option monthly over a period of three years from the grant date at the rate of 1/36 of the option shares each month . under the provisions of the plan , each non-employee director also receives a succeeding annual grant , on the first business day after the annual meeting of stockholders , to purchase 1,471 shares of common stock ( pro rated if the director joined the board within the preceding 12 months ) , with the annual grant vesting and becoming exercisable as to 1/36 of the total shares subject to the annual grant on each monthly anniversary of the date of grant , such that succeeding grants are fully vested and exercisable on the third anniversary of the date of grant , so long as the non-employee director continuously remains a director , consultant or employee of the company . non-employee directors are also eligible to receive additional option or other awards under the plan . in general , under the company 's policies concerning fees for non-employee directors , non-employee directors of the company are entitled to receive the following amounts of cash compensation for service as a director : each non-employee director is entitled to receive an annual fee of $ 25,000 per year , paid quarterly in arrears ; the chair of the audit committee is entitled to receive $ 10,000 per year , paid quarterly in arrears ; the chair of the compensation committee and the nominating and governance committee are each entitled to receive $ 5,000 per year , paid quarterly in arrears ; and each non-employee director is entitled to receive $ 1,500 for each meeting attended in person , and $ 500 for each meeting attended telephonically so long as the telephonic meeting is more than one hour . each director is also entitled to reimbursement of reasonable expenses incurred in connection with board-related activities . 44 item 12 : security ownership of certain beneficial owners and management and related stockholder matters the following table sets forth information , as of may 31 , 2014 ( the “ table date ” ) , regarding beneficial ownership of the common stock to the extent known to us , by ( i ) each person who is a director or a nominee for director ; ( ii ) each named executive officer in the summary compensation table ; ( iii ) all directors and named executive officers as a group ; and ( iv ) each person who is known by us to be the beneficial owner of 5 % or more of the outstanding common stock . except as otherwise noted , each person has sole voting and investment power as to his or her shares . the share numbers and percentages in the table below are based on 105,501,519 shares of common stock outstanding . replace_table_token_5_th * less than 1 % . ( 1 ) based upon information supplied by officers , directors and principal stockholders . beneficial ownership is determined in accordance with rules of the sec that deem shares to be beneficially owned by any person who has or shares voting or investment power with respect to such shares . unless otherwise indicated , the persons named in this table have sole voting and sole investing power with respect to all shares shown as beneficially owned , subject to community property laws where applicable . shares of common stock subject to an option that is currently exercisable or exercisable within 60 days of the date of the table are deemed to be outstanding and to be beneficially owned by the person holding such option for the purpose of computing the percentage ownership of such person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person . except as otherwise indicated , the address of each of the persons in this table is as follows : c/o adamis pharmaceuticals corporation , 11682 el camino real , suite 300 , san diego , california 92130 . ( 2 ) includes 418,220 shares of common stock owned of record , 5,883 shares of common stock held of record by a family member and beneficially owned by dr. carlo , and 152,735 shares of common stock subject to options which were exercisable as of the table date or 60 days after such date . excludes 16,640 shares of common stock underlying options , which become exercisable over time story_separator_special_tag the following discussion and analysis of financial condition and results of operations should be read together with the consolidated financial statements and accompanying notes of the company appearing elsewhere in this report . this discussion of our financial condition and results of operations contains certain statements that are not strictly historical and are “ forward-looking ” statements and involve a high degree of risk and uncertainty . actual results may differ materially from those projected in the forward-looking statements due to other risks and uncertainties that exist in our operations , development efforts and business environment , including those set forth in this item 7 , and in the sections entitled “ 1a . risk factors ” and “ 1 . business ” in this report and uncertainties described elsewhere in this report . story_separator_special_tag and sales capabilities ; implement additional internal systems and infrastructure ; maintain , defend and expand the scope of our intellectual property portfolio ; and hire additional management , sales , research , development and clinical personnel . story_separator_special_tag for additional information concerning the company 's debt and equity financing transactions , see notes 8 , 9 and 13 accompanying our financial statements included elsewhere herein . as noted above under the heading “ going concern and management 's plan , ” at march 31 , 2014 , adamis had substantial liabilities and obligations . the availability of any required additional funding can not be assured . even taking into account the net proceeds from the transactions described above , if we do not obtain additional equity or debt funding in the near future , our cash resources will rapidly be depleted and we will be required to materially reduce or suspend operations . even if are successful in obtaining additional funding to permit us to continue operations at the levels that we desire , substantial time will pass before we obtain regulatory marketing approval for any products and begin to realize revenues from product sales , and during this period adamis will require additional funds . no assurance can be given as to the timing or ultimate success of obtaining future funding . critical accounting policies and estimates the discussion and analysis of our financial condition and results of operations are based on our audited 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 , expenses , and related disclosure of contingent assets and liabilities . we evaluate our estimates on an ongoing basis . we base our estimates on historical experience and on 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 . actual results may differ from these estimates under different assumptions or conditions . we believe the following accounting policies and estimates are most critical to aid you in understanding and evaluating our reported financial results . for further discussion of our accounting policies , see note 3 in the accompanying notes to our financial statements appearing elsewhere in this annual report on form 10-k. stock-based compensation . we account for stock-based compensation transactions in which we receive employee services in exchange for options to purchase common stock . stock-based compensation cost for restricted stock units ( “ rsus ” ) is measured based on the closing fair market value of our common stock on the date of grant . stock-based compensation cost for stock options is estimated at the grant date based on each option 's fair-value as calculated by the black-scholes option-pricing model . we recognize stock-based compensation cost as expense ratably on a straight-line basis over the requisite service period . derivative financial instruments . derivatives are recognized as either assets or liabilities in the consolidated balance sheets and are measured at fair value . the treatment of gains and losses resulting from changes in the fair values of derivative instruments is dependent on the use of the respective derivative instrument and whether they qualify for hedge accounting . as of march 31 , 2014 , no derivative instruments qualified for hedge accounting . accounting standards codification ( asc ) 815 - derivatives and hedging provides guidance to determine what types of instruments , or embedded features in an instrument , are considered derivatives . this guidance can affect the accounting for convertible instruments that contain provisions to protect holders from a decline in the stock price , or down-round provisions . down-round provisions reduce the exercise price of a convertible instrument if a company either issues equity share for a price that is lower than the exercise price of those instruments , or issues new convertible instruments that have a lower exercise price . the company recognizes the derivative assets and liabilities at their respective fair values at inception and on each reporting date . the company utilized a binomial option pricing model ( bopm ) to develop its assumptions for determining the fair value of the conversion and anti-dilution features of its notes . see note 9 in the accompanying financial statements for further discussion of derivative instruments . intangible assets . intangible assets , such as patents and unpatented technology , consist of legal fees and other costs needed to acquire the intellectual property . acquired patents are recorded at their allocated fair value as of the date acquired . patents are amortized on a straight line basis over their estimated remaining useful life . off balance sheet arrangements at march 31 , 2014 , we did not have any off balance sheet arrangements . recent accounting pronouncements in april 2014 , the financial accounting standards board ( “ fasb ” ) issued asu no . 2014-08 ( “ asu 2014-08 ” ) , “ presentation of financial statements ( topic 205 ) and property , plant and equipment ( topic 360 ) : reporting discontinued operations and disclosures of disposals of an entity. ” the amendments in asu 2014-08 change the requirements for reporting discontinued operations . a discontinued operation may include a component of an entity or a group of components of an entity , or a business or nonprofit activity . a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has ( or will have ) a major effect on an entity 's operations and financial results . the update is effective for all disposals ( or classifications as held for
| results of operations our consolidated results of operations are presented for the fiscal year ending march 31 , 2014 and for the fiscal year ending march 31 , 2013. year ended march 31 , 2014 and year ended march 31 , 2013 selling , general and administrative expenses . selling , general and administrative expenses for fiscal 2014 and 2013 were approximately $ 3.4 million and $ 2.0 million , respectively . selling , general and administrative expenses consist primarily of legal fees , accounting and audit fees , consulting expenses , and employee salaries . stock based compensation of approximately $ 670,000 , expenses of approximately $ 113,000 associated with increased headcount , nasdaq listing charges of approximately $ 85,000 and costs associated with rent , consulting , legal , accounting and miscellaneous fees primarily accounted for the increase in expenses during the year ended march 31 , 2014 compared to the prior year . research and development expenses . our research and development costs are expensed as incurred . non-refundable advance payments for goods and services to be used in future research and development activities are recorded as an asset and are expensed when the research and development activities are performed . research and development expenses were approximately $ 1.0 million and $ 1.2 million for the fiscal years ended march 31 , 2014 and 2013 , respectively , which were expensed . the decrease in research and development expenses for fiscal 2014 compared to fiscal 2013 was primarily due to the reduced trial expenses for our apc 100 product candidate . other income ( expenses ) . other income ( expense ) for fiscal 2014 and 2013 was approximately $ ( 3,800,000 ) and $ ( 3,800,000 ) , respectively . other income ( expense ) consists primarily of changes in the value of derivative and conversion features of our convertible notes payable as well as interest expense paid in connection with various notes payable .
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for fixed-price oil and gas sales swaps , we are the seller , so we make settlement payments for prices above the indicated weighted-average price per barrel and per mmbtu , respectively , and receive settlement payments for prices below the indicated weighted-average price per barrel story_separator_special_tag management 's discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and related notes included elsewhere in this report . the following discussion contains forward-looking statements that reflect our future plans , estimates , beliefs and expected performance . the forward-looking statements are dependent upon events , risks and uncertainties that may be outside our control . our actual results could differ materially from those discussed in these forward-looking statements . factors that could cause or contribute to such differences are described in “ item 1a . risk factors ” included earlier in this report . please see “ — cautionary note regarding forward-looking statements. ” this section of the form 10-k generally discusses 2020 and 2019 items and year-to-year comparisons between those years . for discussion of our year ended december 31 , 2018 , as well as the year ended 2019 compared to year ended 2018 , refer to part ii , item 7— “ management 's discussion and analysis of financial condition and results of operations ” of our 2019 annual report on form 10-k . executive overview we are a western united states independent upstream energy company focused on the development and production of onshore , low geologic risk , long-lived conventional oil reserves primarily located in california . in the aggregate , our assets are characterized by high oil content . most of our assets are located in the oil-rich reservoirs in the san joaquin basin of california , which has more than 150 years of production history and substantial remaining oil in place . as a result of the substantial data produced over the basin 's long history , its reservoir characteristics are well understood , leading to predictable , repeatable , low geological risk and low-cost development opportunities . in california , we focus on conventional , shallow oil reservoirs , the drilling and completion of which are relatively low-cost in contrast to unconventional resource plays . we also have assets in the low-operating cost , oil-rich reservoirs in the uinta basin of utah and in the low geologic risk natural gas resource play in the piceance basin in colorado . we believe that the successful execution of our strategy across our low-declining , oil-weighted production base and extensive inventory of identified drilling locations with attractive full-cycle economics will support our objectives to generate levered free cash flow to fund our operations , optimize capital efficiency , and return capital to stockholders , while maintaining a low leverage profile and focusing on attractive organic and strategic growth through commodity price cycles . we have a progressive approach to evolving and growing the business in today 's dynamic oil and gas industry . our strategy includes proactively engaging the many forces driving our industry and impacting our operations , whether positive or negative , to maximize our assets , create value for shareholders , and support environmental goals that align with a more positive future . how we plan and evaluate operations we use “ levered free cash flow ” in planning our capital allocation to sustain production levels and fund internal growth opportunities , as well as determine hedging needs . levered free cash flow is a non-gaap financial measure that we define as adjusted ebitda less capital expenditures , interest expense and dividends . adjusted ebitda is also a non-gaap financial measure that is discussed and defined below . we use the following metrics to manage and assess the performance of our operations : ( a ) adjusted ebitda ; ( b ) operating expenses ; ( c ) environmental , health & safety ( “ eh & s ” ) results ; ( d ) general and administrative expenses ; and ( e ) production . adjusted ebitda adjusted ebitda is the primary financial and operating measurement that our management uses to analyze and monitor the operating performance of our business . adjusted ebitda is a non-gaap financial measure that 64 index to financial statements and supplementary data we define as earnings before interest expense ; income taxes ; depreciation , depletion , and amortization ( “ dd & a ” ) ; derivative gains or losses net of cash received or paid for scheduled derivative settlements ; impairments ; stock compensation expense ; and other unusual , out-of-period and infrequent items . operating expenses overall , operating expense is used by management as a measure of the efficiency with which operations are performing . we define operating expenses as lease operating expenses , electricity generation expenses , transportation expenses , and marketing expenses , offset by the third-party revenues generated by electricity , transportation and marketing activities , as well as the effect of derivative settlements ( received or paid ) for gas purchases . lease operating expenses include fuel , labor , field office , vehicle , supervision , maintenance , tools and supplies , and workover expenses . taxes other than income taxes are excluded from operating expenses . marketing revenues represent sales of natural gas purchased from and sold to third parties . the electricity , transportation and marketing activity related revenues are viewed and treated internally as a reduction to operating costs when tracking and analyzing the economics of development projects and the efficiency of our hydrocarbon recovery . additionally , we strive to minimize the variability of our fuel gas costs for our steam operations with gas hedges . environmental , health & safety like other companies in the oil and gas industry , our operations are subject to stringent and complex federal , state and local laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection . story_separator_special_tag opec+ eventually announced production cuts in april 2020 , and then in june 2020 agreed to extend the cuts through the end of july 2020. in august these production cuts were eased slightly and the output reduction levels remained through the end of 2020. in december 2020 and january 2021 , opec+ agreed to cut production slightly beginning in january 2021 and will continue to reassess monthly . additionally , the effects of demand destruction with a supply surge globally was amplified during the second quarter 2020 as available storage for crude oil and refined products became increasingly limited and there were concerns that available storage could become completely unavailable in 2020 and beyond , depending on the duration and severity of the ongoing pandemic . with the storage and transportation constraints further adding to the pressure on commodities prices , during the second quarter 2020 refiners started to curtail output and producers all over the world - including in the united states - started to shut-in production . toward the end of the second quarter 2020 , oil prices began to recover as the production cuts reduced the supply overhang and global demand began to increase gradually with containment of the covid-19 outbreak in areas around the globe . the storage concerns were partially relieved as a result . demand , and pricing , may again decline due to the ongoing covid-19 pandemic , particularly if there is a continued resurgence of the outbreak , although the extent of the additional impact on our industry and our business can not be reasonably predicted at this time . 66 index to financial statements and supplementary data as we focus on managing our business and operations in response to this health and economic crisis , the safety and well-being of our employees and the communities in which we operate has been , and is , our top priority . for the protection of our employees and to help contain the spread of covid-19 , at times since the pandemic began we modified our business practices , including temporary closing of offices not required to maintain critical operations and instead allowing a large portion of our workforce to work from home , and we have implemented recommended practices with respect to social distancing , quarantines , travel bans and other restrictions . although we managed the transition to remote work arrangements and subsequent office reopening without a loss in business continuity , we incurred additional costs and experienced some inefficiencies ; importantly , none of which had an impact on our financial reporting systems , internal control over financial reporting or disclosure controls and procedures . we managed minimal workforce disruption , with no furloughs , as a result of the pandemic , in part due to the “ essential ” nature of our business . as discussed above , the situation remains volatile and , if there is a resurgence of the covid-19 outbreak in our areas of operation , we may be forced to again temporarily close our offices and transition to work from home ; although we currently expect our operations would continue as normal and without significant additional impact due to the essential nature of our business . we remain committed to being a good corporate citizen by focusing on the well-being of our employees and communities , including maintaining our strong safety and environmental standards and investing in community impact initiatives . as a result of the industry downturn , commodity price outlook , and increasing uncertainty , on april 1 , 2020 , we provided updated guidance for the 2020 fiscal year , reflecting a heightened focus on driving operational efficiencies , preserving cash and reducing costs , including through reducing planned 2020 capital expenditures . we also temporarily suspended our quarterly cash dividend , starting with the second quarter of 2020 , and we did not repurchase any common stock under our authorized share repurchase program during 2020. our california production increased slightly year-over-year , even with the limited capital deployed . while our rockies production decreased largely due to natural declines and no drilling programs during 2020. due to the significant drop in prices in early 2020 , we temporarily discontinued our california drilling activity in april and engaged in proactive maintenance and well management activities . we restarted our drilling activity in mid-october 2020 , which we currently expect to continue through 2021 if our financial position and market conditions continue to support it . capital spending for the full year 2020 was approximately $ 69 million , excluding capitalized overhead and interest , acquisitions and asset retirement spending . during the second quarter of 2020 , we obtained additional storage capacity to support our planned production for the remainder of the year and into 2021. as market conditions improved , we released a portion of the capacity . we currently believe our storage capacity will be sufficient to support our current planned production and we do not anticipate a need to shut in production or delay or discontinue our drilling plans in the near future unless conditions significantly deteriorate , economics dictate or storage becomes unavailable . currently we have storage capacity of 315,000 bbls through june of 2021 to help mitigate these potential consequences . for a discussion of certain potential risks , costs and other considerations related to storage constraints and production curtailment , please see part i , item 1a . risk factors in this report - “ the marketability of our production is dependent upon transportation and storage facilities and other facilities , most of which we do not control , and the availability of such transportation and storage capabilities , which have been severely limited by recent market conditions related to the covid-19 pandemic and the accompanying oversupply of oil and natural gas . if we are unable to access such facilities on commercially reasonable terms , our operations would likely be interrupted , our production could be curtailed , and our revenues reduced , among other adverse consequences .
| results of operations replace_table_token_21_th revenues and other oil , natural gas and ngl sales decreased by $ 187 million , or 33 % , to approximately $ 379 million for the year ended december 31 , 2020 when compared to the year ended december 31 , 2019. the decrease was driven by $ 178 million and $ 4 million of lower prices for oil and natural gas , respectively , and an $ 11 million decrease in volumes in the rockies , offset by a $ 9 million increase in volumes in california . electricity sales which represent sales to utilities decreased by $ 4 million , or 12 % , to approximately $ 26 million for the year ended december 31 , 2020 when compared to the year ended december 31 , 2019. the decrease was largely a result of 16 % lower unit sales prices that were driven by lower natural gas prices . gain or loss on oil and gas sales derivatives consists of settlement gains and losses and mark-to-market gains and losses . our settlement gains for the years ended december 31 , 2020 and 2019 were $ 152 million and $ 43 million , respectively . the increase in settlement gains was driven by lower oil prices relative to the derivative fixed prices in 2020 compared to 2019. the mark-to-market non-cash loss for the years ended december 31 , 2020 and 2019 of $ 34 million and $ 81 million , respectively , were due to higher future prices relative to the derivative fixed prices at each year end . marketing and other revenues were lower for the year ended december 31 , 2020 , compared to the year ended december 31 , 2019 due to lower average gas prices . 72 index to financial statements and supplementary data replace_table_token_22_th 73 index to financial statements and supplementary data ( 1 ) we report electricity , transportation and marketing sales separately in our financial statements as revenues in accordance with gaap .
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we began operations in 1979 and at august 31 , 2013 , operated 4,836 stores in the united states , including puerto rico ; 362 in mexico ; and three in brazil . each of our stores carries an extensive product line for cars , sport utility vehicles , vans and light trucks , including new and remanufactured automotive hard parts , maintenance items , accessories and non-automotive products . at august 31 , 2013 , in 3,421 of our domestic stores , we also have a commercial sales program that provides commercial credit and prompt delivery of parts and other products to local , regional and national repair garages , dealers , service stations and public sector accounts . we also have commercial programs in select stores in mexico , as well as in our stores in brazil . we also sell the alldata brand automotive diagnostic and repair software through www.alldata.com . additionally , we sell automotive hard parts , maintenance items , accessories , and non-automotive products through www.autozone.com , and accessories and performance parts through www.autoanything.com , and our commercial customers can make purchases through www.autozonepro.com . we do not derive revenue from automotive repair or installation services . executive summary we achieved strong performance in fiscal 2013 , delivering record net income of $ 1.016 billion , a 9.3 % increase over the prior year , and sales growth of $ 543.7 million , a 6.3 % increase over the prior year . we completed the year with growth in all areas of our business . we are pleased with the results of our retail business and the increase in our commercial business , where we continue to build our internal sales force and continue to refine our parts assortment . over the past several years , various factors have occurred within the economy that affect both our customers and our industry , including the impact of the recession , continued high unemployment , and other challenging economic conditions . although we have seen a recent increase in new vehicle sales , we believe our consumers ' cash flows continue to decrease due to the previously listed factors . given the nature of these macroeconomic factors , we can not predict whether or for how long these trends will continue , nor can we predict to what degree these trends will impact us in the future . we believe other macroeconomic factors have adversely affected both our customers and our industry . during fiscal 2013 , the average price per gallon of unleaded gasoline in the united states remained at a high level , $ 3.65 per gallon , compared to $ 3.57 per gallon during fiscal 2012. we continue to believe gas prices will remain at overall high levels , thereby reducing discretionary spending for all consumers , and , in particular , our customers . with approximately 11 billion gallons of unleaded gas consumed each month across the u.s. , each $ 1 decrease at the pump contributes approximately $ 11 billion of additional spending capacity to consumers each month . given the unpredictability of gas prices , we can not predict whether gas prices will increase or decrease , nor can we predict how any future changes in gas prices will impact our sales in future periods . an additional macroeconomic factor facing our customer is the reinstitution of payroll taxes back to historic levels . the reduction in our customers ' take home pay as a result of the recent increase in payroll taxes was effective at the beginning of the 2013 calendar year and , at this point , we can not predict the impact this change has had or will have on our sales in future periods . during fiscal 2013 , failure and maintenance related categories represented the largest portion of our sales mix , at approximately 84 % of total sales , with failure related categories continuing to be our strongest performers . while 19 we have not experienced any fundamental shifts in our category sales mix as compared to previous years , we did experience a slight decline in sales of the maintenance category as a percentage of sales . we believe the slowdown in maintenance related products during fiscal 2013 was largely due to weather related impacts in various regions . because of the unusually mild winter during fiscal 2012 across parts of the u.s. , we saw a reduced benefit from sales of maintenance related products in fiscal 2013 compared to the prior fiscal year . however , sales in the maintenance category did improve in the last quarter of fiscal 2013 due to a more normalized winter in fiscal 2013 as compared to fiscal 2012. our primary response to fluctuations in the demand for the products we sell is to adjust our advertising message , store staffing , and product assortment . specifically , during fiscal 2013 , we have closely studied our hub distribution model and store inventory levels and assortment . as a result , we are performing certain strategic tests including adding additional inventory into our hub stores and increasing product availability in our stores . we continue to believe we are well positioned to help our customers save money and meet their needs in a challenging macroeconomic environment . the two statistics we believe have the closest correlation to our market growth over the long-term are miles driven and the number of seven year old or older vehicles on the road . miles driven we believe that as the number of miles driven increases , consumers ' vehicles are more likely to need service and maintenance , resulting in an increase in the need for automotive hard parts and maintenance items . while over the long-term , we have seen a close correlation between our net sales and the number of miles driven , we have also seen certain time frames of minimal correlation in sales performance and miles driven . story_separator_special_tag we purchased $ 44.5 million of marketable securities in fiscal 2013 , $ 45.7 million in fiscal 2012 , and $ 43.8 million in fiscal 2011. we had proceeds from the sale of marketable securities of $ 37.9 million in fiscal 2013 , $ 42.4 million in fiscal 2012 , and $ 43.1 million in fiscal 2011. capital asset disposals provided proceeds of $ 9.8 million in fiscal 2013 , $ 6.6 million in fiscal 2012 , and $ 3.3 million in fiscal 2011. net cash used in financing activities was $ 847.0 million in fiscal 2013 , $ 843.4 million in fiscal 2012 , and $ 973.8 million in fiscal 2011. the net cash used in financing activities reflected purchases of treasury stock which totaled $ 1.387 billion for fiscal 2013 , $ 1.363 billion for fiscal 2012 , and $ 1.467 billion for fiscal 2011. the treasury stock purchases in fiscal 2013 , 2012 and 2011 were primarily funded by cash flows from operations , and by increases in debt levels . proceeds from issuance of debt were $ 800 million for fiscal 2013 , $ 500 million for fiscal 2012 , and $ 500 million for fiscal 2011. in fiscal 2013 and fiscal 2012 , the proceeds from the issuance of debt were used for the repayment of a portion of commercial paper borrowings and general corporate purposes , including for working capital requirements , capital expenditures , store openings and stock repurchases . proceeds from the issuance of debt in fiscal 2013 were also used for the acquisition of autoanything . in fiscal 2013 , we repaid our $ 200 million senior notes due in june 2013 and our $ 300 million senior notes due in october 2012 using commercial paper borrowings . there were no repayments of debt in fiscal 2012. in fiscal 2011 , we used the proceeds from the issuance of debt to repay our $ 199.3 million senior notes due in november 2010 , to repay a portion of our commercial paper borrowings and for general corporate purposes . in 2013 , we received proceeds from the issuance of commercial paper and short-term borrowings in the amount of $ 118.7 million . in 2012 , net payments of commercial paper and short-term borrowings were $ 81.3 million . in 2011 , we received proceeds from the issuance of commercial paper and short-term borrowing in the amount of $ 141.5 million . during fiscal 2014 , we expect to invest in our business at an increased rate as compared to fiscal 2013. our investments are expected to be directed primarily to our new-store development program and enhancements to existing stores and infrastructure . the amount of our investments in our new-store program is impacted by different factors , including such factors as whether the building and land are purchased ( requiring higher investment ) or leased ( generally lower investment ) , located in the united states , mexico or brazil , or located in urban or rural areas . during fiscal 2013 , fiscal 2012 , and fiscal 2011 , our capital expenditures have increased by approximately 10 % , 18 % and 2 % , respectively , as compared to the prior year . our mix of store openings has moved away from build-to-suit leases ( lower initial capital investment ) to ground leases and land purchases ( higher initial capital investment ) , resulting in increased capital expenditures per store over the previous three years , and we expect this trend to continue during the fiscal year ending august 30 , 2014. in addition to the building and land costs , our new-store development program requires working capital , predominantly for inventories . historically , we have negotiated extended payment terms from suppliers , reducing the working capital required and resulting in a high accounts payable to inventory ratio . we plan to continue leveraging our inventory purchases ; however , our ability to do so may be limited by our vendors ' capacity to factor their receivables from us . certain vendors participate in financing arrangements with financial institutions whereby they factor their receivables from us , allowing them to receive payment on our invoices at a discounted rate . depending on the timing and magnitude of our future investments ( either in the form of leased or purchased properties or acquisitions ) , we anticipate that we will rely primarily on internally generated funds and available borrowing capacity to support a majority of our capital expenditures , working capital requirements and stock repurchases . the balance may be funded through new borrowings . we anticipate that we will be able to obtain such financing in view of our credit ratings and favorable experiences in the debt markets in the past . our cash balances are held in various locations around the world . of the $ 142.2 million and $ 103.1 million of cash and cash equivalents at august 31 , 2013 , and august 25 , 2012 , respectively , $ 38.2 million and $ 7.8 million , respectively , were held outside of the u.s. and were generally utilized to support liquidity needs in our foreign operations . we intend to continue to permanently reinvest the cash held outside of the u.s. in our foreign operations . 23 for the fiscal year ended august 31 , 2013 , our after-tax return on invested capital ( roic ) was 32.7 % as compared to 33.0 % for the comparable prior year period . roic is calculated as after-tax operating profit ( excluding rent charges ) divided by average invested capital ( which includes a factor to capitalize operating leases ) . the decrease in roic is primarily due to the acquisition of autoanything . we use roic to evaluate whether we are effectively using our capital resources and believe it is an important indicator of our overall operating performance .
| results of operations fiscal 2013 compared with fiscal 2012 for the fiscal year ended august 31 , 2013 , we reported net sales of $ 9.148 billion compared with $ 8.604 billion for the year ended august 25 , 2012 , a 6.3 % increase from fiscal 2012. this growth was driven primarily by sales from new stores of $ 222.3 million , the 53 rd week sales of $ 177.7 million , and sales from autoanything for a portion of the fiscal year . at august 31 , 2013 , we operated 4,836 domestic stores , 362 stores in mexico and three stores in brazil , compared with 4,685 domestic stores , 321 stores in mexico and none in brazil at august 25 , 2012. we reported a total auto parts ( domestic , mexico and brazil ) sales increase of 5.2 % for fiscal 2013. gross profit for fiscal 2013 was $ 4.741 billion , or 51.8 % of net sales , compared with $ 4.432 billion , or 51.5 % of net sales for fiscal 2012. the improvement in gross margin was primarily driven by lower product acquisition costs , partially offset by the inclusion of autoanything ( 28 basis points ) . 20 operating , selling , general and administrative expenses for fiscal 2013 increased to $ 2.968 billion , or 32.4 % of net sales , from $ 2.803 billion , or 32.6 % of net sales for fiscal 2012. operating expenses , as a percentage of sales , improved due to lower incentive compensation ( 19 basis points ) , partially offset by lower sales growth rates . interest expense , net for fiscal 2013 was $ 185.4 million compared with $ 175.9 million during fiscal 2012. this increase was primarily due to higher average borrowing levels over the comparable prior year period ; partially offset by a decline in borrowing rates . average borrowings for fiscal 2013 were $ 3.927 billion , compared with $ 3.507
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· change in effective control : a change in effective control of the company occurs on the date that either : o any one person , or more than one person acting as a group , acquires ( or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons ) ownership of stock of the company possessing 30 % or more of the total voting power of the stock of the company ; or o a majority of the members of the board of directors of the company is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the board of directors before the date of the appointment or election ; story_separator_special_tag results of operations . general in reviewing management 's discussion and analysis of financial condition and results of operations , you should refer to our consolidated financial statements and the notes related thereto . story_separator_special_tag text-indent:0.5in '' > interest expense interest expense increased to approximately $ 1,110,000 in fiscal year 2013 from approximately $ 8,000 in fiscal year 2012 , due to interest expense , amortization of debt discount and debt discount expensed upon conversion of debentures into shares of our common stock . the full principal amount of $ 750,000 of the convertible debentures due september 2016 was converted into shares of common stock during fiscal year 2013 resulting in a charge to interest expense of approximately $ 717,000 during fiscal year 2013 , as the associated beneficial conversion feature was fully amortized . dividend income dividend income decreased to $ -0- in fiscal year 2013 compared to approximately $ 13,000 in fiscal year 2012. dividend income received in fiscal year 2012 was related to the videocon gdr 's acquired in december 2007. interest income interest income decreased to approximately $ -0- in fiscal year 2013 compared to approximately $ 3,000 the fiscal year 2012. liquidity and capital resources in september 2012 , the company received aggregate gross proceeds of $ 750,000 from the issuance of 8 % convertible debentures due september 12 , 2016 in a private placement , of which $ 300,000 was sold to the company 's current chairman and then chief executive officer and one other director of the company . the september 2012 debentures paid interest quarterly and were convertible into shares of our common stock at a conversion price of $ 0.092 per share on or before september 12 , 2016. the company recorded a discount to the carrying amount of the september 2012 debentures of approximately $ 717,000 related to the debentures ' beneficial conversion feature . the company was permitted to prepay the september 2012 debentures at any time without penalty upon 30 days prior notice . the company also had the option to pay interest on the september 2012 debentures in common stock . during the three month period ended april 30 , 2013 , the entire $ 750,000 principal amount of the september 2012 debentures were converted into 8,152,170 shares of common stock and an additional 100,725 shares were issued in payment of approximately $ 9,300 of accrued interest through the conversion date . the conversion of the september 2012 debentures resulted in a charge to interest expense of approximately $ 717,000 during the second quarter of fiscal 2013. in january 2013 , we received aggregate gross proceeds of $ 1,765,000 from the issuance of 8 % convertible debentures due january 25 , 2015 , of which $ 250,000 was received from our current president , chief executive officer and director , and two other directors of the company . the january 2013 debentures pay interest quarterly and are convertible into shares of our common stock at a conversion price of $ 0.15 per share on or before january 25 , 2015. the embedded conversion feature has certain weighted average anti-dilution protection provisions which would be triggered if the company issues its common stock , or certain common stock equivalents , ( as defined ) at a price below $ 0.15 per share . we have the option to pay any interest on the january 2013 debentures in common stock based on the average of the closing prices of our common stock for the 10 trading days immediately preceding the interest payment date . we also have the option to pay any interest on the january 2013 debentures with additional debentures . we may prepay the january 2013 debentures at any time without penalty upon 30 days prior notice but only if the sales price of the common stock on the principal market on which the common stock is primarily listed and quoted for trading is at least $ 0.30 for 20 trading days in any 30-day trading period ending no more than 15 days before the company 's prepayment notice . in conjunction with the issuance of the january 2013 debentures , we issued warrants to purchase 5,882,745 shares of our common stock . each january 2013 warrant grants the holder the right to purchase one share of our common stock at the purchase price of $ 0.30 per share on or before january 25 , 2016. in connection with the sale of january 2013 debentures , we paid a placement fee of approximately $ 41,000 and issued the placement agent a warrant to purchase 276,014 shares of common stock with identical provisions as january 2013 warrants issued with the january 2013 debentures . we also agreed to register the common stock issuable upon conversion of the january 2013 debentures and exercise of the january 2013 warrants . the january 2013 warrants may be exercised on a cashless basis only if there is not an effective registration statement covering such shares at the time the warrants are exercised . story_separator_special_tag 23 based on currently available information , we believe that our existing cash and cash equivalents together with expected cash flows from patent licensing and enforcement , the sale of our common stock under the stock purchase agreement with aspire capital fund llc ( described in item 5 above recent sales of unregistered securities ) , the gross proceeds of $ 3,500,000 received from the private placement in november 2013 of a 6 % convertible debenture ( also described in item 5 below recent sales of unregistered securities ) , and other potential sources of cash flow will be sufficient to enable us to continue our patent licensing and enforcement activities for at least 12 months . however , our projections of future cash needs and cash flows may differ from actual results . if current cash on hand and cash that may be generated from patent licensing and enforcement activities are insufficient to satisfy our liquidity requirements , we may seek to sell equity securities or obtain loans from various financial institutions where possible . the sale of additional equity securities or securities convertible into or exercisable for equity securities could result in dilution to our stockholders . we can give no assurance that we will generate sufficient cash flows in the future ( through licensing and enforcement of patents , or otherwise ) to satisfy our liquidity requirements or sustain future operations , or that other sources of funding , such as sales of equity or debt , would be available , if needed , on favorable terms or at all . we can also give no assurance that we will have sufficient funds to repay our outstanding indebtedness . if we can not obtain such funding if needed or if we can not sufficiently reduce operating expenses , we would need to curtail or cease some or all of our operations . the following table presents our expected cash requirements for contractual obligations outstanding as of october 31 , 2013 : replace_table_token_3_th off-balance sheet arrangements we have no variable interest entities or other off-balance sheet obligation arrangements . 24 critical accounting policies our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the united states of america . in preparing these financial statements , we make assumptions , judgments and estimates that can have a significant impact on amounts reported in our consolidated financial statements . we base our assumptions , judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances . actual results could differ materially from these estimates under different assumptions or conditions . on a regular basis , we evaluate our assumptions , judgments and estimates and make changes accordingly . we believe that , of the significant accounting policies discussed in note 2 to our notes to consolidated financial statements , the following accounting policies require our most difficult , subjective or complex judgments : · revenue recognition ; · investment securities ; · stock-based compensation ; and · convertible debentures revenue recognition revenue is recognized when ( i ) persuasive evidence of an arrangement exists , ( ii ) all obligations have been substantially performed pursuant to the terms of the arrangement , ( iii ) amounts are fixed or determinable , and ( iv ) the collectability of amounts is reasonably assured . patent monetization and patent assertion in general , revenue arrangements provide for the payment of contractually determined fees in consideration for the grant of certain intellectual property rights for patented technologies owned or controlled by our operating subsidiaries . these rights typically include some combination of the following : ( i ) the grant of a non-exclusive , retroactive and future license to manufacture and or sell products covered by patented technologies owned or controlled by our operating subsidiaries , ( ii ) a covenant-not-to-sue , ( iii ) the release of the licensee from certain claims , and ( iv ) the dismissal of any pending litigation . the intellectual property rights granted are perpetual in nature , extending until the expiration of the related patents . pursuant to the terms of these agreements , our operating subsidiaries have no further obligation with respect to the grant of the non-exclusive retroactive and future licenses , covenants-not-to-sue , releases , and other deliverables , including no express or implied obligation on our operating subsidiaries ' part to maintain or upgrade the technology , or provide future support or services . generally , the agreements provide for the grant of the licenses , covenants-not-to-sue , releases , and other significant deliverables upon execution of the agreement . as such , the earnings process is complete and revenue is recognized upon the execution of the agreement , when collectability is reasonably assured , and when all other revenue recognition criteria have been met . 25 display technology development and license fees we have assessed the revenue guidance of accounting standards codification ( asc ) 605-25 multiple-element arrangements ( asc 605-25 ) to determine whether multiple deliverables in our arrangements with auo represent separate units of accounting . under the auo license agreements , we received initial development and license fees of $ 3 million , of aggregate development and license fees of up to $ 10 million . the additional $ 7 million in development and license fees were payable upon completion of certain conditions for the respective technologies . we have determined that the transfer of the licensed patents and technology and the effort involved in completion of the conditions for the respective technologies represent a single unit of accounting for each technology . accordingly , using a proportional performance method , during the third quarter of fiscal year 2011 we began recognizing the $ 3 million initial development and license fees over the estimated periods that we expected to complete the conditions for the respective technologies .
| results of operations in light of the change in our primary operations from product development and licensing to patent monetization , and patent assertion in connection with the unauthorized use of patented technologies , the comparison of our results of operations may have limited future value . fiscal year ended october 31 , 2013 compared with fiscal year ended october 31 , 2012 revenue although overall revenue decreased by approximately $ 551,000 in fiscal year 2013 , to approximately $ 389,000 , as compared to approximately $ 940,000 in fiscal year 2012 , in the fourth quarter of fiscal 2013 , the company received approximately $ 214,00 from patent assertion activities relating to the issuance of licenses . revenue from fiscal 2012 was attributable to display technology development and license fees related to the auo license agreements . revenue recognition of display technology development and license fees has been suspended pending resolution of the auo/e ink lawsuit . see - agreements relating to previous business operations above in item 1 . 20 inventor royalties and contingent legal fees inventor royalties and contingent legal fees of approximately $ 208,000 are attributable to our patent assertion activities initiated during fiscal 2013 , and are expensed in the period that the related revenues are recognized . the economic terms of patent agreements and contingent legal fee arrangements vary across the patent portfolios owned or controlled by our operating subsidiaries .
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our global customer base consists of companies engaged in all aspects of the oil and natural gas industry , including large integrated oil and natural gas companies , national oil and natural gas companies , independent producers and natural gas processors , gatherers and pipelines . we operate in three primary business lines : contract operations , aftermarket services and fabrication . in our contract operations business line , we use our fleet of natural gas compression equipment and crude oil and natural gas production and processing equipment to provide operations services to our customers . in our aftermarket services business line , we sell parts and components and provide operations , maintenance , overhaul and reconfiguration services to customers who own compression , production , processing , treating and other equipment . in our fabrication business line , we fabricate natural gas compression and oil and natural gas production and processing equipment for sale to our customers and for use in our contract operations services . in addition , our fabrication business line provides engineering , procurement and fabrication services related to the manufacturing of critical process equipment for refinery and petrochemical facilities , the fabrication of tank farms and the fabrication of evaporators and brine heaters for desalination plants . we offer our customers , on either a contract operations basis or a sale basis , the engineering , design , project management , procurement and construction services necessary to incorporate our products into production , processing and compression facilities , which we refer to as integrated projects . proposed spinoff transaction on november 17 , 2014 , we announced that our board of directors had authorized management to pursue a plan to separate ( the spinoff ) our international contract operations , international aftermarket services and global fabrication businesses into an independent , publicly traded company ( spinco ) . to effect the spinoff , we intend to distribute , on a pro rata basis , all of the shares of spinco common stock to our stockholders as of the record date for the spinoff . the spinoff is subject to market conditions , the receipt of an opinion of counsel as to the tax-free nature of the transaction , completion of a review by the u.s. securities and exchange commission of a form 10 to be filed by spinco , the execution of separation and intercompany agreements and final approval of our board of directors . upon completion of the spinoff , we and spinco will be independent , publicly traded companies with separate public ownership , boards of directors and management , and we will own and operate the remaining u.s. contract operations and u.s. aftermarket services businesses that we currently own . in addition , we will continue to hold interests in the partnership , which include the sole general partner interest and certain limited partner interests , as well as all of the incentive distribution rights in the partnership . spinco is expected to issue certain third-party debt instruments and borrow funds on or before the completion of the spinoff . certain , if not all , of the proceeds received by spinco from such borrowings are expected to be distributed to us on or before the completion of the spinoff and we expect to use those distributed funds to repay , in whole or in part , our ( but not the partnership 's ) outstanding debt instruments . although our current goal is to complete the spinoff in the second half of 2015 , there are no assurances as to when the proposed spinoff will be completed , if at all , or if the spinoff will be completed based on the expected plans . unless otherwise indicated , this discussion in part ii , item 7 ( management 's discussion and analysis of financial condition and results of operations ) excludes the potential future impact of the proposed spinoff transaction , if consummated . the effect of the proposed spinoff transaction could significantly change and materially impact our business , financial condition , results of operations and cash flows . industry conditions and trends our business environment and corresponding operating results are affected by the level of energy industry spending for the exploration , development and production of oil and natural gas reserves . spending by oil and natural gas exploration and production companies is dependent upon these companies ' forecasts regarding the expected future supply , demand and pricing of oil and natural gas products as well as their estimates of risk-adjusted costs to find , develop and produce reserves . although we believe our contract operations business is typically less impacted by commodity prices than certain other energy products and service providers , changes in oil and natural gas exploration and production spending normally result in changes in demand for our products and services . 40 natural gas consumption in the u.s. for the twelve months ended november 30 , 2014 increased by approximately 5 % compared to the twelve months ended november 30 , 2013. the eia forecasts that total u.s. natural gas consumption will increase by 1.4 % in 2015 compared to 2014 and increase by an average of 0.7 % per year thereafter until 2040. the eia estimates that the u.s. natural gas consumption level will be approximately 30 trillion cubic feet in 2040 , or 16 % of the projected worldwide total of approximately 185 trillion cubic feet . natural gas marketed production in the u.s. for the twelve months ended november 30 , 2014 increased by approximately 5 % compared to the twelve months ended november 30 , 2013. the eia forecasts that total u.s. natural gas marketed production will increase by 4 % in 2015 compared to 2014 and u.s. natural gas production will increase by an average of 1.5 % per year thereafter until 2040. the eia estimates that the u.s. natural gas production level will be approximately 33 trillion cubic feet in 2040 , or 18 % of the projected worldwide total of approximately 187 trillion cubic feet . story_separator_special_tag we may contribute over time additional u.s. contract operations customer contracts and equipment to the partnership in exchange for cash , the partnership 's assumption of our debt and or our receipt of additional interests in the partnership . such transactions depend on , among other things , market and economic conditions , our ability to agree with the partnership regarding the terms of any purchase and the availability to the partnership of debt and equity capital on reasonable terms . certain key challenges and uncertainties market conditions in the oil and natural gas industry , competition in the natural gas compression industry and the risks inherent in international markets continue to represent key challenges and uncertainties . in addition to these challenges , we believe the following represent some of the key challenges and uncertainties we will face in the near future : north america market and oil and natural gas pricing . during 2014 , we continued to see steady activity in north america shale plays and areas focused on the production of oil and natural gas liquids . this activity has increased the overall amount of compression horsepower in the industry ; however , these increases continued to be partially offset by horsepower declines in more mature and predominantly dry gas markets , where we provide a significant amount of contract operations services . historically , oil and natural gas prices in north america have been volatile . global oil prices and north america natural gas prices have fallen significantly recently . during periods of lower oil or natural gas prices , oil and natural gas production growth could moderate or decline in north america , and as a result the demand or pricing for our natural gas compression and oil and natural gas production and processing equipment and services could be adversely affected . the recent investment of capital in new equipment by our competitors and other third parties could also create uncertainty in our business outlook . many of our north america contract operations agreements with customers have short initial terms and are typically cancelable on short notice after the initial term , and we can not be certain that these contracts will be extended or renewed after the end of the initial contractual term . any such nonrenewals , or renewals at reduced rates , could adversely impact our results of operations . execution on larger contract operations and fabrication projects . some of our projects have a relatively larger size and scope than the majority of our projects , which can translate into more technically challenging conditions or performance specifications for our products and services . contracts with our customers generally specify delivery dates , performance criteria and penalties for our failure to perform . any failure to execute such larger projects in a timely and cost effective manner could have a material adverse effect on our business , financial condition , results of operations and cash flows . execution of the proposed spinoff . execution of the proposed spinoff transaction will require significant expense and the time and attention of our management . the spinoff could distract management from the operation of our business and the execution of our other strategic initiatives . our employees may also be uncertain about their future roles within the separate companies pending the completion of the spinoff , which could lead to departures . further , if the spinoff is completed , we may not realize the benefits we expect to realize . any such difficulties could have an adverse effect on our business , results of operations and financial condition . if completed , the spinoff may also expose us to certain risks that could have an adverse effect on our results of operations and financial condition . the spinoff is contingent upon the final approval of our board of directors and other conditions , some of which are beyond our control . for this and other reasons , the spinoff may not be completed in the expected timeframe or at all . personnel , hiring , training and retention . both in north america and internationally , we believe our ability to grow may be challenged by our ability to hire , train and retain qualified personnel . although we have been able to satisfy our personnel needs thus far , retaining employees in our industry continues to be a challenge . our ability to continue our growth will depend in part on our success in hiring , training and retaining these employees . activity in the global energy markets . our results of operations depend upon the level of activity in the global energy markets , including oil and natural gas development , production , processing and transportation . oil and natural gas prices and the level of drilling and exploration activity can be volatile . for example , oil and natural gas exploration and development activity and the number of well completions typically decline when there is a significant reduction in oil or natural gas prices or significant instability in energy markets . global oil prices and north america natural gas prices have fallen significantly recently , and , as a result , research analysts are forecasting declines in u.s. and worldwide capital spending for drilling activity in 2015 , and producers in the u.s. and other parts of the world have begun to announce reduced capital budgets for this year . in addition , in international projects , some business activity is related to infrastructure development or regulatory requirements such as regulations to prevent the flaring of natural gas . the timing and financial impact of these projects is difficult to predict as they typically have longer lead times and larger scope , which can lead to variations in our results of operations internationally on a year over year basis . 42 summary of results as discussed in note 3 to the financial statements , the results from continuing operations for all periods presented exclude the results of our venezuelan contract operations business , canadian operations and contract water treatment business .
| results by business segment . the following table summarizes revenue , gross margin and gross margin percentages for each of our business segments ( dollars in thousands ) : replace_table_token_6_th ( 1 ) defined as revenue less cost of sales , excluding depreciation and amortization expense . gross margin , a non-gaap financial measure , is reconciled , in total , to net income ( loss ) , its most directly comparable financial measure calculated and presented in accordance with gaap in part ii , item 6 ( selected financial data non-gaap financial measures ) of this report . ( 2 ) defined as gross margin divided by revenue . 43 operating highlights the following tables summarize our total available horsepower , total operating horsepower , average operating horsepower , horsepower utilization percentages and fabrication backlog ( in thousands , except percentages ) : replace_table_token_7_th replace_table_token_8_th the year ended december 31 , 2014 compared to the year ended december 31 , 2013 north america contract operations ( dollars in thousands ) replace_table_token_9_th the increase in revenue during the year ended december 31 , 2014 compared to the year ended december 31 , 2013 was primarily attributable to a 17 % increase in average operating horsepower , which included the assets acquired in the august 2014 midcon acquisition and the april 2014 midcon acquisition as well as organic growth in operating horsepower , and higher rates in the current year , partially offset by a $ 12.1 million decrease in revenue with little incremental cost due to the termination of three natural gas processing plant contracts during the second quarter of 2013. gross margin ( defined as revenue less cost of sales , excluding depreciation and amortization expense ) and gross margin percentage increased during the year ended december 31 , 2014 compared to the year ended december 31 , 2013 primarily due to the revenue increase explained above .
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this discussion includes an analysis of our financial condition and results of operations for fiscal year 2020 and fiscal year 2019 and year-over-year comparisons between those periods . for year-over-year comparisons between fiscal year 2019 and fiscal year 2018 , refer to part ii , item 7 , “ management 's discussion and analysis of financial condition and results of operations , ” of our annual report on form 10-k for the fiscal year ended march 31 , 2019 filed with the sec on may 30 , 2019 . 35 overview we are a global leader in designing , marketing , and distributing innovative footwear , apparel , and accessories developed for both everyday casual lifestyle use and high-performance activities . we market our products primarily under five proprietary brands : ugg , hoka , teva , sanuk and koolaburra . we believe that our products are distinctive and appeal broadly to women , men , and children . we sell our products through quality domestic and international retailers , international distributors , and directly to our consumers both domestically and internationally through our dtc business , which is comprised of our retail stores and e-commerce websites . we seek to differentiate our brands and products by offering diverse lines that emphasize authenticity , functionality , quality , and comfort , and products tailored to a variety of activities , seasons , and demographic groups . all of our products are currently manufactured by independent manufacturers . trends and uncertainties impacting our business during early calendar year 2020 , the covid-19 pandemic ( referred to herein as covid-19 or the covid-19 pandemic ) spread globally , including throughout the geographic regions in which we operate our business , and where our wholesale customers , retail stores , manufacturers , and suppliers are located . in response to the pandemic , many federal , state , local , and foreign governments have put in place , and others in the future may put in place , travel restrictions , “ shelter-in-place ” orders , and similar government orders and restrictions in an attempt to control the spread and mitigate the impact of the disease . such restrictions or orders have resulted in the mandatory closure of “ non-essential ” businesses ( including retail stores ) , increased unemployment rates , “ social distancing ” restrictions , reduced tourist activity , work-from-home policies , and other changes that have led to significant disruptions to businesses and global financial markets . the overall impact of the pandemic on our business and future results of operations is highly uncertain and subject to change , and we are not able to accurately predict the magnitude or scope of such impacts at this time . our business and the industry in which we operate continue to be impacted by several important trends and uncertainties , including as a result of the covid-19 pandemic . we have experienced a number of material impacts , and identified a number of material trends , within our business as follows : retail environment in connection with the “ shelter-in-place ” orders discussed above , all of our company-owned and operated stores , and nearly all of the retail stores of our wholesale customers and retail partners , were closed for a portion of our fourth fiscal quarter ended march 31 , 2020 ( fourth fiscal quarter ) , and largely remain closed during the first part of our first fiscal quarter ending june 30 , 2020. the closure of these retail stores had a negative impact on our results of operations during the fourth fiscal quarter as we experienced delays in shipment and acceptance of scheduled order shipments , which we attribute to the retail store closures and other uncertainties caused by the covid-19 pandemic . the retail stores that we and our partners operate have begun to reopen at a measured pace . we will continue to reopen our retail stores as we determine appropriate and in line with guidance provided by health officials , expert agencies and local authorities . our decision regarding the appropriate timing to reopen our retail stores will depend on a number of factors , including the safety of our customers and employees , our ability to comply with government orders and restrictions , and our ability to deliver products to our customers . we expect the scope of allowable retail activities , as well as retail consumer traffic patterns , to vary by geographic region , including ongoing restrictions imposed by local governmental authorities , the demand for our products within the region , and the actual and expected impact of the covid-19 pandemic on the region . e-commerce business even prior to mandatory retail store closures resulting from the covid-19 pandemic , we observed a meaningful shift in the way consumers shop for products and make purchasing decisions , evidenced by significant and prolonged decreases in consumer retail activity as customers continue to migrate to online shopping . these trends have been positively impacting the performance of our e-commerce 36 business , while creating challenges and headwinds for our traditional retail business , as well as the retail businesses of our wholesale customers and retail partners . we operate our e-commerce business through various websites and platforms , which have remained operational throughout the covid-19 pandemic , and we expect they will continue to remain operational . during our fourth fiscal quarter , as well as our first fiscal quarter ending june 30 , 2020 , we observed strong demand across our brands within our e-commerce business , especially for the ugg and hoka brands . we expect our wholesale customers that have an established e-commerce presence will experience similar strong demand trends as those we have experienced , although the trends may vary from customer to customer . we continue to see demand for our products , especially within the ugg and hoka brands , from a number of these wholesale customers , which we believe reflects strong sell-through of our products within our partners ' e-commerce platforms . story_separator_special_tag as a result of changes in consumer purchasing behavior , we continue to focus on the enhancement of our omni-channel strategy to enable us to better engage existing and prospective consumers and expose them to our brands . our strategy is transforming the way we approach marketing , including through a sustained focus on our targeted digital marketing efforts , as well as marketing activations and product seeding to drive global brand heat . for example , we have begun applying these transformation efforts in europe to drive ugg brand heat as we work to differentiate consumer experiences across various consumer touch points as part of our marketplace reset strategy . we have also started to apply this marketing strategy shift in asia . in response to the covid-19 pandemic , we have enhanced our focus on digital marketing as we seek to target consumers within the work-from-home environment and promote products that are desirable based on current consumer preferences , working conditions and lifestyle choices . 38 liquidity we believe we are in a strong financial position to respond to the disruptions and uncertainties caused by the covid-19 pandemic . as of march 31 , 2020 , our cash and cash equivalents balance was $ 649,436 . in addition , we had available borrowings of $ 469,473 under our existing revolving credit facilities , providing a liquidity position of over $ 1,000,000 as of march 31 , 2020 . for additional information , see the sections entitled “ liquidity ” and “ capital resources ” below . we are temporarily pausing repurchases under our stock repurchase programs due to the disruption and uncertainty caused by the covid-19 pandemic and our focus on liquidity and cash management . we are working closely with our wholesale customers , as well as our manufacturers and suppliers , to manage accounts receivable and accounts payable to maximize the availability of working capital . operating expenses to mitigate the adverse impact the covid-19 pandemic may have on our business and operations , we have implemented a number of temporary measures to reduce operating expenses , including : ◦ restricting employee travel ; ◦ canceling or postponing certain events , trainings , and conferences ; ◦ converting meetings with current and prospective customers to a virtual platform ; ◦ suspending hiring of certain non-essential employees and annual salary increases ; ◦ eliminating or deferring discretionary expenditures ; ◦ seeking payment accommodations or deferrals ; and ◦ furloughing certain retail employees while stores are closed . we also believe the significant changes we implemented in connection with our previously completed restructuring and operating profit improvement plans will help mitigate any potential negative impacts on our gross margins resulting from the covid-19 pandemic . completed restructuring plan during february 2016 , we announced the implementation of a multi-year restructuring plan designed to realign our brands across our fashion lifestyle and performance lifestyle groups , optimize our worldwide owned retail store fleet , and consolidate our management and operations that was designed to reduce overhead costs and create operating efficiencies while improving collaboration across brands . as of march 31 , 2019 , we completed our restructuring plan and incurred cumulative restructuring charges of $ 55,619 against selling , general , and administrative ( sg & a ) expense . in addition , the cumulative annualized sg & a savings realized as of march 31 , 2019 by reportable operating segment were , approximately , as follows : amount ugg brand wholesale $ 1,000 sanuk brand wholesale 1,000 other brands wholesale 1,000 direct-to-consumer 43,000 unallocated overhead costs 17,000 total $ 63,000 we currently do not anticipate incurring additional restructuring charges in connection with this restructuring plan . 39 completed operating profit improvement plan during february 2017 , we announced that we would implement an operating profit improvement plan to execute various business transformation initiatives to further reduce expenses and improve gross margins . as of march 31 , 2019 , we successfully completed our plan and achieved in excess of $ 100,000 of combined net annualized operating profit improvement under our restructuring and operating profit improvement plans . we will continue to apply the lessons learned in our completed plans by pursuing opportunities to further optimize profitability and seeking to enhance results of operations throughout our business . reportable operating segment overview our six reportable operating segments include the worldwide wholesale operations of the ugg brand , hoka brand , teva brand , sanuk brand , and other brands , as well as dtc . information reported to the chief operating decision maker ( codm ) , who is our principal executive officer , is organized into these reportable operating segments and is consistent with how the codm evaluates our performance and allocates resources . ugg brand . the ugg brand is one of the most iconic and recognized brands in our industry , which highlights our successful track record of building niche brands into lifestyle and fashion market leaders . with loyal consumers around the world , the ugg brand has proven to be a highly resilient line of premium footwear , apparel , and accessories with expanded product offerings and a growing global audience that appeals to women , men , and children . we believe demand for ugg brand products will continue to be driven by the following : high consumer brand loyalty due to the consistent delivery of quality and luxuriously comfortable footwear , apparel , and accessories . diversification of our footwear product offerings , such as women 's spring and summer lines , as well as expanded category offerings for men 's , apparel , and accessories . hoka brand . the hoka brand is an authentic premium line of year-round performance footwear and apparel that offers enhanced cushioning and inherent stability with minimal weight . originally designed for ultra-runners , the brand now appeals to athletes around the world , regardless of activity . the hoka brand is quickly becoming a leading brand within run specialty wholesale accounts , with strong marketing fueling both domestic and international sales growth .
| result of operations year ended march 31 , 2020 compared to year ended march 31 , 2019 . the following table summarizes our results of operations : replace_table_token_3_th net sales . the following table summarizes our net sales by location , and by brand and channel : replace_table_token_4_th 42 replace_table_token_5_th despite the negative impact of the covid-19 pandemic on net sales during our fourth fiscal quarter , total net sales for the full fiscal year increased primarily due to higher hoka and other brands wholesale sales , as well as higher dtc sales , partially offset by lower sanuk brand wholesale sales . further , we experienced an increase of 2.8 % in total volume of pairs sold to 36,800 from 35,800 compared to the prior period . on a constant currency basis , net sales increased by 6.5 % , compared to the prior period . drivers of significant changes in net sales are as follows : wholesale net sales of the hoka brand increased due to continued global growth through new customer acquisitions , as well as higher sales driven by key franchise updates and new product launches . wholesale net sales of the other brands increased primarily due to continued customer penetration in us family value wholesale accounts for the koolaburra brand . wholesale net sales of the ugg brand increased due to higher domestic net sales driven by the slipper collection and the sell-in of fall and winter products , primarily for men 's and kid 's product lines , partially offset by lower international sales driven by a multi-year marketplace reset in europe and european macroeconomic factors , as well as covid-19 related sales losses in the fourth fiscal quarter . on a constant currency basis , wholesale net sales of the ugg brand increased by 2.1 % , compared to the prior period .
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2018-15 , “ intangibles - goodwill and other - internal-use software ( subtopic 350-40 ) - customer 's accounting for implementation costs incurred in a cloud computing arrangement that is a service contract ( a consensus of fasb emerging issues task force ) `` ( `` asu 2018-15 `` ) . asu 2018-15 aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred story_separator_special_tag the following discussion and analysis of financial condition and results of operations is provided to enhance the understanding of , and should be read in conjunction with , part i , item 1 , “ business ” and item 8 , “ financial statements and supplementary data. ” for information on risks and uncertainties related to our business that may make past performance not indicative of future results , or cause actual results to differ materially from any forward-looking statements , see “ general , ” and part i , item 1a , “ risk factors. ” overview we source , process , and supply agri-products . tobacco has been our principal focus since our founding in 1918 , and we are the leading global leaf tobacco supplier . we derive most of our revenues from sales of processed tobacco to manufacturers of tobacco products throughout the world and from fees and commissions for specific services . we hold a strategic position in the world leaf markets where we work closely with both our customers and farmers to ensure that we deliver a compliant product that meets our customers ' needs while promoting a strong supplier base . we adapt to meet changes in customer requirements as well as broader changes in the leaf markets , while continuing to provide the stability of supply and high level of service that distinguishes us in the marketplace . we believe that we have successfully met the needs of both our customers and suppliers while adapting to changes in leaf markets . recognizing that leaf tobacco is a mature industry , we have also been positioning our company for the future by investing in non-tobacco businesses and are focusing on building out a broader plant-based agri-product services platform . over the last three fiscal years , we have generated over $ 250 million in net cash flow from operations , invested over $ 185 million in our businesses , and returned over $ 250 million to our shareholders through a combination of dividends and share repurchases . in fiscal year 2018 , net income remained steady at about $ 106 million , despite modestly lower lamina volumes . we also continued to grow our market share and expand the services we provide our customers , including gaining new multi-year processing commitments in brazil . in addition , we rewarded our shareholders by increasing our dividend rate and returning almost $ 55 million through dividends and repurchasing about $ 22 million , or 2 % , of our outstanding common stock . fiscal year 2018 was not without its challenges as fewer carryover crop sales and shipment delays in north america , african burley crop sizes that were down more than 40 % over the prior year , and a $ 10 million reduction in income from the timing of receipt of distributions of unconsolidated subsidiaries compared to fiscal year 2017 , negatively impacted our results . however , we did benefit from a return to normal crop volumes in brazil , and the resultant gains from higher volumes and lower factory unit costs there . fiscal year 2019 was another strong year for universal . we increased our tobacco volumes handled , earned additional business with our customers by expanding the services we provide , and have continued to improve our market share . during fiscal year 2019 , we benefited from the recovery of african burley production , strong carryover volumes in the first half of the year , and robust demand for wrapper tobacco . our revenues were up about 10 % on those higher volumes , compared to fiscal year 2018. our gross margin percentage remained flat , even though our product mix was less favorable as we handled a higher percentage of by-products in fiscal year 2019. in addition , results in our north america segment were negatively impacted by weather damage to tobacco crops in the united states , which reduced yields and third party processing volumes . near the end of fiscal year 2020 , uncertain market conditions , mainly driven by the ongoing covid-19 pandemic , led to extreme weakening of the indonesian rupiah , brazilian real , and mexican peso relative to the u.s. dollar , all of which experienced double-digit depreciation during the month of march 2020. these currency weaknesses were the primary drivers for unfavorable currency comparisons , mainly attributable to remeasurement , of $ 13 million for the year ended march 31 , 2020. towards the end of fiscal year 2020 , we also saw some shipment delays in certain regions due to the covid-19 pandemic and slower customer orders , which increased our uncommitted inventory levels . in addition , our results for fiscal year 2020 were negatively impacted by lower carryover volumes compared to fiscal year 2019 , mainly in north america and africa . our gross margins for fiscal year 2020 , however , remained relatively flat compared to fiscal year 2019. as we move into fiscal year 2021 , we are forecasting that global flue-cured and burley tobacco production will decline by about 7 % and 10 % , respectively , which we believe will keep flue-cured tobacco in a slight oversupply position and burley will remain in a balanced supply position . we are closely monitoring the impacts of covid-19 in all of our operations around the world . business activity during the first fiscal quarter is usually lower than in other quarters , as crop purchases are continuing in brazil and just beginning in africa . story_separator_special_tag ( 5 ) during fiscal year 2019 , the company reversed amounts previously recorded for dividend withholding taxes on distributed and undistributed retained earnings of a foreign subsidiary . the reversal followed the resolution of uncertainties with the local country taxing authorities with respect to the inclusion of the tax under a tax holiday applicable to the subsidiary and was attributable to retained earnings amounts previously distributed or expected to be distributed prior to the expiration of the tax holiday . see note 6 to the consolidated financial statements in item 8 of this annual report for more information . the company 's consolidated effective tax rate for the fiscal year ended march 31 , 2020 , was approximately 31 % . income tax expense for the fiscal year ended march 31 , 2020 , included $ 2.8 million of additional expense ( $ 0.11 per diluted share ) for the resolution of a transfer pricing matter at a foreign subsidiary . without the effect of this item , the consolidated effective tax rate for fiscal year 2020 , would have been 29 % . for the fiscal year ended march 31 , 2019 , the company 's consolidated effective income tax rate on pretax earnings was 27 % . income tax expense for fiscal year 2019 included a $ 7.8 million ( $ 0.30 per diluted share ) benefit from reversing a portion of a liability previously recorded for dividend withholding taxes on the cumulative retained earnings of a foreign subsidiary . without the dividend withholding tax reversal , the consolidated effective income tax rate for fiscal year 2019 would have been 33 % . the effective tax rates include the benefit of various tax planning opportunities , the effects of exchange rate changes on local earnings and taxes of foreign subsidiaries , as well as the net effect of items accounted for on a discrete basis in the respective reporting periods . 24 fiscal year ended march 31 , 2019 , compared to the fiscal year ended march 31 , 2018 net income for the fiscal year ended march 31 , 2019 , was $ 104.1 million , or $ 4.11 per diluted share , compared with $ 105.7 million , or $ 4.14 per diluted share , for the fiscal year ended march 31 , 2018. those results included certain non-recurring items , detailed in other items below , which decreased diluted earnings per share by $ 0.34 and increased diluted earnings per share by $ 0.18 for the fiscal years ended march 31 , 2019 and march 31 , 2018 , respectively . excluding those non-recurring items , net income and earnings per share increased by $ 11.7 million and $ 0.49 , respectively , for fiscal year 2019 compared to fiscal year 2018. operating income of $ 161.2 million for the fiscal year ended march 31 , 2019 , which included restructuring and impairment charges of $ 20.3 million detailed in other items below , decreased by $ 9.7 million , compared to operating income of $ 170.8 million for the fiscal year ended march 31 , 2018. segment operating income was $ 186.8 million for the fiscal year ended march 31 , 2019 , an increase of $ 6.8 million , compared to segment operating income of $ 180.0 million for the fiscal year ended march 31 , 2018. results reflected earnings improvements in the other regions and other tobacco operations segments and flat results for the north america segment for fiscal year 2019. consolidated revenues increased by $ 193.2 million to $ 2.2 billion for the fiscal year 2019 , compared to fiscal year 2018 , primarily due to higher sales and processing volumes . flue-cured and burley leaf tobacco operations other regions operating income for the other regions segment increased by $ 4.8 million to $ 151.5 million for the fiscal year ended march 31 , 2019 , compared with fiscal year 2018 , on stronger sales and processing volumes partially offset by higher selling , general and administrative costs . in fiscal year 2019 , volumes increased in africa , mainly from higher burley production volumes and carryover crop sales . in south america , volumes also increased , but the product mix was less favorable . results for asia reflected lower sales and trading volumes for fiscal year 2019 , while europe saw improvements in processing volumes . selling , general , and administrative costs were higher for fiscal year 2019 compared to fiscal year 2018 , primarily from negative foreign currency remeasurement and exchange variances , higher compensation and incentive accruals , and higher customer claim costs , partially offset by higher net recoveries on advances to suppliers . revenues for the other regions segment of $ 1.6 billion for fiscal year 2019 , were up $ 87.6 million compared to fiscal year 2018 , on higher volumes and processing revenues , offset in part by lower sales prices and a less favorable product mix . north america operating income for the north america segment of $ 23.1 million for year ended march 31 , 2019 , was flat , compared to fiscal year 2018. results for fiscal year 2019 reflected higher carryover crop sales volumes on shipments delayed from the fourth quarter of fiscal year 2018 due to reduced transportation availability in the united states , offset by lower u.s. current crop sales and processing volumes largely due to weather-affected crops . results for fiscal year 2019 also included higher shipment volumes from guatemala and mexico , compared to fiscal year 2018. selling , general , and administrative costs for the north america segment for the fiscal year ended march 31 , 2019 , were modestly lower and declined as a percentage of sales , compared to fiscal year 2018. revenues for this segment increased by $ 73.9 million to $ 382.6 million for the fiscal year ended march 31 , 2019 , compared to the fiscal year ended march 31 , 2018 , on the higher sales volumes , partly offset by lower processing revenues .
| results of operations amounts described as net income ( loss ) and earnings ( loss ) per diluted share in the following discussion are attributable to universal corporation and exclude earnings related to non-controlling interests in subsidiaries . adjusted operating income ( loss ) , adjusted net income ( loss ) attributable to universal corporation , adjusted diluted earnings ( loss ) per share , and the total for segment operating income ( loss ) referred to in this discussion are non-gaap financial measures . these measures are not financial measures calculated in accordance with gaap and should not be considered as substitutes for operating income ( loss ) , net income ( loss ) attributable to universal corporation , diluted earnings ( loss ) per share , cash from operating activities or any other operating or financial performance measure calculated in accordance with gaap , and may not be comparable to similarly-titled measures reported by other companies . a reconciliation of adjusted operating income ( loss ) to consolidated operating ( income ) , adjusted net income ( loss ) attributable to universal corporation to consolidated net income ( loss ) attributable to universal corporation and adjusted diluted earnings ( loss ) per share to diluted earnings ( loss ) per share are provided in other items below . in addition , we have provided a reconciliation of the total for segment operating income ( loss ) to consolidated operating income ( loss ) in note 17 . `` operating segments '' to the consolidated financial statements in item 8. management evaluates the consolidated company and segment performance excluding certain significant charges or credits . we believe these non-gaap financial measures , which exclude items that we believe are not indicative of our core operating results , provide investors with important information that is useful in understanding our business results and trends .
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certain risks , uncertainties and other factors , including but not limited to those set forth under “ cautionary note regarding forward-looking statements , ” “ risk factors ” and elsewhere in this form 10-k , may cause actual results to differ materially from those projected in the forward-looking statements . we assume no obligation to update any of these forward-looking statements principal factors affecting our results of operations net income . net income is calculated by taking interest and noninterest income and subtracting our costs to do business , such as interest , salaries , taxes and other operational expenses . we evaluate our net income based on measures that include net interest margin , return on average assets and return on average equity . net interest income . net interest income represents interest income , less interest expense . we generate interest income from interest , dividends and fees received on interest earning assets , including loans , interest earning deposits in other banks and investment securities we own . we incur interest expense from interest paid on interest bearing liabilities , including interest bearing deposits , borrowings and other forms of indebtedness . net interest income typically is the most significant contributor to our net income . to evaluate net interest income , we measure and monitor : ( i ) yields on our loans , interest earning deposits in other banks and other interest earning assets ; ( ii ) the costs of our deposits and other funding sources ; ( iii ) our net interest spread ; and ( iv ) our net interest margin . net interest spread is the difference between rates earned on interest earning assets and rates paid on interest bearing liabilities . net interest margin is a ratio calculated as net interest income divided by average interest earning assets for the same period . because noninterest bearing sources of funds , such as noninterest bearing deposits and shareholders ' equity , also fund interest earning assets , net interest margin includes the benefit of these noninterest bearing sources . changes in market interest rates and interest we earn on interest earning assets or pay on interest bearing liabilities , as well as the volume and types of our interest earning assets , interest bearing and noninterest bearing liabilities and shareholders ' equity , usually have the largest impact on periodic changes in our net interest spread , net interest margin and net interest income . we measure net interest income before and after our provision for loan losses . provision for loan losses . provision for loan losses is the amount of expense that , based on our management 's judgment , is required to maintain our allowance for loan losses at an adequate level to absorb probable losses inherent in our loan portfolio at the applicable balance sheet date and that , in our management 's judgment , is appropriate under relevant accounting guidance . determination of the allowance for loan losses is complex and involves a high degree of judgment and subjectivity . for a description of the factors considered by our management in determining the allowance for loan losses see “ —financial condition—allowance for loan losses. ” noninterest income . noninterest income consists of , among other things : ( i ) mortgage warehouse fee income ; ( ii ) service fees related to off-balance sheet deposits ; ( iii ) deposit related fees ; ( iv ) gain on sale of loans ; and ( v ) other noninterest income . service fees related to off-balance sheet deposits are fees earned for off-balance sheet deposit placements , primarily for our digital currency customers . the placements are facilitated under agreements we have entered into with customers and nationally recognized third party service providers that , in accordance with customer instructions , allow us to sweep customer funds into deposit accounts at other insured depository institutions . in connection with such sweeps and placements , the bank earns noninterest income based on the difference between the gross interest earned on such deposit placements and the net interest the bank agreed to pay on such swept funds ( if any ) . deposit related fees include cash management fees , such as analyzed checking fees , account maintenance fees , insufficient funds fees , overdraft fees , stop payment fees , foreign exchange fee income , domestic and foreign wire transfer fees , sen related fees and card processing fee income . noninterest expense . noninterest expense includes , among other things : ( i ) salaries and employee benefits ; ( ii ) occupancy and equipment expense ; ( iii ) communications and data processing fees ( iv ) professional services fees ; ( v ) federal deposit insurance ; ( vi ) correspondent bank charges ; and ( vii ) other general and administrative expenses . salaries and employee benefits include compensation , stock-based compensation , employee benefits and tax expenses for our personnel . occupancy and equipment expense includes depreciation expense , lease expense on our leased properties and other occupancy-related expenses . equipment expense includes expenses related to our furniture , fixtures , equipment and software . communications expense includes costs for telephone and internet . data processing fees include expenses paid to our third-party data processing system provider and other data service providers . professional fees include legal , accounting , consulting and other outsourcing arrangements . federal deposit insurance expense relates to fdic assessments based on the level of our deposits . correspondent bank charges include wire transfer fees , transaction fees and service charges related to transactions settled with correspondent relationships . other general and administrative expenses include expenses associated 51 with travel , meals , advertising , promotions , sponsorships , training , supplies , postage , insurance and other expenses related to being a public company . noninterest expenses generally increase as we grow our business . story_separator_special_tag the net reversal for the year ended december 31 , 2019 was due to improvements in qualitative factors related to the loan portfolio and the continued low charge-off rates . the reversal for the year ended december 31 , 2018 was primarily due to reclassifying $ 125.2 million in loans held-for-investment as loans held-for-sale in connection with the company 's november 2018 agreement to sell the bank 's business loan portfolio . the allowance for loan losses to total gross loans held-for-investment was 0.93 % at december 31 , 2019 compared to 1.13 % at december 31 , 2018 . noninterest income the following table presents , for the periods indicated , the major categories of noninterest income : noninterest income replace_table_token_11_th n/m—not meaningful noninterest income for the year ended december 31 , 2019 was $ 15.8 million , an increase of $ 8.2 million or 108.3 % compared to noninterest income of $ 7.6 million for the year ended december 31 , 2018 . this increase was primarily due to a pre-tax gain on sale of $ 5.5 million for our san marcos branch and business loan portfolio that was completed in march 2019 , a $ 2.9 million increase in deposit related fees and a $ 0.7 million gain on sale of securities , offset by a $ 0.8 million decrease in service fees related to off-balance sheet deposits . service fees related to off-balance sheet deposits decreased due to lower average balances in off-balance sheet deposit placements for our digital currency customers in addition to a decrease in the spread earned on those deposits . deposit related fees increased primarily due to increases in cash management , foreign exchange , and sen related fees associated with our digital currency initiative . d uring the year ended december 31 , 2019 , we sold a total of $ 42.0 million in securities and realized a net gain on sale of $ 0.7 million . 56 noninterest expense the following table presents , for the periods indicated , the major categories of noninterest expense : noninterest expense replace_table_token_12_th noninterest expense increase d $ 4.2 million or 8.6 % for the year ended december 31 , 2019 compared to the year ended december 31 , 2018 primarily due to increases in salaries and employee benefits , communications and data processing expense , and occupancy and equipment , partially offset by decreases in professional services and federal deposit insurance expense . the increase of $ 4.0 million or 13.4 % in salaries and employee benefits was due to increased staffing related to the growth of the bank . the bank 's average full-time equivalent employees grew from 195 for the year ending december 31 , 2018 to 208 for 2019 with increases in the bank 's project management , software development , operations and compliance divisions offset by decreases in branch , lending and administration divisions . in march 2019 , we sold the san marcos branch resulting in the reduction of 12 employees . occupancy and equipment increase d $ 0.5 million or 17.7 % % primarily due to expansion of the corporate headquarters . communications and data processing increase d $ 1.5 million or 49.2 % primarily due to updating our it infrastructure and expansion projects to support our digital currency initiative offset by capitalized costs related to software implementation for our foreign currency platform enhancements . in 2018 , we committed to expanding our banking platform with a cloud-based api-enabled payment hub to complement our api-enabled sen. in addition , we are implementing a customer-facing foreign exchange platform . the decrease of $ 1.4 million or 23.9 % in professional services fees was primarily related to lower consulting , external audit and legal services . consulting fees were higher in 2018 as a result of numerous bank initiatives designed to support infrastructure growth including technology improvements and enhanced internal control processes . consulting fees for these projects were higher in 2018 , due to bringing some of the support in-house and capitalizing software related costs . external audit services were higher in 2018 as the company prepared for complying with enhanced audit standards in connection with the ipo . the decrease of $ 0.8 million or 66.3 % in federal deposit insurance payments was due to an fdic assessment credit as well as a reduction in the multiplier based on significant asset growth for the prior fiscal year relative to the current comparable period . income tax expense income tax expense was $ 9.8 million for the year ended december 31 , 2019 compared to $ 8.1 million for the year ended december 31 , 2018 . the increase was primarily related to increased pre-tax income and an increase in the effective tax rate . our effective tax rates for the year ended december 31 , 2019 and 2018 were 28.3 % and 26.5 % , respectively . the increase in the effective tax rate was primarily related to higher blended state taxes , lower excess benefit from stock-based compensation and an increase in non-deductible expenses compared to 2018. financial condition as of december 31 , 2019 , our total assets increase d to $ 2.1 billion compared to $ 2.0 billion as of december 31 , 2018 . shareholders ' equity increase d $ 39.8 million , or 20.8 % , to $ 231.0 million at december 31 , 2019 compared to $ 191.2 million at december 31 , 2018 . a summary of the individual components driving the changes in total assets , total liabilities and shareholders ' equity is discussed below . 57 interest earning deposits in other banks interest earning deposits in other banks decrease d from $ 670.2 million at december 31 , 2018 to $ 132.0 million at december 31 , 2019 . the decrease was due to lower balances with the frb and purchases of securities particularly during the first half of 2019 as the bank implemented its hedging strategy , discussed below .
| results of operations net income the following table sets forth the principal components of net income for the periods indicated . replace_table_token_8_th net income for the year ended december 31 , 2019 was $ 24.8 million , an increase of $ 2.5 million or 11.3 % from net income of $ 22.3 million for the year ended december 31 , 2018 . the increase was primarily due to an increase of $ 1.3 million or 1.9 % in net interest income and an increase of $ 8.2 million , or 108.3 % in noninterest income , partially offset by a $ 4.2 52 million or 8.6 % increase in noninterest expense and an increase of $ 1.8 million , or 21.8 % in income tax expense , all as described below . net interest income and net interest margin analysis we analyze our ability to maximize income generated from interest earning assets and control the interest expenses of our liabilities , measured as net interest income , through our net interest margin and net interest spread . net interest income is the difference between the interest and fees earned on interest earning assets , such as loans , interest earning deposits in other banks and securities , and the interest expense incurred on interest bearing liabilities , such as deposits and borrowings , which are used to fund those assets . changes in market interest rates and the interest rates we earn on interest earning assets or pay on interest bearing liabilities , as well as in the volume and types of interest earning assets , interest bearing and noninterest bearing liabilities and shareholders ' equity , are usually the largest drivers of periodic changes in net interest income , net interest margin and net interest spread .
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upon the consummation of the arct iii merger , american realty capital trust iii special limited partner , llc , the holder of the special limited partner interest in the arct iii op , was entitled to subordinated distributions of net sales proceeds from arct iii op which resulted in the story_separator_special_tag the following discussion and analysis should be read in conjunction with the accompanying financial statements of american realty capital properties , inc. ( the “ company ” ) and the notes thereto . as used herein , the terms “ we , ” “ our ” and “ us ” refer to american realty capital properties , inc. , a maryland corporation , and , as required by context , to arc properties operating partnership , l.p. ( the “ op ” ) , a delaware limited partnership and its subsidiaries . as of december 31 , 2013 , american realty capital properties , inc. was still externally managed by arc properties advisors , llc ( our “ former manager ” ) , a delaware limited liability company and a wholly owned subsidiary of ar capital , llc ( “ arc ” ) . overview we were incorporated on december 2 , 2010 , as a maryland corporation that qualified as a real estate investment trust for u.s. federal income tax purposes beginning in the year ended december 31 , 2011 . on september 6 , 2011 , we completed our ipo and our shares of common stock began trading on the nasdaq global select market ( “ nasdaq ” ) under the symbol “ arcp ” . we acquire , own and operate single-tenant , freestanding commercial real estate properties , primarily subject to net leases with high credit quality tenants . we focus on investing in properties that are net leased to ( i ) credit tenants , which are generally large public companies with investment-grade ratings and other creditworthy tenants and ( ii ) governmental , quasi-governmental and not-for-profit entities . our long-term business strategy is to acquire a diverse portfolio consisting of approximately 70 % long-term leases and 30 % medium-term leases , with an average remaining lease term of 10 to 12 years . we expect this investment strategy to provide for stable income from credit tenants and to provide for growth opportunities from re-leasing of current below market leases . we have advanced our investment objectives by growing our net lease portfolio through strategic mergers and acquisitions . since january 1 , 2013 , we have completed mergers and portfolio acquisitions that have provided assets totaling approximately $ 20.0 billion . see note 2 to the consolidated financial statements . substantially all of our business is conducted through our op . we are the sole general partner and holder of 95.8 % of the equity interest in the op as of december 31 , 2013 . certain affiliates of ours and certain unaffiliated investors are limited partners and owners of 3.9 % and 0.3 % , respectively , of the equity interest in our op . after holding units of limited partner interests in our op for a period of one year , holders of op units have the right to convert limited partner interest in the op ( “ op units ” ) for the cash value of a corresponding number of shares of our common stock or , at the option of our op , a corresponding number of shares of our common stock , as allowed by the limited partnership agreement of our op . the remaining rights of the holders of op units are limited , however , and do not include the ability to replace the general partner or to approve the sale , purchase or refinancing of our op 's assets . during the year ended december 31 , 2013 , we retained our former manager to manage our affairs on a day to day basis and , as a result , was generally externally managed , with the exception of certain acquisition , accounting and portfolio management services performed by our employees . in august 2013 , our board of directors determined that it is in the best interests of us and our stockholders to become self-managed , and we completed our transition to self-management on january 8 , 2014. in connection with becoming self-managed , we terminated the existing management agreement with our former manager , entered into employment and incentive compensation arrangements with our executives and acquired from our former manager certain assets necessary for our operations . see note 23 — subsequent events for further discussion . as of december 31 , 2013 , excluding one vacant property classified as held for sale , we owned 1,329 properties consisting of 34.2 million square feet , which properties were 98.1 % leased with a weighted average remaining lease term of 8.5 years . in constructing our portfolio , we are committed to diversification ( industry , tenant and geography ) . as of december 31 , 2013 , rental revenues derived from investment grade tenants and tenants affiliated with investment grade entities as determined by a major rating agency approximated 54 % ( we have attributed the rating of each parent company to its wholly owned subsidiary for purposes of this disclosure ) . our strategy encompasses receiving the majority of our revenue from investment grade tenants as we further acquire properties and enter into ( or assume ) lease arrangements . as of december 31 , 2013 , arcp , arct iv , cole and the fortress and inland portfolios , on a combined basis , excluding one vacant property classified as held for sale , owned 3,710 properties consisting of 101.5 million square feet , which properties were 98.8 % leased with a weighted average remaining lease term of 10.2 years as of december 31 , 2013 . story_separator_special_tag pursuant to the terms set forth in the caplease merger agreement , at the effective time of the caplease merger , each outstanding share of common stock of caplease , other than shares owned by us , caplease or any of their respective wholly owned subsidiaries , was converted into the right to receive $ 8.50 . each outstanding share of preferred stock of caplease , other than shares owned by us , caplease or any of their respective wholly owned subsidiaries , was converted into the right to receive an amount in cash , equal to the sum of $ 25.00 plus all accrued and unpaid dividends on such shares of preferred stock . in addition , in connection with the merger of caplease , lp with and into the op ( the “ caplease partnership merger ” ) , each outstanding unit of equity ownership of caplease 's operating partnership other than units owned by caplease or any wholly owned subsidiary of caplease was converted into the right to receive $ 8.50 . shares of caplease 's outstanding restricted stock were accelerated and became fully vested , and restricted stock and any outstanding performance shares were fully earned and received $ 8.50 per share . in total , cash consideration of $ 920.7 million was paid to the common and preferred stockholders of caplease . accounting treatment for the caplease merger the caplease merger has been accounted for under the acquisition method of accounting under u.s. gaap . under the acquisition method of accounting , the assets acquired and liabilities assumed from caplease have been recorded as of the acquisition date at their respective fair values . any excess of purchase price over the fair values will be recorded as goodwill . results of operations for caplease will be included in our consolidated financial statements from the date of acquisition . see note 5 — caplease acquisition . american realty capital trust iv merger on july 1 , 2013 , we entered into arct iv merger agreement with arct iv and certain subsidiaries of each company . the arct iv merger agreement provided for the merger of arct iv with and into a subsidiary of the op . we consummated the arct iv merger on january 3 , 2014. pursuant to the terms of the arct iv merger agreement , as amended , each outstanding share of common stock of arct iv was exchanged for ( i ) $ 9.00 in cash , plus ( ii ) 0.5190 of a share of our common stock , par value $ 0.01 per share , and ( iii ) 0.5937 of a share of a new series of our preferred stock designated as 6.70 % series f cumulative redeemable preferred stock ( “ series f preferred stock ” ) , par value $ 0.01 per share . in total , we paid $ 650.9 million in cash and issued 36.9 million shares of common stock and 42.2 million shares of series f preferred stock ( as defined in note 16 — preferred and common stock ) to the former arct iv stockholders in connection with the consummation of the arct iv merger . in addition , each outstanding class b unit of equity ownership of the operating partnership of arct iv was converted into 2.3961 of our class b op units and other equity units of arct iv received 2.3961 of our op units . in addition , on the date of the arct iv merger , all outstanding restricted common stock of arct iv date will become fully vested and exchanged for shares of our common stock based on the arct iv exchange ratio . in connection with the arct iv merger and pursuant to the terms of the agreement of limited partnership of arct iv 's operating partnership , arct iv 's external advisor received subordinated distributions of net sales proceeds in an approximate amount of $ 63.2 million . such subordinated distributions of net sales proceeds were paid in the form of equity units of arct iv 's operating partnership that were automatically converted into 6.7 million op units upon the consummation of the arct iv merger and are subject to a minimum two-year holding period from the date of issuance before being exchangeable into our common stock . accounting treatment of the arct iv merger we and arct iv were considered to be entities under common control . both entities ' advisors are wholly owned subsidiaries of arc . arc and its related parties had ownership interests in us and arct iv through the ownership of shares of common stock and other equity interests . in addition , the advisors of both entities were contractually eligible to charge potential fees for their services to both of the companies including asset management fees , incentive fees and other fees and will continue to charge fees to us following the arct iv merger . due to the significance of these fees , the advisors and ultimately arc were determined to have a significant economic interest in both companies in addition to having the power to direct the activities of the companies through advisory/management agreements , which qualified them as affiliated companies under common control in accordance with u.s. gaap . the acquisition of an entity under common control is accounted for on the carryover basis of accounting whereby the assets and liabilities of the companies are recorded upon the merger on the same basis as they were carried by the companies on the arct iv merger date . in addition , u.s. gaap requires us to present historical financial information as if the entities were combined for each period presented . however , as the arct iv merger was not consummated as of december 31 , 2013 , the assets and liabilities and historical financial information of arct iv merger are not included in the accompanying financial statements including the notes thereto in accordance with u.s. gaap .
| results of operations as of december 31 , 2013 , we owned 1,329 properties with an aggregate original base purchase price of $ 5.2 billion , excluding one vacant property classified as held for sale . as of december 31 , 2013 , the properties comprised 34.2 million square feet and were 98.1 % leased . as of december 31 , 2012 , we owned 653 properties with an aggregate original base purchase price of $ 1.8 billion , excluding one vacant property that was classified as held for sale . as of december 31 , 2012 , the properties comprised 15.4 million square feet and were 100 % leased . accordingly , our results of operations for the year ended december 31 , 2013 as compared to the year ended december 31 , 2012 reflect significant increases in most categories . comparison of the year ended december 31 , 2013 to year ended december 31 , 2012 rental income rental income increased $ 158.9 million to $ 223.7 million for the year ended december 31 , 2013 compared to $ 64.8 million for the year ended december 31 , 2012 . rental income was driven by our acquisition of 638 properties , which excludes 38 properties that are accounted for as direct financing leases , acquired during the year ended december 31 , 2013 for an aggregate purchase price of $ 3.4 billion . the annualized rental income per square foot of the properties at december 31 , 2013 was $ 11,554.46 with a weighted average remaining lease term of 8.5 years , compared to $ 9.4 per square foot at december 31 , 2012 . our properties are generally leased from two to 20 years and 54 % are leased to investment grade tenants and affiliates of investment grade tenants , as determined by major credit rating agencies .
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clauses ( a ) and ( b ) , has or will have a direct or indirect material interest ( other than solely as a result of being a director or a less than 10 % beneficial owner of another entity ) . a conflict of interest situation can arise when a person takes actions or has interests that may make it difficult to perform his or her work objectively and effectively . conflicts of interest may also arise if a person , or a member of his or her family , receives improper personal benefits as a result of his or her position . we will also require each of our directors and executive officers to annually complete a directors ' and officers ' questionnaire that elicits information about related party transactions . all ongoing and future transactions between us and any of our officers and directors or their respective affiliates will be on terms believed by us to be no less favorable to us than are available from unaffiliated third parties . such transactions will require prior approval by a majority of our uninterested “ independent ” directors ( to the extent we have any ) or the members of our board who do not have an interest in the transaction , in either case who had access , at our expense , to our attorneys or independent legal counsel . we will not enter into any such transaction unless our disinterested “ independent ” directors ( or , if there are no “ independent ” directors , our disinterested directors ) determine that the terms of such transaction are no less favorable to us than those that would be available to us with respect to such a transaction from unaffiliated third parties . 52 these procedures are intended to determine whether any such related party transaction impairs the independence of a director or presents a conflict of interest on the part of a director , employee or officer . to further minimize potential conflicts of interest , we have agreed not to consummate a business combination with an entity which is affiliated with any of our initial shareholders unless we obtain an opinion from an independent investment banking firm that the business combination is fair to our unaffiliated shareholders from a financial point of view . we currently do not anticipate entering into a business combination with an entity affiliated with any of our initial shareholders . we do not intend to pursue a business combination with any company that is a portfolio company of , or otherwise affiliated with , or has received financial investment from , an entity with which our existing shareholders , executive officers or directors are affiliated . however , if circumstances change and we decide to acquire such an entity , we are required to obtain an opinion from an independent investment banking firm that is a member of finra that the business combination is fair to our unaffiliated shareholders from a financial point of view . furthermore , in no event will any of our sponsor , existing officers , directors or any entity with which they are affiliated , be paid any finder 's fee , consulting fee or other compensation prior to , or for any services they render in order to effectuate , the consummation of a business combination . director independence currently , messrs. calcano , donaldson and sodha would each be considered an “ independent director ” under the listing rules of the nasdaq stock market llc , which is defined generally as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship , which , in the opinion of the company 's board of directors would interfere with the director 's exercise of independent judgment in carrying out the responsibilities of a director . our independent directors will have regularly scheduled meetings at which only independent directors are present . any affiliated transactions will be on terms no less favorable to us than could be obtained from independent parties . any affiliated transactions must be approved by a majority of our independent and disinterested directors . item 14. principal accounting fees and services . the firm of marcum llp acts as our independent registered public accounting firm . the following is a summary of fees paid to marcum llp for services rendered . audit story_separator_special_tag the following discussion should be read in conjunction with our financial statements and footnotes thereto contained in this report . forward looking statements all statements other than statements of historical fact included in this form 10-k including , without limitation , statements under “ management 's discussion and analysis of financial condition and results of operations ” regarding our financial position , business strategy and the plans and objectives of management for future operations , are forward looking statements . when used in this form 10-k , words such “ may , ” “ should , ” “ could , ” “ would , ” “ expect , ” “ plan , ” “ anticipate , ” “ believe , ” “ estimate , ” “ continue , ” or the negative of such terms or other similar expressions , as they relate to us or our management , identify forward looking statements . factors that might cause or contribute to such a discrepancy include , but are not limited to , those described in our other securities and exchange commission ( “ sec ” ) filings . references to “ we ” , “ us ” , “ our ” or the “ company ” are to capitol acquisition corp. ii , except where the context requires otherwise . story_separator_special_tag such forward looking statements are based on the beliefs of management , as well as assumptions made by , and information currently available to , our management . no assurance can be given that results in any forward-looking statement will be achieved and actual results could be affected by one or more factors , which could cause them to differ materially . the cautionary statements made in this annual report on form 10-k should be read as being applicable to all forward-looking statements whenever they appear in this annual report . for these statements , we claim the protection of the safe harbor for forward-looking statements contained in the private securities litigation reform act . actual results could differ materially from those contemplated by the forward looking statements as a result of certain factors detailed in our filings with the securities and exchange commission . all subsequent written or oral forward looking statements attributable to us or persons acting on our behalf are qualified in their entirety by this paragraph . 34 overview we are a blank check company in the development stage , formed on august 9 , 2010 to acquire , through a merger , share exchange , asset acquisition , stock purchase , plan of arrangement , recapitalization , reorganization or other similar business combination , one or more businesses or entities . we do not have any specific initial business transaction under consideration , but we are actively searching for a target business . we presently have no revenue , have had losses since inception from incurring formation costs and have no other operations other than the active solicitation of a target business with which to complete a business combination . we have relied upon the sale of our securities and loans from our officers and directors to fund our operations . the registration statement for our offering was declared effective on may 9 , 2013. on may 10 , 2013 , we filed a new registration statement to increase the size of the offering by 20 % pursuant to rule 462 ( b ) under the securities act of 1933 , as amended . on may 15 , 2013 , we consummated the offering and received proceeds net of the underwriter 's discount and other offering expenses of $ 195,333,700 and simultaneously received $ 5,600,000 from the issuance of 5,600,000 sponsor 's warrants in the private placement . from the net proceeds , $ 933,700 was available for working capital and tax purposes . our management has broad discretion with respect to the specific application of the net proceeds of the offering and the private placement , although substantially all of the net proceeds are intended to be applied generally towards consummating a business combination successfully . story_separator_special_tag new roman ; font-size : 10pt '' > we do not have any long-term debt , capital lease obligations , operating lease obligations or long-term liabilities . critical accounting policies our financial statements and the notes to our financial statements contain information that is pertinent to management 's discussion and analysis . 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 and liabilities and disclosures of contingent assets and liabilities . management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . on a continual basis , management reviews its estimates utilizing currently available information , changes in facts and circumstances , historical experience and reasonable assumptions . after such reviews , and if deemed appropriate , those estimates are adjusted accordingly . actual results may vary from these estimates and assumptions under different and or future circumstances . management considers an accounting estimate to be critical if : a. it requires assumptions to be made that were uncertain at the time the estimate was made ; and b. changes in the estimate , or the use of different estimating methods that could have been selected , could have a material impact on the company 's results of operations or financial condition . the following critical accounting policies have been identified that affect the more significant judgments and estimates used in the preparation of the financial statements . we believe that the following are some of the more critical judgment areas in the application of our accounting policies that affect our financial condition and results of operations . we have discussed the application of these critical accounting policies with our audit committee . the following critical accounting policies are not intended to be a comprehensive list of all of the company 's accounting policies or estimates . 37 use of estimates the preparation of financial statements in conformity with accounting principles generally accepted in the united states of america requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period . actual results could differ from those estimates . income taxes the company accounts for income taxes under accounting standards codification ( “ asc ” ) 740 , “ income taxes ” ( “ asc 740 ” ) . asc 740 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carry forwards . asc 740 additionally requires a valuation allowance to be established when it is more likely than not that all or a portion of deferred tax assets will not be realized . asc
| results of operations our entire activity since inception up to the closing of our initial public offering on may 15 , 2013 was in preparation for that event . since the offering , our activity has been limited to the evaluation of business combination candidates , and we will not generate any operating revenues until the closing and completion of our initial business combination . we expect to generate small amounts of non-operating income in the form of interest income on cash and cash equivalents . interest income is not expected to be significant in view of current low interest rates on risk-free investments ( treasury securities ) . we currently incur increased expenses as a result of being a public company ( for legal , financial reporting , accounting and auditing compliance ) , as well as for due diligence expenses . 35 for the years ended december 31 , 2013 and 2012 , we had net losses of $ 721,020 and $ 4,768 , respectively , and for the period from august 9 , 2010 ( inception ) through december 31 , 2013 , we had cumulative net losses of $ 728,265. we incurred operating expenses for the years ended december 31 , 2013 and 2012 of $ 748,654 and $ 4,768 , respectively , for the period from august 9 , 2010 ( inception ) through december 31 , 2013 of $ 755,899. these costs consist mainly of professional and consulting fees , rent , office administrative costs and delaware franchise tax . we incurred offering costs of $ 666,300 with regard to the offering , which were netted against additional paid-in capital upon the consummation of the offering .
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due to the large number of diverse businesses and the company 's decentralized operating structure , the company does not require its businesses to provide detailed information on operating results . instead , the company 's corporate management collects data on several key measurements : operating revenue , operating income , operating margin , overhead costs , number of months on hand in inventory , days sales outstanding in accounts receivable , past due receivables and return on invested capital . these key measures are monitored by management and significant changes in operating results versus current trends in end markets and variances from forecasts are discussed with operating unit management . the itw business model the powerful and highly differentiated itw business model is the company 's core source of value creation . this business model is the company 's competitive advantage and defines how itw creates value for its shareholders and comprises three unique elements : itw 's 80/20 management process is the operating system that is applied in every itw business . initially introduced as a manufacturing efficiency tool in the 1980 's , itw has continually refined , improved and expanded 80/20 into a proprietary , holistic business management process that generates significant value for the company and its customers . through the application of data-driven insights generated by 80/20 practice , itw focuses on its largest and best opportunities ( the “ 80 ” ) and eliminates cost , complexity and distractions associated with the less profitable opportunities ( the “ 20 ” ) . 80/20 enables itw businesses to consistently achieve world-class operational excellence in product availability , quality , and innovation , while generating superior financial performance ; customer-back innovation has fueled decades of profitable growth at itw . the company 's unique innovation approach is built on insight gathered from the 80/20 management process . working from the customer back , itw businesses position themselves as the go-to problem solver for their “ 80 ” customers . itw 's innovation efforts are focused on understanding customer needs , particularly those in “ 80 ” markets with solid long-term growth fundamentals , and subsequently creating unique solutions to address those needs . these customer insights and learnings drive innovation at itw and have contributed to a portfolio of more than 17,000 granted and pending patents ; itw 's decentralized , entrepreneurial culture allows itw businesses to be fast , focused , and responsive . itw businesses have significant flexibility within the framework of the itw business model to customize their approach in order to best serve their specific customers ' needs . itw colleagues recognize their unique responsibilities to execute the company 's strategy and values . as a result , the company maintains a focused and simple organizational structure that , combined with outstanding execution , delivers best-in-class services adapted to each business ' customers and end markets . enterprise strategy in late 2012 , itw began the process of transitioning the company onto its current strategic path to fully leverage the compelling performance potential of the itw business model . since then , itw has made considerable progress , as evidenced by the company 's strong financial performance over the past four years . the roots of itw 's enterprise strategy began in late 2011 / early 2012 , when the company undertook a complete review of its performance . focusing on its businesses delivering consistent above-market growth with best-in-class margins and returns , itw developed a strategy to replicate that performance across its operations . 19 based on this rigorous evaluation , itw determined that solid and consistent above-market organic growth must be the core growth engine to deliver world-class financial performance and compelling long-term returns for its shareholders . to shift its primary growth engine to organic , the company began executing a multi-step approach . the first step was to narrow the focus and improve the quality of itw 's business portfolio . as part of the portfolio management initiative , itw exited businesses that were operating in commoditized market spaces and prioritized sustainable differentiation as a must-have requirement for all itw businesses . this process included both divesting entire businesses and exiting commoditized product lines and customers inside otherwise highly differentiated itw divisions . as a result of this work , itw 's business portfolio now has significantly higher organic growth potential . itw segments and divisions now possess attractive and differentiated product lines and end markets as they continue to improve operating margins and generate price/cost increases . the company achieved this through product line simplification , or eliminating the complexity and overhead costs associated with smaller product lines and customers , while supporting and growing the businesses ' largest / most profitable customers and product lines . with the initiative nearly complete and itw businesses demonstrating notably improved financial performance , the company believes that the significant product line simplification work is essentially finalized and will return to more normalized levels in 2017 and beyond . step two , business structure simplification , was implemented to simplify and scale-up itw 's operating structure to support increased engineering , marketing , and sales resources , and , at the same time , improve global reach and competitiveness , all of which were critical to driving accelerated organic growth . itw now has 85 scaled-up divisions with significantly enhanced focus on growth investments , core customers and products , and customer-back innovation . the strategic sourcing initiative was established as a core capability to better leverage itw 's scale and improve global competitiveness . sourcing is now a core strategic and operational capability at itw . the company 's 80/20-enabled sourcing organization has delivered an average of one percent reduction in spend each year from 2013 through 2016 and is on track to do the same in 2017 and 2018. with the portfolio realignment and scale-up work largely complete , the company was able to shift its focus to preparing for and accelerating , organic growth . story_separator_special_tag results of operations by segment the reconciliation of segment operating revenue and operating income to total operating revenue and operating income is as follows : replace_table_token_7_th 23 replace_table_token_8_th segments are allocated a fixed overhead charge based on the segment 's revenue . expenses not charged to the segments are reported separately as unallocated . because the unallocated category includes a variety of items , it is subject to fluctuations on a quarterly and annual basis . automotive oem this segment is a global , niche supplier to top tier oems , providing unique innovation to address pain points for sophisticated customers with complex problems . businesses in this segment produce components and fasteners for automotive-related applications . this segment primarily serves the automotive original equipment manufacturers and tiers market . products in this segment include : plastic and metal components , fasteners and assemblies for automobiles , light trucks and other industrial uses . the results of operations for the automotive oem segment for 2016 , 2015 and 2014 were as follows : 2016 compared to 2015 replace_table_token_9_th operating revenue increased due to the ef & c acquisition and higher organic revenue , partially offset by the unfavorable effect of foreign currency translation . organic revenue grew 5.1 % . ◦ north american organic revenue grew 3.4 % versus total north american auto build growth of 2 % . auto build growth for the detroit 3 , where the company has higher content , declined 1 % . ◦ european organic revenue growth of 6.0 % exceeded european auto builds which grew 3 % . ◦ asia pacific organic revenue increased 10.9 % driven by product penetration gains in china due to new product launches in 2016. china organic revenue growth of 22.7 % exceeded chinese auto build growth of 14 % . auto builds of foreign automotive manufacturers in china , where the company has higher content , grew 11 % . on july 1 , 2016 , the company completed the acquisition of the ef & c business from zf trw . ef & c had operating revenue of $ 245 million for the six months ended december 31 , 2016 , and increased automotive oem operating revenue by 9.7 % . operating margin of 24.1 % decreased 10 basis points due to the dilutive impact of 160 basis points from the ef & c acquisition and unfavorable price/cost of 40 basis points , partially offset by positive operating leverage of 80 basis 24 points , the net benefits from the company 's enterprise initiatives and cost management of 90 basis points and lower restructuring expenses . 2015 compared to 2014 replace_table_token_10_th operating revenue decreased primarily due to the unfavorable effect of foreign currency translation , partially offset by organic revenue growth . organic revenue grew 5.8 % as a result of product innovation and penetration gains , exceeding worldwide auto build growth of 1 % . ◦ european organic revenue growth of 11.1 % exceeded auto builds which grew 4 % . ◦ north american organic revenue growth of 4.2 % exceeded auto build growth of 3 % . ◦ asia pacific organic revenue increased 0.5 % . china organic revenue grew 7.9 % , as chinese auto builds increased 4 % . auto builds of foreign automotive manufacturers in china , where the company has higher content , were flat for 2015. operating income of $ 613 million increased 2.1 % . excluding the negative impact of foreign currency translation of 7.9 % , operating income would have increased 10.0 % . operating margin was 24.2 % . the increase of 100 basis points was primarily driven by 80 basis points of operating leverage , the net benefits from the company 's enterprise initiatives and favorable price/cost of 10 basis points . food equipment this segment is a highly focused and branded industry-leader in commercial food equipment differentiated by innovation and integrated service offerings . this segment primarily serves the food institutional/restaurant , food service and food retail markets . products in this segment include : warewashing equipment ; cooking equipment , including ovens , ranges and broilers ; refrigeration equipment , including refrigerators , freezers and prep tables ; food processing equipment , including slicers , mixers and scales ; kitchen exhaust , ventilation and pollution control systems ; and food equipment service , maintenance and repair . the results of operations for the food equipment segment for 2016 , 2015 and 2014 were as follows : 2016 compared to 2015 replace_table_token_11_th operating revenue increased due to organic revenue growth , partially offset by the unfavorable effect of foreign currency translation . organic revenue increased 2.8 % as equipment and service organic revenue grew 3.9 % and 0.8 % , respectively . 25 ◦ north american organic revenue increased 4.3 % . north american equipment revenue increased 6.6 % primarily due to strong end market demand in the retail , refrigeration , warewash and cooking businesses . service revenue in north america increased 0.8 % . ◦ international organic revenue grew 0.8 % . international equipment organic revenue increased 0.8 % primarily due to growth in europe and asia . international service organic revenue grew 0.9 % . operating margin of 25.4 % increased 170 basis points driven by positive operating leverage of 60 basis points , the net benefits of the company 's enterprise initiatives and cost management of 40 basis points , favorable price/cost of 40 basis points and lower restructuring expenses . 2015 compared to 2014 replace_table_token_12_th operating revenue decreased 3.7 % due to the unfavorable effect of foreign currency translation , partially offset by organic revenue growth . organic revenue increased 3.4 % in 2015 . ◦ north american organic revenue increased 5.6 % . north american equipment revenue increased 6.6 % primarily due to product innovation and improved market penetration in the warewash and refrigeration businesses . service revenue in north america increased 4.1 % . ◦ international organic revenue increased 1.0 % .
| consolidated results of operations leveraging itw 's highly differentiated and proprietary business model , the company delivered strong financial results in 2016 despite a challenging global macro environment and foreign currency translation headwinds . with the solid execution of the company 's enterprise strategy initiatives , six of seven segments achieved worldwide organic revenue growth and five of seven segments had operating margin expansion . on july 1 , 2016 , the company completed the acquisition of the engineered fasteners and components business ( `` ef & c '' ) from zf trw for a purchase price of approximately $ 450 million . ef & c had operating revenue of $ 245 million for the six months ended december 31 , 2016. ef & c diluted the company 's operating margin in 2016 by 30 basis points due to lower operating margin and acquisition related expenses . the company expects ef & c to be slightly accretive to earnings in the first twelve months , but expects improved earnings and operating margin performance in later years through the application of the company 's 80/20 business management process . the operating results of ef & c are reported within the company 's automotive oem segment . the acquisition of ef & c did not materially affect the company 's results of operations or financial position for any period presented . refer to note 3. acquisitions in item 8. financial statements and supplementary data for further information . 21 the company 's consolidated results of operations for 2016 , 2015 and 2014 are summarized as follows : 2016 compared to 2015 replace_table_token_5_th operating revenue increased due to growth in organic and acquisition revenues , partially offset by the unfavorable effect of foreign currency translation . organic revenue grew 1.2 % as six of seven segments had worldwide organic revenue growth primarily due to penetration gains , higher end market demand and product innovation .
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the option award will have story_separator_special_tag you should read the following discussion and analysis of our financial condition and results of operations together with our historical consolidated financial statements and the related notes thereto appearing elsewhere in this annual report . some of the information contained in this discussion and analysis or set forth 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 risks and uncertainties . as a result of many factors , including those factors set forth in the `` risk factors '' section of this annual report , our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis . overview we are a biopharmaceutical company engaged in the development of novel anti-infective agents to treat serious infections . we have two product candidates that have been submitted to the u.s. food and drug administration , or the fda , for approval : lefamulin , potentially the first pleuromutilin antibiotic available for oral and intravenous ( or iv ) administration in humans , for the treatment of community-acquired bacterial pneumonia , or cabp and contepo , a potentially first-in-class epoxide antibiotic for intravenous ( or iv ) use in the united states for complicated urinary tract infections , or cuti . we may potentially develop lefamulin and contepo for additional indications . both lefamulin formulations and contepo were granted qualified infectious disease product , or qidp , and fast track designation by the fda , enabling priority review of the new drug applications , or the ndas by the fda . lefamulin is a semi-synthetic pleuromutilin antibiotic discovered and developed by our team with the potential to be first-in-class for iv and oral in humans . it inhibits the synthesis of bacterial protein , which is required for bacteria to grow by binding with high affinity , high specificity and at molecular targets that are different than other antibiotic classes . based on results from two global , phase 3 clinical trials , we believe that lefamulin is well-positioned for use as a first-line monotherapy for the treatment of cabp due to its novel mechanism of action , targeted spectrum of activity , resistance profile , achievement of substantial drug concentration in lung tissue and fluid , availability of oral and iv formulations and a 117 generally well-tolerated safety profile . we believe lefamulin represents a potentially important new treatment option for the five to six million adults in the united states diagnosed with cabp each year . on july 24 , 2018 , we completed the acquisition of zavante therapeutics , inc. , or zavante , a privately-held late clinical-stage biopharmaceutical company focused on developing novel therapies to improve the outcomes of hospitalized patients . zavante 's lead product candidate is contepo ( fosfomycin for injection , previously referred to as zti-01 and zolyd ) . contepo is a novel , potentially first-in-class investigational intravenous antibiotic in the united states with a broad spectrum of gram-negative and gram-positive activity , including activity against most contemporary multi-drug resistant , or mdr , strains such as extended-spectrum b-lactamase- , or esbl , producing enterobacteriaceae . iv fosfomycin has been approved for a number of indications and utilized for over 45 years in europe to treat a variety of serious bacterial infections , including cutis . contepo utilizes a new dosing regimen that optimize its pharmacokinetics and pharmacodynamics . we believe these attributes , the extensive clinical experience worldwide and the positive efficacy and safety results from the phase 2/3 clinical trial support contepo as a first-line treatment for cutis , including acute pyelonephritis , or ap , suspected to be caused by mdr pathogens . at least 20 % of cutis are caused by mdr bacteria and limited treatment options are available in the u.s. in addition , non-clinical data have shown that contepo acts in combination with certain other antibiotics to improve bacterial killing . we submitted an nda , for marketing approval of contepo for the treatment of cuti in adults in the united states , to the fda in october 2018. the nda submission is utilizing the 505 ( b ) ( 2 ) regulatory pathway and is supported by a robust data package , including a pivotal phase 2/3 clinical trial ( known as zeus ) , which met its primary endpoint of statistical non-inferiority to piperacillin/tazobactam in patients with cuti , including ap . we submitted two ndas to the fda for the oral and iv formulations of lefamulin for the treatment of cabp in december 2018. the fda has granted us a prescription drug user fee act , or pdufa , target action date of april 30 , 2019 for contepo and a pdufa target action date of august 19 , 2019 for lefamulin . we plan to submit a marketing authorization application for lefamulin in europe in the first half of 2019. the two ndas are supported by two pivotal , phase 3 clinical trials ( known as leap 1 and leap 2 ) that evaluated the safety and efficacy of iv and oral lefamulin compared to moxifloxacin in the treatment of adults with cabp , including the option to switch from iv to oral administration and a short course oral treatment with lefamulin . in both leap 1 and leap 2 , lefamulin was demonstrated to be non-inferior to moxifloxacin , and met both the fda and european medicines agency , or ema , primary and secondary efficacy endpoints for the treatment of cabp . lefamulin was also shown to be generally well-tolerated when administered either orally or intravenously . both lefamulin formulations and contepo were granted qidp and fast track designation by the fda , enabling potential priority review of the ndas by the fda . we were notified by the fda that contepo iv and both formulations of lefamulin were granted priority review following acceptance of the ndas . story_separator_special_tag zavante then met with the fda in the second half of 2017 to discuss the filing of an nda for contepo . we submitted an nda for marketing approval of contepo for the treatment of cuti in adults in the united states , to the fda in october 2018. the fda has granted us pdufa target action date of april 30 , 2019 for contepo . we believe that the zeus study results , along with extensive clinical experience with iv fosfomycin for over 45 years outside the united states , support contepo as a potential first-line treatment for cuti suspected to be caused by mdr pathogens in the united states . a number of studies report that at least 20 % of cutis are caused by mdr bacteria and limited treatment options are available in the united states . in addition , non-clinical data have shown that contepo acts in combination with certain other antibiotics to improve bacterial killing . the fda has designated contepo as a qidp and granted fast track designations to contepo under the gain act for : complicated urinary tract infections , or cuti complicated intra-abdominal infections , or ciai hospital-acquired bacterial pneumonia , or habp ventilator-associated bacterial pneumonia , or vabp acute bacterial skin and skin structure infections , or absssi although we have no current plans to finance development of contepo for indications other than cuti , including ap , these designations make contepo eligible for fast track and generating antibiotic incentives now act , or the gain act , incentives . we may in the future consider additional non-dilutive financing options to advance these programs in the clinic . in recognition of the growing need for the development of new antibiotics , recent regulatory changes , including priority review and regulatory guidance enabling smaller clinical trials , have led to renewed interest from the pharmaceutical industry in anti-infective development . for example , the fda safety and innovation act became law in 2012 and included the gain act , which provides incentives , including access to expedited fda review for approval , fast track designation and five years of potential data exclusivity extension for the development of new qidps . on march 1 , 2017 , nabriva therapeutics plc , or nabriva ireland , was incorporated in ireland under the name hyacintho 2 plc , and was renamed to nabriva therapeutics plc on april 10 , 2017 , in order to effectuate the change of the jurisdiction of incorporation of the ultimate company of the group from austria to ireland . nabriva ireland replaced nabriva therapeutics ag , or nabriva austria , as the ultimate parent company on june 23 , 2017 , following the conclusion of a tender offer , or the exchange offer , in which holders of 98.6 % of the outstanding share capital of nabriva austria exchanged their holdings for ordinary shares , $ 0.01 nominal value per share , of nabriva ireland , which 120 we refer to as the redomiciliation transaction . the ordinary shares of nabriva ireland were issued on a one-for-ten basis to the holders of the nabriva austria common shares and on a one-for-one basis to the holders of the nabriva austria american depositary shares , or nabriva austria adss , participating in the exchange offer . on june 26 , 2017 , the ordinary shares of nabriva ireland began trading on the nasdaq global market under the symbol `` nbrv , '' the same symbol under which the nabriva austria adss were previously traded . this transaction was accounted for as a merger between entities under common control ; accordingly , the historical financial statements of nabriva austria for periods prior to this transaction are considered to be the historical financial statements of nabriva ireland . as of august 18 , 2017 , 100 % of nabriva austria share capital had been exchanged for ordinary shares of nabriva ireland . nabriva austria was incorporated in october 2005 in austria under the name nabriva therapeutics forschungs gmbh , a limited liability company organized under austrian law , as a spin-off from sandoz gmbh and commenced operations in february 2006. in 2007 , nabriva austria transformed into a stock corporation ( aktiengesellschaft ) under the name nabriva therapeutics ag . on october 19 , 2017 , nabriva austria was converted into a limited liability company under austrian law and renamed nabriva therapeutics gmbh . in 2014 , we established our wholly owned u.s. subsidiary , which began operations in august 2014. since inception , we have incurred significant operating losses . as of december 31 , 2018 , we had an accumulated deficit of $ 394.0 million . to date , we have financed our operations primarily through our 2018 equity offering , our term loan , our `` at-the-market '' offering facility , our 2017 equity offering , our 2016 rights offering , our 2015 initial public offering , private placements of our equity securities , convertible loans and research and development support from governmental grants and loans . we have devoted substantially all of our efforts to research and development , including clinical trials . our ability to generate profits from operations and remain profitable depends on our ability to successfully develop and commercialize drugs that generate significant revenue . we expect to continue to incur significant expenses and increasing operating losses for at least the next several years . we expect to continue to invest in critical pre-commercialization and supply chain activities prior to potentially receiving marketing approval for lefamulin and contepo and making them available to patients . our expenses will increase if we suffer any regulatory delays or are required to conduct additional clinical trials to satisfy regulatory requirements . if we obtain marketing approval for lefamulin , contepo or any other product candidate that we develop , in-license or acquire , we expect to incur significant commercialization expenses related to product sales , marketing , distribution and manufacturing .
| results of operations comparison of years ended december 31 , 2017 and 2018 replace_table_token_4_th revenues revenues increased by $ 4.3 million from $ 5.3 million for the year ended december 30 , 2017 to $ 9.7 million for the year ended december 31 , 2018 , primarily due to the $ 5.0 million upfront payment received from our sinovant license agreement , as well as a $ 1.5 million of variable consideration related to a future milestone payment pursuant to the sinovant license agreement that we believe is probable to be met . grant revenue from research premiums provided to us by the austrian government decreased by $ 2.2 million as a result of a decrease in our research and development expenses for which we can receive grant revenue . research and development expenses research and development expenses increased by $ 32.7 million from $ 49.6 million for the year ended december 31 , 2017 to $ 82.3 million for the year ended december 31 , 2018. the increase was primarily due to a $ 32.0 million increase for in-process research and development expenses associated with the acquisition of zavante assets , a $ 6.5 million increase in research consulting fees , a $ 6.5 million increase associated with the payment of the nda fees to the fda for lefamulin and contepo , a $ 1.9 million increase in staff costs due to the addition of employees , a $ 0.3 million increase in travel and other research and development costs , partly offset by a $ 13.9 million decrease in research materials and purchased services related to the development of lefamulin and a $ 0.7 million decrease in stock-based compensation expense .
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certain statements in this annual report on form 10-k , including statements about the focus of open text corporation ( “ opentext ” or “ the company ” ) in our fiscal year beginning on july 1 , 2013 and ending june 30 , 2014 ( fiscal 2014 ) on growth in earnings and cash flows , creating value through investments in broader enterprise information management ( eim ) capabilities , distribution , the company 's presence in the cloud and in growth markets , its financial condition , results of operations and earnings , declaration of quarterly dividends , and other matters , may contain words such as `` anticipates '' , `` expects '' , `` intends '' , `` plans '' , `` believes '' , `` seeks '' , `` estimates '' , `` may '' , `` could '' , `` would '' , `` might ” , “ will ” and variations of these words or similar expressions are considered forward-looking statements or information under applicable securities laws . in addition , any information or statements that refer to expectations , beliefs , plans , projections , objectives , performance or other characterizations of future events or circumstances , including any underlying assumptions , are forward-looking , and based on our current expectations , forecasts and projections about the operating environment , economies and markets in which we operate . forward-looking statements reflect our current estimates , beliefs and assumptions , which are based on management 's perception of historic trends , current conditions and expected future developments , as well as other factors it believes are appropriate in the circumstances , such as certain assumptions about the economy , as well as market , financial and operational assumptions . management 's estimates , beliefs and assumptions are inherently subject to significant business , economic , competitive and other uncertainties and contingencies regarding future events and , as such , are subject to change . we can give no assurance that such estimates , beliefs and assumptions will prove to be correct . forward-looking statements involve known and unknown risks , uncertainties and other factors and assumptions that may cause the actual results , performance or achievements to differ materially . such factors include , but are not limited to : ( i ) the future performance , financial and otherwise , of opentext ; ( ii ) the ability of opentext to bring new products and services to market and to increase sales ; ( iii ) the strength of the company 's product development pipeline ; ( iv ) the company 's growth and profitability prospects ; ( v ) the estimated size and growth prospects of the eim market ; ( vi ) the company 's competitive position in the eim market and its ability to take advantage of future opportunities in this market ; ( vii ) the benefits of the company 's products and services to be realized by customers ; ( viii ) the demand for the company 's products and services and the extent of deployment of the company 's products and services in the eim marketplace ; and ( ix ) the company 's financial condition and capital requirements . the risks and uncertainties that may affect forward-looking statements include , but are not limited to : ( i ) integration of acquisitions and related restructuring efforts , including the quantum of restructuring charges and the timing thereof ; ( ii ) the possibility that the company may be unable to meet its future reporting requirements under the exchange act , and the rules promulgated thereunder ; ( iii ) the risks associated with bringing new products and services to market ; ( iv ) fluctuations in currency exchange rates ; ( v ) delays in the purchasing decisions of the company 's customers ; ( vi ) the competition the company faces in its industry and or marketplace ; ( vii ) the final determination of litigation , tax audits and other legal proceedings ; ( viii ) the possibility of technical , logistical or planning issues in connection with the deployment of the company 's products or services ; ( ix ) the continuous commitment of the company 's customers ; and ( x ) demand for the company 's products and services . readers are cautioned not to place undue reliance upon any such forward-looking statements , which speak only as of the date made . unless otherwise required by applicable securities laws , the company disclaims any intention or obligation to update or revise any forward-looking statements , whether as a result of new information , future events or otherwise . readers should carefully review part i , item 1a “ risk factors ” and other documents we file from time to time with the securities and exchange commission and other applicable securities regulators . a number of factors may materially affect our business , financial condition , operating results and prospects . these factors include but are not limited to those set forth in part i , item 1a “ risk factors ” and elsewhere in this annual report on form 10-k. any one of these factors , and other factors that we are unaware of , or currently deem immaterial , may cause our actual results to differ materially from recent results or from our anticipated future results . the following md & a is intended to help readers understand our results of operations and financial condition , and is provided as a supplement to , and should be read in conjunction with , our consolidated financial statements and the accompanying notes to our consolidated financial statements under part ii , item 8 of this annual report on form 10-k. all dollar and percentage comparisons made herein under the sections titled “ fiscal 2014 compared to fiscal 2013 ” refer to fiscal 2014 compared with the twelve months ended june 30 , 2013 ( fiscal 2013 ) . story_separator_special_tag with the acquisition of gxs , our cloud services revenue has grown and we expect cloud services revenue to continue to be a recurring and growing stream of income in the future . we also believe that our diversified geographic profile helps strengthen our position and helps to reduce the impact of a downturn in the economy that may occur in any one specific region . critical accounting policies and estimates the preparation of financial statements in conformity with u.s. gaap requires us to make estimates , judgments and assumptions that affect the amounts reported in the consolidated financial statements . these estimates , judgments and assumptions are evaluated on an ongoing basis . we base our estimates on historical experience and on various other assumptions that we believe are reasonable at that time , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . actual results may differ materially from those estimates . the accounting policies that reflect our more significant estimates , judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following : ( i ) revenue recognition , ( ii ) capitalized software ( iii ) goodwill , ( iv ) acquired intangibles , ( v ) restructuring charges , ( vi ) business combinations , ( vii ) foreign currency , and ( viii ) income taxes . revenue recognition license revenues we recognize revenues in accordance with asc topic 985-605 , “ software revenue recognition ” ( topic 985-605 ) . we record product revenues from software licenses and products when persuasive evidence of an arrangement exists , the software product has been shipped , there are no significant uncertainties surrounding product acceptance by the customer , the fees are fixed and determinable , and collection is considered probable . we use the residual method to recognize revenues on delivered elements when a license agreement includes one or more elements to be delivered at a future date if evidence of the fair value of all undelivered elements exists . if an undelivered element for the arrangement exists under the license arrangement , revenues related to the undelivered element is deferred based on vendor-specific objective evidence ( vsoe ) of the fair value of the undelivered element . our multiple-element sales arrangements include arrangements where software licenses and the associated post contract customer support ( pcs ) are sold together . we have established vsoe of the fair value of the undelivered pcs element based on the contracted price for renewal pcs included in the original multiple element sales arrangement , as substantiated by contractual terms and our significant pcs renewal experience , from our existing worldwide base . our multiple element sales arrangements generally include irrevocable rights for the customer to renew pcs after the bundled term ends . the customer is not subject to any economic or other penalty for failure to renew . further , the renewal pcs options are for services comparable to the bundled pcs and cover similar terms . it is our experience that customers generally exercise their renewal pcs option . in the renewal transaction , pcs is sold on a stand-alone basis to the licensees one year or more after the original multiple element sales arrangement . the exercised renewal pcs price is consistent with the renewal price in the original multiple element sales arrangement , although an adjustment to reflect consumer price changes is common . if vsoe of fair value does not exist for all undelivered elements , all revenues are deferred until sufficient evidence exists or all elements have been delivered . 31 we assess whether payment terms are customary or extended in accordance with normal practice relative to the market in which the sale is occurring . our sales arrangements generally include standard payment terms . these terms effectively relate to all customers , products , and arrangements regardless of customer type , product mix or arrangement size . exceptions are only made to these standard terms for certain sales in parts of the world where local practice differs . in these jurisdictions , our customary payment terms are in line with local practice . cloud revenues cloud revenues consist of subscription revenues for our software as a service offering and managed service arrangements . the majority of the contracts for our software as a service offering and managed service arrangements are based on customers ' usage over a period and the revenue associated with those contracts are recognized once the usage has been measured , the fee fixed and determinable and collection is probable . in certain managed services arrangements , we sell transaction processing along with implementation and start-up services . the implementation and start-up services typically do not have stand-alone value and , therefore , they do not qualify as separate units of accounting and are not separated . we believe these services do not have stand-alone value as the customer generally only receives value from these services in conjunction with the use of the related transaction processing service , we do not generally sell such services separately , and the output of such services can not be re-sold by the customer . revenues related to implementation and start-up services are recognized over the estimated customer life . in some arrangements , we also sell professional services which do have stand-alone value and can be separated from other elements in the arrangement . the revenue related to these services is recognized as the service is performed . we defer all direct and relevant costs associated with implementation of long-term customer contracts to the extent such costs can be recovered through guaranteed contract revenues . service revenues service revenues consist of revenues from consulting , implementation , training and integration services . these services are set forth separately in the contractual arrangements such that the total price of the customer arrangement is expected to vary as a result of the inclusion or exclusion of these services .
| summary of results of operations replace_table_token_6_th 37 replace_table_token_7_th ( 1 ) americas consists of countries in north , central and south america . ( 2 ) emea primarily consists of countries in europe , africa and the united arab emirates . ( 3 ) asia pacific primarily consists of the countries japan , australia , hong kong , korea , philippines , singapore and new zealand . ( 4 ) see `` use of non-gaap financial measures '' ( discussed later in the md & a ) for a reconciliation of non-gaap-based measures to gaap-based measures . revenues , cost of revenues and gross margin by product type 1 ) license revenues : license revenues consist of fees earned from the licensing of software products to customers . our license revenues are impacted by the strength of general economic and industry conditions , the competitive strength of our software products , and our acquisitions . cost of license revenues consists primarily of royalties payable to third parties . replace_table_token_8_th fiscal 2014 compared to fiscal 2013 : license revenues increased by $ 29.6 million , which was geographically attributable to an increase in emea of $ 10.9 million , an increase in asia pacific of $ 9.6 million , and an increase in americas of $ 9.1 million . the number of license deals greater than $ 0.5 million that closed during fiscal 2014 increased as compared to the prior fiscal year ( 77 deals in fiscal 2014 compared to 68 deals in fiscal 2013 ) . the acquisition of gxs contributed approximately $ 2.6 million of license revenues during fiscal 2014. cost of license revenues decreased by $ 2.7 million due to lower third party technology costs . as a result , the gross margin percentage on cost of license revenues increased to approximately 96 % from approximately 94 % .
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the nose rock project consists of mineral rights covering approximately 6,400 acres . the company 's mineral rights are directly owned and are situated in sections 10 , 11 , 15 , 17 , 18 , 19 , 20 , 29 , 30 , and 31 , township 19 north , range 11 west , mckinley county , new mexico . the surface estate over the company 's deeded mineral rights is owned in fee by the navajo nation . there are no royalties or interests held by others relating to the company 's mineral rights . west largo the west largo project lands are comprised of 75 unpatented lode mining claims that were staked in sections 20 and 28 , and four sections of fee mineral rights in sections 17 , 19 , 21 and 29 , all situated in township 15 north , range 10 west . collectively , the properties cover an area of approximately 3,840 acres . the company has a 100 % interest in these properties . the surface estates for sections 17 and 21 are navajo allotments . the surface over the unpatented lode mining claims in sections 20 and 28 is public domain managed by the blm . the surface for section 19 is held in trust for the navajo nation , and the surface of section 29 is owned by the elkins ranch . we do not hold any surface access rights or agreements for sections 17 , 19 or 21. there are no work or royalty obligations for the unpatented lode mining claims , which we own . the unpatented claims are subject to annual maintenance payments of $ 140 per claim to the blm in order to maintain the mineral rights in good standing . a production royalty of 2.5 percent of `` ore value `` is payable to the elkins ranch for any production from section 29. roca honda projects the roca honda project lies about 4 miles northwest of the town of san mateo in mckinley county , new mexico . the company owns 36 unpatented lode mining claims situated in section 8 , township 13 north , range 8 west , mckinley county , new mexico , lease 31 unpatented claims in f-17 uranium resources , inc. notes to consolidated financial statements ( continued ) december 31 , 2013 and 2012 4. property , plant and equipment ( continued ) section 11 , and own fee mineral rights covering sections 13 , 15 and 17 , all of which are in township 13 north , range 8 west . collectively , the company 's mineral rights holdings in the roca honda project area are approximately 3,085 acres . cebolleta property in connection with the merger of neutron we acquired the cebolleta lease with la merced del pueblo de cebolleta ( the `` cebolleta land grant `` ) , a privately held land grant , to lease the cebolleta property , which is composed of approximately 6,717 acres of fee ( deeded ) surface and mineral rights . the cebolleta lease provides for : ( i ) a term of ten years and so long thereafter as cibola is conducting operations on the cebolleta property ; ( ii ) initial payments to the cebolleta land grant of $ 5,000,000 ; ( iii ) a recoverable reserve payment equal to $ 1.00 multiplied by the number of pounds of recoverable uranium reserves upon completion of a feasibility study to be completed within six years , less ( a ) the $ 5,000,000 referred to in ( ii ) above , and ( b ) not more than $ 1,500,000 in annual advance royalties previously paid pursuant to ( iv ) ; ( iv ) annual advanced royalty payments of $ 500,000 ; ( v ) gross proceeds royalties from 4.50 % to 8.00 % based on the then current price of uranium ; ( vi ) employment opportunities and job-skills training for the members of the cebolleta land grant and ( vii ) funding of annual higher education scholarships for the members of the cebolleta land grant . the cebolleta lease provides cibola with the right to explore for , mine , and process uranium deposits present on the cebolleta property . in february 2012 , cibola entered into an amendment of its mining story_separator_special_tag forward looking statements this item 7 contains `` forward-looking statements . '' these statements include , without limitation , statements relating to liquidity , financing of operations , continued volatility of uranium prices and other matters . the words `` believes , '' `` expects , '' `` projects , '' `` targets , '' `` estimates '' or similar expressions identify forward-looking statements . we do not undertake to update , revise or correct any of the forward-looking information . readers are cautioned that such forward-looking statements should be read in conjunction with our disclosures under the heading : `` risk factors '' beginning on page 12. restatement of previously reported consolidated financial information on december 17 , 2013 , we filed an amended annual report on form 10-k/a ( `` form 10-k/a '' ) to our annual report on form 10-k for the fiscal year ended december 31 , 2012 to amend and restate the company 's consolidated financial statements and related disclosures as of december 31 , 2011 and 2012 and for the years ended december 31 , 2010 , 2011 and 2012 ( including restated financial information as of and for the interim periods contained therein ) by reclassifying approximately $ 9.0 million of costs , approximately $ 3.9 million of which were recorded before 2010 , from property , plant and equipment to mineral property expenses , as more fully described in note 2 to the consolidatedfinancial statements contained in the form 10-k/a . story_separator_special_tag the company is not currently conducting uranium production activities and has no uranium inventory . the company is not projecting significant sales revenue and related cash inflows for 2014 . 57 on november 13 , 2013 , the company and its largest stockholder , rcf entered into a loan agreement ( the `` loan agreement '' ) whereby rcf agreed , subject to the terms and conditions set forth in the loan agreement , to provide a secured convertible loan facility of up to $ 15.0 million to the company . the facility consists of three tranches of $ 5.0 million each . rcf advanced $ 3.0 million of the first $ 5.0 million tranche shortly following the closing of the loan agreement , and on january 29 , 2014 , the company 's stockholders , excluding rcf , approved the loan agreement and the issuance of shares thereunder . following such approval , rcf advanced the remaining $ 2.0 million of the first tranche . two additional tranches of $ 5.0 million each are available under the loan agreement , subject to a determination by the company 's board of directors to draw such amounts and the terms and conditions of the rcf loan agreement . the company 's convertible debentures may be converted by rcf at any time prior the convertible debt facility 's maturity date of december 31 , 2016. the conversion price is $ 2.60 per share , but can be adjusted downward should the company issue shares in any equity financing for less than $ 2.60 per share prior to november 13 , 2014. on october 28 , 2011 , the company entered into an at-the-market sales agreement with btig , llc , allowing it to sell from time to time shares of its common stock having an aggregate offering price of up to $ 15.0 million through an `` at-the-market '' equity offering program ( `` atm sales agreement '' ) . from january 17 , 2014 to january 31 , 2014 , the company sold 523,350 shares of common stock for net proceeds of $ 1.9 million under its atm sales agreement . as of february 1 , 2014 the company has a total of $ 7.1 million available for future sales under the atm sales agreement . on february 12 , 2014 , the company completed its $ 10.3 million registered direct offering with the issuance of 3,960,000 shares of common stock at a price of $ 2.60 per share for net proceeds of $ 9.5 million . the company and rcf are currently discussing the level of participation accorded rcf per its anti-dilution rights under the loan agreement . the company expects that its existing cash , atm sales agreement and other public offerings will provide it the necessary liquidity for 2014. additional funding under the atm sales agreement or other public offerings is subject to market conditions . in the event funds are not available , we may be required to change our planned business strategies . 58 contractual obligations the table below sets forth our best estimates as to the amounts and timing of future payments relating to our most significant contractual obligations as of december 31 , 2013 , except as otherwise noted . replace_table_token_11_th ( 1 ) includes interest of 12 % on initial advance , then 10 % following the shareholder approval on january 29 , 2014. critical accounting policies our significant accounting policies are described in note 2 to the consolidated financial statements on page f-7 of this form 10-k. we believe our most critical accounting policies involve those requiring the use of significant estimates and assumptions in determining values or projecting future costs . specifically regarding our uranium properties , significant estimates were utilized in determining the carrying value of these assets . these assets have been recorded at their estimated net realizable value for impairment purposes , which is less than our cost . the actual value realized from these assets may vary significantly from these estimates based upon market conditions , financing availability and other factors . future market conditions in particular can be difficult to predict and measure because of the impact of events that affect public acceptance of nuclear energy , the limited size of the market for the use of uranium , changes in the prices of alternative energy sources , development of new low-cost alternative energy sources and other factors . regarding our reserve for future restoration and reclamation costs , significant estimates were utilized in determining the future costs to complete the groundwater restoration and surface reclamation at our isr sites . estimating future costs can be difficult and unpredictable because they are based principally on current legal and regulatory requirements and isr site closure plans that may change materially . the laws and regulations governing isr site closure and remediation in a particular jurisdiction are subject to review at any time and may be amended to impose additional requirements and conditions which may cause our provisions for environmental liabilities to be underestimated and could materially affect our financial position or results of operations . estimates of future restoration and reclamation costs are also subject to operational risks such as acceptance of treatment techniques or other operational changes . also , the calculation of reserves , other mineralized material and grading are estimates and depend upon geological interpretation and statistical inferences or assumptions drawn from drilling and sampling analysis , which may prove to be unpredictable . there is a degree of uncertainty attributable to the calculation of reserves , mineralized material and corresponding grades . until reserves and other mineralized materials are actually mined and processed , the quantity of ore and grades must be considered as an estimate only . in addition , the quantity of reserves and other mineralized materials and ore may vary depending on the price of uranium . any material change in the quantity of reserves , other mineralized materials ,
| financial condition and results of operations comparison of twelve months ended december 31 , 2013 and 2012 uranium sales during the years ended 2013 and 2012 we had no uranium sales . cost of uranium sales the cost of operations is comprised of operating expenses , mineral property expenses , accretion and amortization of the asset retirement obligations , depreciation and depletion expenses , and impairment of uranium properties . during 2013 , cost of operations totaled $ 10.0 million , primarily for stand-by operations , and maintenance and monitoring activities at our rosita and kingsville dome projects . during 2012 , cost of uranium sales totaled $ 9.0 million , primarily for stand-by operations , and maintenance and monitoring activities at our rosita and kingsville dome projects . the increase in cost of sales was primarily related to increased impairment of uranium properties during fiscal year 2013 , partially offset by a decrease in mineral property expenses . 53 the following table details our production cost of uranium sales for the years ended december 31 , 2013 and 2012 : replace_table_token_8_th operating expenses during 2013 , we incurred operating expenses of approximately $ 2,693,000 , of which approximately $ 2,289,000 was in connection with the kingsville dome pond recovery project , and approximately $ 404,000 for other south texas projects . during 2012 , we incurred operating expenses of approximately $ 2,565,000 , of which approximately $ 2,293,000 was in connection with the kingsville dome pond recovery project , and approximately $ 272,000 for other south texas projects . all such costs were from stand-by and or care and maintenance activities . mineral property expenses during 2013 , we incurred mineral property expenses of approximately $ 2,522,000 , of which $ 1,658,000 was spent on our new mexico mineral properties for land holding costs and permitting costs at the churchrock project , the crownpoint project and the juan tafoya and cebolleta properties .
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we are closely monitoring the current and potential impact of the covid- 19 pandemic and future opec actions on all aspects of our business , including how these events may impact our future operations , financial results , liquidity , employees and operators . the impact of the covid- 19 pandemic and the related economic downturn and the historically low oil and natural gas prices on the account of the oil price war between opec and other oil producing countries is rapidly evolving . we can not predict the long-term impact of these events on our liquidity , financial position , results of operations or cash flows due to uncertainties including the severity of covid- 19 , the duration of the outbreak domestically and worldwide , additional governmental or other actions taken to combat covid- 19 and the effect covid- 19 and the current depressed oil prices will have on the demand for oil and natural gas . these situations remain fluid and unpredictable , and we are actively managing our response . f- 9 dorchester minerals , l.p. ( a delaware limited partnership ) notes to consolidated financial statements 2. acquisition for units on march 29 , 2019 , pursuant to a contribution and exchange agreement with h. huffman & co. , a limited partnership , an oklahoma limited partnership ( “ hhc ” ) , the buffalo co. , a limited partnership , an oklahoma limited partnership ( “ tbc ” and together with hhc , the “ acquired entities ” ) , huffman oil co. , l.l.c . , an oklahoma limited liability company , and the equity holders of the acquired entities , the partnership acquired ( i ) a 96.97 % net profits interest in certain working interests in various oil and gas properties owned by hhc , ( ii ) all of the minerals and royalty interests held by hhc , and ( iii ) all of the minerals and royalty interests held by tbc in exchange for 2,400,000 common units representing limited partnership interests in the partnership ( “ common units ” ) valued at $ 43.8 million and issued pursuant to the partnership 's acquisition shelf registration statements on form s- 4. the acquisition was complimentary to our business . the acquired entities were accounted for as an acquisition of assets under u.s. gaap . accordingly , the cost of the acquisition was allocated on a relative fair value basis and transaction costs were capitalized as a component of the cost of the assets acquired . the consolidated balance sheet as of december 31 , 2019 includes $ 42.9 million in net property additions . net property additions includes $ 4.3 million of unproved properties acquired that were recorded to the oil and natural gas properties full cost pool , thereby accelerating the costs subject to depletion . the partnership subsequently filed an acquisition shelf registration statement on form s- 4 that became effective june 6 , 2019 and a shelf registration statement on form s- 3 that became effective august 21 , 2019. at present , 20,000,000 units remain available for issuance under the partnership 's registration statements . on october 21 , 2020 , the partnership and affiliates of its general partner closed the divestiture of our immaterial hhc entity , including all associated working interest properties and net profits interest . 3. net profits interest divestiture on september 30 , 2020 , the partnership and affiliates of its general partner closed the divestiture of our hugoton net profits interest located in texas county , oklahoma and stevens county , kansas to a third party . in accordance with the full cost method of accounting , as the divestiture did not represent a significant portion of the partnership 's reserves , gross divestiture proceeds of $ 5.7 million were credited to the oil and natural gas properties full cost pool as of december 31 , 2020. transaction costs of $ 0.5 million are included in general and administrative expenses on the consolidated income statement for the year ended december 31 , 2020. holdbacks of $ 0.2 million are included in trade and other receivables story_separator_special_tag 2020 overview our results during 2020 were affected by industrywide volatility in terms of covid-19 pandemic driven demand reductions and price challenges resulting in operator curtailments and decreased activity levels . significant results include the following : ● net income of $ 21.9 million ; ● distributions of $ 48.2 million to our limited partners ; ● divestiture of our hugoton net profits interest located in texas county , oklahoma and stevens county , kansas , to a third party for $ 5.0 million in proceeds , net of transaction costs and customary holdbacks . this included operated working interests and related properties , our field office and our gathering system and related assets ; ● first payments on 414 gross and three net new wells completed on our royalty properties and 90 gross and two net new wells completed on our npi properties . the wells were located in 60 counties and parishes in seven states with the majority of the activity concentrated in the permian basin and bakken . included in these totals are wells in which we own both a royalty interest and a net profits interest . wells with such overlapping interests are counted in both categories ; ● total lease bonus of $ 0.3 million includes consummation of 14 leases and pooling elections of our mineral interest in undeveloped properties located in nine counties in two states . critical accounting policies we utilize the full cost method of accounting for costs related to our oil and natural gas properties . story_separator_special_tag we currently expect to have sufficient liquidity to fund our distributions to unitholders and operations despite potential material uncertainties that may impact us as a result of the ongoing covid-19 pandemic and continued oil and natural gas market volatility . our ability to fund future distributions to unitholders may be affected by the prevailing economic conditions in the oil and natural gas market and other financial and business factors , including the ongoing covid-19 pandemic , which are beyond our control . if market conditions were to change due to further declines in oil prices or uncertainty created by the ongoing covid-19 pandemic , and our revenues were reduced significantly or our operating costs were to increase significantly , our cash flows and liquidity could be reduced . we continue to evaluate potential reductions in all discretionary spending . the current economic environment is volatile , and therefore , we can not predict the ultimate impact on our liquidity or cash flows . off-balance sheet arrangements we have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition , changes in financial condition , revenues or expenses , results of operations , liquidity , capital expenditures or capital resources that are material to unitholders . liquidity and working capital cash and cash equivalents were $ 11.2 million as of december 31 , 2020 and $ 15.3 million as of december 31 , 2019. distributions distributions to limited partners and the general partner related to cash receipts were as follows : replace_table_token_10_th in general , the limited partners are allocated 96 % of the royalty properties ' net receipts and 99 % of npi net receipts . net profits interests we receive monthly payments from the operating partnership equal to 96.97 % of the net proceeds actually realized by the operating partnership from the properties underlying the net profits interest ( or “ npi ” ) . the operating partnership retains the 3.03 % balance of these net proceeds . net proceeds generally reflect gross proceeds attributable to oil and natural gas production actually received during the month , less production costs actually paid during the same month , net of budgeted capital expenditures . production costs generally reflect drilling , completion , operating and general and administrative costs and exclude depletion , amortization and other non-cash costs . the operating partnership made npi payments to us totaling $ 19.6 million during october 2019 through september 2020 , which payments reflected 96.97 % of total net proceeds of $ 20.2 million realized from september 2019 through august 2020. net proceeds realized by the operating partnership during september through november 2020 were reflected in npi payments made during october through december 2020. these payments were included in the fourth quarter distribution paid in early 2021 and are excluded from this 2020 analysis . 28 royalty properties revenues from the royalty properties are typically paid to us with proportionate severance ( production ) taxes deducted and remitted by others . additionally , we generally pay ad valorem taxes , general and administrative costs , and marketing and associated costs because royalties and lease bonuses generally do not otherwise bear operating or similar costs . after deduction of the above described costs including cash reserves , our net cash receipts from the royalty properties during october 2019 through september 2020 were $ 30.0 million , of which $ 28.8 million ( 96 % ) was distributed to the limited partners and $ 1.2 million ( 4 % ) was distributed to the general partner . proceeds received by us from the royalty properties during october through december 2020 became part of the fourth quarter distribution paid in early 2021 , which is excluded from this 2020 analysis . distribution determinations the actual calculation of distributions is performed each calendar quarter in accordance with our partnership agreement . the following calculation covering the period october 2019 through september 2020 demonstrates the method : replace_table_token_11_th in summary , our limited partners received 96 % , and our general partner received 4 % of the net cash generated by our activities and those of the operating partnership during this period . due to these fixed percentages , our general partner does not have any incentive distribution rights or other right or arrangement that will increase its percentage share of net cash generated by our activities or those of the operating partnership . during the period october 2019 through september 2020 , our partnership 's quarterly distribution payments to limited partners were based on all of its available cash . available cash is defined as all cash and cash equivalents on hand at the end of that quarter ( other than cash proceeds received by the partnership from public or private offering of securities of the partnership ) , less any amount of cash reserves that our general partner determines is necessary or appropriate to provide for the conduct of its business or to comply with applicable laws or agreements or obligations to which we may be subject . our practice is to accrue funds quarterly for amounts incurred throughout the year but invoiced and paid annually or semi-annually ( e.g . ad valorem taxes and professional services ) . these amounts generally are not held for periods over one year . fourth quarter 2020 distribution indicated price in an effort to provide information concerning prices of oil and natural gas sales that correspond to our quarterly distributions , management calculates the average price by dividing gross revenues received by the net volumes of the corresponding product without regard to the timing of the production to which such sales may be attributable . this “ indicated price ” does not necessarily reflect the contractual terms for such sales and may be affected by transportation costs , location differentials , and quality and gravity adjustments . while the relationship between the partnership 's cash receipts and the
| results of operations normally , our period-to-period changes in net income and cash flows from operating activities are principally determined by changes in oil and natural gas sales volumes and prices , and to a lesser extent , by capital expenditures deducted under the npi calculation . our portion of oil and natural gas sales volumes and average sales prices are shown in the following table . replace_table_token_9_th comparison of the years ended december 31 , 2020 and 2019 the decrease in oil sales volumes attributable to our royalty properties during 2020 is primarily a result of decreased permian basin production due to lower suspense releases on new wells , operator curtailments based on the low commodity price environment , and natural declines , partially offset by higher suspense releases on new wells in the bakken region and rockies . the decrease in natural gas sales volumes attributable to our royalty properties during 2020 is primarily a result of first and second quarter decreases in production across multiple regions due to operator curtailments based on the low commodity price environment and higher natural declines when compared to the prior year , partially offset by higher suspense releases on new wells in the bakken , rockies , and southeast regions . oil sales volumes attributable to our npi properties remained consistent during 2019 and 2020. the lack of change is primarily a result of higher suspense releases on new wells in the bakken region and increased production in the permian basin , offset by second quarter 2020 bakken region curtailments due to the low commodity price environment .
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an unallocated component can be maintained to cover uncertainties that could affect management 's estimate of probable losses . the unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio . bank owned life insurance bank owned life insurance policies are reflected on the consolidated balance sheets at cash surrender value . changes in the net cash surrender value of the policies , as well as insurance proceeds received , are reflected in non-interest income on the consolidated statements of income and are not subject to income taxes . premises and equipment premises and equipment are stated at cost , less accumulated depreciation and amortization . cost and related allowances for depreciation and amortization of premises and equipment retired or otherwise disposed story_separator_special_tag this discussion and analysis reflects our consolidated financial statements and other relevant statistical data , and is intended to enhance your understanding of our financial condition and results of operations . you should read the information in this section in conjunction with the business and financial information regarding provident bancorp , inc. , including the financial statements , provided in this annual report . 28 covid-19 the outbreak of covid-19 has adversely impacted a broad range of industries in which the company 's customers operate and could impair their ability to fulfill their financial obligations . the world health organization declared covid-19 to be a global pandemic indicating that almost all public commerce and related business activities were to be , to varying degrees , curtailed with the goal of decreasing the rate of new infections . the spread of the outbreak has caused significant disruption in the u.s. economy and has disrupted banking and other financial activity in the areas in which the company operates . the u.s. government and regulatory agencies have taken several actions to provide support to the u.s. economy . most notably , the coronavirus aid , relief and economic security act ( the “ cares act ” ) was signed into law on march 27 , 2020 as a $ 2 trillion legislative package . the goal of the cares act is to prevent a severe economic downturn through various measures , including direct financial aid to american families and economic stimulus to significantly impacted industry sectors . the cares act also includes extensive emergency funding for hospitals and providers . in addition to the general impact of the covid-19 pandemic , certain provisions of the cares act , as well as other recent legislative and regulatory relief efforts , are expected to have a material impact on the company 's operations . also , the actions of the board of governors of the federal reserve system ( the “ frb ” ) to combat the economic contraction caused by the covid-19 pandemic , including the reduction of the target federal funds rate and quantitative easing programs , could , if prolonged , adversely affect the company 's net interest income , margins , and profitability . federal banking agencies issued guidance encouraging financial institutions to work with borrowers that may be unable to meet contractual obligations due to the effects of covid-19 . in addition , section 4013 of the cares act states , “ banks may elect not to categorize loan modifications as tdrs [ troubled debt restructurings ] if they are ( 1 ) related to covid-19 ; ( 2 ) executed on a loan that was not more than 30 days past due as of december 31 , 2019 ; and ( 3 ) executed between march 1 , 2020 , and the earlier of ( a ) 60 days after the date of termination of the national emergency or ( b ) december 31 , 2020. ” the december 31 , 2020 date was subsequently extended to january 1 , 2022 under the consolidated appropriations act , 2021. the company did not classify any modifications related to covid-19 which met either the agency guidance or the cares act conditions as tdrs . the company implemented its business continuity and pandemic plans , which include remote working arrangements for the majority of its workforce . while there has been no material impact to the company 's employees as of this report date , if covid-19 escalates further it could also potentially create business continuity issues . the company does not currently anticipate significant challenges to its ability to maintain systems and controls in light of the measures the company has taken in response to covid-19 . while it is not possible to know the full extent of these impacts as of the date of this filing , detailed below are potentially material items of which we are aware . story_separator_special_tag 108 % ; margin-bottom : .001pt ; margin-left : 0 ; margin-right : 0 ; margin-top : 0 ; text-align : justify ; '' > 30 the qualitative factors are determined based on the various risk characteristics of each loan segment . risk characteristics relevant to each portfolio segment are as follows : residential real estate : we generally do not originate loans with a loan-to-value ratio greater than 80 % and do not grant subprime loans . loans with loan to value ratios greater than 80 % require the purchase of private mortgage insurance . all loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower . the overall health of the economy , including unemployment rates and housing prices , will have an effect on the credit quality in this segment . commercial real estate : loans in this segment are primarily income-producing properties throughout massachusetts and new hampshire . the underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates , which in turn , will have an effect on the credit quality in this segment . management periodically obtains rent rolls and continually monitors the cash flows of these loans . story_separator_special_tag at december 31 , 2020 , net loans were $ 1.31 billion , or 87.3 % of total assets , compared to $ 959.3 million , or 85.5 % of total assets , at december 31 , 2019. increases in commercial loans of $ 114.2 million , or 25.3 % , the acquisition and growth of mortgage warehouse loans to $ 265.4 million , and an increase in commercial real estate loans of $ 20.6 million , or 4.9 % were partially offset by decreases in construction and land development loans of $ 17.8 million , or 38.1 % , residential real estate loans of $ 12.9 million , or 28.3 % , and consumer loans of $ 7.2 million , or 56.4 % . our commercial loan growth attributed to a continued focus on our specialty lending of , enterprise value loans , which increased $ 108.1 million , or 60.7 % , to $ 286.1 million at december 31 , 2020 from $ 178.0 million at december 31 , 2019. also included in commercial loans at december 31 , 2020 are $ 41.8 million in sba ppp loans originated in the second quarter of 2020. this growth was partially offset by a decrease in our specialty lending of renewable energy loans of $ 28.9 million , or 43.8 % , to $ 37.2 million at december 31 , 2020 from $ 66.1 million at december 31 , 2019 due to loan payoffs . the following table sets forth the composition of our loan portfolio by type of loan at the dates indicated , excluding loans held for sale . replace_table_token_7_th _ ( 1 ) includes home equity loans and lines of credit ( 2 ) includes multi-family real estate loans 32 loan maturity . the following table sets forth certain information at december 31 , 2020 regarding the contractual maturity of our loan portfolio . demand loans , loans having no stated repayment schedule or maturity , and overdraft loans are reported as being due in one year or less . the table does not include any estimate of prepayments that could significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below . replace_table_token_8_th the following table sets forth our fixed and adjustable-rate loans at december 31 , 2020 that are contractually due after december 31 , 2021. replace_table_token_9_th asset quality credit risk management . our strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans . management of asset quality is accomplished by internal controls , monitoring and reporting of key risk indicators , and both internal and independent third-party loan reviews . the primary objective of our loan review process is to measure borrower performance and assess risk for the purpose of identifying loan weakness in order to minimize loan loss exposure . from the time of loan origination through final repayment , commercial real estate , construction and land development and commercial business loans are assigned a risk rating based on pre-determined criteria and levels of risk . the risk rating is monitored annually for most loans ; however , it may change during the life of the loan as appropriate . when entering a new lending line , we typically seek to manage risks and costs by limiting initial activity . we then decide whether it would be profitable and consistent with our risk tolerance levels to expand the activity , and continually calibrate and adjust our actions to maintain appropriate risk limitations . we typically enter a new lending line based upon the experience of our existing employees , or we may hire an experienced individual or group of individuals to manage new activities . internal and independent third-party loan reviews vary by loan type . depending on the size and complexity of the loan , some loans may warrant detailed individual review , while other loans may have less risk based upon size , or be of a homogeneous nature reducing the need for detailed individual analysis . assets with these characteristics , such as consumer loans and loans secured by residential real estate , may be reviewed on the basis of risk indicators such as delinquency or credit rating . in cases of significant concern , a total re-evaluation of the loan and associated risks are documented by completing a loan risk assessment and action plan . some loans may be re-evaluated in terms of their fair market value or net realizable value in order to determine the likelihood of potential loss exposure and , consequently , the adequacy of specific and general loan loss reserves . 33 when a borrower fails to make a required loan payment , we take a number of steps to have the borrower cure the delinquency and restore the loan to current status , including contacting the borrower by letter and phone at regular intervals . when the borrower is in default , we may commence collection proceedings . if a foreclosure action is instituted and the loan is not brought current , paid in full , or refinanced before the foreclosure sale , the real property securing the loan generally is sold at foreclosure . management informs the board of directors monthly of the amount of loans delinquent more than 30 days . management provides detailed information to the board of directors quarterly on loans 60 or more days past due and all loans in foreclosure and repossessed property that we own . delinquent loans . the following tables set forth our loan delinquencies by type and amount at the dates indicated . replace_table_token_10_th replace_table_token_11_th the $ 4.4 million in commercial delinquencies 30-59 days past due at december 31 , 2020 were primarily related two loan relationships that were in the process of receiving covid modifications as of that date .
| financial position and results of operations the company 's fee income will be reduced due to covid-19 . in keeping with the guidance from regulators , during the second quarter of 2020 the company actively worked with covid-19 affected customers to waive fees from a variety of sources , such as , but not limited to , insufficient funds , account maintenance , minimum balance , and atm fees . management continues to monitor and measure the impact on its assets and operations . the company 's interest income could be reduced due to covid-19 . in keeping with the guidance from the regulators , the company actively worked with covid-19 affected borrowers to defer payments , interest and fees . while interest and fees will accrue to income through normal gaap accounting , should eventual credit losses on these deferred payments emerge , interest income and fees accrued would need to be reversed . management continues to monitor and measure the impact and potential future impact on operations . allowance for loan losses continued uncertainty regarding the severity and duration of the covid-19 pandemic and related economic effects will continue to affect the accounting for loan losses , which could cause the provision for loan losses to increase . it also is possible that asset quality could worsen , expenses associated with collection efforts could increase and loan charge-offs could increase . the company actively participated in the first round of the small business administration 's ( “ sba 's ” ) paycheck protection program ( “ ppp ” ) , providing loans to small businesses negatively impacted by the covid-19 pandemic . ppp loans are fully guaranteed by the u.s. government ; if that should change , the company could be required to increase its allowance for loan losses through an additional provision for loan losses charged to earnings .
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the following table sets forth the fair value of the company 's financial assets and liabilities measured on a recurring basis by level within the fair value hierarchy ( in thousands ) : replace_table_token_17_th 95 replace_table_token_18_th where quoted prices are available in an active market , securities are classified as level 1. the company classifies money market funds , u.s. treasury securities story_separator_special_tag of operations you should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section of this report entitled “ selected financial data ” and our financial statements and related notes included elsewhere in this report . this discussion and other parts of this report contain forward-looking statements that involve risk and uncertainties , such as statements of our plans , objectives , expectations and intentions . our actual results could differ materially from those discussed in these forward-looking statements . factors that could cause or contribute to such differences include , but are not limited to , those discussed in the section of this report entitled “ risk factors . ” these forward-looking statements speak only as of the date hereof . except as required by law , we assume no obligation to update or revise these forward-looking statements for any reason . unless the context requires otherwise , the terms “ ardelyx ” , “ company ” , “ we ” , “ us ” , and “ our ” refer to ardelyx , inc. overview we are a specialized biopharmaceutical company focused on developing first-in-class medicines to improve treatment for people with cardiorenal diseases . this includes patients with chronic kidney disease , or ckd , on dialysis suffering from elevated serum phosphorus , or hyperphosphatemia ; and patients with ckd and or heart failure patients with elevated serum potassium , or hyperkalemia . our portfolio is led by the development of tenapanor , a first-in-class medicine in late-stage clinical development for the control of serum phosphorus in patients with ckd on dialysis . tenapanor has a unique mechanism of action and acts locally in the gut to inhibit the sodium hydrogen exchanger 3 , or nhe3 . this results in the tightening of the epithelial cell junctions , thereby significantly reducing paracellular uptake of phosphate , the primary pathway of phosphate absorption . we have evaluated tenapanor in a phase 3 program for the control of serum phosphorus in ckd patients on dialysis . in december 2019 , we reported statistically significant topline efficacy results from our second monotherapy phase 3 clinical trial , the phreedom trial . the phreedom trial followed a successful monotherapy phase 3 clinical trial completed in 2017 , which achieved statistical significance for the primary endpoint . p hreedom is a one-year study with a 26-week open-label treatment period and a 12-week double-blind , placebo-controlled randomized withdrawal period followed by a 14-week open-label safety extension period . an active safety control group , for safety analysis only , received sevelamer , open-label , for the entire 52-week study period . patients completing the phreedom trial from both the tenapanor arm and the sevelamer active safety control arm had the option to participate in normalize , an ongoing open-label 18-month extension study . the goal of the normalize study is to further our understanding of the potential for the dual mechanism of tenapanor and sevelamer to reduce patients ' serum phosphorus levels towards normal ( < 4.6 mg/dl ) while minimizing medication burden . in addition , in september 2019 , we reported positive results from the amplify trial , a phase 3 study evaluating tenapanor in patients with ckd on dialysis who had uncontrolled hyperphosphatemia despite phosphate binder treatment . we are preparing to submit a new drug application , or nda , to the united states food and drug administration , or fda , for tenapanor for the control of serum phosphorus in adult patients with ckd on dialysis in mid-2020 . tenapanor , if approved , would be the first therapy for phosphate management that is not a phosphate binder . as tenapanor is a novel , potent , small molecule there would be significantly less pill burden than with phosphate binders . tenapanor is dosed as a single pill , twice-daily , which we believe could greatly improve patient adherence and compliance and free patients from having to take multiple pills before every meal . we are also advancing a small molecule potassium secretagogue program , rdx013 , for the potential treatment of hyperkalemia . hyperkalemia is a common problem in patients with heart and kidney disease , particularly in patients taking common blood pressure medications known as raas inhibitors , which inhibit the renin-angiotensin-aldosterone system . similar to what we have done with tenapanor in developing a non-binder approach for the treatment of elevated serum phosphate levels , rdx013 is designed to offer a non-binder alternative to lowering elevated potassium with a much lower pill burden than potassium binders and we believe may provide significant advantages as a stand-alone agent or in combination with potassium binders . 62 in addition to the development of tenapanor in our cardiorenal portfolio , we have developed tenapanor for the treatment of patients with irritable bowel syndrome with constipation , or ibs-c. on september 12 , 2019 , we received us fda approval of ibsrela® ( tenapanor ) for the treatment of ibs-c in adults . ibs-c is a burdensome gi disorder affecting a significant number of people . it is characterized by significant abdominal pain , constipation , straining during bowel movements , bloating and or gas . ibsrela ( tenapanor ) is a locally acting inhibitor nhe3 , an antiporter expressed on the apical surface of the small intestine and colon primarily responsible for the absorption of dietary sodium . by inhibiting nhe3 on the apical surface of the enterocytes , tenapanor reduces absorption of sodium from the small intestine and colon , resulting in an increase in water secretion into the intestinal lumen , which accelerates intestinal transit time and results in a softer stool consistency . story_separator_special_tag we expect to continue to make substantial investments in research and development activities as we further progress the development of tenapanor , as well as our other product candidates , as we advance our research programs into the preclinical stage and as we continue our early stage research . the process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time-consuming . we may not succeed in achieving marketing approval for all of our product candidates , including tenapanor for the control of serum phosphorus . additionally , for the marketing approval received in the united states for tenapanor for the treatment of ibs-c , we may not be successful in securing one or more collaboration partners to commercialize tenapanor in the united states or in other territories . the probability of success of each of the product candidates may be affected by numerous factors , including preclinical data , clinical data , market acceptance , sufficient third-party coverage or reimbursement , our ability to access capital on acceptable terms , competition , manufacturing capability and commercial viability . we anticipate that we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success of each product candidate , ongoing assessment as to each product candidate 's commercial potential , and our ability to access capital on acceptable terms . we will need to raise additional capital and will seek additional collaboration partnerships in order to complete the development and commercialization of tenapanor . if we are unable to access capital on a timely basis and on terms that are acceptable to us , we may be forced to restructure certain aspects of our business or identify and complete one or more strategic collaborations or other transactions in order to fund the development or commercialization of tenapanor or certain of our product candidates through the use of alternative structures . 64 general and administrative general and administrative expenses consist primarily of salaries and related benefits , including stock-based compensation , for our executive , board , finance , legal , business development , market development , commercial and support staff . other general and administrative expenses include facility related costs and professional fees for legal , accounting and audit , investor relations , other consulting services and allocated facility-related costs not otherwise included in research and development expenses . we anticipate that our general and administrative expenses will increase in the future primarily because of increased pre-commercial activities , personnel costs and professional fees for services to support the potential launch and commercialization of tenapanor for the control of serum phosphorus in ckd patients on dialysis . interest expense interest expense represents the interest paid on our loan payable . other income , net other income consists of interest income earned on our cash and cash equivalents and held-to-maturity investments , the periodic revaluation of the exit fee related to our loan and currency exchange gains and losses . provision for income taxes our provision for income taxes includes current and deferred tax , including foreign withholding taxes paid on payments received from certain collaboration partners . deferred income taxes reflect the 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 . our deferred tax assets continue to be fully offset by a valuation allowance , including deferred tax assets related to our net operating loss carryforwards , which may be subject to annual limitations as a result of ownership changes that may have occurred or could occur in the future . critical accounting polices and estimates a detailed discussion of our significant accounting policies can be found in note 2 , summary of significant accounting policies , in the notes to our financial statements , included in part ii , item 8 , of this annual report on form 10-k. critical accounting policies are those that require significant judgment and or estimates by management at the time that financial statements are prepared such that materially different results might have been reported if other assumptions had been made . these estimates form the basis for making judgments about the carrying values of assets and liabilities . we base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances . actual results could differ materially from these estimates . we consider certain accounting policies related to revenue recognition , accrued research and development expenses and stock-based compensation to be critical policies to understanding the judgments and estimates applied in our reported financial results . revenue recognition we generate revenue primarily from research and collaboration and license agreements with customers . goods and services in the agreements may include the grant of licenses for the use of our technology , the provision of services associated with the research and development of product candidates , manufacturing services , and participation in joint steering committees . the terms of these arrangements typically include payment to us of one or more of the following : 65 non-refundable , up-front license fees ; research , development , regulatory and commercial milestone payments ; reimbursement of research and development services ; option payments ; reimbursement of certain costs ; payments for manufacturing supply services ; and future royalties on net sales of licensed products . when two or more contracts are entered into with the same customer at or near the same time , we evaluate the contracts to determine whether the contracts should be accounted for as a single arrangement .
| results of operations comparison of the years ended december 31 , 2019 and 2018 revenue replace_table_token_3_th total revenues for the year ended december 31 , 2019 were $ 5.3 million , which represents an increase of $ 2.7 million , or 103 % , as compared to total revenues of $ 2.6 million for the year ended december 31 , 2018. the licensing revenue of $ 4.5 million is attributable to the achievement of a milestone , which amounted to $ 3.0 million , pursuant to our exclusive license agreement with fosun pharma , entered into in december 2017 for the development , commercialization and distribution of tenapanor in china for both hyperphosphatemia and ibs-c , and the full recognition of the $ 1.5 million license fee related to the xuanzhu agreement , as discussed in note 13 , collaboration and licensing agreements , to our financial statements , included in part ii , item 8 of this annual report on form 10-k. 69 the increase in collaborative development revenue of $ 0.5 million is attributable entirely to the revenue recognized , under the input method , during the fourth quarter of 2019 related to the 2019 kkc agreement . we expect to recognize the remaining $ 9.5 million of the initial transaction price over the research and development period of the program that is currently expected to extend through the end of 2021. however , we will revisit our current estimates and timing of performance at the end of each future reporting period and adjust as necessary . the other revenue of $ 0.3 million relates to the manufacturing supply of tenapanor and other materials sold to kkc in connection with that collaboration partner 's product development and clinical trials in japan .
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the maximum potential amount of future payments the company could be required to make under story_separator_special_tag this annual report on form 10-k includes forward-looking statements within the meaning of the federal securities laws , particularly statements referencing our expectations relating to the productivity of our sales force , revenues , deferred revenues , cost of revenues , operating expenses , stock-based compensation , and provision for income taxes ; the growth of our customer base and customer demand for our products ; the sufficiency of our cash balances and cash flows ; the impact of recent changes in accounting standards ; market risk sensitive instruments , contractual obligations ; and assumptions underlying any of the foregoing . in some cases , forward-looking statements can be identified by the use of terminology such as may , will , expects , intends , plans , anticipates , estimates , potential , or continue , or the negative thereof , or other comparable terminology . although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable , these expectations or any of the forward-looking statements could prove to be incorrect , and actual results could differ materially from those projected or assumed in the forward-looking statements . our future financial condition and results of operations , as well as any forward-looking statements , are subject to risks and uncertainties , including but not limited to the factors set forth in this report under part i , item 1a . risk factors . all forward-looking statements and reasons why results may differ included in this report are made as of the date of the filing of this report , and we assume no obligation to update any such forward-looking statements or reasons why actual results may differ . the following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing in part ii , item 8 of this annual report . overview we are a medical device company that has developed and commercialized an innovative neuromodulation platform for the treatment of chronic pain . our senza system is the only spinal cord stimulation ( scs ) system that delivers our proprietary hf10 therapy . on may 8 , 2015 , our premarket approval ( pma ) application for our senza scs system , or senza , was approved by the u.s. food and drug administration ( fda ) . accordingly , we began u.s. commercialization of the senza system in may 2015. in order to maintain our pma approval in the united states , we need to comply with applicable laws and regulations from the fda and other relevant regulatory agencies . the senza system received a ce mark in 2010 , and commercialization commenced in europe in 2010 and australia in 2011 where the system is reimbursed under existing scs codes . we market our products to physicians in europe and australia and sell to hospitals and outpatient surgery centers through both a direct sales organization and distributors . beginning in 2010 , we established our international sales organizations to support our product launch outside of the united states . in the second quarter of 2015 , we recorded our first commercial sales of senza in the united states . during 2015 , sales in the united states increased from $ 53,000 in the second quarter to $ 4.5 million in the third quarter and $ 19.8 million in the fourth quarter . revenue from international sales was $ 9.7 million , $ 11.3 million , $ 10.9 million and $ 13.3 million for the first , second , third and fourth quarters of fiscal year 2015 , respectively . our total revenue was $ 9.7 million , $ 11.4 million , $ 15.4 million and $ 33.1 million for the first , second , third and fourth quarters of fiscal year 2015 , respectively . total combined revenue from u.s. and international sales was $ 23.5 million , $ 32.6 million and $ 69.6 million for fiscal years 2013 , 2014 and 2015 , respectively . our commercial efforts are supported by the results of our senza-rct u.s. pivotal study , which demonstrated the superiority of hf10 therapy over traditional scs therapies for treating both back and leg pain . while scs therapy is indicated and reimbursed for treating back and leg pain , it has limited efficacy in back pain and is utilized primarily for treating leg pain , which has limited its market adoption . in our pivotal study , hf10 therapy was demonstrated to provide significant and sustained back pain relief in addition to leg pain relief . we believe we are positioned to transform and grow the approximately $ 1.7 billion existing global scs market under current reimbursement by treating back pain in addition to leg pain without causing paresthesia . 66 since our inception , we have financed our operations primarily through equity financings and borrowings under our debt facility . our accumulated deficit as of december 31 , 2015 was $ 189.4 million . a significant amount of our capital resources has been used to support the development of senza and our hf10 therapy , including , our pivotal clinical trial , senza-rct , and more recently we have made a significant investment building our u.s. commercial infrastructure and sales force to support our commercial launch in the united states . we intend to continue to make significant investments in our u.s. commercial infrastructure , as well as in research and development ( r & d ) to develop senza to treat other chronic pain indications , including conducting clinical trials to support our future regulatory submissions . as a result of these and other factors , we expect to continue to incur net losses for the next several years and may require substantial additional funding , which may include future equity and debt financings . we rely on third-party suppliers for all of the components of senza and for the assembly of the system . story_separator_special_tag we do not expect our revenue growth rate in international markets to continue at historic rates our revenue from international markets has increased from $ 18.2 million for the year ended december 31 , 2012 to $ 45.3 million for the year ended december 31 , 2015. revenue increased as a result of our sales of senza in europe and australia ; however , we do not expect to continue this rate of revenue growth in these international markets given our existing penetration in these markets . despite our growth in international markets , international revenue was negatively impacted by the appreciation of the u.s. dollar . due to governmental reimbursements constraints in the european scs market limiting the number of annual scs implants and our current penetration in these markets , we expect to grow less rapidly in the future than we have in the past in this market . critical accounting policies , significant judgments and use of estimates our management 's discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements , which have been prepared in accordance with accounting principles 68 generally accepted in the united states of america , or us gaap . the preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , revenues and expenses . on an ongoing basis , we evaluate our critical accounting policies and estimates . we base our estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions and conditions . we believe that the estimates , judgments , and assumptions involved in the accounting for revenue recognition , inventory , stock-based compensation , income taxes , and allowance for doubtful accounts have the greatest potential impact on our consolidated financial statements , so we consider these to be our critical accounting policies . we discuss below the critical accounting estimates associated with these policies . historically , our estimates , judgments , and assumptions relative to our critical accounting policies have not differed materially from actual results . our significant accounting policies are more fully described in note 2 of notes to consolidated financial statements in part ii , item 8 of this report . revenue we recognize revenue when all of the following criteria are met : persuasive evidence of an arrangement exists ; the sales price is fixed or determinable ; collection of the relevant receivable is reasonably assured at the time of sale ; and delivery has occurred or services have been rendered . for a majority of sales , where our sales representative delivers our product at the point of implantation at hospitals or medical facilities , we recognize revenue upon completion of the procedure and authorization , which represents satisfaction of the required revenue recognition criteria . for the remaining sales , which are sent from our distribution centers directly to hospitals and medical facilities , as well as distributor sales where product is ordered in advance of an implantation procedure and a valid purchase order has been received , we recognize revenue at the time of shipment of the product , which represents the point in time when the customer has taken ownership and assumed the risk of loss and the required revenue recognition criteria are satisfied . such customers are obligated to pay within specified terms regardless of when or if they ever they sell or use the products . we do not offer rights of return or price protection and we have no post-delivery obligations . we periodically provide incentive offers to customers . product revenue is recorded net of such incentive offers . inventory valuation we contract with third parties for the manufacturing and packaging of all of the components of senza . we plan the manufacture of our systems based on estimates of market demand . the nature of our business requires that we maintain sufficient inventory on hand to meet the requirements of our customers . inventories are stated at the lower of cost or market value . cost is determined using actual cost on a first-in , first-out basis . market value is determined as the lower of replacement cost or net realizable value . we regularly review inventory quantities in consideration of actual loss experiences , projected future demand , and remaining shelf life to record a provision for excess and obsolete inventory when appropriate . inventory write downs are recorded for excess and obsolete inventory . we periodically assesses the recoverability of all inventories to determine whether write downs for impairment are required . we evaluate projected future demand as compared to remaining shelf life and other obsolescence and excess criteria in assessing the recoverability of our inventory . in determining the adequacy of reserves , we analyze the following , among other things : current inventory quantities on hand ; product acceptance in the marketplace ; customer demand ; 69 historical sales ; forecast sales ; product obsolescence ; technological innovations ; and character of the inventory as a distributed item , finished manufactured item or system components . any inventory write-downs are recorded in cost of goods sold within the statements of operations during the period in which such write-downs are determined necessary by management . stock-based compensation stock-based compensation costs related to stock options granted to employees are measured at the date of grant based on the estimated fair value of the award , net of estimated forfeitures . we estimate the grant date fair value , and the resulting stock-based compensation expense , using the black-scholes option-pricing model on a straight-line basis over the requisite service period of the award , which is generally the vesting term of four years .
| summary of significant accounting policies of notes to consolidated financial statements in part ii , item 8 of this report . 73 comparison of the years ended december 31 , 2015 and 2014 revenue , cost of revenue , gross profit and gross margin replace_table_token_6_th revenue . revenue increased to $ 69.6 million in 2015 from $ 32.6 million in 2014 , an increase of $ 37.0 million , or 114 % , due to sales of the senza system in the united states , which began in may 2015 upon receiving fda approval of our pma for senza , and continued adoption of the senza system in international markets where it had historically been sold . we expanded our sales force in the united states in 2015 to support our anticipated revenue growth . cost of revenue , gross profit and gross margin . cost of revenue increased to $ 28.1 million in 2015 from $ 11.3 million in 2014 , an increase of $ 16.8 million , or 149 % . this increase was primarily due to a $ 12.7 million increase in the acquisition costs of manufactured product components as sales volumes increased , as well as a $ 2.0 million increase in inventory-related charges . gross profit increased to $ 41.5 million in 2015 from $ 21.3 million in 2014 , an increase of $ 20.2 million , or 95 % . gross profit as a percentage of revenue , or gross margin , decreased to 60 % in 2015 compared to 65 % in 2014. the decrease was partly attributed to the costs incurred in association with ramping our operational infrastructure in response to the product launch in the united states , as well as the $ 2.0 million increase in the write down of inventory in 2015. additionally , while costs were primarily incurred in u.s. dollars , international revenue was negatively impacted by the appreciation of the u.s. dollar , which negatively impacted the overall gross margin for the period .
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our business is focused on several competencies , including commercial property and corporate facilities management , tenant/occupier and property/agency leasing , capital markets solutions ( property sales , commercial mortgage origination and servicing , and debt/structured finance ) real estate investment management , valuation , development services and proprietary research . we generate revenue from management fees on a contractual and per-project basis , and from commissions on transactions . in 2014 , we were the highest ranked commercial real estate services company among the fortune most admired companies , and we ranked seventh among all companies on the barron 's 500 , which evaluates companies on growth and financial performance . we have been the only commercial real estate services and investment firm included in the s & p 500 since 2006 , and in the fortune 500 since 2008. additionally , the international association of outsourcing professionals ( iaop ) has included us among the top 100 global outsourcing companies across all industries for nine consecutive years . in 2014 , the iaop ranked us as a top three service provider among all outsourcing companies globally and as the highest ranked commercial real estate services company for the fifth consecutive year . when you read our financial statements and the information included in this section , you should consider that we have experienced , and continue to experience , several material trends and uncertainties that have affected our financial condition and results of operations that make it challenging to predict our future performance based on our historical results . we believe that the following material trends and uncertainties are crucial to an understanding of the variability in our historical earnings and cash flows and the potential for continued variability in the future : macroeconomic conditions economic trends and government policies affect global and regional commercial real estate markets as well as our operations directly . these include : overall economic activity and employment growth , interest rate levels , the cost and availability of credit and the impact of tax and regulatory policies . periods of economic weakness or recession , significantly rising interest rates , fiscal uncertainty , declining employment levels , decreasing demand for commercial real estate , falling real estate values , disruption to the global capital or credit markets , or the public perception that any of these events may occur , will negatively affect the performance of some of our business lines . compensation is our largest expense and the sales and leasing professionals in our advisory services business generally are paid on a commission and bonus basis that correlates with their revenue production . as a result , the negative effect of difficult market conditions on our operating margins is partially mitigated by the inherent variability of our compensation cost structure . in addition , when negative economic conditions are particularly severe , we have moved decisively to lower operating expenses to improve financial performance , and then have restored certain expenses as economic conditions improved . nevertheless , adverse global and regional economic trends could be significant risks to the performance of our operations and our financial condition . commercial real estate markets have recovered over the past five years in step with the steady improvement in global economic activity , most particularly in the united states . since 2010 , increased u.s. property sales activity has been sustained by gradually improving occupancy market conditions , including lower vacancy rates 34 and higher rents , as well as the availability of low-cost credit and increased capital flows into commercial real estate . u.s. leasing markets have also recovered , with falling vacancies , higher rents and increased transaction activity . european economies began to emerge from recession in 2013 , with most countries there returning to positive , albeit very modest , economic growth . reflecting the macro environment , property sales have increased significantly over the past two years , with higher volumes occurring across much of europe in 2014. leasing markets outside of the united kingdom have been slower to recover , but did show some improvement in 2014. in asia pacific , leasing activity picked up in 2014 , but strong construction activity limits future rent growth . investment markets have generally been stronger than leasing markets , and while investment levels have varied across the region , some countries like australia and japan have been notably strong . real estate investment management and property development activity has generally improved since 2010 as the real estate credit markets recovered and capital flows into commercial real estate have been strong . the performance of our global sales , leasing , investment management and development services operations depends on sustained economic growth , strong job creation , stable , healthy global credit markets and continued improved business and investor sentiment . effects of acquisitions our management historically has made significant use of strategic acquisitions to add new service competencies , to increase our scale within existing competencies and to expand our presence in various geographic regions around the world . in 2013 , we fortified our real estate outsourcing platform in europe within our emea segment with the acquisition of london-based norland managed services ltd ( norland ) for approximately $ 474 million , which figure includes approximately $ 40 million deferred purchase price paid in 2014 ( the norland acquisition ) . norland is a premier provider of building technical engineering services that enables us to self-perform these services in europe and adds to our expertise in the highly specialized critical environments market . strategic in-fill acquisitions have also played a key role in expanding our geographic coverage and broadening and strengthening our service offerings . the companies we acquired have generally been quality regional or specialty firms that complement our existing platform within a region , or affiliates in which , in some cases , we held a small equity interest . story_separator_special_tag as of december 31 , 2014 , our total debt excluding our notes payable on real estate ( which are generally nonrecourse to us ) and warehouse lines of credit ( which are recourse only to our wholly-owned subsidiary , cbre capital markets , inc. , or cbre capital markets , and are secured by our related warehouse receivables ) was approximately $ 1.9 billion . our level of indebtedness and the operating and financial restrictions in our debt agreements place some constraints on the operation of our business . although our management believes that long-term indebtedness has been an important lever in the development of our business , including facilitating the acquisition of the majority of the real estate investment management business of netherlands-based ing group n.v. ( the reim acquisitions ) and the norland acquisition , the cash flow necessary to service this debt is not available for other general corporate purposes , which may limit our flexibility in planning for , or reacting to , changes in our business and in the commercial real estate services industry . our management seeks to mitigate this exposure both through the refinancing of debt when available on attractive terms and through selective repayment and retirement of indebtedness . for example , during 2014 , we completed three financing transactions , and in january 2015 we entered into an amended and restated credit agreement . the 2014 transactions included the issuance in september 2014 and december 2014 of $ 300.0 million and $ 125.0 million , respectively , in aggregate principal amount of 5.25 % senior notes due march 15 , 2025 and the redemption in october 2014 of all of the then outstanding 6.625 % senior notes ( aggregate principal amount of $ 350.0 million ) . during the year ended december 31 , 2014 , in connection with these financing activities , we incurred approximately $ 4.7 million of financing costs . in addition , we expensed $ 5.7 million of previously-deferred financing costs as well as a $ 17.4 million early extinguishment premium . critical accounting policies our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the united states , which require management to make estimates and assumptions that affect reported amounts . the estimates and assumptions are based on historical experience and on other factors that management believes to be reasonable . actual results may differ from those estimates . we believe that the following critical accounting policies represent the areas where more significant judgments and estimates are used in the preparation of our consolidated financial statements : revenue recognition in order for us to recognize revenue , there are four basic criteria that must be met : existence of persuasive evidence that an arrangement exists ; 37 delivery has occurred or services have been rendered ; the seller 's price to the buyer is fixed and determinable ; and collectability is reasonably assured . our revenue recognition policies are consistent with these criteria . the judgments involved in revenue recognition include understanding the complex terms of agreements and determining the appropriate time to recognize revenue for each transaction based on such terms . each transaction is evaluated to determine : ( i ) at what point in time revenue is earned , ( ii ) whether contingencies exist that impact the timing of recognition of revenue and ( iii ) how and when such contingencies will be resolved . the timing of revenue recognition could vary if different judgments were made . our revenues subject to the most judgment are brokerage commission revenue and incentive-based management and development fees . we record commission revenue on real estate sales generally upon close of escrow or transfer of title , except when future contingencies exist . real estate commissions on leases are generally recorded in revenue when all obligations under the commission agreement are satisfied . terms and conditions of a commission agreement may include , but are not limited to , execution of a signed lease agreement and future contingencies including tenant occupancy , payment of a deposit or payment of a first month 's rent ( or a combination thereof ) . as some of these conditions are outside of our control and are often not clearly defined , judgment must be exercised in determining when such required events have occurred in order to recognize revenue . a typical commission agreement provides that we earn a portion of a lease commission upon the execution of the lease agreement by the tenant and landlord , with the remaining portion ( s ) of the lease commission earned at a later date , usually upon tenant occupancy or payment of rent . the existence of any significant future contingencies results in the delay of recognition of corresponding revenue until such contingencies are satisfied . for example , if we do not earn all or a portion of the lease commission until the tenant pays its first month 's rent , and the lease agreement provides the tenant with a free rent period , we delay revenue recognition until rent is paid by the tenant . property and facilities management revenues are generally based upon percentages of the revenue or base rent generated by the entities managed or the square footage managed . these fees are recognized when earned under the provisions of the related management agreements . investment management fees are based predominantly upon a percentage of the equity deployed on behalf of our limited partners . fees related to our indirect investment management programs are based upon a percentage of the fair value of those investments . these fees are recognized when earned under the provisions of the related investment management agreements . our global investment management segment also earns performance-based incentive fees with regard to many of its investments . such revenue is recognized at the end of the measurement periods when the conditions of the applicable incentive fee arrangements have been satisfied and following the expiration of any potential claw back provision .
| results of operations the following table sets forth items derived from our consolidated statements of operations for the years ended december 31 , 2014 , 2013 and 2012 : replace_table_token_8_th ( 1 ) includes ebitda related to discontinued operations of $ 7.9 million and $ 5.6 million for the years ended december 31 , 2013 and 2012 , respectively . ebitda represents earnings before net interest expense , write-off of financing costs , income taxes , depreciation and amortization , while amounts shown for ebitda , as adjusted , remove the impact of certain cash and non-cash charges related to acquisitions and cost containment expenses , as well as certain carried interest incentive compensation ( reversal ) expense . our management believes that both of these measures are useful in evaluating our operating performance compared to that of other companies in our industry because the calculations of ebitda and ebitda , as adjusted , generally eliminate the effects of financing and income taxes and the accounting effects of capital spending and acquisitions , which would include impairment charges of goodwill and intangibles created from acquisitions . such items may vary for different companies for reasons 43 unrelated to overall operating performance . as a result , our management uses these measures to evaluate operating performance and for other discretionary purposes , including as a significant component when measuring our operating performance under our employee incentive programs . additionally , we believe ebitda and ebitda , as adjusted , are useful to investors to assist them in getting a more complete picture of our results of operations . however , ebitda and ebitda , as adjusted , are not recognized measurements under u.s. generally accepted accounting principles , or gaap , and when analyzing our operating performance , readers should use ebitda and ebitda , as adjusted , in addition to , and not as an alternative for , net income as determined in accordance with gaap .
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current maturity dates range from july 2014 to june 2015. cross currency swaps story_separator_special_tag the following discussion of coach 's financial condition and results of operations should be read together with coach 's consolidated financial statements and notes to those statements , included elsewhere in this document . when used herein , the terms “ coach , ” “ company , ” “ we , ” “ us ” and “ our ” refer to coach , inc. , including consolidated subsidiaries . story_separator_special_tag expectations , see part i , item 1a - `` risk factors '' included in this annual report on form 10-k. 28 summary — fiscal 2014 in fiscal 2014 , we reported net sales of $ 4.81 billion , net income of $ 781.3 million and net income per diluted share of $ 2.79 . this compares to net sales of $ 5.08 billion , net income of $ 1.03 billion , and net income per diluted share of $ 3.61 in fiscal 2013. in fiscal 2014 , the comparability of our operating results has been affected by $ 131.5 million of pretax charges ( $ 88.3 million after tax or $ 0.31 per diluted share ) related to our transformation plan . in fiscal 2013 , the comparability of our operating results was affected by $ 53.2 million of pretax charges ( $ 32.6 million after tax or $ 0.11 per diluted share ) related to restructuring and transformation-related charges . our operating performance for fiscal 2014 reflected a decline in revenue of 5.3 % , primarily due to decreased revenues from our north america business partially offset by gains in our international businesses . excluding the effects of foreign currency , net sales decreased 3.1 % . our gross profit decreased by 10.8 % to $ 3.30 billion during fiscal 2014 which included the negative impact of charges under our transformation plan of $ 82.2 million . in fiscal 2013 , restructuring and transformation-related charges negatively impacted gross profit by $ 4.8 million . selling , general and administrative ( `` sg & a '' ) expenses remained fairly consistent from fiscal 2013 , however sg & a expense as a percentage of net sales increased by 250 basis points primarily due to higher selling expenses to support our international businesses as well as a decline in total net sales . excluding charges under our transformation plan in fiscal 2014 and restructuring and transformation-related charges in fiscal 2013 , sg & a expenses remained fairly consistent . net income decreased in fiscal 2014 as compared to fiscal 2013 , primarily due to a decrease in operating income of $ 404.4 million , partially offset by a $ 145.2 million decrease in our provision for income taxes . net income per diluted share decreased due to lower net income . excluding charges under our transformation plan in fiscal 2014 and restructuring and transformation-related charges in fiscal 2013 , net income decreased 18.5 % and net income per diluted share decreased 16.9 % . fiscal 2014 compared to fiscal 2013 the following table summarizes results of operations for fiscal 2014 compared to fiscal 2013 . all percentages shown in the table below and the discussion that follows have been calculated using unrounded numbers . replace_table_token_10_th items affecting comparability the company 's reported results are presented in accordance with accounting principles generally accepted in the united states of america ( “ gaap ” ) . the reported gross profit , selling , general and administrative expenses , operating income , income before provision for income taxes , provision for income taxes , net income and earnings per diluted share in fiscal 2014 and 2013 reflect certain items which affect the comparability of our results , as noted in the following tables . refer to page 39 for a discussion on the non-gaap measures . 29 coach , inc. gaap to non-gaap reconciliation for the years ended june 28 , 2014 and june 29 , 2013 ( in millions , except per share data ) replace_table_token_11_th replace_table_token_12_th items affecting comparability fiscal 2014 items transformation and other related actions in fiscal 2014 , the company incurred restructuring and transformation related charges of $ 131.5 million under its multi-year transformation plan as announced in the fourth quarter of fiscal 2014. the charges recorded in cost of sales and sg & a expenses were $ 82.2 million and $ 49.3 million , respectively . these charges , which are primarily associated with our north america business , relate to inventory and fleet related costs , including impairment , accelerated depreciation and severance related to store closures . refer to the `` executive overview '' herein and note 3 , `` transformation , restructuring and other related actions , '' for further information regarding the transformation plan . additional actions will continue into fiscal 2015. fiscal 2013 items restructuring and transformation-related charges in fiscal 2013 , the company incurred restructuring and transformation related charges of $ 53.2 million . the charges recorded in selling , general and administrative expenses and cost of sales were $ 48.4 million and $ 4.8 million , respectively . the charges include the strategic reassessment of the reed krakoff business , streamlining our organizational model and reassessing the fleet of our retail stores and inventories . currency fluctuation effects the change in net sales in fiscal 2014 has been presented both including and excluding currency fluctuation effects ( primarily attributable to coach japan ) . 30 net sales net sales decreased 5.3 % or $ 269.2 million to $ 4.81 billion . excluding the effects of foreign currency , net sales decreased 3.1 % or $ 155.9 million . the decrease was driven by lower sales in the north america business partially offset by gains in the international business . story_separator_special_tag advertising , marketing and design expenses include employee compensation , media space and production , advertising agency fees ( primarily to support north america ) , new product design costs , public relations and market research expenses . distribution and customer service expenses include warehousing , order fulfillment , shipping and handling , customer service and bag repair costs . administrative expenses include compensation costs for “ corporate ” functions including : executive , finance , human resources , legal and information systems departments , as well as corporate headquarters occupancy costs , consulting and software expenses . administrative expenses also include global equity compensation expense . coach includes inbound product-related transportation costs from our service providers within cost of sales . coach , similar to some companies , includes certain transportation-related costs related to our distribution network in selling , general and administrative expenses rather than in cost of sales ; for this reason , our gross margins may not be comparable to that of entities that include all costs related to their distribution network in cost of sales . sg & a expenses increased 0.2 % or $ 3.3 million to $ 2.18 billion in fiscal 2014 as compared to $ 2.17 billion in fiscal 2013 , primarily driven by an increase in selling expenses . as a percentage of net sales , sg & a expenses increased to 45.3 % during fiscal 2014 as compared to 42.8 % during fiscal 2013 . excluding items affecting comparability of $ 49.3 million in fiscal 2014 and $ 48.4 million in fiscal 2013 , sg & a expenses increased $ 2.4 million from fiscal 2013 ; and sg & a expenses as a percentage of net sales increased , primarily due to the increase in selling expenses as a percentage of net sales , to 44.3 % in fiscal 2014 from 41.9 % in fiscal 2013. selling expenses were $ 1.55 billion , or 32.2 % of net sales , in fiscal 2014 compared to $ 1.51 billion , or 29.8 % of net sales , in fiscal 2013 . the dollar increase in selling expenses reflected increases in new store openings in our international business including the impact of acquiring our former partner hackett 's 50 % interest in our european joint venture . these expenses were mostly offset by a favorable impact of foreign currency exchange rates primarily related to coach japan and lower expenses in north america due to the divestiture of the reed krakoff business . advertising , marketing , and design costs were $ 242.3 million , or 5.0 % of net sales , in fiscal 2014 , compared to $ 265.4 million , or 5.2 % of net sales , during fiscal 2013 . the decrease was primarily due to the divestiture of the reed krakoff business . this decrease was partially offset by increased advertising , marketing , and design costs related to the company 's transformation efforts . distribution and consumer service expenses of $ 87.2 million , or 1.8 % of net sales , in fiscal 2014 , were fairly consistent with fiscal 2013 expenses of $ 86.1 million , or 1.7 % of net sales . administrative expenses were $ 300.5 million , or 6.3 % of net sales , in fiscal 2014 compared to $ 307.1 million , or 6.1 % of net sales , during fiscal 2013 . excluding items affecting comparability of $ 49.3 million in fiscal 2014 and $ 48.4 million in fiscal 2013 , administrative expenses were $ 251.2 million , or 5.2 % of net sales , in fiscal 2014 and $ 258.7 million , or 5.1 % of net sales , in fiscal 2013 . lower compensation expense was mostly offset by additional costs incurred as part of investments made in the business , particularly related to increased depreciation expense . operating income operating income decreased 26.5 % or $ 404.4 million to $ 1.12 billion during fiscal 2014 as compared to $ 1.52 billion in fiscal 2013 . operating margin decreased to 23.3 % as compared to 30.0 % in fiscal 2013 . excluding items affecting comparability of $ 131.5 million in fiscal 2014 and $ 53.2 million in fiscal 2013 , operating income decreased 20.7 % or $ 326.1 million to $ 1.25 billion from $ 1.58 billion in fiscal 2013 ; and operating margin was 26.0 % , in fiscal 2014 as compared to 31.1 % in fiscal 2013 . 32 the following table presents operating income by reportable segment for fiscal 2014 compared to fiscal 2013 : replace_table_token_14_th ( 1 ) in connection with the acquisition of the retail business in europe , the company evaluated the composition of its reportable segments and concluded that the operating income associated with this region should be included in the international segment . accordingly , prior year comparable amounts have been reclassified to conform to the current year presentation . see note 7 , `` acquisitions '' and note 16 , `` segment information '' for more information . ( 2 ) operating income in the other category , which is not a reportable segment , consists of sales and expenses generated in ancillary channels , including licensing and disposition . north america operating income decreased 20.3 % or $ 295.9 million to $ 1.16 billion in fiscal 2014 reflecting the decrease in gross profit of $ 353.1 million which was partially offset by lower sg & a expenses of $ 57.2 million . the decrease in sg & a expenses was related to the absence of costs in fiscal 2014 related to the divestiture of the reed krakoff business and lower variable selling costs as a result of lower sales . operating margin decreased 450 basis points to 37.5 % in fiscal 2014 from 42.0 % during the same period in the prior year due to lower gross margin of 310 basis points and higher sg & a expense as a percentage of net sales of 140 basis points .
| executive overview coach is a leading new york design house of modern luxury accessories and lifestyle collections . our product offerings include fine accessories , gifts and certain seasonal lifestyle apparel collections for women and men . coach operates in two segments : north america and international . the north america segment includes sales to north american customers through coach-operated stores ( including the internet ) and sales to north american wholesale customers . the international segment includes sales to customers through coach-operated stores ( including the internet ) and concession shop-in-shops in japan and mainland china , coach-operated stores and concession shop-in-shops in hong kong , macau , singapore , taiwan , malaysia , south korea , the united kingdom , france , ireland , spain , portugal , germany and italy , as well as sales to wholesale customers and distributors in approximately 35 countries . as coach 's business model is based on multi-channel global distribution , our success does not depend solely on the performance of a single channel or geographic area . in order to drive growth within our global business , we are focused on four key initiatives , which directly align with the company 's transformation plan , described below : grow our business in north america and worldwide , by transforming from a leading international accessories company into a global lifestyle brand , anchored in luxury accessories . leverage the global opportunity for coach by raising brand awareness and building market share in markets where coach is under-penetrated , most notably in asia and europe . we are also developing the brand opportunity as we expand into south america and central america . focus on the men 's opportunity for the brand , by drawing on our long heritage in the category . we are capitalizing on this opportunity by opening new standalone and dual gender stores and broadening the men 's assortment in existing stores .
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notes to financial statements december 31 , 2013 and 2012 n ote f - a ccounts p ayable and a ccrued e xpenses accounts payable and accrued expenses consist of the following : replace_table_token_30_th n ote g - o ther during each of 2012 and 2011 , the company was charged $ 75,000 by siebert for general and administrative services . during 2013 the company was charged $ 100,000 by siebert for general and administrative services . f-23 signatures pursuant to the requirements of section 13 or 15 ( d ) of the securities exchange act of 1934 , the registrant has duly caused this report to be signed on its behalf by the undersigned , thereunto duly authorized . siebert financial corp. by : suzanne shank suzanne shank acting chief executive officer date : march 31 , 2014 pursuant to the requirements of the securities exchange act of 1934 , this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated . name title date suzanne shank acting chief executive officer march 31 , 2014 suzanne shank ( principal executive officer ) joseph m. ramos , jr. executive vice president , chief operating officer and chief financial officer and secretary ( principal financial and accounting officer ) march 31 , 2014 joseph m. ramos , jr. patricia l. francy director march 31 , 2014 patricia l. francy jane h. macon director march 31 , 2014 jane h. macon robert p. mazzarella director march 31 , 2014 robert p. mazzarella nancy peterson hearn director march 31 , 2014 nancy peterson hearn exhibit index exhibit no . description of document 2.1 plan and agreement of merger between j. michaels , inc. ( jmi ) and muriel siebert capital markets group , inc. ( mscmg ) , dated as of april 24 , 1996 ( merger agreement ) ( incorporated by reference to siebert financial corp. 's annual report on form 10-k for the fiscal year ended december 31 , 1996 ) 2.2 amendment no . 1 to merger agreement , dated as of june 28 , 1996 ( incorporated by reference to siebert financial corp. 's annual report on form 10-k for the fiscal year ended december 31 , 1996 ) 2.3 amendment no . 2 to merger agreement , dated as of september 30 , 1996 ( incorporated by reference to siebert financial corp. 's annual report on form 10-k for the fiscal year ended december 31 , 1996 ) 2.4 amendment no . 3 to merger agreement , dated as of november 7 , 1996 ( incorporated by reference to siebert financial corp. 's annual report on form 10-k for the fiscal year ended december 31 , 1996 ) 3.1 certificate of incorporation of siebert financial corp. , formerly known as j. michaels , inc. originally filed on april 9 , 1934 , as amended and restated to date ( incorporated by reference to siebert financial corp. 's annual report on form 10-k for the fiscal year ended december 31 , 1997 ) 3.2 by-laws of siebert financial corp. ( incorporated by reference to siebert financial corp. 's registration statement on form s- 1 ( file no . 333-49843 ) filed with the securities and exchange commission on april 10 , 1998 ) 10.1 * * siebert financial corp. 1998 restricted stock award plan ( incorporated by reference to siebert financial corp. 's annual report on form 10-k for the fiscal year ended december 31 , 1997 ) 10.2 * * siebert financial corp. 1997 stock option plan ( incorporated by reference to siebert financial corp. 's annual report on form 10-k for the fiscal year ended december 31 , 1996 ) 10.3 siebert , brandford , shank & co. , llc operating agreement , among siebert , brandford , shank & co. , l.l.c . , muriel siebert & co. , inc. , napoleon brandford iii and suzanne f. shank , dated as of march 10 , 1997 ( incorporated by reference to siebert financial corp. 's annual report on form 10-k for the fiscal year ended december 31 , 1996 ) 10.4 services agreement , between siebert , brandford , shank & co. , l.l.c . and muriel siebert & co. , inc. , dated as of march 10 , 1997 ( incorporated by reference to siebert financial corp. 's annual report on form 10-k for the fiscal story_separator_special_tag this discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto contained elsewhere in this annual report . our working capital is invested primarily in money market funds , so that liquidity has not been materially affected . the recent financial crisis did have the effect of reducing participation in the securities market by our retail and institutional customers , which had an adverse effect on our revenues . while the stock market improved in 2013 our revenues did not . in 2012 we had one customer account generate commissions that accounted for 12 % of the total revenue . the company 's expenses during 2013 , 2012 and 2011 include the costs of an arbitration proceeding commenced by a former employee following the termination of his employment , which remains unresolved and are included as professional fees . the company believes that the action is without merit , but the costs of defense have adversely affected the company 's results of operations and may continue to affect the results of operations until the action is completed . income of our affiliate , sbs , decreased in 2013 to $ 193,000 as a result of an decrease in the number of offerings by municipalities and spreads paid to investment banking firms . story_separator_special_tag as a result , the company 's income from sbs decreased to $ 94,000 in 2013. competition in the brokerage industry remains intense . the following table sets forth certain metrics as of december 31 , 2013 , 2012 and 2011 , respectively , which we use in evaluating our business . replace_table_token_4_th replace_table_token_5_th - 14 - description : total retail trades represents retail trades that generate commissions . average commission per retail trade represents the average commission generated for all types of retail customer trades . retail customer net worth represents the total value of securities and cash in the retail customer accounts before deducting margin debits . retail customer money market fund value represents all retail customers accounts invested in money market funds . retail customer margin debit balances represents credit extended to our customers to finance their purchases against current positions . retail customer accounts with positions represent retail customers with cash and or securities in their accounts . we , like other securities firms , are directly affected by general economic and market conditions including fluctuations in volume and prices of securities , changes and the prospect of changes in interest rates , and demand for brokerage and investment banking services , all of which can affect our profitability . in addition , in periods of reduced financial market activity , profitability is likely to be adversely affected because certain expenses remain relatively fixed , including salaries and related costs , portions of communications costs and occupancy expenses . accordingly , earnings for any period should not be considered representative of earnings to be expected for any other period . competition continues to intensify among all types of brokerage firms , including established discount brokers and new firms entering the on-line brokerage business . electronic trading continues to account for an increasing amount of trading activity , with some firms charging very low trading execution fees that are difficult for any conventional discount firm to meet . some of these brokers , however , impose asset based charges for services such as mailing , transfers and handling exchanges which we do not currently impose , and also direct their orders to market makers where they have a financial interest . continued competition could limit our growth or even lead to a decline in our customer base , which would adversely affect our results of operations . industry-wide changes in trading practices , such as the continued use of electronic communications networks , are expected to put continuing pressure on commissions/fees earned by brokers while increasing volatility . we are a party to an operating agreement ( the operating agreement ) , with suzanne shank and napoleon brandford iii , the two individual principals ( the principals ) of sbsfpc . pursuant to the terms of the operating agreement , the company and each of the principals made an initial capital contribution of $ 400,000 in exchange for a 33.33 % initial interest in sbsfpc . sbsfpc engages in derivatives transactions related to the municipal underwriting business . the operating agreement provides that profit and loss will be shared 66.66 % by the principals and 33.33 % by us . sbsfpc has no derivative positions as of december 31 , 2013. the company and principals are planning to wind down the operations of sbsfpc in 2014. on january 23 , 2008 , our board of directors authorized a buy back of up to 300,000 shares of our common stock . under this program , shares are purchased from time to time , at our discretion , in the open market and in private transactions . during 2013 we repurchased 12,266 shares of common stock for an average price of $ 1.56. critical accounting policies we generally follow accounting policies standard in the brokerage industry and believe that our policies appropriately reflect our financial position and results of operations . our management makes significant estimates that affect the reported amounts of assets , liabilities , revenues and expenses and the related disclosure of contingent assets and liabilities included in the financial statements . the estimates relate primarily to revenue and expense items in the normal course of business as to which we receive no confirmations , invoices , or other documentation , at the time the books are closed for a period . we use our best judgment , based on our knowledge of revenue transactions and expenses incurred , to estimate the amount of such revenue and expenses . our management believes that its estimates are reasonable . - 15 - story_separator_special_tag sipc dues , offset by increases in office expense , travel and entertainment , insurance & equipment repairs . income from our equity investment in sbs , an entity in which siebert holds a 49 % equity interest , for 2012 was $ 774,000 compared to income of $ 8,000 for 2011 , an increase of $ 766,000 , primarily due to sbs participating in more municipal bond offerings as senior- and co-manager . income from our equity investment in sbsfpc , an entity in which we hold a 33 % equity interest , for 2012 was $ 32,000 as compared to income of $ 21,000 from the same period in 2011. this increase was principally due to a gain recorded by - 17 - sbsfpc on termination of swap positions and marked to market of positions . results of operations of equity investees is considered to be integral to our operations and material to the results of operations . taxes . the tax provision for the year ended december 31 , 2012 and 2011 was $ 34,000 and $ 23,000 , respectively . the provision for income taxes for 2012 represents a state assessment of $ 34,000 based on income relating to years 2007 , 2008 and 2009 based on a tax examination completed by new york state in 2012. the company has recorded a valuation allowance to fully offset our deferred tax asset
| results of operations year ended december 31 , 2013 compared to year ended december 31 , 2012 revenues . total revenues for 2013 were $ 16.4 million , a decrease of $ 4.6 million , or 21.8 % , from 2012. commission and fee income decreased $ 2.7 million , or 18.4 % , from the prior year to $ 11.9 million primarily due to a decrease in average commission charged per trade as a result of a decrease in retail options trading by one customer , which accounted for approximately 18 % of total commission and fees in 2012 , as well as an decrease in our institutional trading commissions and our commission recapture operations . investment banking revenues decreased $ 1.5 million , or 38.3 % , from the prior year to $ 2.4 million in 2013 due to our participation in fewer new issues in the equity and debt capital markets . trading profits decreased $ 384,000 , or 16.3 % , from the prior year to $ 2.0 million in 2013 primarily due to a fixed income sales- trader being on medical leave . income from interest and dividends decreased $ 14,000 , or 18.4 % , from the prior year to $ 62,000 in 2013 primarily due to lower cash balances . expenses . total expenses for 2013 were $ 22.2 million , an increase of $ 303,000 , or 1.4 % , from the prior year . employee compensation and benefit costs decreased $ 783,000 , or 7.8 % , from the prior year to $ 9.3 million in 2013. this decrease was due to lower commission and bonus payouts based on production offset by severance incurred to former key employees released in 2013. clearing and floor brokerage fees decreased $ 360,000 , or 13.1 % , from the prior year to $ 2.4 million in 2013 primarily due to lower retail trading volumes as well as execution charges for institutional equity customers .
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choices by customers to self-generate results in fewer kilowatt hour sales to absorb the increasing costs of the electrical system , further increasing rates for sce 's other customers . working with policy makers to balance competing priorities , a key focus of sce is to manage the costs that drive increases in electricity rates while delivering safe and reliable electric service to its customers . highlights of operating results replace_table_token_2_th sce 's earnings are prepared in accordance with generally accepted accounting principles used in the united states . management uses core earnings for financial planning and for analysis of performance . core earnings are also used when communicating with analysts and investors regarding sce 's earnings results to facilitate comparisons of the performance from period to period . core earnings are a non-gaap financial measure and may not be comparable to those of other companies . core earnings are defined as earnings attributable to sce less income or loss from significant discrete items that management does not consider representative of ongoing earnings , such as : settlement of certain tax , regulatory or legal matters or proceedings . sce 's 2011 core earnings increased primarily due to rate base growth . non-core items included : an earnings benefit of $ 95 million recorded in 2010 relating to the california impact of the federal global settlement resulting from acceptance by the california franchise tax board of tax positions finalized with the irs in 2009 and receipt of the final interest determination from the franchise tax board . for further discussion of the global settlement , see `` item 8. sce notes to consolidated financial statements—note 7. income taxes . '' an after-tax earnings charge of $ 39 million recorded in 2010 to reverse previously recognized federal tax benefits eliminated by federal health care legislation enacted in 2010. the health care law eliminated the federal tax deduction for retiree health care costs to the extent those costs are eligible for federal medicare part d subsidies . see `` results of operations '' for discussion of sce results of operations , including a comparison of 2010 results to 2009 . 2012 cpuc general rate case sce filed its 2012 grc application in november 2010. in october 2011 , sce submitted updated testimony to reflect changes in escalation rates , known changes due to governmental actions and changes in the timing of recovery for nuclear refueling outages at san onofre , which taken together changed its requested 2012 base rate revenue requirement to $ 6.3 billion . sce 's updated request , after considering the effects of sales growth and including the impacts of reducing sce 's solar program as approved by the cpuc , would result in incremental customer base rate increases of $ 809 million , $ 117 million and $ 513 million in 2012 , 2013 and 2014 , respectively . the division of ratepayer advocates ( `` dra '' ) recommended that sce 's requested 2012 base rate revenue requirement be decreased by approximately $ 850 million , comprised of approximately $ 630 million in operation and maintenance expense 17 reductions and approximately $ 220 million in capital-related revenue requirement reductions . the utility reform network ( `` turn '' ) and other intervenors recommended an additional $ 610 million revenue requirement reduction , beyond the dra adjustments , primarily capital-related in nature , as well as disallowances of recorded capital investments for specific projects . intervenors have also recommended changes to sce 's proposed post-test year ratemaking methodology to be used for 2013 and 2014 as well as limiting the recovery amount of sce 's pension costs . a final decision on the grc is expected in the first half of 2012. t he cpuc has authorized the establishment of a grc memorandum account , which will make the 2012 revenue requirement ultimately adopted by the cpuc effective as of january 1 , 2012. recognition of the revenue for the period january 1 , 2012 through the date of a final decision , as well as any delays in certain expenditures , may impact the timing of earnings in 2012. ferc formula rates the ferc has accepted , subject to refund and settlement procedures , sce 's request to implement formula rates as a means to determine sce 's ferc transmission revenue requirement effective january 1 , 2012. the formula rates include revenue requirements related to construction work in progress ( `` cwip '' ) that was previously recovered through a separate mechanism . sce estimates its total 2012 ferc weighted average roe will be 11.1 % , including the previously authorized 50 basis point incentive for caiso participation and individual authorized project incentives . the actual weighted average roe and rate base is dependent upon the amount and timing of capital expenditures among ferc incentive and non-incentive projects . sce 's request proposed the adoption of a specific formula to calculate a forecasted annual revenue requirement that is used to establish rates and is trued-up annually to allow sce to recover its actual revenue requirement , including its actual cost of service , actual rate base and the authorized return on investment . sce 's request also allows sce to make single-issue rate filings requesting changes to certain elements of the formula , including the base roe , depreciation rates and the retail rate structure . sce and the other parties to the proceeding are currently in settlement negotiations . capital program during 2011 , sce continued execution of its capital investment program . total capital expenditures ( including accruals ) were $ 3.9 billion in 2011 compared to $ 3.8 billion in 2010. the level of future spending is significantly dependent on a final outcome of sce 's 2012 grc decision and the timing , scope and approvals of major transmission projects . sce 's capital program for 2012 – 2014 is focused primarily in the following areas : maintaining reliability and expanding the capability of sce 's transmission and distribution system . story_separator_special_tag sce remits to cdwr and does not recognize as revenue the amounts that sce bills and collects from its customers for electric power purchased and sold by the cdwr to sce 's customers , as well as cdwr bond-related costs and a portion of direct access exit fees . the amounts collected and remitted to cdwr were $ 1.1 billion , $ 1.2 billion and $ 1.8 billion for years ended december 31 , 2011 , 2010 and 2009 , respectively . all cdwr power contracts allocated to sce by the cpuc had expired by the end of 2011. sce 's revenue and related purchased power expense is expected to increase in 2012 as these cdwr contracts are replaced by new power purchase agreements entered into by sce . effective january 1 , 2010 , the cdwr-related rates were decreased to reflect lower power procurement expenses and a refund of operating reserves that cdwr releases as its contracts terminate . approximately $ 440 million is expected to be refunded to sce customers through lower cdwr rates in 2012. income taxes the table below provides an analysis of the principal factors impacting sce 's effective tax rate . replace_table_token_4_th 1 edison international and the irs finalized the terms of a global settlement on may 5 , 2009 . the global settlement resolved all of sce 's federal income tax disputes and affirmative claims through tax year 2002. during 2009 , sce recorded after-tax earnings of approximately $ 306 million . during 2010 , sce recognized a $ 95 million earnings benefit from the acceptance by the california franchise tax board of the tax positions finalized in 2009 and receipt of the final interest determination from the franchise tax board . 2 during 2010 , the irs approved sce 's request to change its tax accounting method for asset removal costs primarily related to its infrastructure replacement program . as a result , sce recognized a $ 40 million earnings benefit ( of which $ 28 million relates to asset removal costs incurred prior to 2010 ) from deducting asset removal costs earlier in the construction cycle . these deductions were recorded on a flow-through basis as required by the cpuc . 3 during 2010 , sce recorded a $ 39 million non-cash charge to reverse previously recognized federal tax benefits eliminated by the federal health care legislation enacted in march 2010. the health care law eliminated the federal tax deduction for retiree health care costs to the extent those costs are eligible for federal medicare part d subsidies . the increase in income taxes for property-related items was primarily due to a cumulative deferred income tax adjustment of $ 30 million in 2011 related to nuclear fuel . for a discussion of the status of edison international 's income tax audits , see `` sce notes to consolidated financial statements—note 7. income taxes . '' 22 liquidity and capital resources sce 's ability to operate its business , fund capital expenditures , and implement its business strategy are dependent upon its cash flow and access to the capital markets . sce 's overall cash flows fluctuate based on , among other things , its ability to recover its costs in a timely manner from its customers through regulated rates , changes in commodity prices and volumes , collateral requirements , interest and dividend payments to investors , and the outcome of tax and regulatory matters . sce expects to fund its 2012 obligations , capital expenditures and dividends through operating cash flows , tax benefits ( including bonus depreciation ) and capital market financings of debt and preferred equity , as needed . sce also has availability under its credit facilities to meet operating and capital requirements . in january and february 2012 , sce issued 250,000 shares and 100,000 shares , respectively , of 6.25 % series e preference stock ( cumulative , $ 1,000 liquidation value ) . the series e preference stock may not be redeemed prior to february 1 , 2022 . the proceeds from the sale of these shares were used to repay commercial paper borrowings issued to fund sce 's capital program . available liquidity sce has two credit facilities : a $ 2.4 billion five-year credit facility that matures in february 2013 and a $ 500 million three-year credit facility that matures in march 2013 . ( in millions ) credit facilities commitment $ 2,894 outstanding borrowings supported by credit facilities ( 419 ) outstanding letters of credit ( 81 ) amount available $ 2,394 debt covenant sce has a debt covenant in its credit facilities that limits its debt to total capitalization ratio to less than or equal to 0.65 to 1. at december 31 , 2011 , sce 's debt to total capitalization ratio was 0.48 to 1. capital investment plan sce 's forecasted capital expenditures for 2012 – 2014 include a capital forecast in the range of $ 11.8 billion to $ 13.2 billion based on the average variability experienced in 2011 , 2010 and 2009 of 11 % between annual forecast capital expenditures and actual spending . this capital forecast includes certain projects under cpuc jurisdiction that are subject to the outcome of the 2012 cpuc grc . the completion of projects , the timing of expenditures , and the associated cost recovery may be affected by permitting requirements and delays , construction schedules , availability of labor , equipment and materials , financing , legal and regulatory approvals and developments , weather and other unforeseen conditions . sce 's 2011 capital expenditures and the 2012 – 2014 capital expenditures forecast are set forth in the table below : replace_table_token_5_th 1 included in sce 's capital expenditures plan are projected environmental capital expenditures of $ 499 million , $ 534 million and $ 576 million in 2012 , 2013 and 2014 , respectively . the projected environmental capital expenditures are to comply with laws , regulations , and other nondiscretionary requirements .
| results of operations sce 's results of operations are derived mainly through two sources : utility earning activities – representing revenue authorized by the cpuc and ferc which is intended to provide sce a reasonable opportunity to recover its costs and earn a return on its net investment in generation , transmission and distribution assets . the annual revenue requirements are comprised of forecasted operation and maintenance costs , depreciation , taxes and a return consistent with the capital structure . also , included in utility earnings activities are revenues or penalties related to incentive mechanisms , other operating revenue , and regulatory charges or disallowances , if any . utility cost-recovery activities – representing cpuc- and ferc-authorized balancing accounts which allow for recovery of specific project or program costs incurred or provide for mechanisms to track and recover or refund differences in forecasted and actual amounts , subject to reasonableness review or compliance with upfront standards . the following table is a summary of sce 's results of operations for the periods indicated . the presentation below separately identifies utility earning activities and utility cost-recovery activities . replace_table_token_3_th 1 effective january 1 , 2010 , sce deconsolidated the big 4 projects and therefore these projects are reflected in 2009 activities only ( see `` item 8. sce notes to consolidated financial statements—note 3. variable interest entities '' for further discussion ) . 2 effective july 1 , 2009 , sce transferred mountainview power company , llc to sce . as a result of the transfer and for comparability purposes , mountainview 's 2009 activity was reclassified from cost-recovery activities to utility earning activities consistent with the revised recovery mechanism . 3 see use of non-gaap financial measures in `` management overview—highlights of operating results . ''
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the units are adjusted to each reporting period based on the expected appreciation of the units as defined in the plan . 48 nortech systems incorporated and subsidiaries notes to consolidated financial statements as of and for the years ended december 31 , 2017 and 2016 during the year ended december 31 , 2016 , we granted 31,666 units with a base date of january 1 , 2016 and a vesting date of january 1 , 2019. during the year-ended december 31 , 2017 , we granted a total of 100,000 units and a vesting date of december 31 , 2019. total compensation ( income ) expense related to the vested outstanding units based on the estimated appreciation over their remaining terms was approximately ( $ 22,000 ) and $ 37,000 for the years ended december 31 , 2017 and 2016 , respectively . story_separator_special_tag overview we are a minnesota , united states based full-service global ems contract manufacturer offering a full range of value-added engineering , technical and manufacturing services and support including project management , design , testing , prototyping , manufacturing , supply chain management and post-market services . our products are complex wire and cable assemblies , printed circuit board assemblies , higher-level assemblies , medical devices and other box builds for a wide range of industries . we serve three major markets within the ems industry : aerospace and defense , medical , and the industrial market which includes industrial capital equipment , transportation , vision , agriculture , oil and gas . as of december 31 , 2017 , we have the following facilities in minnesota ; bemidji , blue earth , eden prairie , mankato , merrifield , milaca and maple grove . we also have facilities in monterrey , mexico and suzhou , china . on january 31 , 2017 , we closed our manufacturing operations in augusta , wisconsin ( see note 8 , of notes to consolidated financial statements ) . our revenue is derived from complex designed products built to the customers ' specifications . the products we manufacture are engineered and designed products that require sophisticated manufacturing support . quality , on time delivery , and reliability are of upmost importance . our goal is to expand and diversify our customer base by focusing on sales and marketing efforts that fit our value-added service , early engagement design , and development strategy . we continue to focus on lean manufacturing initiatives , quality and on-time delivery improvements to increase asset utilization , reduce lead times and provide competitive pricing . in 2016 , our operations in suzhou , china had startup costs that decreased operating income for the year with production revenue starting in the second half of the year . startup costs included in cost of goods sold in 2016 was $ 0.5 million . in 2017 , our operations are now in full production mode for our strategic global customers . our strategic investments have positioned us to capitalize on growth opportunities in the medical markets and improve our competitiveness by expanding our global footprint . our industrial and defense markets are focused on improving our asset utilization and profitability while transforming to a value added , solution-sell business model that supports early engagement , design for manufacturability and rapid prototyping . critical accounting policies and estimates our significant accounting policies and estimates are summarized in notes to consolidated financial statements . some of the accounting policies require us to exercise significant judgment in selecting the appropriate assumptions for calculating financial estimates . such judgments are subject to an inherent degree of uncertainty . these judgments are based on historical experience , known trends in the industry , terms of existing contracts and other information from outside sources , as appropriate . actual results may differ from these estimates under different assumptions and conditions . certain of the most critical estimates that require significant judgment are as follows : revenue recognition we recognize manufacturing revenue when we ship goods or the goods are received by our customer , when title has passed , all contractual obligations have been satisfied , the price is fixed or determinable and 15 collection of the resulting receivable is reasonably assured . generally , there are no formal substantive customer acceptance requirements or further obligations related to manufacturing services . if such requirements or obligations exist , then we recognize the related revenues at the time when such requirements are completed and the obligations are fulfilled . we also provide engineering services separate from the manufacturing of a product . revenue for engineering services is generally recognized on a time and materials basis or upon completion of the engineering process . in addition , we have another separate source of revenue that comes from short-term repair services , which are recognized when the repairs are completed and the repaired products are shipped back to the customer . our net sales for services were less than 10 % of our total sales for all periods presented , and accordingly , are included in net sales in the consolidated statements of operations and comprehensive income ( loss ) . shipping and handling costs charged to our customers are included in net sales , while the corresponding shipping expenses are included in cost of goods sold . beginning january 1 , 2018 , we adopted new revenue recognition guidance issued by the fasb , asu 2014-09 , revenue from contracts with customers ( topic 606 ) . this standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance , including industry-specific guidance . the core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service . a customer obtains control when it has the ability to direct the use of , and obtain the benefits from , the goods or services . story_separator_special_tag an amount of judgment is required when assessing the ability to realize accounts receivable , including assessing the probability of collection and the current credit-worthiness of each customer . if the financial condition of our customers was to deteriorate , resulting in an impairment of their ability to make payments , an additional provision for uncollectible accounts may be required . we believe the reserve is adequate for any exposure to loss in the december 31 , 2017 accounts receivable . at december 31 , 2017 , our allowance for doubtful accounts was $ 0.2 million . inventory reserves inventory reserves are maintained for the estimated value of the inventory that may have a lower value than stated or quantities in excess of future production needs . we have an evaluation process to assess the value of the inventory that is slow moving , excess or obsolete on a quarterly basis . we evaluate our inventory based on current usage and the latest forecasts of product demand and production requirements from our customers . we believe the total reserve at december 31 , 2017 of $ 0.8 million is adequate . story_separator_special_tag style= '' margin:0in 0in .0001pt ; '' > our loss from operations for the 2017 fiscal year was $ 1.3 million , a reduction of $ 1.9 million compared to the 2016 income from operations of $ 0.6 million . loss on extinguishment of debt loss on the extinguishment of debt for the year ended december 31 , 2017 was $ 0.2 million , primarily related to legal and terminations fees ( see note 3 , of notes to consolidated financial statements ) . there was no loss on extinguishment of debt recorded in 2016. interest expense interest expense for both years ended december 31 , 2017 and 2016 , was approximately $ 0.6 million . 19 income taxes income tax expense for the year ended december 31 , 2017 was $ 0.4 million . income tax expense for the year ended december 31 , 2016 was $ 35,000. the effective tax rate for fiscal 2017 and 2016 was ( 18.1 % ) and 44.4 % , respectively . our 2017 tax rate was impacted by the recently enacted federal tax reform , a significant change in valuation allowance and the company being in a loss position so as not to able to generate a domestic production activities deduction credit . the statutory reconciliation for the years ended december 31 , 2017 and 2016 is as follows : replace_table_token_7_th net income ( loss ) our net loss in 2017 was $ 2.4 million or $ 0.89 per diluted common share . net income in 2016 was $ 44,000 or $ 0.02 per diluted common share . liquidity and capital resources we believe that our existing financing arrangements and anticipated cash flows from operations will be sufficient to satisfy our working capital needs , capital expenditures and debt repayments for the foreseeable future . credit facility we have a credit agreement with bank of america which was entered into on june 15 , 2017 ( as amended effective december 29 , 2017 , the bank of america credit agreement ) , and provides for a line of credit arrangement of $ 16 million that expires on june 15 , 2022. the credit arrangement also has a $ 5 million real estate term note outstanding with a maturity date of june 15 , 2022. the bank of america credit agreement replaced our previous credit agreement with wells fargo bank ( the wells fargo credit agreement ) , which terminated on june 20 , 2017 , resulting in a loss on the extinguishment of debt of $ 174,834 primarily related to legal and terminations fees . under the bank of america credit agreement , both the line of credit and real estate term notes are subject to variations in the libor rate . our bank of america credit agreement bears interest at the combined weighted-average interest rate of 3.74 % as of december 31 , 2017. we had borrowings on our bank of america credit agreement of $ 8.5 million outstanding as of december 31 , 2017. there are no acceleration clauses under the bank of america credit agreement that would accelerate the maturity of our outstanding line of credit borrowings . 20 the line of credit and real estate term notes with bank of america contain certain covenants which , among other things , require us to adhere to regular reporting requirements , abide by annual shareholder dividend limitations , maintain certain financial performance , and limit the amount of annual capital expenditures . the availability under our line is subject to borrowing base requirements , and advances are at the discretion of the lender . the line of credit is secured by substantially all of our assets . the bank of america credit agreement provides for , among other things , a fixed charge coverage ratio of not less than ( i ) 1.0 to 1.0 for each period of four fiscal quarters , commencing with the period of four fiscal quarters ending december 31 , 2018. in addition , the bank of america credit agreement requires that we comply with certain minimum levels of cumulative ebitda for measurement periods during fiscal 2018 , including cumulative ebitda of $ 1,970,000 for the twelve months ended december 31 , 2018. the availability under the line is subject to borrowing base requirements , and advances are at the discretion of the lender . at december 31 , 2017 , we had unused availability under our line of credit of $ 4.2 million , supported by our borrowing base . the line is secured by substantially all of our assets .
| operating results the following table presents our statements of operations data as percentages of total net sales for the years indicated : 17 replace_table_token_4_th net sales our net sales in 2017 were $ 112.3 million , compared to $ 116.6 million in 2016 , a decrease of 3.7 % . revenue from our medical customers in 2017 decreased 4.4 % compared to 2016 , due to medical device customer project delays and lack of funding for certain customers . revenue from our industrial customers decreased 3.1 % year over year , due to lower demand levels from our transportation equipment customers . our defense revenue decreased 2.7 % year over year due to customer mix . programs frequently fluctuate in demand or come to an end and are replaced by new programs . net sales by our major ems industry markets for the years ended december 31 , 2017 and 2016 were as follows : replace_table_token_5_th backlog our 90-day backlog at december 31 , 2017 was $ 19.4 million , compared to $ 20.5 million at the end of 2016. our medical customers 90-day backlog decreased 41.6 % compared to the prior year end . the medical decrease was partially offset by increases in backlog to our defense customers of 36.6 % , and industrial customers of 35.1 % . our industrial backlog growth is primarily due to our semi-conductor and capital equipment related customers . the growth in our defense backlog is due largely to our aerospace related customers . the decline in our medical backlog is primarily due to a significant customer working through their inventory levels that were built up in the first half of 2017 and various other medical device customer reducing their forecasts . 90-day backlog by our major ems industry markets are as follows : 18 replace_table_token_6_th our 90-day backlog varies due to order size , manufacturing delays , inventory programs , contract terms and conditions and changes in timing of customer delivery schedules and releases .
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if it is determined that a loss will result from the performance of a contract , the entire amount of the estimable future loss is charged against income in the period the loss is identifiable . changes in these estimates can routinely occur over the contract performance period for a variety of story_separator_special_tag the following discussion and analysis of our financial condition and results of operations and quantitative and qualitative disclosures about market risk should be read in conjunction with our consolidated and combined financial statements and the related notes . it contains forward-looking statements ( which may be identified by words such as those described in “ risk factors—forward-looking statement risks ” in part i of this annual report ) , including statements regarding our intent , belief , or current expectations with respect to , among other things , trends affecting our financial condition or results of operations , backlog , our industry , government budgets and spending and the impact of competition . such statements are not guarantees of future performance and involve risks and uncertainties , and actual results may differ materially from those in the forward-looking statements as a result of various factors . factors that could cause or contribute to these differences include those discussed below and elsewhere in this annual report , particularly in “ risk factors ” in part i of this annual report . due to such uncertainties and risks , you are cautioned not to place undue reliance on such forward-looking statements , which speak only as of the date hereof . we do not undertake any obligation to update these factors or to publicly announce the results of any changes to our forward-looking statements due to future results or developments . references herein to “ former parent ” refer to leidos holdings , inc. ( formerly saic , inc. ) collectively with its consolidated subsidiaries . we use the terms “ company , ” “ we , ” “ us ” and “ our ” to refer to both ( 1 ) science applications international corporation and its consolidated subsidiaries for time periods after the separation and ( 2 ) , for time periods prior to separation , the technical , engineering and enterprise information technology ( it ) services businesses of former parent , which were contributed to science applications international corporation as part of the separation . the financial information discussed below and included elsewhere in this annual report may not necessarily reflect what our financial condition , results of operations or cash flow would have been had we been a stand-alone company during the periods presented prior to separation or what our financial condition , results of operations and cash flows may be in the future . unless otherwise noted , references to fiscal years are to fiscal years ended january 31 ( for fiscal 2013 and earlier periods ) or fiscal years ending the friday closest to january 31 ( for fiscal 2014 and later periods ) . for example , we refer to the fiscal year ended january 31 , 2014 as “ fiscal 2014. ” effective in fiscal 2014 , we changed our fiscal year to a 52/53 week fiscal year ending on the friday closest to january 31 , with interim fiscal quarters typically consisting of thirteen weeks and ending on the friday closest to april 30 , july 31 , and october 31. business overview we are a leading provider of technical , engineering and enterprise it services , primarily to the u.s. government . we provide engineering and integration offerings for large , complex government projects and offer a broad range of services with a targeted emphasis on higher-end , differentiated technology services . our end-to-end enterprise it offerings span the entire spectrum of our customers ' it infrastructure . the saic brand has developed through over 45 years of addressing customers ' mission critical needs and solving their most complex problems . we serve markets of significant scale and opportunity , with our primary customers being the departments and agencies of the u.s. government . we serve our customers through more than 1,500 active contracts and task orders and employ approximately 13,000 individuals who are led by an experienced executive team of proven industry leaders . serving our country 's defense and civilian markets , along with many commercial and state/local governments , has afforded us the ability to develop strong and longstanding relationships with some of the largest customers in the markets we serve . having completed our first full fiscal year as a stand-alone company , we continue to believe we are well positioned to protect our existing business base , expand our offerings to current customers and grow into adjacent markets . we believe that saic 's value proposition is found in the proven ability to serve as a trusted adviser to our customers . in doing so , we leverage our expertise and scale to help them execute their mission . we succeed as a business based on the solutions we deliver , our past performance and our ability to compete on price . our solutions are based on best practices , technology transfer and inspired through innovation . our past performance was achieved by employee dedication and customer focus . our ability to be competitive in the future will continue to be driven by our reputation of successful program execution , competitive cost structure and efficiencies in assigning the right people , at the right time , in support of our contracts . -27- science applications international corporation substantially all of our revenues are generated by , and tangible long-lived assets owned by , entities located in the united states . on march 1 , 2015 the company entered into a definitive agreement to acquire privately held scitor holdings , inc. ( scitor ) , a market leading provider of services primarily to the intelligence community , for an all-cash purchase price of $ 790 million , subject to adjustment . story_separator_special_tag it does not include the unfunded portion of contracts where funding is incrementally appropriated or authorized on a quarterly or annual basis by the u.s. government and other customers even though the contract may call for performance over a number of years . funded backlog for contracts with non-government agencies represents the estimated value on contracts , which may cover multiple future years , under which we are obligated to perform , less revenues previously recognized on these contracts . negotiated unfunded backlog . negotiated unfunded backlog represents estimated amounts of revenue to be earned in the future from ( 1 ) negotiated contracts for which funding has not been appropriated or otherwise authorized and ( 2 ) unexercised priced contract options . negotiated unfunded backlog does not include any estimate of future potential task orders expected to be awarded under idiq , gsa schedule or other master agreement contract vehicles . we expect to recognize revenue from a substantial portion of our funded backlog within the next 12 months ( from the end of the reporting period ) . however , the u.s. government can adjust the scope of services of or cancel contracts at any time . similarly , certain contracts with commercial customers include provisions that allow the customer to cancel prior to contract completion . most of our contracts have cancellation terms that would permit us to recover all or a portion of our incurred costs and fees for work performed . the estimated value of our total backlog as of the dates presented was : replace_table_token_7_th -31- science applications international corporation the decline in backlog was driven primarily by contract award timing and the lack of resolution of contract protests . during fiscal 2015 , we submitted $ 9 billion in proposals which represents a 3 % increase over the prior year . our backlog fluctuates from year to year based on the timing of large contract awards and , for protested awards , favorable protest resolution . for example , during fiscal 2015 the award of the high performance computing modernization program integrated technical services ( hits ) contract was protested . in the fourth quarter of fiscal 2015 the government customer took corrective action , requesting that bidders resubmit their proposals . we now expect that this program will be awarded to the winner of the resubmission process during fiscal 2016. contract types . our earnings and profitability may vary materially depending on changes in the proportionate amount of revenues derived from each type of contract . for a discussion of the types of contracts under which we generate revenue , see “ business—contract types ” in part i of this annual report . the following table summarizes revenues by contract type as a percentage of total revenues for the periods presented : replace_table_token_8_th revenue mix . we generate revenues under our contracts from the efforts of our employees ( which we refer to below as labor-related revenues ) , the efforts of our subcontractors and the materials provided on a contract . our subcontractor-related revenues and materials-related revenues generally have lower margins than our labor-related revenues . the following table presents changes in labor-related , subcontractor-related and materials-related revenues for the periods presented : replace_table_token_9_th labor-related revenues as a percentage of total revenues increased in fiscal 2015 due to the decrease in subcontractor revenue discussed below and our continued efforts to adjust our contract labor mix in favor of work performed by our employees . subcontractor-related revenues decreased in fiscal 2015 and fiscal 2014 , relative to each 's respective prior periods , primarily due to funding delays on certain dod contracts as well as the loss of dgs ( which ended in fiscal 2014 ) . supply chain materials-related revenues increased as a result of stronger than usual ordering activity by the dod near the end of the government fiscal year and continued into the fourth quarter of fiscal 2015. other materials-related revenues decreased for fiscal 2014 compared to fiscal 2013 primarily on it and logistics contracts affected by the in-theater force drawdown and due to the completion of an army reserve and national guard technical support program . -32- science applications international corporation liquidity and capital resources we strive to consistently and efficiently convert our earnings from operations into cash available for deployment for the ultimate purpose of increasing shareholder value and , accordingly , seek to be positioned to take advantage of business opportunities as and when they arise . since separation , we have endeavored to deploy capital consistent with our objective to maintain a target average minimum cash balance of $ 150 million , while also managing our debt level . we intend to deploy excess capital above this level though dividends , share repurchases , additional debt amortization or strategic acquisitions . in march 2015 we entered into a definitive agreement to acquire scitor , a strategic acquisition which will provide access to new customers in the intelligence community . we have secured a firm financing commitment and expect to put in place permanent financing prior to closing . in march 2015 we amended the terms of our existing credit facility to , among other things , provide for and permit the company to incur approximately $ 670 million of additional secured debt to finance the planned acquisition and permit the conversion of our existing revolving and term loan facilities from unsecured loans to secured loans upon completion of the acquisition . we intend to fund the acquisition through these increased borrowings and cash on hand . we use various financial measures when we develop and update our disciplined cash deployment methodology , which include evaluating cash provided by operating activities , free cash flow and financial leverage . our business requires minimal infrastructure investment because we are primarily a services provider . we expect to fund our ongoing working capital , commitments and any other discretionary investments with existing cash and cash equivalents , future cash flows from operations and , if needed , borrowings under our $ 200 million revolving credit facility .
| results of operations the primary financial performance measures we use to manage our business and monitor results of operations are revenues , operating income and cash flows from operating activities . the following table summarizes our results of operations : replace_table_token_4_th ( a ) management believes that the presentation of operating income excluding separation transaction and restructuring expenses , as a percentage of revenues , which is a non-gaap financial measure , provides useful information to investors regarding the company 's financial condition and results of operations . revenues . from fiscal 2013 to fiscal 2014 revenues decreased by $ 673 million , or 14 % . the decrease from fiscal 2014 to 2015 was less pronounced , decreasing $ 182 million , or 5 % . the easing of the revenue contraction is a result of the reduced impact of programs which ended in prior years , including the disn global solutions program ( dgs ) , an army reserve and national guard technical support program and lower activity on in-theater logistics programs . although budget pressures , funding delays and changing government procurement strategies have continued to result in lower dod program material and subcontract revenues , the magnitude of the impact was lower in fiscal 2015 compared to the prior year . for fiscal 2015 these decreases were partially offset by revenues on newly awarded programs and increased material volume on supply chain contracts . the following summarizes the major factors contributing to the change in revenues between fiscal 2013 and fiscal 2014 and between fiscal 2014 and fiscal 2015 . -29- science applications international corporation replace_table_token_5_th revenues performed by former parent decreased in the current year due to the expected ramp down of pre-separation joint work . these revenues are recorded equal to cost to reflect that no additional profit is charged to the customer for work performed by former parent . operating income .
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our actual results could differ materially from those discussed in the forward-looking statements . factors that could cause or contribute to these differences include those discussed below and elsewhere in this annual report on form 10-k , particularly in “ risk factors ” in item 1a . all monetary amounts used in this discussion are in thousands except common units and share amounts . overview we are a global diversified holding company that engages in multiple businesses through consolidated subsidiaries , associated companies and other interests . we have interests in a variety of businesses , including diversified industrial products , energy , defense , banking , insurance , food products and services , sports , training , education , and the entertainment and lifestyle industries . the securities of some of the companies in which we have interests are traded on national securities exchanges , while others are privately held or less liquid . we seek to work with our companies to increase corporate value over the long term for all stakeholders and shareholders by implementing steel partners operational excellence programs , the steel partners purchasing council , steel partners corporate services , balance sheet improvements , capital allocation policies and growth initiatives . we also own interests directly and indirectly in other companies and certain other interests that are accounted for as available-for-sale securities or held by the spii liquidating trust . segment information the company 's reportable segments as of december 31 , 2012 are outlined in the table below . additional detail related to each one of the company 's reportable segments can be found in the `` diversified industrial , '' `` energy '' , `` financial services '' and `` corporate '' sections later in this management 's discussion and analysis . replace_table_token_7_th _ ( 1 ) consolidated subsidiary ( 2 ) equity method investment ( 3 ) the operations of bns are included in the energy segment through june 30 , 2012. the results of the bns liquidating trust are included in the corporate and other segment from july 1 , 2012 through december 31 , 2012 ( 4 ) other investments classified in corporate and other include various investments in available-for-sale securities in the computer software and services , aerospace/defense , manufacturing and restaurant industries . included in these investments are two of the company 's available-for-sale investments , api group plc ( `` api '' ) and jps industries , inc. ( `` jps '' ) . effective december 31 , 2011 , these investments were reclassified from equity method investments to available-for-sale securities , and accordingly are included in the corporate and other segment in 2012 . 30 results of operations the following is a summary of sph 's consolidated operating results : replace_table_token_8_th diversified industrial segment the following presents a summary of the diversified industrial segment operating results as reported in our consolidated financial statements : replace_table_token_9_th as of december 31 , 2012 , the diversified industrial segment for financial reporting purposes consists of hnh , which is a consolidated subsidiary , and sli which is an associated company . bns ' 2012 and 2011 results have been reclassified from the diversified industrial segment to the newly formed energy segment ( see below ) for comparability . bns was included in corporate and other in 2010 since it was a holding company with no continuing operations prior to its february of 2011 acquisition of sun well . for the years ended december 31 , 2011 and 2010 , diversified industrial results include the income or loss associated with its investments in api group plc ( “ api ” ) , a leading manufacturer of specialized materials for packaging and jps industries , inc. ( “ jps ” ) , a manufacturer of extruded urethanes , polypropylenes and mechanically formed glass . the investments in both api and jps were accounted for as equity method investments throughout 2011 and 2010. effective december 31 , 2011 , the company 's investments in api and jps were reclassified from equity method investments to available for sale securities , and accordingly are currently classified in the corporate and other segment in 2012 . 31 total revenue for the diversified industrial segment increased to $ 629,396 for the year ended december 31 , 2012 , as compared to $ 634,964 in the prior year . total revenue for the diversified industrial segment increased to $ 634,964 for the year ended december 31 , 2011 , as compared to $ 367,124 in the prior year period . this was a result of the consolidation of hnh effective may 7 , 2010. hnh w e consolidated hnh effective may 7 , 2010 , the date that our interest in hnh exceeded 50 % . for comparative purposes however , unaudited pro forma revenues and earnings of hnh are presented in the tables and discussion below for the year ended december 31 , 2010. we believe this presentation is more meaningful for management 's discussion and analysis in that it allows comparability to prior periods . the pro forma results of hnh for the year ended december 31 , 2010 has been prepared as if the acquisition of the controlling interest in hnh had occurred on january 1 , 2010. the pro forma information is not necessarily indicative of the results that actually would have occurred if the above transactions had been consummated for the periods , nor do they purport to represent the financial position and results of operations for future periods . the unaudited pro forma condensed combined statements of operations of hnh for the year ended december 31 , 2010 has been derived from the financial statements of hnh which are included as exhibit 99.1 in this form 10-k. the pro forma adjustments are described below . the following presents a summary of hnh : replace_table_token_10_th pro forma adjustments unaudited pro forma information in the above table includes adjustments to hnh 's operating results as reflected in the financial statements of hnh for the applicable periods . story_separator_special_tag % , to $ 634,964 , as compared to $ 540,471 for the year ended december 31 , 2010. the higher sales volume from most of the company 's segments was driven by both higher demand for hnh 's products , and the impact of higher silver prices , which accounted for approximately $ 46,300 of the increase in sales for the year ended december 31 , 2011. higher sales were also driven by the impact of an increase in the average market price of silver , which increased by 75.6 % in 2011 ( $ 35.40 per troy oz . ) as compared to 2010 ( $ 20.16 per troy oz ) . in addition , incremental sales were driven by higher volume of commercial roofing products and fasteners , increased sales of printed circuit board materials related to the telecommunications infrastructure in china , increased sales of flex heater and coil insulation products for the general industrial market , and higher sales of tubing to the petrochemical and ship building markets and the medical industry markets . this was partially offset by weakness in tubing sales to the refrigeration market . gross profit for the year ended december 31 , 2011 increased to $ 161,199 as compared to $ 141,016 for the same period of 2010. gross profit margin for the year ended december 31 , 2011 decreased to 25.4 % as compared to 26.1 % during the same 33 period of 2010. the lower gross margin was primarily due to higher silver costs from the joining materials segment . since hnh 's precious metal inventory is hedged and the cost of silver is passed-through to the customer principally at market , higher silver prices generally result in moderation or , at times , a reduction in the joining materials segment 's gross profit margin . sg & a expenses were $ 8,733 higher for the year ended december 31 , 2011 compared to the same period of 2010 , reflecting higher variable selling costs and non-cash restricted stock expense of approximately $ 3,100. sg & a as a percentage of net sales was 17.2 % for the year ended december 31 , 2011 as compared to 18.6 % for the same period of 2010. realized and unrealized loss on derivatives totaled $ 397 for the year ended december 31 , 2011 , compared to a loss of $ 5,983 in the same period of 2010. the lower loss in 2011 was primarily driven by a reduction in the amount of ounces under contract in 2011 as compared to 2010. the derivative financial instruments utilized by hnh are precious metal forward and future contracts which are used to economically hedge hnh 's precious metal inventory against price fluctuations . the trend in the market price of silver could significantly affect the income from continuing operations of the company . if there is a material increase in silver prices , it could reasonably be expected to cause a loss on hnh 's open silver derivatives contracts . interest expense was $ 11,926 for the year ended december 31 , 2011 , compared to $ 13,808 in the same period of 2010. the decrease was primarily due to lower interest rates as a result of the company 's debt refinancing during the fourth quarter of 2010. income ( loss ) of associated companies income ( loss ) of associated companies includes income or loss we recognize on investments where we own between 20 % and 50 % of the outstanding equity and have the ability to exercise influence , but not control , over the investee . income ( loss ) of associated companies included in the diversified industrial segment net income from continuing operations includes the following : replace_table_token_11_th ( a ) effective may 7 , 2010 we consolidated hnh . prior to this date the investment in hnh was accounted for under the equity method at fair value . ( b ) effective july 5 , 2011 , we consolidated dgt . prior to this date the investment in dgt was accounted for under the equity method . ( c ) effective december 31 , 2011 the company discontinued the equity method of accounting and reclassified jps to investments at fair value and began classifying jps as an available for sale security . no income or loss was recorded in 2011 , as the information was not available . changes in fair value of jps are reported in accumulated other comprehensive income . ( d ) effective december 31 , 2011 the company discontinued the equity method of accounting and reclassified api to investments at fair value and began classifying api as an available for sale security . changes in fair value of api continue to be reported in the consolidated statement of operations . ( e ) associated company . 34 energy segment the following presents a summary of the energy segment operating results on a pro forma basis : replace_table_token_12_th ( a ) steel excel 's reported revenue and net income from continuing operations before income taxes , included in sph 's consolidated financial statements was $ 72,402 and $ 8,217 for the year ended december 31 , 2012 . ( b ) includes five months and eleven months of sun well 's operating results in 2012 and 2011 , respectively . ( c ) effective january 1 , 2012 , equity method income or loss for steel excel was reclassified to the energy segment due to acquisitions of oil field servicing companies . during 2011 , equity method income or losses from steel excel are classified in the corporate and other segment as steel excel did not have any significant operations at that time . as discussed below , the company consolidated steel excel effective may 31 , 2012 , the date that its interest in steel excel exceeded 50 % . sph 's newly formed energy segment consists of its consolidated subsidiary steel excel , which was acquired on may 31 , 2012 , and bns .
| cash flow summary replace_table_token_21_th cash flows from operating activities net cash provided by operating activities for the twelve months ended december 31 , 2012 was $ 65,498 . net income of $ 63,765 was partially offset by a decrease of $ 15,535 relating to changes in operating assets and liabilities . of this working capital decrease , $ 20,142 was from an increase on loans held for sale , $ 12,895 was from a decrease in accounts payable and accrued and other liabilities , partially offset by an decrease in accounts receivable of $ 19,112 , and a decrease in inventories $ 932 . net income was also impacted by $ 11,448 relating to the increase in the deferred fee liability to related party and $ 2,389 relating to net cash provided by operating activities of discontinued operations . the decrease in accounts receivable relates primarily to principally due to the impact of lower silver prices on hnh in 2012 , compared with rising prices in 2011. net cash provided by operating activities for the twelve months ended december 31 , 2011 was $ 5,488 . significant items that decreased cash flow from operations included $ 57,446 relating to changes in operating assets and liabilities ( of which $ 10,182 was from an increase in receivables , $ 29,935 was from a decrease in accounts payable and accrued and other liabilities and $ 18,460 was due to a net increase in loans held for sale ) . in addition , the deferred fee liability decreased by $ 6,107 and net cash used by operating activities of discontinued operations was $ 1,501 .
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this loan portfolio comprised story_separator_special_tag this discussion and analysis reviews our consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations . the information in this section has been derived from the consolidated financial statements and footnotes thereto that appear in item 8 of this form 10-k. the information contained in this section should be read in conjunction with these consolidated financial statements and footnotes and the business and financial information provided in this form 10-k. unless otherwise indicated , the financial information presented in this section reflects the consolidated financial condition and results of operations of first financial northwest and its subsidiaries . overview first savings bank is a wholly-owned subsidiary of first financial northwest and , as such , comprises substantially all of the activity for first financial northwest . first savings bank is a community-based savings bank primarily serving king and to a lesser extent , pierce , snohomish and kitsap counties , washington through our full-service banking office located in renton , washington . first savings bank 's business consists of attracting deposits from the public and utilizing these funds to originate one-to-four family residential , multifamily , commercial real estate , construction/land development , business and consumer loans . our current business strategy emphasizes one-to-four family residential , multifamily and commercial real estate lending . over the last five years , the national residential lending market has experienced severe challenges as home values declined and loan delinquencies and foreclosure rates reached unprecedented levels . during 2013 real estate values in our market areas modestly improved and the unemployment rates likewise modestly improved , although due to the slow recovery from the recent recession , remain at elevated levels . total loan originations increased as a result of increased loan demand in our market area and our renewed focus on generating loan volume during the year ended december 31 , 2013 to $ 157.0 million as compared to $ 118.8 53 million , for the year ended december 31 , 2012. during the year ended december 31 , 2013 , our net loan portfolio increased $ 12.7 million , or 2.0 % from december 31 , 2012 , primarily due to increases in our commercial real estate and construction/land development loans offsetting the decline in our on-to four-family residential loans . during the past several years we have limited our origination of construction loans because of the higher risks associated with those loans , the economic challenges in our market area and to focus on reducing our non-performing assets . we are now experiencing improved conditions in our primary market area as evidenced by stronger real estate prices , a general lack of new housing inventory in certain areas and stronger employment in the puget sound region . as a result , we have selectively increased our origination of construction lending and anticipate that it will become a larger portion of our total portfolio in future periods . we are taking a disciplined approach in our construction/land development lending by concentrating our efforts on smaller projects with lower total unit development per site . we also have generally limited our origination of land development projects to those projects where the borrower has their required portion of the construction funds available to build the proposed homes . our current speculative construction lending requirements are also higher than prior periods , with loan to cost guidelines of no more than 80 % and loan to completed value of no more than 75 % , unless sufficient factors exist to mitigate operating outside of these guidelines . our primary source of revenue is net interest income . net interest income is the difference between interest income , and is the income that we earn on our loans and investments , and interest expense that is the interest that we pay on our deposits and borrowings . changes in levels of interest rates affect our net interest income . first savings bank is liability-sensitive , meaning our liabilities reprice at a faster rate than our interest-earning assets , the lower interest rate environment that we are currently experiencing has contributed to an improvement in our net interest rate spread . an offset to net interest income is the provision for loan losses that represents the periodic charge to operations and is required to adequately provide for probable losses inherent in our loan portfolio . during 2013 , we had a recovery in our provision for loan losses of $ 100,000 , as compared to a provision for loan losses of $ 3.1 million for the year ended december 31 , 2012. the decrease in the provision during 2012 was attributable to the decline in the level of nonperforming and classified loans , improved delinquency rates and the decline in the level of charge-offs . we will continue to monitor our loan portfolio and make adjustments to our alll as we deem necessary . our noninterest expenses consist primarily of salaries and employee benefits , occupancy and equipment , data processing , oreo-related expenses , professional fees , regulatory assessments and other general and administrative expenses . salaries and employee benefits consist primarily of the salaries and wages paid to our employees , payroll taxes and expenses for retirement and other employee benefits . occupancy and equipment expenses , the fixed and variable costs of buildings and equipment , consist primarily of real estate taxes , depreciation expenses , maintenance and costs of utilities . oreo-related expenses consist primarily of maintenance and costs of utilities for the oreo inventory , market valuation adjustments , build-out expenses , gains and losses from oreo sales , legal fees , real estate taxes and insurance related to the properties included in the oreo inventory . story_separator_special_tag accordingly , the valuation of oreo is subject to significant external and internal judgment . if the carrying value of the loan at the date a property is transferred into oreo exceeds the fair value less estimated costs to sell , the excess is charged to the alll . management periodically reviews oreo values to determine whether the property continues to be carried at the lower of its recorded book value or fair value , net of estimated costs to sell . any further decreases in the value of oreo are considered valuation adjustments and are charged to noninterest expense in the consolidated income statements . expenses from the maintenance and operations and any gains or losses from the sales of oreo are included in noninterest expense . deferred taxes . deferred tax assets arise from a variety of sources , the most significant being expenses recognized in our financial statements but disallowed in the tax return until the associated cash flow occurs write-downs in the value of assets for financial statement purposes that are not deductible for tax purposes until the asset is sold or deemed worthless . we record a valuation allowance to reduce our deferred tax assets to the amount that can be recognized in line with the relevant accounting standards . the level of deferred tax asset recognition is influenced by management 's assessment of our historic and future profitability profile . at each balance sheet date , existing assessments are reviewed and , if necessary , revised to reflect changed circumstances . in a situation where income is less than projected or recent losses have been incurred , the relevant accounting 55 standards require convincing evidence that there will be sufficient future tax capacity . for additional information regarding our deferred taxes , see note 13 of the notes to consolidated financial statements contained in item 8. other-than-temporary impairments on the market value of investments . declines in the fair value of any available-for-sale or held-to-maturity investment below their cost that is deemed to be other-than-temporary results in a reduction in the carrying amount of the investment to that of fair value . a charge to earnings and an establishment of a new cost basis for the investment is made . unrealized investment losses are evaluated at least quarterly to determine whether such declines should be considered other-than-temporary and therefore be subject to immediate loss recognition . although these evaluations involve significant judgment , an unrealized loss in the fair value of a debt security is generally deemed to be temporary when the fair value of the investment security is below the carrying value primarily due to changes in interest rates and there has not been significant deterioration in the financial condition of the issuer . an unrealized loss in the value of an equity security is generally considered temporary when the fair value of the security is below the carrying value primarily due to current market conditions and not deterioration in the financial condition of the issuer . other factors that may be considered in determining whether a decline in the value of either a debt or an equity security is other-than-temporary include ratings by recognized rating agencies ; the extent and duration of an unrealized loss position ; actions of commercial banks or other lenders relative to the continued extension of credit facilities to the issuer of the security ; the financial condition , capital strength and near-term prospects of the issuer and recommendations of investment advisers or market analysts . therefore , deterioration of market conditions could result in impairment losses recognized within the investment portfolio . fair value . fasb asc 820 , fair value measurements and disclosures , establishes a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value . the degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability . financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value . conversely , financial instruments rarely traded or not quoted will generally have little or no pricing observability and a higher degree of judgment utilized in measuring fair value . pricing observability is impacted by a number of factors , including the type of financial instrument , whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction . see note 8 of the notes to consolidated financial statements contained in item 8 for additional information about the level of pricing transparency associated with financial instruments carried at fair value . comparison of financial condition at december 31 , 2013 and december 31 , 2012 assets . the following table details the changes in the composition of our assets at december 31 , 2013 from december 31 , 2012. replace_table_token_30_th interest-bearing deposits , investments available-for-sale and oreo decreased $ 33.9 million , $ 7.9 million and $ 5.9 million , respectively . funds received were utilized to reduce our customer interest-bearing deposits by $ 58.2 million as part of our strategy to reduce our total assets , mainly cash and to reduce higher-cost certificates of deposit . 56 net loans receivable increased $ 12.7 million to $ 663.2 million at december 31 , 2013 compared to $ 650.5 million at december 31 , 2012. loan originations for the year ended december 31 , 2013 totaled $ 157.0 million , an increase of $ 38.2 million from the year ended december 31 , 2012. the increase in our net loan portfolio was primarily the result of loan originations exceeding paydowns due to normal borrower activity , charge-offs and transfers to oreo . loan originations increased primarily as a result of increased loan demand during 2013 and a renewed emphasis on loan originations by our staff , now that the performance of our loan portfolio has improved .
| general . net income for the year ended december 31 , 2012 was $ 2.7 million , compared to $ 4.2 million in 2011. net interest income . net interest income in 2012 was $ 29.2 million , a $ 3.3 million or 10.3 % decrease from $ 32.6 million in 2011 , as a result of the changes in interest income and interest expense as detailed below . interest income . total interest income decreased $ 9.6 million to $ 41.5 million for the year ended december 31 , 2012 from $ 51.1 million for the year ended december 31 , 2011. the following table compares detailed average interest-earning asset balances , associated yields and resulting changes in interest and dividend income for the years ended december 31 , 2012 and 2011 : 63 replace_table_token_39_th the $ 9.6 million decline in interest income for 2012 as compared to 2011 was primarily a result of the decline in the average balance of our loan portfolio . the yield on average interest-earning assets declined 35 basis points to 4.37 % for the year ended december 31 , 2012 from 4.72 % for 2011 , reflecting both the general decline in interest rates and the strategic shift in our investment portfolio to more lower yielding adjustable-rate investments . interest income from net loans receivable decreased $ 7.6 million to $ 39.0 million for the year ended december 31 , 2012 from $ 46.6 million for the year ended december 31 , 2011. the primary reason for the decline was due to the $ 104.3 million decrease in the average loan balance to $ 663.2 million as compared to the average loan balance in 2011. the decrease in loan interest income related to the size of our portfolio accounted for $ 6.3 million of the reduction in loan interest income .
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the liability for unrecognized tax benefits related to this tax position was $ 905 and $ 477 at march 31 , 2012 and 2011 , respectively , which represents management 's estimate of the potential resolution of this story_separator_special_tag ( amounts in thousands , except per share data ) overview we are a global designer and manufacturer of custom-engineered ejectors , vacuum systems , condensers , liquid ring pump packages and heat exchangers to the refining and petrochemical industries , and a nuclear code accredited supplier of components and raw materials to the nuclear power generating market . our equipment is used in critical applications in the petrochemical , oil refining and electric power generation industries , including nuclear , cogeneration and geothermal plants . our equipment can also be found in alternative energy , including ethanol , biodiesel and coal and gas-to-liquids , as well as other diverse applications , such as metal refining , pulp and paper processing , shipbuilding , ( the nuclear propulsion program of the u.s. navy ) , water heating , refrigeration , desalination , soap manufacturing , food processing , pharmaceuticals , and heating , ventilating and air conditioning . our corporate offices are located in batavia , new york and we have production facilities in both batavia , new york and at our wholly-owned subsidiary , energy steel & supply co. , located in lapeer , michigan . we also have a wholly-owned foreign subsidiary , graham vacuum and heat transfer technology ( suzhou ) co. , ltd. , located in suzhou , china , which supports sales orders from china and provides engineering support and supervision of subcontracted fabrication . on december 14 , 2010 , we acquired energy steel to advance our strategy to diversify our products and broaden our offerings to the energy industry . this transaction was accounted for under the acquisition method of accounting . accordingly , the results of energy steel were included in our consolidated financial statements and comparisons to our prior fiscal year will be enhanced by the inclusion of energy steel in this fiscal year 's results . highlights highlights for fiscal 2012 , include : net income and income per diluted share for fiscal 2012 , were $ 10,553 and $ 1.06 compared with net income and income per diluted share of $ 5,874 and $ 0.59 for fiscal 2011. net sales for fiscal 2012 were a record $ 103,186 , up 39 % compared with $ 74,235 for fiscal 2011. orders received in fiscal 2012 of $ 106,709 were up 69 % compared with fiscal 2011 , when orders were $ 63,222. backlog on march 31 , 2012 was a record $ 94,934 , up 4 % from backlog of $ 91,096 on march 31 , 2011. gross profit and operating margins for fiscal 2012 were 31.6 % and 16.6 % compared with 29.4 % and 11.8 % , respectively , for fiscal 2011. cash and short-term investments at march 31 , 2012 were $ 41,688 compared with $ 43,083 as of march 31 , 2011 , down 3 % . at fiscal year end , we had a solid balance sheet that was free of bank debt and provided financial flexibility . forward-looking statements this report and other documents we file with the securities and exchange commission include forward-looking statements within the meaning of section 27a of the securities act of 1933 , as amended , and section 21e of the securities exchange act of 1934 , as amended . these statements involve known and unknown risks , uncertainties and other factors that may cause actual results to be materially different from any future results implied by the forward-looking statements . such factors include , but are not limited to , the risks and uncertainties identified by us under the heading risk factors in item 1a and elsewhere in this annual report on form 10-k. 17 forward-looking statements may also include , but are not limited to , statements about : the current and future economic environments affecting us and the markets we serve ; expectations regarding investments in new projects by our customers ; sources of revenue and anticipated revenue , including the contribution from the growth of new products , services and markets ; plans for future products and services and for enhancements to existing products and services ; our operations in foreign countries ; our ability to continue to pursue our acquisition and growth strategy ; our ability to expand nuclear power work into new markets ; our ability to successfully execute our existing contracts ; estimates regarding our liquidity and capital requirements ; timing of conversion of backlog to sales ; our ability to attract or retain customers ; the outcome of any existing or future litigation ; and our ability to increase our productivity and capacity . forward-looking statements are usually accompanied by words such as anticipate , believe , estimate , may , might , intend , appear , expect and similar expressions . actual results could differ materially from historical results or those implied by the forward-looking statements contained in this report . undue reliance should not be placed on our forward-looking statements . except as required by law , we undertake no obligation to update or announce any revisions to forward-looking statements contained in this report , whether as a result of new information , future events or otherwise . fiscal 2013 and the near-term market conditions during fiscal 2012 , bidding activity remained active . we believe the business environment is continuing to improve and that our customers are more inclined to procure the equipment needed for their projects . this supports our belief that our oil refining , petrochemical and related markets are in the early stages of a business recovery . while there continues to be uncertainty as to whether a sustained global economic recovery is occurring , we believe current signs ( such as order activity during our fourth quarter of fiscal 2012 ) continue to be more positive than in the past few years . story_separator_special_tag in the near future we expect to see smaller value projects than what we had seen during the last expansion cycle . this will require more orders for us to achieve a similar revenue level and will adversely impact our ability to realize margin gains through volume leverage . our quarterly order levels for fiscal 2012 , fiscal 2011 and fiscal 2010 , respectively , are set forth in the table below . mix shift : expected stronger international growth in refining and chemical processing with domestic growth in nuclear power and u.s. navy projects we expect growth in the refining and chemical processing markets to be driven by emerging markets . we have also expanded our addressable markets through the acquisition of energy steel and our focus on u.s. navy nuclear propulsion projects . we believe our revenue opportunities during the near term will be equivalent between the domestic and international markets . over the long-term , we expect our customers ' markets to regain their strength and , while remaining cyclical , continue to grow . we believe the long-term trends remain strong and that the drivers of future growth include : long-term demand trends global consumption of crude oil is estimated to expand significantly over the next two decades , primarily in emerging markets . this is expected to offset estimated flat to slightly declining demand in north america and europe . in addition , an increased trend toward export supply of finished product from the middle east to north america and europe . global oil refining capacity is projected to increase , and is expected to be addressed through new facilities , refinery upgrades , revamps and expansions . increased demand is expected for power , refinery and petrochemical products , stimulated by an expanding middle class in asia and the middle east . increased development of geothermal electrical power plants in certain regions is expected to address projected growth in demand for electrical power . 20 increased global regulations over the refining , petrochemical and nuclear power industries are expected to continue to drive requirements for capital investments . more refineries are expected to convert their facilities to use heavier , more readily available and lower cost crude oil as a feedstock . lower costs are expected to drive increased domestic use of natural gas in the u.s. , as well as , the ability to export liquefied natural gas to serve other regions , since natural gas in the u.s. is globally competitive with oil . increased focus on safety and redundancy is anticipated in existing nuclear power facilities . long-term increased project development of international nuclear facilities is expected , despite the recent tragedy in japan , ( including in the u.s. ) . construction of new petrochemical plants in the middle east to meet local demand . an expansion of the petrochemical market in the u.s. , given the plentiful supply and globally competitive price of natural gas . increased investments in new power generation projects are expected in asia and south america to meet projected consumer demand increases . long-term growth potential is believed to exist in alternative energy markets , such as geothermal , coal-to-liquids , gas-to-liquids and other emerging technologies , such as biodiesel , and waste-to-energy . shale gas development and the resulting availability of affordable natural gas as feedstock to u.s.-based chemical/petrochemical facilities is expected to lead to renewed investment in chemical/petrochemical facilities in the u.s. we believe that all of the above factors offer us long-term growth opportunities to meet our customers ' expected capital project needs . in addition , we believe we can continue to grow our less cyclical smaller product lines and aftermarket businesses . our domestic sales as a percentage of aggregate product sales was 63 % in our fiscal year ended march 31 , 2009. as the u.s. market weakened , relative to international markets , domestic sales declined to 45 % of total sales in each of fiscal 2010 and 2011. in fiscal 2012 , domestic sales increased to 54 % , with the full year impact of energy steel and additional u.s. navy work . the navy activity represents our production of surface condensers for the cvn-79 gerald r. ford class nuclear carrier order that was won in q3 fiscal 2010. this project was in excess of $ 25 million and is converting to revenue across multiple fiscal years . story_separator_special_tag style= '' margin-top:6px ; margin-bottom:0px ; text-indent:4 % '' > sg & a and other expenses for fiscal 2011 were $ 13,076 , up 7 % compared with $ 12,189 in fiscal 2010. the increase in sg & a was related to our acquisition of energy steel , which had $ 764 of sg & a ( including $ 53 of intangible asset amortization costs ) related to post-acquisition operating costs . there was also $ 676 of transaction costs related to the acquisition . sg & a , excluding energy steel , decreased $ 553 , driven by lower pension and variable compensation costs . sg & a and other expenses as a percentage of sales decreased in fiscal 2011 to 17.6 % of sales compared with 19.6 % of sales in fiscal 2010. interest income for fiscal 2011 was $ 77 , up from $ 55 in fiscal 2010. this increase was due to higher average levels of cash during fiscal 2011 compared with fiscal 2010. interest expense was $ 92 in fiscal 2011 , up from $ 36 in fiscal 2010. the increase was due to an interest charge for unrecognized tax benefits . our effective tax rate in fiscal 2011 was 33 % compared with an effective tax rate of 37 % for fiscal 2010. the tax rate in fiscal 2011 was adversely affected by acquisition-related costs which were not tax affected . excluding the acquisition-related tax impact , the effective tax rate in fiscal 2011 was 32 % .
| results of operations for an understanding of the significant factors that influenced our performance , the following discussion should be read in conjunction with our consolidated financial statements and the notes to our consolidated financial statements included in item 8 of part ii of this annual report on form 10-k. the following table summarizes our results of operations for the periods indicated : replace_table_token_3_th 21 fiscal 2012 compared with fiscal 2011 sales for fiscal 2012 were $ 103,186 , up $ 28,951 or 39 % , as compared with sales of $ 74,235 for fiscal 2011. the increase was driven by organic growth as well as the full year impact of our acquisition of energy steel . organic sales grew $ 17,478 , or 26 % , representing 60 % of the growth in fiscal 2012. sales from energy steel , which was acquired in december 2010 of fiscal 2011 , increased $ 11,473 , representing the remaining 40 % of the growth in fiscal 2012. all comparisons discussed include a full year of financial results for energy steel in fiscal 2012 compared with approximately 3 1 / 2 months of financial results in fiscal 2011. domestic sales increased by $ 22,074 in fiscal 2012 , driven by the full year impact of energy steel , increased conversion of the navy project and strong organic growth .
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the local television station 's news programming that attracts the largest audience in a market generally will provide a larger audience for its network programming ; and the quality of the other non-network programming carried by the television station . a local television station 's syndicated programming that attracts the largest audience in a market generally will provide larger audience lead-ins to its network programming . 43 a local television station can be the top-rated station in a market , regardless of the national ranking of its affiliated network , depending on the factors or attributes listed above . abc , cbs , fox and nbc , each have affiliations with local television stations that have the largest primetime audience in the local market in which the station operates regardless of the network 's primetime rating . some broadcasting companies believe that network affiliations are the most important component of the value of a station . these companies generally believe that television stations with network affiliations have the most successful local news programming and the network affiliation relationship enhances the audience for local syndicated programming . as a result , these broadcasting companies allocate a significant portion of the purchase price for any station that they may acquire to the network affiliation relationship . we generally have acquired broadcast licenses in markets with a number of commercial television stations equal to or less than the number of television networks seeking affiliates . the methodology we used in connection with the valuation of the stations acquired is based on our evaluation of the broadcast licenses and the characteristics of the markets in which they operated . we believed that in substantially all our markets we would be able to replace a network affiliation agreement with little or no economic loss to our television station . as a result of this assumption , we ascribed no incremental value to the incumbent network affiliation in substantially all our markets in which we operate beyond the cost of negotiating a new agreement with another network and the value of any terms that were more favorable or unfavorable than those generally prevailing in the market . other broadcasting companies have valued network affiliations on the basis that it is the affiliation and not the other attributes of the station , including its broadcast license , which contributes to the operating performance of that station . as a result , we believe that these broadcasting companies include in their network affiliation valuation amounts related to attributes that we believe are more appropriately reflected in the value of the broadcast license or goodwill . in future acquisitions , the valuation of the broadcast licenses and network affiliations may differ from those attributable to our existing stations due to different facts and circumstances for each station and market being evaluated . valuation allowance for deferred tax assets we consider future taxable income and feasible tax planning strategies in assessing the need for establishing or removing a valuation allowance . we record or subsequently remove a valuation allowance to reflect our deferred tax assets to an amount that is more likely than not to be realized . in the event that our determination changes regarding the realization of all or part of our deferred tax assets in the future , an adjustment to the deferred tax asset is recorded to our consolidated statement of operations in the period in which such a determination is made . revenue recognition we recognize local , national and political advertising sales , net of agency commissions , during the period in which the advertisements or programs are aired on our television stations , and when payment is reasonably assured . internet and mobile advertisement sales are recognized when the advertisement is displayed on our web sites or the web sites of our advertising network . we recognize retransmission consent fees in the period in which our service is delivered . stock-based compensation we estimate the fair value of stock option awards using a black-scholes valuation model . the black-scholes model requires us to make assumptions and judgments about the variables used in the calculation , including the option 's expected term , the price volatility of the underlying stock and the number of stock 44 option awards that are expected to be forfeited . the expected term represents the weighted-average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and our historical exercise patterns . expected volatility is based on historical trends for our class a common stock over the expected term , and prior to 2010 , we used the historical trends of our class a common stock over the expected term , as well as a comparison to peer companies . expected forfeitures are estimated using our historical experience . if future changes in estimates differ significantly from our current estimates , our future stock-based compensation expense and results of operations could be materially impacted . retirement plan we have historically provided a defined benefit retirement plan to our employees who did not receive matching contributions from our company to their 401 ( k ) plan accounts . our pension benefit obligations and related costs are calculated using actuarial concepts . our defined benefit plan is a non-contributory plan under which we made contributions either to : a ) traditional plan participants based on periodic actuarial valuations , which are expensed over the expected average remaining service lives of current employees ; or b ) cash balance plan participants based on 5 % of each participant 's eligible compensation . story_separator_special_tag the automotive category , which represented 26 % of our local and national advertising sales during the year ended december 31 , 2012 , was up 15 % as compared to 2011 , during which the automotive category represented 24 % of our local and national advertising sales . net revenues during the year ended december 31 , 2011 decreased by $ 8.2 million when compared with the prior year . the decrease was primarily due to : ( i ) a $ 33.5 million decrease in political advertising 47 sales ; and ( ii ) a $ 3.2 million decrease in national advertising sales . these decreases were partially offset by : ( i ) a $ 17.7 million increase in local revenues ; and ( ii ) a $ 10.8 million increase in digital revenues . the decrease in national advertising sales during 2011 was primarily due to the impact on advertising revenue of the 2011 japan earthquake and tsunami . the increase in local revenues during 2011 was primarily due to growth in local advertising sales , growth in retransmission consent revenues , primarily as a result of contractual rate increases , and increased advertising on our television station web sites . the increase in digital revenues for the year ended december 31 , 2011 , compared to the same period last year was a result of growth in internet advertising revenues primarily from increased advertising sales from lin digital . the automotive category , which represented 24 % of our local and national advertising sales during the year ended december 31 , 2011 was essentially flat as compared to 2010 , during which the automotive category represented 23 % of our local and national advertising sales . direct operating expenses ( excluding depreciation and amortization of intangible assets ) , which consist primarily of news , engineering , and programming expenses , increased $ 29.6 million , or 23 % , for the year ended december 31 , 2012 , compared to the prior year . this increase is primarily the result of an increase in fees relating to network affiliation agreements , growth in employee compensation expense , and higher cost of goods sold associated with lin digital . our direct operating expenses for the year ending december 31 , 2012 includes $ 9.4 million that is attributable to television stations acquired during the fourth quarter of 2012. direct operating expenses increased $ 11.5 million or 10 % for the year ended december 31 , 2011 , compared to the prior year , primarily due to higher cost of goods sold associated with interactive revenues , and an increase in fees pursuant to network affiliation agreements . selling , general and administrative expenses consist primarily of employee salaries , sales commissions , employee benefit costs , advertising , promotional expenses and research . these costs increased $ 21.5 million , or 21 % , for the year ended december 31 , 2012 , compared to the prior year . the increase was primarily due to higher variable costs attributable to the growth in revenue compared to the prior year . our selling , general and administrative expenses for the year ending december 31 , 2012 includes $ 9.7 million that is attributable to television stations acquired during the fourth quarter of 2012. selling , general and administrative expenses increased $ 1.7 million , or 2 % , for the year ended december 31 , 2011 , compared to the prior year . the increase was primarily due to an increase in sales compensation as a result of growth in our digital revenues . additionally , the increase was due in part to a benefit from a litigation settlement that occurred during the year ended december 31 , 2010 that did not recur during 2011. selling expenses as a percentage of net revenues were 6.6 % , 7.4 % and 7.3 % for the years ended december 31 , 2012 , 2011 and 2010 , respectively . amortization of program rights represents the recognition of expense associated with syndicated programming , features and specials , and these costs increased $ 1.6 million , or 8 % , for the year ended december 31 , 2012 and decreased $ 1.3 million , or 6 % , for the year ended december 31 , 2011 , compared to their respective prior years . the increase in 2012 compared to 2011 was attributable to the amortization of programming rights associated with the television stations acquired during the fourth quarter of 2012. the decrease in 2011 compared to 2010 was primarily attributable to a decrease in the cost of syndicated programming . corporate expenses represent corporate executive management , accounting , legal and other costs associated with the centralized management of our stations , and these costs increased $ 7.8 million , or 29 % , 48 for the year ended december 31 , 2012 , compared to the prior year . the increase was primarily due to increases in employee compensation and acquisition related expenses compared to prior year . corporate expenses increased $ 2.5 million , or 11 % , for the year ended december 31 , 2011 , compared to the prior year . the increase was primarily due to increases in legal and professional fees , and stock-based compensation . depreciation expense increased $ 5.9 million , or 22 % , for the year ended december 31 , 2012 and decreased $ 0.8 million , or 3 % , for the year ended december 31 , 2011 , compared to their respective prior years . the increase in 2012 was primarily attributable to the property and equipment associated with our acquisitions of television stations in the fourth quarter of 2012. the decreases during 2012 and 2011 were due to assets that have been fully depreciated compared to the prior year . amortization of intangible assets increased $ 5.2 million , or 431 % , for the
| executive summary we own , operate or service 43 television stations and seven digital channels in 23 u.s. markets , with multiple network affiliates in 18 markets , along with a diverse portfolio of web sites , apps and mobile products . our operating revenues are primarily derived from the sale of advertising time to local , national and political advertisers . less significant revenues are generated from our television station web sites , retransmission consent fees , interactive revenues and other revenues . we recorded net ( loss ) income of ( $ 7.6 ) million , $ 48.8 million and $ 36.5 million for the years ended december 31 , 2012 , 2011 , and 2010 , respectively . our operating highlights for 2012 include the following : net revenues increased $ 153.5 million , or 38 % , compared to 2011 , primarily as a result of a $ 68.3 million increase in net political advertising sales as well as an increase of $ 61 million , or 24 % , in local revenues , which include net local advertising sales , retransmission consent fees and television station web site revenues . also contributing to the increase in net revenues was an increase in interactive revenues , which include revenues from lin digital and nami media of $ 13.9 million , or 51 % , and an increase in net national revenues of $ 11.6 million , or 12 % .
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management is leading a set of initiatives designed to strengthen aon and unite the firm with one portfolio of capability enabled by proprietary data and analytics and one operating model to deliver additional insight , connectivity , and efficiency . the divestiture of the benefits administration and business process outsourcing in the second quarter of 2017 represents the next step of our strategy , reinforces our focus to provide advice and solutions , and further aligns our portfolio around our clients ' highest priorities . further , it reinforces our roic decision-making process and emphasis on operating cash flow . discontinued operations on february 9 , 2017 , the company entered into a purchase agreement with tempo acquisition , llc to sell the divested business to the buyer , an entity formed and controlled by affiliates of the blackstone group l.p. , and certain designated purchasers that are direct or indirect subsidiaries of the buyer . on may 1 , 2017 , the buyer purchased all of the outstanding equity interests in each of the divested business ' subsidiaries , plus certain related assets and liabilities , for a purchase price of $ 4.3 billion in cash paid at closing , subject to customary adjustments set forth in the purchase agreement , and deferred consideration of up to $ 500 million . cash proceeds after customary adjustments and before taxes due were $ 4.2 billion . aon and the buyer entered into certain transaction related agreements at the closing , including two commercial agreements , a transition services agreement , certain intellectual property license agreements , sub-leases and other customary agreements . aon expects to continue to be a significant client of the divested business and the divested business has agreed to use aon for its broking and other services for a specified period of time . in the twelve months ended december 31 , 2017 , the company recorded a gain on sale , net of taxes , of $ 779 million and a non-cash impairment charge to its tradenames associated with the divested business of $ 380 million as these assets were not sold to the buyer . additionally , effective may 1 , 2017 , consistent with operating as one segment , the company has implemented a three -year strategy to transition to a unified aon brand . as a result , aon commenced amortization of all indefinite lived tradenames and prospectively accelerated amortization of its finite lived tradenames over the three -year period . the accelerated amortization and impairment charge are included in amortization and impairment of intangible assets on the consolidated statement of income . financial results the following is a summary of our 2017 financial results from continuing operations : revenue increased 6 % , or $ 589 million , to $ 10.0 billion in 2017 compared to 2016 , reflecting 4 % organic revenue growth and a 2 % increase related to acquisitions , net of divestitures . organic revenue growth for the year was driven by growth across every major revenue line , with particular strength in reinsurance solutions , health solutions , and data & analytic services operating expenses increased $ 1.2 billion , or 16 % , to $ 9.0 billion in 2017 compared to 2016 due primarily to $ 497 million of restructuring costs , a $ 380 million non-cash impairment charge to the indefinite lived tradenames associated with the sale of the divested business , a $ 258 million increase in expenses related to acquisitions , net of divestitures , $ 143 million of accelerated amortization related to tradenames , and an increase in expense associated with 4 % organic revenue growth , partially offset by $ 165 million of savings related to restructuring and other operational improvement initiatives and a $ 92 million decrease in expenses related to certain pension settlements . operating margin decreased to 9.8 % in 2017 from 17.4 % in 2016 . the decrease in operating margin from the prior year is primarily driven by an increase in operating expenses , described above , partially offset by organic revenue growth of 4 % and core operational improvement . due to the factors set forth above , income from continuing operations was $ 435 million in 2017 , a decrease of $ 818 million , or 65 % , from 2016 . cash flow provided by operating activities was $ 669 million in 2017 , a decrease of $ 1.2 billion , or 63 % , from $ 1.8 billion in 2016 , due primarily to cash tax payments of approximately $ 940 million associated with the divested business , $ 280 million of cash payments for restructuring charges , and $ 45 million of transaction costs related to the divested business , partially offset by operational improvement . 27 we focus on four key non-gaap metrics that we communicate to shareholders : organic revenue growth , adjusted operating margins , adjusted diluted earnings per share , and free cash flow . these non-gaap metrics should be viewed in addition to , not instead of , our consolidated financial statements and notes thereto . the following is our measure of performance against these four metrics from continuing operations for 2017 : organic revenue growth , a non-gaap measure defined under the caption “ review of consolidated results — organic revenue growth , ” was 4 % in 2017 , comparable to 4 % organic growth in the prior year . organic revenue growth was driven by growth across every major revenue line , with particular strength in reinsurance solutions , health solutions , and data & analytic services . adjusted operating margin , a non-gaap measure defined under the caption “ review of consolidated results — adjusted operating margin , ” was 23.4 % in 2017 , compared to 21.6 % in the prior year . the increase in adjusted operating margin primarily reflects organic revenue growth of 4 % , core operational improvement , and $ 165 million of savings related to restructuring and other operational improvement initiatives . story_separator_special_tag the increase was primarily driven by $ 131 million of restructuring costs , a $ 71 million increase in expenses associated with acquisitions , net of divestitures , $ 28 million of costs related to regulatory and compliance matters , and an increase in expense associated with 4 % organic revenue growth , partially offset by $ 20 million of savings related to restructuring and other operational improvement initiatives and a $ 15 million decrease in expenses related to the sale of the divested business in the prior year period . interest income interest income represents income earned on operating cash balances and other income-producing investments . it does not include interest earned on funds held on behalf of clients . interest income was $ 27 million in 2017 , an increase of $ 18 million , or 200 % , from 2016 , due primarily to additional income earned on the balance of cash proceeds from the divested business . interest expense interest expense , which represents the cost of our debt obligations , was $ 282 million in 2017 , similar to the prior year period . other income ( expense ) other income ( expense ) decreased $ 75 million from $ 36 million in 2016 to $ ( 39 ) million in 2017 . other expense in 2017 includes , among other things , a $ 37 million unfavorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies and $ 16 million in net losses on the disposition of businesses , partially offset by $ 12 million of equity earnings and $ 2 million of gains on certain financial instruments . other income in 2016 includes $ 39 million in net gains on the disposition of businesses and $ 13 million in equity earnings , partially offset by a $ 2 million unfavorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies and $ 14 million of losses on certain financial instruments . 30 income from continuing operations before income taxes due to factors discussed above , income from continuing operations before income taxes was $ 685 million in 2017 , a 51 % decrease from $ 1.4 billion in 2016 . income taxes from continuing operations the effective tax rate on net income from continuing operations was 36.5 % in 2017 and 10.6 % in 2016 . the 2017 rate reflects changes in the geographical distribution of income , the impact of share-based payments , and the provisional estimate of the impact of u.s. tax reform based on aon 's initial analysis of the tax cuts and jobs act . the 2016 rate reflects changes in the geographical distribution of income and the impact from certain pension settlements in the second and fourth quarters . income from discontinued operations , net of tax on february 9 , 2017 , the company entered into a purchase agreement with the buyer to sell the divested business . the company has retrospectively classified the results of the divested business as discontinued operations in the company 's consolidated statements of income for all periods presented . income from discontinued operations , net of tax , increased $ 651 million to $ 828 million compared to 2016 . this increase was primarily driven by the gain on sale of the divested business . net income attributable to aon shareholders net income attributable to aon shareholders decreased to $ 1.2 billion , or $ 4.70 per diluted share , in 2017 , compared to $ 1.4 billion , or $ 5.16 per diluted share , in 2016 . consolidated results for 2016 compared to 2015 revenue total revenue decreased by 1 % , or $ 71 million , to $ 9.4 billion in 2016 , compared to $ 9.5 billion in 2015 . the decrease was driven by a 3 % unfavorable impact from foreign currency translation and a 2 % decrease related to acquisitions , net of divestitures , partially offset by organic revenue growth of 4 % . commercial risk solutions organic revenue growth was 2 % in 2016 driven by record business generation in u.s. retail and strong growth in latin america , asia , and pacific regions , despite economic weakness in certain countries . reinsurance solutions organic revenue growth was 1 % in 2016 driven by net new business growth in treaty placements globally and modest growth in facultative placements , partially offset by an unfavorable market impact in treaty and a decline in capital markets transactions and advisory business . retirement solutions organic revenue growth was 2 % in 2016 driven by growth in investment consulting , primarily for delegated investment management . health solutions organic revenue growth was 13 % in 2016 driven by solid growth in health & benefits brokerage , highlighted by double-digit growth across asia and emea , and double-digit growth in healthcare exchanges . data & analytic services organic revenue growth was 6 % in 2016 driven by strong growth in affinity , particularly in the u.s. compensation and benefits compensation and benefits increased $ 82 million , or 1 % , in 2016 compared to 2015 . the increase was primarily driven by a $ 220 million increase in non-cash expense related to certain pension settlements and an increase in expense associated with 4 % organic revenue growth , partially offset by a $ 169 million favorable impact from foreign currency translation and a $ 97 million decrease in expenses related to acquisitions , net of divestitures . information technology information technology decreased $ 3 million , or 1 % , in 2016 compared to 2015 . this decrease was primarily driven by a $ 12 million favorable impact from foreign currency translation and a $ 7 million decrease in the core expense base resulting from acquisitions , net of divestitures , partially offset by an increase in expense associated with 4 % organic revenue growth . 31 premises premises decreased $ 19 million , or 5 % , in 2016 compared to 2015 .
| executive summary we believe that our balance sheet and strong cash flow provide us with adequate liquidity . our primary sources of liquidity are cash flow from operations , available cash reserves , and debt capacity available under our credit facilities . our primary uses of liquidity are operating expenses , capital expenditures , acquisitions , share repurchases , pension obligations , and shareholder dividends . we believe that cash flows from operations , available credit facilities and the capital markets will be sufficient to meet our liquidity needs , including principal and interest payments on debt obligations , capital expenditures , pension contributions , and anticipated working capital requirements , for the foreseeable future . cash on our balance sheet includes funds available for general corporate purposes , as well as amounts restricted as to their use . funds held on behalf of clients in a fiduciary capacity are segregated and shown together with uncollected insurance premiums in fiduciary assets in the consolidated statement of financial position , with a corresponding amount in fiduciary liabilities . fiduciary funds generally can not be used for general corporate purposes and are not a source of liquidity for us . cash and cash equivalents and short-term investments increased $ 569 million to $ 1,285 million in 2017 as compared to 2016 . during 2017 , sources of funds in 2017 included proceeds from the sale of businesses of $ 4,246 million . during 2017 , cash flow from operating activities decreased $ 1,160 million to $ 669 million . additional primary uses of funds in 2017 included share repurchases of $ 2.4 billion , acquisitions of businesses of $ 1,029 million , dividends to shareholders of $ 364 million , repayments of debt , net of issuances of $ 345 million , and purchases of short-term investments of $ 232 million .
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in addition , this asu specifies new accounting for costs associated with obtaining or fulfilling contracts with customers and expands the required disclosures related to revenue story_separator_special_tag overview systemax is primarily a direct marketer of brand name and private label products . our operations are organized in two reportable business segments — technology products and industrial products . technology products our technology products segment primarily sells ict and ce products . these products are marketed in north america , puerto rico and europe . most of these products are manufactured by other companies ; however , the company does offer a selection of products that are manufactured for our own design and marketed on a private label basis . technology products accounted for 84 % , 86 % and 89 % of our net sales in 2014 , 2013 and 2012 , respectively . on march 10 , 2015 the company announced that its technology products business segment would be exiting the retail store business in order to accelerate its focus on its business to business ( “ b2b ” ) operations . this exit plan includes the closing of substantially all of its retail stores , closing a distribution center , and implementing a general workforce reduction to align available resources with a b2b focus as well as transitioning retail customers to online consumer sales . the company has engaged outside firms to assist with the retail store liquidation , as well as the workforce reduction , and anticipates that all of these actions will be completed by the end of the second quarter of 2015. the company anticipates that one time exit charges will aggregate between $ 50 and $ 55 million ( including approximately $ 4 million of severance expenses , and $ 39 million in lease exit costs ) substantially all of which will require cash expenditures . the company expects these costs to be paid out beginning in the first quarter of 2015 through the end of 2017 . after completion of these actions the company will see a significant decline in retail revenues , however the company expects to realize improved profitability of between $ 18 and $ 22 million . as a result of negative cash flows in its operations in the united states and canada in 2014 , and a forecast for continued use of cash in future periods , the company conducted an evaluation of the long-lived and other intangible assets in those operations and concluded that those assets were impaired . accordingly an impairment charge of approximately $ 10.0 million , pre-tax , was recorded in the fourth quarter of 2014 . 21 on june 12 , 2014 , the company acquired scc services b.v. ( “ scc ” ) ( renamed misco solutions b.v. ) , a supplier of business-to-business it products and services with operations in the netherlands . the purchase price ( after giving effect to the conversion of euros to u.s. dollars ) was approximately $ 7.3 million in cash ( 5.4 million euro ) , $ 0.6 million ( 0.4 million euro ) of which was placed into an escrow account for one year to secure the sellers ' indemnification obligations under the purchase agreement . this acquisition expands the company 's business in the netherlands . in 2013 , the company opened a shared services center in budapest , hungary to facilitate the continued growth of its european technology products business . this new facility provides administrative and back office services for the existing european business , will help drive operational efficiencies and better serve the company 's pan-european operating strategy , and will serve as the sales location for future business in eastern europe . as an incentive to locate in hungary , the hungarian investment and trade agency ( “ hita ” ) agreed to reimburse the company for approximately 8 % of payroll costs , up to a maximum of approximately $ 3.1 million , for the first 505 employees hired at the shared service center . the reimbursement is limited to the first twenty four months of employment for employees hired by december 2015 with all such reimbursements being completed by december 2017. in return for this incentive , the company has committed to maintaining certain employment levels through 2020. failure by the company to maintain these employment levels will result in pro rata repayment of related reimbursements with interest . in the fourth quarter of 2013 , certain subsidiaries of the company sold compusa intellectual property assets ( primarily domain names , trademarks and certain historical customer information ) and accordingly the company discontinued using the compusa brand in puerto rico . the company wrote off approximately $ 2.9 million , pre-tax , related to the intangible assets of the compusa brand in puerto rico . in the fourth quarter of 2012 , the company conducted an evaluation , in 2012 , of its technology products multi-brand united states consumer strategy and the intangible assets used in that strategy and concluded that the company 's future north american consumer business would be optimized by consolidating its united states consumer operations under tigerdirect , its leading and largest brand . this consolidation resulted in a write off of the intangible assets and goodwill of compusa and circuit city of approximately $ 35.3 million . in the fourth quarter of 2012 , the company exited the pc manufacturing operations after conducting an evaluation of its operations and concluded that the company 's north american technology results would be enhanced by exiting the computer manufacturing business . the exit resulted in a write down of the carrying cost of the company 's computer manufacturing facilities , related equipment and inventory of approximately $ 4.6 million . story_separator_special_tag however if our estimates are materially different than our actual experience we could have a material gain or loss adjustment . allowance for doubtful accounts receivable . we record an allowance for doubtful accounts to reflect our estimate of the collectibility of our trade accounts receivable . while bad debt allowances have been within expectations and the provisions established , there can be no guarantee that we will continue to experience the same allowance rate we have in the past . our allowance for doubtful accounts policy contains assumptions and judgments made by management related to collectibility of aged accounts receivable and chargebacks from credit card sales . we evaluate the collectibility of accounts receivable based on a combination of factors , including an analysis of the age of customer accounts and our historical experience with accounts receivable write-offs . the analysis also includes the financial condition of a specific customer or industry , and general economic conditions . in circumstances where we are aware of customer credit card charge-backs or a specific customer 's inability to meet its financial obligations , a specific reserve for bad debts applicable to amounts due to reduce the net recognized receivable to the amount management reasonably believes will be collected is recorded . in those situations with ongoing discussions , the amount of bad debt recognized is based on the status of the discussions . we have not made any material changes to our allowance for doubtful accounts receivable reserve policy in the past three years and we do not anticipate making any material changes to this policy in the future . however if our estimates are materially different than our actual experience we could have a material gain or loss adjustment . a change of 10 % in our allowance for doubtful accounts reserve at december 31 , 2014 would impact net income by approximately $ 0.6 million . 23 inventory valuation . we value our inventories at the lower of cost or market , cost being determined on the first-in , first-out method except in certain locations in europe and retail locations where an average cost is used . excess and obsolete or unmarketable merchandise are written down based on historical experience , assumptions about future product demand and market conditions . if market conditions are less favorable than projected or if technological developments result in accelerated obsolescence , additional write-downs may be required . while obsolescence and resultant markdowns have been within expectations , there can be no guarantee that we will continue to experience the same level of markdowns we have in the past . our inventory reserve policy contains assumptions and judgments made by management related to inventory aging , obsolescence , credits that we may obtain for returned merchandise , shrink and consumer demand . we have not made any material changes to our inventory reserve policy in the past three years and we do not anticipate making any material changes to this policy in the future . however if our estimates are materially different than our actual experience we could have a material loss adjustment . a change of 10 % in our inventory reserves at december 31 , 2014 would impact net income by approximately $ 0.8 million . goodwill and intangible assets . we apply the provisions of relevant accounting guidance in our valuation of goodwill , trademarks , domain names , client lists and other intangible assets . relevant accounting guidance requires that goodwill and indefinite lived intangibles be reviewed at least annually for impairment or more frequently if indicators of impairment exist . the amount of an impairment loss would be recognized as the excess of the asset 's carrying value over its fair value . our impairment testing involves judgments and uncertainties , quantitative and qualitative , related to the use of discounted cash flow models and forecasts of future results , both of which involve significant judgment and may not be reliable . significant management judgment is necessary to evaluate the operating environment and economic conditions that exist to develop a forecast for a reporting unit . assumptions related to the discounted cash flow models we use include the inputs used to determine the company 's weighted average cost of capital including a market risk premium , the beta of a reporting unit , reporting unit specific risk premiums and terminal growth values . critical assumptions related to the forecast inputs used in our discounted cash flow models include projected sales growth , same store sales growth , gross margin percentages , new business opportunities , working capital requirements , capital expenditures and growth in selling , general and administrative expense . we also use our company 's market capitalization and comparable company market data to validate our reporting unit valuations . we have not made any material changes to our goodwill policy in the past three years and we do not anticipate making any material changes to this policy in the future . we recorded goodwill and intangible assets related to the june 2014 scc acquisition of approximately $ 2.7 million and in the fourth quarter of 2014 , we recorded intangible asset impairment charges related to our retail operations in the united states and canada ( see below ) . we have approximately $ 7.4 million in goodwill and intangible assets at december 31 , 2014. we do not believe it is reasonably likely that the estimates or assumptions used to determine whether any of our remaining goodwill or intangible assets are impaired will change materially in the future . however if the inputs used in our discounted cash flow models or our forecasts are materially different than actual experience we could incur impairment charges that are material .
| highlights from 2014 the discussion of our results of operations and financial condition that follows will provide information that will assist in understanding our financial statements and information about how certain accounting principles and estimates affect the consolidated financial statements . this discussion should be read in conjunction with the consolidated financial statements included herein . · consolidated sales increased 2.7 % to $ 3.4 billion ; on a constant currency basis and excluding scc services , sales increased 0.6 % . · b2b channel sales increased 8.9 % to $ 2.6 billion ; on a constant currency basis and excluding scc services , sales increased 5.6 % . · b2c channel sales declined 11.7 % to $ 0.9 billion ; on a constant currency basis , sales declined 11.0 % . · movements in exchange rates positively impacted european sales by approximately $ 24.0 million and negatively impacted canadian sales by approximately $ 13.8 million . · $ 11.7 million in estimated workforce reductions related to the restructuring of our european operations were recorded . · impairment charges related to long-lived and other intangible assets of $ 10.0 million , pre-tax , were incurred . 27 results of operations key performance indicators * ( in millions ) : replace_table_token_5_th * excludes discontinued operations * * includes special charges , net ( see note 8 of notes to consolidated financial statements ) . net sales segments : the technology products segment , which includes our european and north american technology operations , showed sales improvement , benefiting from the june 2014 scc services acquisition , strong sales growth in france , improved b2b sales from certain markets in europe and north america and favorable movements in exchange rates . on a constant currency basis and excluding the scc services acquisition , technology products net sales decreased 2.3 % .
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” asu 2015-11 eliminates the guidance that entities consider replacement cost or net realizable value less an approximately normal profit margin in the subsequent measurement of inventory when cost is determined on a first-in , first-out or average cost basis . the provisions of asu 2015-11 are effective for public entities with fiscal years beginning after december 15 , 2016 , and interim periods within those fiscal years , with early adoptio n permitted . the company will adopt asu 2015-11 as of january 30 , 2017 , the first day of the company 's f iscal year 2017 and does not anticipate a significant impact to the company 's consolidated financial statements . improvements to employee share-based payment accounting in march 2016 , the fasb issued accounting standards update no . 2016-09 , compensation – stock compensation ( topic 718 ) : improvements to employee share-based payment accounting ( “ asu 2016-09 ” ) , which is intended to improve the accounting story_separator_special_tag the following discussion and analysis of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and the accompanying notes and information contained in other sections inclu ded elsewhere in this annual report , particularly , “ risk factors , ” “ selected financial data , ” and “ business. ” this discussion and analysis is based on the beliefs of our management , as well as assumptions made by , and inf ormation currently available to our management . the statements in this discussion and analysis concerning expectations regarding our future performance , liquidity and capital resources , as well as other non-historical statements in this discussion and analysis , are forward-looking statements . see “ forward-looking statement s . ” these forward-looking statements are subject to numerous risks and uncertainties , including those described under “ risk factors . ” our actual results could differ materially from those suggested or implied by any forward-looking statements . the following discussion contains references to fiscal years 201 6 , 201 5 and 201 4 , which refer to our fiscal year s ended january 29 , 2017 , january 31 , 2016 and febru ary 1 , 2015 , respectively . fiscal years 201 6 , 201 5 and 201 4 were 52-week periods . overview we are a rapidly growing lifestyle brand of men 's and women 's casual wear , workwear and accessories sold exclusively through our own direct and retail channels . the direct segment , consisting of our website and catalogs , offers products nationwide and represented 82.3 % of our fiscal 2016 consolidated net sales . in 20 10 , we added retail to our omni - channel platform with the opening of our first store . since then , we have expanded our retail presence , and as of january 29 , 2017 , we operated 14 retail stores and two outlet stores . net sales for our retail segment represented 17.7 % of our fiscal 2016 consolidated net sales . we offer a comprehensive line of innovative , durable and functional product , such as our longtail t ® shirts , buck naked tm underwear , and fire hose ® work pants , which reflect our position as the modern , self-reliant american lifestyle brand . our brand has a heritage in workwear that transcends tradesmen and appeals to a broad demographic f or everyday and on-the-job use . from our heritage as a catalog for those working in the building trades , duluth trading has become a widely recognized brand and proprietary line of innovative and functional apparel and gear . over the last decade , we have created strong brand awareness , built a loyal customer base and generated robust sales momentum . we have done so by sticking to our roots of “ there 's got ta be a better way ” and through our relentless focus on providing our customers wi th quality , functional products . a summary of our financial results is as follows : · net sales have increased year-over-year for 28 consecu tive quarters through january 29 , 2017 ; · net sales in fiscal 2016 increased by 23.7 % over the prior year to $ 376.1 million ; · net income in fiscal 2016 decreased by 22.3 % over the prior year to $ 21.3 million ; a djusted for income taxes , as if we had been a “ c ” corporation at a combined federal , state and local effective income tax rate of 40.0 % , net income in fiscal 2016 increased by 23.4 % over the prior pro forma net income ; · adjusted ebitda in fiscal 2016 increased by 21.1 % over the prior year to $ 41.2 million ; · our retail stores have achieved an average payback of less than two years . see “ reconciliation of net income to ebitda and ebitda to adjusted ebitda ” section for a reconciliation of our net income to ebitda and ebitda to adjusted ebitda , both of which are non-u.s. gaap financial measure s . see also the information under the heading “ adjusted ebitda ” in the section “ how we assess the performance of our business ” for our definition of adjusted ebitda . we are pursuing several strategies to continue our profitable growth , including building brand awareness to continue customer acquisition , accelerating retail expansion , selectively broadening assortments in certain men 's product categories and growing our women 's business . how we assess the performance of our business in assessing the performance of our business , we consider a variety of financial and operating measures that affect our operating results . 33 net sales net sales reflect our sale of merchandise plus shipping and handling revenue collected from our customers , less returns and discounts . direct sales are recognized upon customer receipt of the product , while retail sales are recognized at the point of sale . story_separator_special_tag as a percen tage of net sales , gross margin increased 50 basis points to 57.0 % of net sales in fiscal 2015 , compared to 56.5 % of net sales in fiscal 2014. th e increase in gross profit of $ 42.5 million was primarily driven by an increase in net sales as discussed above . the increase in gross margin rate was pr imarily attributable to product mix , with a shift into higher margin products in fiscal 2015 compared to fiscal 2014 , coupled with improved cost . selling , general and administrative expenses selling , general and administrative expenses increased $ 37.4 million , or 35.0 % , to $ 144.4 million in fiscal 2015 compared to $ 107.0 millio n in fiscal 2014. selling , general and administrative expenses as a percentage of net sales were 47.5 % and 4 6.1 % during fiscal 2015 and fiscal 2014 , respectively . the increase in selling , general and administrative expenses of $ 37.4 million was attributable to an increase of $ 15 . 8 million in advertising and marketing costs , $ 11.1 million in selling expenses and $ 10.5 million in general and administrative expenses . the $ 15.8 million increase in advertising and marketing costs was primarily driven by our continued marketing efforts . as a percentage of net of sales , advertising and marketing costs increased slightly by 10 basis points to 21.4 % in fiscal 2015 , compared to 21.3 % in fiscal 2014 . the $ 11.1 million increase in selling expense was primarily due to an increase in distribution labor as a result of increased n et sales coupled with expenses incurred in the implementation of our warehouse management system and 3pl infrastr ucture to support the continued growth of our business and an increased in shipping expense due to increased net sales . as a percentage of net sales , selling expense increased 50 basis points to 14.0 % in fiscal 2015 compared to 13.5 % in fiscal 2014. the 50 basis point increase in selling expense as a percentage of net sales was primarily driven by an increase in distribution labor of 80 basis points as discussed above , partially offset by a decrease in shipping expense of 40 basis points due to favorable shipping rates , coupled with having our two 3pl 's closer to our customers , which reduced the cost of a delivered package . the $ 10.5 million increase in general and administrative expenses was primarily due to an increase in personnel expense due to the growth of our business , an increase in cons ulting and professional fees and an increase in depreciation expense due to retail stores , information technology and infrastructure investments . the increased consulting-related fees were primarily attributable to the implementation of our new warehouse management system and the inc reased professional fees were primarily due to us becoming a public company . as a percentage of net sales , general and administrative expenses increased 80 basis points to 12.1 % in fiscal 2015 , compared to 11.3 % in fiscal 2014 , primarily due to the factors discussed above . interest expense interest expense was $ 0.3 million for both fiscal 2015 and fiscal 2014. provision for income taxes income tax expense was $ 1 . 3 million in fiscal 2015 , which consisted of $ 1 . 2 million for a one-time deferred tax expense recognized upon the conver sion to a “ c ” corporation and $ 0 . 1 million of expense related to activity during the portion of fiscal 2015 that we were a “ c ” corporation ( november 25 , 2015 through january 31 , 2016 ) . prior to november 25 , 2015 , we had been classified as an “ s ” corporation for federal and state income tax purposes and therefore , we had not been subject to income taxes . prior to tha t date , our shareholders had been subject to income tax on their distributive share of our earnings . in connection with our ipo , w e converted to a “ c ” corporation . on a pro forma basis , if we 37 had been taxed as a “ c ” corporation at an estimated 40 % effective tax rate , income taxes would have increased $ 2.1 million , or 21.7 % , to $ 11.5 million in fiscal 2015 from $ 9.5 million in fiscal 2014. net income net income increased $ 3.8 million , or 16.0 % to $ 27.4 million in fiscal 2015 compared to $ 23.6 million in fiscal 2014 , primarily due to the factors discussed above . applying a pro forma 40 % “ c ” corporation effective tax rate to both fiscal 2015 and fiscal 2014 , rather than the “ s ” corporation tax rate that actually applied to us prior to our ipo , pro forma net income increased $ 3.1 million , or 21.7 % , to $ 17.3 million in fiscal 2015 from $ 14.2 million in fiscal 2014. reconciliation of net income to ebitda and ebitda to adjusted ebitda the following table represents reconciliations of net income to ebitda and ebitda to adjusted ebitda , both of which are non-gaap financial measure s , for the periods indicated below . see the above section titled “ how we assess the performance of our business , ” for our definition of adjusted ebitda . replace_table_token_7_th as a result of the factors disc ussed above in the “ results of operations ” section , adjusted ebitda increased $ 7 . 2 million , or 21.1 % , to $ 41.2 million in fiscal 2016 compared to $ 34.0 million in fiscal 2015 . as a percen tage of net sal es , adjusted ebitda de creased 3 0 basis points to 10.9 % of net sales in fiscal 2016 compared to 11.2 % of net sales in fiscal 2015 .
| results of operations the following table summarizes our consolidated results of operations for the periods indicated , both in dollars and as a percentage of net sales . replace_table_token_6_th _ ( 1 ) the unaudited pro forma net income information for fiscal 2015 and fiscal 2014 presented gives effect to an adjustment for income tax expense on the income attributable to controlling interest as if we had been a “ c ” corporation at an assumed combined federal , state and local effective income tax rate , which approximate our statutory income tax rate , of 40 % . no pro forma income tax expense was calculated on the income attributable to noncontrolling interest because this entity did not convert to a “ c ” corporation . fiscal 2016 compared to fiscal 2015 net sales net sales increased $ 72.0 million , or 23.7 % , to $ 376.1 million in fiscal 2016 compared to $ 304.2 million in fiscal 2015 , driven by gains in both direct and retail segments of $ 43.3 million , or 16.3 % , and $ 28.6 million , or 75.7 % , respectively , across all product categories . the dir ect net sales gains were primarily attri butable to an increase in website sales . our website visits 35 increased 14.9 % in fiscal 2016 compared to fiscal 2015. the $ 28.6 million increase in retail net sales was primarily attributable to the opening of seven new stores during fiscal 2016. gross profit gross profit increased $ 40.6 million , or 23.4 % , to $ 214.1 milli on in fiscal 2016 compared to $ 173.5 million in fiscal 2015 . as a percenta ge of net s ales , gross margin decreased 10 basis points to 56.9 % of net sales in fiscal 2016 compared to 57.0 % of net sales in fiscal 201 5 .
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our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors , including those discussed under “ risk factors ” and elsewhere in this annual report . this discussion includes references to non-gaap financial measures as defined in the rules of the securities and exchange commission ( ‘ sec ' ) . we present such non-gaap financial measures , specifically , core revenue , adjusted ebitda and adjusted ep s non-gaap financial measures , as we believe such information is of interest to the investment community because it provides additional meaningful methods of evaluating certain aspects of the company 's operating performance from period to period on a basis that may not be otherwise apparent under u.s. gaap , and these provide a measure against which our businesses may be assessed in the future . our methods of calculating these measures may differ from those used by other companies and therefore comparability may be limited . these financial measures should be viewed in addition to , not in lieu of , the consolidated financial statements for the year ended december 31 , 2020. see ‘ non-gaap financial measures ' below for further discussion of our core revenue , adjusted ebitda and adjusted ep s non-gaap financial measures the following discussion contains references to periods prior to the offering , including january through april 2018 , which represents the consolidated and combined financial results of our predecessor goosehead financial , llc and its subsidiaries texas wasatch insurance services , lp , goosehead insurance agency , llc and its affiliates goosehead management , llc and texas wasatch insurance holdings group , llc . we are a rapidly growing personal lines independent insurance agency , reinventing the traditional approach to distributing personal lines products and services throughout the united states . we were founded with one vision in mind—to provide consumers with superior insurance coverage at the best available price and in a timely manner . by leveraging our differentiated business model and innovative technology platform , we are able to deliver a superior insurance experience to our clients . the following discussion contains references to the years ended december 31 , 2020 and december 31 , 2019. see goosehead 's annual report on form 10-k for the year ended december 31 , 2019 for a discussion of the changes from year ended december 31 , 2018 to the year ended december 31 , 2019. financial highlights for 2020 : total revenue increased 51 % from 2019 to $ 117.0 million ; core revenues * of $ 95.1 million increased 41 % over 2019 total written premiums placed increased 45 % from 2019 to $ 1.074 billion net income increased by $ 8.4 million from 2019 to $ 18.8 million adjusted ebitda * , a non-gaap measure , increased 59 % from 2019 to $ 27.8 million , or 24 % of total revenues basic earnings per share was $ 0.55 and adjusted eps * , a non-gaap measure , was $ 0.68 for the year ended december 31 , 2020. policies in force increased 48 % from december 31 , 2019 to 713,000 at december 31 , 2020. corporate sales headcount increased 47 % from december 31 , 2019 to 364 at december 31 , 2020 . ◦ as of december 31 , 2020 , 207 of these corporate sales agents had less than one year of tenure and 157 had greater than one year of tenure . 46 operating franchises increased 45 % from december 31 , 2019 to 891 at december 31 , 2020 . ◦ in texas as of december 31 , 2020 , 43 operating franchises had less than one year of tenure and 185 operating franchisees had greater than one year of tenure . ◦ outside of texas as of december 31 , 2020 , 285 operating franchises had less than one year of tenure and 378 had greater than one year of tenure . * core revenue , adjusted ebitda and adjusted eps are non-gaap measures . reconciliation of adjusted ebitda to net income ( loss ) and adjusted eps to eps , the most directly comparable financial measures presented in accordance with gaap , are set forth in the `` key performance indicators '' section of management 's discussion and analysis of financial condition and results of operations of this form 10-k. factors affecting our results of operations we believe that the most significant factors affecting our results of operations include : investment in growth . we continue to invest in expanding our national footprint , increasing our revenue-producing headcount , and increasing the level of support provided to our salespeople . our ability to attract and retain top corporate channel sales agents and franchise owners , ramp up new agent productivity , and retain existing and future policies in force are key to continued profitable growth . investment in technology . we continue to develop and invest in our technology platform to drive scalability , adaptability , and efficiency in both the corporate channel and franchise channel . we believe our significant proprietary investment in our technology is a key competitive advantage that supports our growth and operating margins . continued penetration of franchise channel into existing markets . we will continue to market actively for new franchises in our established markets , including texas , which represent over 97 % of the u.s. population . we are now licensed with the necessary state departments of commerce and insurance and registered as a franchisor in all 50 states in the u.s. continued retention of existing book of business . we have made significant progress in recent years in client retention metrics , and maintaining these high levels of client retention is key to future profitability . increase in margins as business shifts from new to renewal . story_separator_special_tag see `` liquidity and capital resources ” . given the uncertainty regarding the spread and severity of covid-19 and the adverse effects on the national and global economy , the related financial impact on our business can not be accurately predicted at this time . we continue to monitor the rapidly evolving situation and guidance from the authorities , including federal , state and local public health officials and as a result may take additional actions . while we intend to continue to execute on our strategic plans and operational initiatives during the outbreak , in these circumstances , there may be developments outside our control requiring us to adjust our operating plan . see part ii , item 1a . “ risk factors—the global outbreak of the coronavirus disease ( covid-19 ) may negatively impact the global economy in a significant manner for an extended period of time , and could also materially adversely affect our business and operating results. ” 48 certain income statement line items revenues effective as of the annual report on form 10-k for the year ended december 31 , 2019 , the company adopted new accounting guidance , asu 2014-09 - revenue from contracts with customers ( `` topic 606 '' ) , related to revenue from contracts with customers . the company adopted topic 606 using the modified retrospective method , which applies the new guidance prospectively , beginning as of 2019 , the year of adoption . accordingly , the adoption of topic 606 using the modified retrospective method does not impact consolidated financial statements prior to 2019. in 2020 , revenue increased by 51 % to $ 117.0 million from $ 77.5 million in 2019. total written premium growth , which is the best leading indicator of future revenue growth , was 45 % to $ 1.074 billion from $ 739 million in 2019. total written premiums placed drive our current and future core revenue and gives us potential opportunities to earn ancillary revenue in the form of contingent commissions . our various revenue streams do not equally contribute to the long-term value of goosehead . for instance , renewal revenue and renewal royalty fees are more predictable and have higher margin profiles , thus are higher quality revenue streams for the company . alternatively , contingent commissions , while high margin , are unpredictable and dependent on insurance company underwriting and forces of nature and thus are lower quality revenue for the company . our revenue streams can be viewed in three distinct categories : core revenue , cost recovery revenue , and ancillary revenue , which are non-gaap measures . a reconciliation of core revenue , cost recovery revenue , and ancillary revenue to total revenue , the most directly comparable financial measures presented in accordance with gaap , are set forth in the `` key performance indicators '' section of management 's discussion and analysis of financial condition and results of operations of this form 10-k. core revenue : renewal commissions - highly predictable , higher-margin revenue stream , which is managed by our service team . renewal royalty fees - highly predictable , higher-margin revenue stream , which is managed by our service team . for policies in their first renewal term , we see an increase in our share of royalties from 20 % to 50 % on the commission paid by the carriers . new business commissions - predictable based on agent headcount and consistent ramp-up of agents , but lower margin than renewal commissions because of higher commissions paid to agents and higher back-office costs associated with policies in their first term . this revenue stream has predictably converted into higher-margin renewal commissions historically , and we expect this to continue moving forward . new business royalty fees - predictable based on franchise count and consistent ramp-up of franchises , but lower margin than renewal royalty fees because the company only receives a royalty fee of 20 % on the commissions paid by the carrier in the first term of every policy and higher back-office costs associated with policies in their first term . this revenue stream has predictably convert into higher-margin renewal royalty fees historically , and we expect this to continue moving forward . agency fees - although predictable based on agent count , agency fees do not renew like new business commissions and renewal commissions . cost recovery revenue : initial franchise fees - one-time cost recovery revenue stream per franchise unit that covers the company 's costs to recruit , train , onboard , and support the franchise for the first year . these fees are fully earned and non-refundable when a franchise attends our initial training . interest income - like initial franchise fees , interest income is a cost recovery revenue stream that reimburses the company for those franchises on a payment plan . ancillary revenue : contingent commissions - although high margin , contingent commissions are unpredictable and susceptible to weather events and carrier underwriting results . management does not rely on contingent commissions for operating cash flow or budget planning . other income - book transfer fees , marketing investments from carriers and other items that are unpredictable and supplemental to other revenue streams . 49 we discuss below the breakdown of our revenue by stream : replace_table_token_3_th ( 1 ) renewal commissions , new business commissions , agency fees , and contingent commissions are included in `` commissions and agency fees '' as shown on the consolidated statements of operations . ( 2 ) renewal royalty fees , new business royalty fees , initial franchise fees , and other income are included in `` franchise revenues '' as shown on the consolidated statements of operations . core revenue : the company 's primary source of revenue is through the placement of insurance policies . we are paid a percentage of the premium from the carriers in the form of new business commissions and , in states which allow it , we charge agency fees for the placement of the policy .
| consolidated results of operations the following is a discussion of our consolidated results of operations for each of the years ended december 31 , 2020 , december 31 , 2019 , and december 31 , 2018 ( under asc 605 ) . this information is derived from our accompanying consolidated financial statements prepared in accordance with gaap . the following table summarizes our results of operations for the years ended december 31 , 2020 , 2019 , and 2018 : replace_table_token_10_th revenues in 2020 , revenue increased by 51 % to $ 117.0 million from $ 77.5 million in 2019. commissions and agency fees commissions and agency fees consist of core revenue from new business commissions , renewal commissions , and agency fees , and ancillary revenue from contingent commissions generated from the corporate channel and franchise channel and other income . 57 the following table sets forth our commissions and agency fees by amount and as a percentage of our revenues for the periods indicated ( in thousands ) : replace_table_token_11_th renewal commissions increased by $ 6.0 million , or 26 % , to $ 28.9 million for the year ended december 31 , 2020 from $ 22.9 million for the year ended december 31 , 2019. these increases are primarily attributable to an increase in the number of policies in the renewal term at december 31 , 2020 compared to december 31 , 2019. new business commissions increased by $ 5.4 million , or 45 % , to $ 17.3 million for the year ended december 31 , 2020 from $ 12.0 million for the year ended december 31 , 2019. revenue from agency fees increased by $ 2.9 million , or 47 % , to $ 8.9 million for the year ended december 31 , 2020 from $ 6.1 million for the year ended december 31 , 2019. these increases were primarily attributable to an increase in total sales agent head count to 364 at december 31 , 2020 , from 248 at december 31 , 2019 ,
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based upon restricted stock studies of similar duration and a black-scholes valuation to measure the discount for lack of marketability , approximately $ 0.4 million of the proceeds from the sanofi purchase agreement was attributed to the 2014 sanofi amendment , and represents consideration for the value of the program targeting mir-221/222 for hcc . we recognized the $ 0.4 million allocated consideration into revenue ratably over the estimated period of performance of the mir-221/222 program . we are eligible to receive milestone payments related to the development and commercialization of mir-221/222 for hcc of up to $ 38.8 million for proof-of-concept option exercise fees ( net of $ 1.25 million creditable , as noted above ) , $ 25.0 million for clinical milestones and up to $ 130.0 million for regulatory and commercial milestones . in addition , we are entitled to receive royalties based on a percentage of net sales of any products from the mir-221/222 program which , in the case of sales in the united states , will be in the middle of the 10 % to 20 % range , and , in the case of sales outside of the united states , will range from the low end to the middle of the 10 % to 20 % range , depending upon the volume of sales . if we exercise our option to co-promote a mir-221/222 product , we will continue to be eligible to receive royalties on net sales of each product in the united states at the same rate , unless we elect to share a portion of sanofi 's profits from sales of such product in the united states in lieu of royalties . in november 2018 , we entered into an amendment to the 2014 sanofi amendment with sanofi to modify the parties ' rights and obligations with respect to our mir-21 programs , including our rg-012 program ( the “ 2018 sanofi amendment ” ) . under the terms of the 2018 sanofi amendment , we have granted sanofi a worldwide , royalty-free , fee-bearing , exclusive license , with the right to grant sublicenses , under our know-how and patents to develop and commercialize mir-21 compounds and products for all indications , including alport syndrome . sanofi will control and will assume all responsibilities and obligations for developing and commercializing each of our mir-21 programs , including our obligations regarding the administration and expense of clinical trials and all other costs , including in-license royalties and other in-license payments , related to our mir-21 programs . under the terms of the 2018 sanofi amendment , we have assigned to sanofi certain agreements , product-specific patents and all materials directed to mir-21 or to any mir-21 compound or product and are required to provide reasonable technical assistance to sanofi for a period of 24 months after the date of the 2018 sanofi amendment . under the terms of the 2018 sanofi amendment , we were eligible to receive approximately $ 6.8 million in upfront payments for the license and for mir-21 program-related materials ( collectively , the “ upfront amendment payments ” ) . we were also eligible to receive up to $ 40.0 million in development milestone payments , including a $ 10.0 million payment for an interim enrollment milestone ( the `` enrollment milestone `` ) . in addition , sanofi has agreed to reimburse us for certain out-of-pocket transition activities and assume our upstream license royalty obligations . we and sanofi also agreed to a general release of claims against each other for any claims that arose at any time prior to the date of the 2018 sanofi amendment , or that thereafter could arise based on anything that occurred prior to the date of the 2018 sanofi amendment . in 2019 , we completed the performance obligations under the 2018 sanofi amendment and recognized revenue for the $ 6.8 million in upfront amendment payments . as of december 31 , 2019 , the $ 40.0 million in development milestone payments ( variable consideration ) was fully constrained and therefore , did not meet the criteria for revenue recognition . in august 2020 , we entered into an amendment to the 2018 sanofi amendment ( the `` 2020 sanofi amendment `` ) . under the terms of the 2020 sanofi amendment , we agreed to transfer to sanofi additional rg-012 development program materials ( the “ materials ” ) in exchange for a payment from sanofi of $ 1.0 million ( the “ transfer payment ” ) . in addition , in lieu of the $ 10.0 million enrollment milestone under the 2018 sanofi amendment , sanofi agreed to pay us a $ 4.0 million milestone upon the completion of the transfer and verification of the materials , and $ 5.0 million upon achievement of the enrollment milestone . additionally , we are eligible to receive $ 25.0 million upon achievement of an additional development milestone related to sanofi 's development of the mir-21 compounds . in september 2020 , we received $ 1.0 million in exchange for the transfer of the materials to sanofi , and received an additional $ 4.0 million in october 2020 as a result of sanofi 's completion and verification of the materials in september 2020. as the performance obligations associated with both of these payments had been satisfied under topic 606 as of september 30 , 2020 , both amounts were recognized as revenue in the third quarter story_separator_special_tag you should read the following discussion and analysis and our financial statements and related notes included elsewhere in this annual report . the following discussion contains forward-looking statements that involve risks and uncertainties . story_separator_special_tag the probability of success for each product candidate may be affected by numerous factors , including preclinical data , clinical data , competition , manufacturing capability and commercial viability . successful development of future product candidates is highly uncertain and may not result in approved products . completion dates and completion costs can vary significantly for each future product candidate and are difficult to predict . we anticipate we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to our ability to maintain or enter into new collaborations with respect to each program or potential product candidate , the scientific and clinical success of each future product candidate , as well as ongoing assessments as to each future product candidate 's commercial potential . we will need to raise additional capital and may seek additional collaborations in the future in order to advance our various programs . general and administrative expenses general and administrative expenses consist primarily of salaries and related benefits , including stock-based compensation , related to our executive , finance , legal , business development and support functions . other general and administrative expenses include allocated facility-related costs not otherwise included in research and development expenses and professional fees for auditing , tax and legal services , some of which are incurred as a result of being a publicly-traded company . other income ( expense ) , net other income ( expense ) consists primarily of interest income and expense and various income or expense items of a non-recurring nature . we earn interest income from interest-bearing accounts and money market funds for cash and cash equivalents and marketable securities , such as interest-bearing bonds , for our short-term investments . interest expense is primarily attributable to interest charges associated with borrowings under our secured term loan . critical accounting policies and estimates the preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities , disclosure of contingent assets and liabilities , and the revenues and expenses incurred during 54 the reported periods . 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 apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . while our significant accounting policies are described in the notes to our financial statements appearing elsewhere in this annual report , we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results . revenue recognition our revenues generally consist of upfront payments for licenses or options to obtain licenses in the future , milestone payments and payments for other research services under license and collaboration agreements . we recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services . to determine revenue recognition for contracts with customers we perform the following five steps : ( i ) identify the contract ( s ) with a customer ; ( ii ) identify the performance obligation ( s ) in the contract ; ( iii ) determine the transaction price ; ( iv ) allocate the transaction price to the performance obligation ( s ) in the contract ; and ( v ) recognize revenue when ( or as ) we satisfy the performance obligation ( s ) . at contract inception , we assess the goods or services promised within each contract , assess whether each promised good or service is distinct and identify those that are performance obligations . we recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when ( or as ) the performance obligation is satisfied . collaborative arrangements we enter into collaborative arrangements with partners that typically include payment to us of one of more of the following : ( i ) license fees ; ( ii ) payments related to the achievement of developmental , regulatory , or commercial milestones ; and ( iii ) royalties on net sales of licensed products . where a portion of non-refundable up-front fees or other payments received are allocated to continuing performance obligations under the terms of a collaborative arrangement , they are recorded as contract liabilities and recognized as revenue when ( or as ) the underlying performance obligation is satisfied . as part of the accounting for these arrangements , we must develop estimates and assumptions that require judgment to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligation ( s ) . the stand-alone selling price may include items such as forecasted revenues , development timelines , discount rates , and probabilities of technical and regulatory success . we evaluate each performance obligation to determine if it can be satisfied at a point in time , or over time . in addition , variable consideration must be evaluated to determine if it is constrained and , therefore , excluded from the transaction price .
| results of operations comparison of the years ended december 31 , 2020 and 2019 the following table summarizes our results of operations for the years ended december 31 , 2020 and 2019 ( in thousands ) : replace_table_token_0_th revenue under collaborations 56 our revenues are generated from ongoing collaborations , and generally consist of upfront payments for licenses or options to obtain licenses in the future , milestone payments , program material sales payments and payments for other research services . revenue under collaborations was $ 10.0 million for the year ended december 31 , 2020 , compared to $ 6.8 million for the year ended december 31 , 2019. the increase was attributable to the recognition of the enrollment milestone under the 2020 sanofi amendment and the recognition of program-related materials under the 2020 sanofi amendment as revenue during the year ended december 31 , 2020. research and development expenses the following table summarizes the components of our research and development expenses for the periods indicated , together with year-over-year changes ( dollars in thousands ) : replace_table_token_1_th research and development expenses increased by $ 3.0 million for the year ended december 31 , 2020 compared to the year ended december 31 , 2019. the aggregate increase was driven by a $ 3.5 million increase in external development costs , primarily attributable to the fact that fda lifted the partial clinical hold on the rgls4326 phase 1 mad study in december 2019 and we recommenced that study in february 2020 , with the final dosing completed in july 2020. further contributing to the increase in external development costs were costs associated with activities leading up to , and including , patient dosing in our rgls4326 phase 1b study , with the first patient having been dosed in october 2020. general and administrative expenses general and administrative expenses were $ 8.8 million for the year ended december 31 , 2020 , compared to $ 11.3 million for
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this asu eliminates current guidance requiring deferred taxes for each jurisdiction to be presented as a net current asset or liability and a net noncurrent asset or liability . as a result , each jurisdiction would have one net noncurrent dta or dtl balance . the asu does not change story_separator_special_tag the following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes thereto included in item 8 of this form 10-k. the following discussion contains forward-looking statements that reflect our plans , estimates and beliefs . our actual results could differ materially from those discussed in the forward-looking statements . factors that could cause such differences are discussed in the sections titled “ forward-looking statements ” and “ item 1a - risk factors. ” general the following discussion and analysis presents our financial condition and results of operations on a consolidated basis . however , because we conduct all of our material business operations through the bank , the discussion and analysis relates to activities primarily conducted at the bank . 34 executive overview we are the holding company for investors community bank , which is headquartered in manitowoc , wisconsin . our results of operations depend primarily on our net interest income . net interest income is the difference between the interest income we earn on our interest-earning assets , such as loans , and the interest we pay on interest-bearing liabilities , such as deposits . we generate most of our revenue from interest on loans and investments and loan- and deposit-related fees . our loan portfolio consists of a mix of agricultural , commercial real estate , commercial , residential real estate and installment and consumer loans . our primary source of funding is deposits . our largest expenses are interest on these deposits and salaries and related employee benefits . we measure our performance through various metrics , including our pre-tax net income , net interest margin , efficiency ratio , return on average assets , return on average common shareholders ' equity , earnings per share , and non-performing assets to total assets . we must also maintain appropriate regulatory leverage and risk-based capital ratios . the following table sets forth the key financial metrics we use to measure our performance . replace_table_token_14_th ( 1 ) this measure is not recognized under gaap and is therefore considered to be a non-gaap financial measure . see “ item 6 - selected financial data ” for a reconciliation of this measure to its most directly comparable gaap measure . ( 2 ) non-performing assets consist of nonaccrual loans and other real estate owned . critical accounting policies and estimates certain of our accounting policies are important to the portrayal of our financial condition , since they require management to make difficult , complex or subjective judgments , some of which may relate to matters that are inherently uncertain . estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances . facts and circumstances which could affect these judgments include , but are not limited to , changes in interest rates , changes in the performance of the economy and changes in the financial condition of borrowers . our significant accounting policies are discussed in detail in note 1 to our consolidated financial statements included in item 8 of this form 10-k. those significant accounting policies that we consider to be most critical are described below . our policies with respect to the methodology for the determination of the valuations of loans acquired in business combinations , goodwill , and core deposit intangible , the allowance for loan losses , oreo and fair value of financial instruments involve a degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters . changes in these judgments , assumptions or estimates could materially impact our results of operations . these critical policies and their application are reviewed with the board of directors annually and prior to any change in policy . business combinations and valuations of loans acquired in business combinations we account for acquisitions under fasb accounting standards codification ( “ asc ” ) topic 805 , business combinations , which requires the use of the acquisition method of accounting . assets acquired and liabilities assumed in a business combination are recorded at estimated fair value on their purchase date . as provided for under gaap , management has up to 12 months following the date of acquisition to finalize any provisional fair values of acquired assets and assumed liabilities , where it was not possible to estimate the acquisition date fair value upon consummation . management finalized the fair value of acquired assets and assumed liabilities within this 12-month period for the acquisition of fox river valley and management considers such values to be the fair values . in particular , the valuation of acquired loans involves significant estimates , assumptions and judgments based on information available as of the acquisition date . substantially all loans acquired in the transaction are evaluated either individually or in pools of loans with similar characteristics ; since the estimated fair value of acquired loans includes a credit consideration , no carryover of any previously recorded allowance for loan losses is recorded at acquisition . a number of factors are considered in determining the estimated fair value of purchased loans including , among other things , the remaining life of the acquired loans , estimated prepayments , estimated loss ratios , estimated value of the underlying collateral , estimated holding periods , contractual interest rates compared to market interest rates , and net present value of cash flows expected to be received . 35 in determining the fair value of acquired loans , management calculates a nonaccretable difference ( the credit mark component of the acquired loans ) a nd an accretable difference ( the market rate or yield component of the acquired loans ) . story_separator_special_tag subsequent to foreclosure , independent valuations are performed annually and the assets are carried at the lower of carrying amount or fair value less estimated costs to sell . revenue and expenses from operations and changes in the valuation allowance are included in other non-interest expense . costs related to the development and improvement of other real estate owned is capitalized . fair value of financial instruments a significant portion of the company 's assets are financial instruments carried at fair value . this includes securities available for sale and certain impaired loans . the majority of assets carried at fair value are based on either quoted market prices or market prices for similar instruments . for additional disclosures regarding the fair value of financial instruments , see note 20 . “ fair value measurements ” to our consolidated financial statements . jobs act transition period the jumpstart our business startups ( jobs ) act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards . thus , an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies . we have elected to avail ourselves of this extended transition period . merger transaction on may 13 , 2016 , the company completed its acquisition of fox river valley and its wholly-owned bank subsidiary , the business bank , through the merger of fox river valley into a wholly-owned subsidiary of the company ( which subsequently dissolved ) and the merger of the business bank into the bank . in connection with the merger , county acquired approximately $ 142 million in loans and $ 202 million of deposits . the purpose of the acquisition was for strategic reasons management believes to be beneficial to the company . the acquisition is consistent with its growth plans to expand into the markets of appleton and green bay , wisconsin and diversify its loan portfolio and agricultural concentration . the company believes it is well-positioned to achieve stronger financial performance and enhance shareholder value through synergies of the combined operations . merger consideration . in connection with the merger , county paid aggregate merger consideration of approximately $ 14.45 million in cash and 712,830 shares of the company 's common stock . board of directors . upon completion of the merger , the makeup of the board of directors expanded to include two new directors who previously sat on the board of fox river valley . for additional information on this merger , see note 2 . “ acquisition ” to our consolidated financial statements . comparison of financial condition at december 31 , 2017 , 2016 , and 2015 total assets . total assets increased $ 154.4 million , or 12.4 % , from $ 1.2 billion at december 31 , 2016 to $ 1.4 billion at december 31 , 2017. the increase is primarily the result of loan growth of $ 118.5 million , an increase in loans held for sale of $ 5.4 million , and an increase in cash and due from banks of $ 24.1 million , between december 31 , 2016 and december 31 , 2017. in addition , $ 5.5 million of additional bank owned life insurance policies were purchased during 2017. total assets increased $ 357.8 million , or 40.4 % , from $ 884.9 million at december 31 , 2015 to $ 1.2 billion at december 31 , 2016. the increase was primarily the result of the acquisition of fox river valley , which closed on may 13 , 2016 and resulted in the addition of $ 229.7 million in assets . including the impact of the assets acquired through the acquisition , loans increased $ 280.1 million , securities increased $ 40.2 million , and cash and due from banks increased $ 27.8 million , between december 31 , 2015 and december 31 , 2016. net loans . total net loans increased by $ 117.9 million , or 11.6 % , from $ 1.0 billion at december 31 , 2016 to $ 1.1 billion at december 31 , 2017. the increase is attributed to a 9.9 % increase in our agricultural portfolio , an 8.2 % increase in our commercial real estate portfolio , and a 27.1 % increase in our commercial portfolio . total net loans increased by $ 280.1 million , or 38.0 % , from $ 737.8 million at december 31 , 2015 to $ 1.0 billion at december 31 , 2016. the increase is attributed to a 25.0 % increase in our agricultural portfolio , a 67.2 % increase in our commercial real estate portfolio , a 73.0 % increase in our commercial portfolio , and a 30.7 % increase in our residential real estate portfolio , partially offset by a small decrease in our installment and consumer loans . 37 the following table sets forth the composition of our loan portfolio at the dates indicated : replace_table_token_15_th the following table sets forth loan origination activity for the periods indicated : replace_table_token_16_th the majority of our loan participations and sales relate to agricultural customers . when customers request additional funding , generally for expansion of their operations , the existing loan participations are usually repurchased , with the consent of the participating institution , to allow for repackaging of the loans . this allows the new loans , including the additional funding , to be re-participated at a later time . the decision to re-participate a loan is dependent on many factors , including in-house lending limits and longer-term interest rate options provided to the borrower . as reflected by the balances of “ loans sold , net of repayments ” , we decreased the amount of loans we participated in 2017 due to a change in the regulations of farm service agency , which is a government program that guarantees many of the loans that we participate . loan servicing .
| general component . the general component of the allowance for loan losses relates to loans that are not determined to be impaired . management determines the appropriate loss factor for each segment of loans with similar risk characteristics within the portfolio based on that segment 's loss experience and several other quantitative , qualitative and economic factors relevant to each segment . while loan segments generally represent groups of loans with similar risk characteristics , we may include loans categorized by loan grade , or any other characteristic that causes a loan 's risk profile to be similar to a group of loans . we consider estimated credit losses associated with each segment of our portfolio to differ from purely historical loss experience due to qualitative factors including changes in lending policies and procedures and changes in the nature and volume of the loan portfolio ; quantitative factors including changes in the volume and severity of past due , nonaccrual , and adversely graded loans , changes in concentrations of credit , and changes in the value of underlying collateral for collateral dependent loans ; and economic factors including changes in economic or business conditions and the effect of competition , legal and regulatory requirements on estimated credit losses . the historical charge-off data is updated on a rolling quarterly basis , with the oldest quarter 's charge-off data being replaced with the most recent quarter 's charge-off data . we typically give more weight to the more recent charge-off data for each specific type of loan , as we believe that is more indicative of current trends . our quantitative , qualitative , and economic factors are reviewed on a quarterly basis for each loan segment and our historical loss experience is reviewed quarterly to ensure that our analysis is reflective of current conditions in our loan portfolio and economy . non-impaired component .
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on january 31 , 2003 , the company entered into a lease termination agreement with the landlord of the facility and paid $ 1.5 million to the landlord to completely terminate any future rights or obligations under the lease . the $ 0.1 million excess payment amount over the established accrual was recorded as restructuring and other related charges in 2003. the company is currently working with real estate agents story_separator_special_tag overview we are a leading provider of enabling technologies , platforms and systems to wireless and wireline telecommunications operators and network equipment and application providers . our products , which include systems building blocks , a services delivery system , voice quality systems and a wireless access gateway , address a wide range of our customers ' needs as they seek to develop and deploy enhanced voice and data services and applications , and improve the quality and efficiency of communications networks . telecommunications operators use our products to improve customer acquisition and retention , diversify revenue streams and reduce operating costs and capital expenditures . network equipment and application providers use our products to help deploy leading technology solutions for their telecommunications and enterprise customers in a timely and cost-effective manner . we sell our products worldwide through our direct sales force as well as through channel partners . our customers include leading telecommunications operators and network equipment and application providers such as verizon wireless , cable & wireless , france telecom , telefonica , nextel partners , u.s. cellular , alcatel , avaya , ericsson , lucent technologies , motorola , siemens and aspect communications . in the third quarter of 2003 , we merged our network solutions business unit into our platform solutions business unit . our three business segments are now comprised of the platform solutions ( ps ) business unit , the voice quality systems ( vqs ) business unit and the network infrastructure ( ni ) business unit . the ps business unit consists of products and services , which we refer to as systems building blocks , that provide connectivity to communications networks , call processing , real-time media processing , apis and other application development software tools . also included in this business unit are a multi-application enhanced services delivery system and a wireless entertainment offering . the 22 vqs business unit consists of our voice quality enhancement and echo cancellation products , systems and services . the ni business unit consists of our wireless access gateway product , accessgate , that can dramatically lower carriers ' operating expenses in tdma , gsm , universal mobile telecommunications system ( umts ) and edge networks by reducing the number of radio access network leased lines through advanced optimization techniques , without affecting voice and data quality . the downturn in the telecommunications industry , which began in late 2000 , continued through fiscal year 2003. as a result of the unfavorable economic conditions and continued weakness in capital spending by telecommunications operators and enterprises , our revenues declined 15 % from $ 102.7 million in 2002 to $ 87.1 million in 2003. revenues from our vqs offerings declined by 29 % from 2002 to 2003 and revenues from our ps offerings declined by 10 % from 2002 to 2003. geographically , revenues from north american customers decreased 28 % , while revenues from international customers increased 7 % from 2002 to 2003. despite the year-over-year revenue decline in 2003 , we had four consecutive quarters of sequential growth in revenue during the year . over the past three years , we responded to the decline in revenues by taking actions to realign our business with changes in the industry and our expectations for the future , while at the same time , continuing to invest in new and enhanced product offerings . in an effort to reduce our operating expenses and align our workforce with revenue expectations , over the last three years we engaged in restructuring efforts resulting in the recording of restructuring and other related charges . additionally , in accordance with fas 142 , `` financial accounting and reporting for acquired goodwill and other intangible assets '' , and fas 144 , `` accounting for the impairment or disposal of long-lived assets , '' over the same period we recorded impairment charges related to the goodwill , intangible and tangible assets associated with the vqs , messagemachines , inc. ( `` mmi , '' part of the ps business unit ) and mobilee inc. ( `` mobilee , '' part of the ps business unit ) acquisitions . our restructuring actions and impairments have resulted in reducing our quarterly operating expenses . critical accounting policies our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states of america . the preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , revenues and expenses , and related disclosure of contingent assets and liabilities . on an on-going basis , we evaluate our estimates , including those related to revenue recognition , accounts receivable , inventories , long-lived assets and goodwill , income taxes , restructuring and other related charges , and accounting for acquisitions . we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . we believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements : revenue recognition . story_separator_special_tag we recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases . deferred tax assets and liabilities are measured using enacted statutory tax rates in effect in the year in which the differences are expected to reverse . a deferred tax asset is established for the expected future benefit of net operating loss and credit carryforwards . because we currently believe that the realization of certain deferred tax assets is more unlikely than not , we have established a full valuation against our deferred tax assets . we will continue to assess the valuation allowance and if we were to determine that we would be able to realize our deferred tax assets , an adjustment to the valuation allowance would increase income in the period such determination was made . restructuring and other related charges . costs associated with exit activities are recognized at their fair value in the period in which the liability is incurred . both the fair value as well as the date on which the liability is incurred are subject to assumptions and estimates . if actual results of any of these assumptions or estimates were to exceed or not meet our expectations in the future , we may need to adjust certain restructuring and other related charges in future reporting periods , resulting in increased or decreased operating expense . accounting for acquisitions . we account for acquisitions using the purchase method . in connection with the application of the purchase method , management makes certain estimates regarding the value of tangible and intangible assets acquired and liabilities assumed based on information gathered from internal and external sources . 25 story_separator_special_tag million , based on the declining historical and forecasted operating results as they related to earlier estimates . the value of goodwill and intangible assets related to mmi , mobilee and the vqs business unit had decreased . based on the results of the impairment analyses performed on the goodwill and intangible assets , these assets were written down to their estimated fair value . the total impairment charge included $ 10.3 million to reduce the carrying value of the goodwill and indefinite-lived intangible assets related to the mmi and mobilee acquisitions to estimated fair value . this charge is included in the consolidated statement of operations under `` impairment charges '' for 2003. the balance of the 2003 impairment charge of $ 8.0 million resulted from a reduction in the carrying values of the amortizable intangible assets related to the vqs , mmi and mobilee acquisitions . of these costs , $ 3.9 million was related to the reduction in carrying value of a vqs supply agreement and $ 0.1 million was related to the reduction in carrying value of vqs trademarks and patents . these charges are included in `` impairment charges '' in the statement of operations for 2003. as part of the impairment charge , fixed assets associated with the vqs and ps business units were written down to their estimated fair value resulting in charges of $ 1.2 million and $ 2.8 million , respectively . these charges are included in `` impairment charges '' in the consolidated statement of operations for 2003 . 29 additionally , $ 0.6 million , $ 1.5 million and $ 5.3 million were related to the write-down of acquired completed technology from the mobilee , mmi and vqs acquisitions , respectively , and are included in `` cost of revenues '' within the consolidated statement of operations for 2003. as of december 31 , 2003 , there was no goodwill or long-lived intangible assets on our balance sheet . during 2002 , we recorded impairment charges totaling approximately $ 72.5 million related to the goodwill , intangible assets and fixed assets associated with the iml and vqs acquisitions . during the second quarter of 2002 , we recorded impairment charges totaling approximately $ 36.4 million related to the goodwill and intangible assets associated with the iml acquisition . as a result of our planned intention to reduce overall workforce , including iml employees , the discontinuation of certain iml products as a part of our generally available product offering and continued declining revenues for iml products , the estimated value of iml 's goodwill and intangible assets had decreased . based on the results of the impairment analysis performed , these assets were written down to their estimated fair value . in addition to this charge , a $ 2.9 million charge is included in the consolidated statement of operations classification , `` cost of revenues , '' related to the write-down of iml-acquired completed technology . during the fourth quarter of 2002 , we recorded impairment charges totaling approximately $ 30.1 million related to the goodwill , intangible assets and fixed assets associated with the vqs acquisition . based on the declining historical and forecasted operating results of vqs as they related to earlier estimates , the economic condition of the telecommunications industry as a whole , and our 18 % reduction of the vqs workforce , the estimated value of vqs 's goodwill , intangible assets and fixed assets had decreased . based on the results of the impairment analysis performed , these assets were written-down to their fair value . in addition to this charge , a $ 3.1 million charge is included in the consolidated statement of operations classification , `` cost of revenues , '' as it relates to the write-down of vqs-acquired completed technology . restructuring and other related charges replace_table_token_10_th in an effort to further reduce our expenses and align our workforce and operations with anticipated revenues , we initiated additional restructuring efforts resulting in the recording of total restructuring and other related charges of $ 6.9 million for 2003 .
| results of operations the following table sets forth , for the periods indicated , certain items from our consolidated statements of operations as a percentage of revenues . replace_table_token_3_th revenues . revenues consist primarily of product sales and , to a lesser extent , sales of services provided to our customers by our ps and vqs business units . the ps business unit revenues consist of sales of our systems building block products and services as well as nms hearsay products . future mycaller revenues , if any , will be recorded as ps business unit sales . the vqs business unit revenues consist of sales of our voice quality enhancement and echo cancellation products , systems and services . the ni business unit revenues consist of our wireless access gateway product and services . cost of revenues . cost of revenues consists primarily of product cost , cost of services provided to our customers , overhead associated with testing and fulfillment operations and the amortization of acquired completed technology . selling , general and administrative expenses . selling , general and administrative expenses consist primarily of salaries , commissions and related personnel expenses for those engaged in our sales , marketing , promotional , public relations , executive , accounting and administrative activities , amortization of intangible assets and non-cash compensation and other general corporate expenses . research and development expenses . research and development expenses consist primarily of salaries , personnel expenses and prototype fees related to the design , development , testing and enhancement of our products . these costs are expensed as incurred . 26 impairment charges . impairment charges consist of the reduction to fair value of the goodwill , tangible and intangible assets related to our acquisitions . restructuring and other related charges . restructuring charges consist of involuntary severance related costs , legal and placement costs , facility closures or downsizing and disposal of excess or unused assets . other income ( expense ) , net .
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md & a is organized as follows : > overview : this section provides a general description of our business , and a discussion of management 's general outlook regarding market demand , our competitive position and product innovation , as well as recent developments we believe are important to understanding our results of operations and financial condition or in understanding anticipated future trends . > basis of presentation : this section provides a discussion of the basis on which our consolidated financial statements were prepared . > results of operations : this section provides an analysis of our results of operations for each of the three years ended december 31 , 2014 , 2013 and 2012 . > liquidity and capital resources : this section provides a discussion of our financial condition and an analysis of our cash flows for each of the three years ended december 31 , 2014 , 2013 and 2012. this section also provides a discussion of our contractual obligations , other purchase commitments and customer credit risk that existed at december 31 , 2014 , as well as a discussion of our ability to fund our future commitments and ongoing operating activities through internal and external sources of capital . > critical accounting policies and estimates : this section identifies and summarizes those accounting policies that significantly impact our reported results of operations and financial condition and require significant judgment or estimates on the part of management in their application . overview the company is a leader in home and security products focused on the design , manufacture and sale of market-leading branded products in the following categories : kitchen and bath cabinetry , plumbing and accessories , entry door systems , and security products . for the year ended december 31 , 2014 , net sales based on country of destination were : replace_table_token_8_th we believe the company has certain competitive advantages including market-leading brands , a diversified mix of customer channels , and lean and flexible supply chains , as well as a tradition of strong innovation and customer service . we are focused on outperforming our markets in growth , profitability and returns in order to drive increased shareholder value . we believe the company 's track record reflects the long-term attractiveness and potential of our categories and our leading brands . as consumer demand and the housing market grow , we expect the benefits of operating leverage and strategic spending will help us to continue to achieve profitable organic growth . 19 we believe our most attractive opportunities are to invest in profitable organic growth initiatives . we also believe that as the market grows , we have the potential to generate additional growth from leveraging our cash flows and balance sheet strength by pursuing accretive strategic acquisitions and joint ventures , and returning cash to shareholders through a combination of dividends and repurchases under our share repurchase programs as explained in further detail under liquidity and capital resources below . the u.s. market for our home products consists of spending on both new home construction and repair and remodel activities within existing homes , with the substantial majority of the markets we serve consisting of repair and remodel spending . we believe that the u.s. market for our home products is in the midst of a multi-year recovery from the u.s. economic recession that ended in mid-2009 and that a continued recovery will largely depend on consumer confidence , employment , home prices , stable mortgage rates and credit availability . over the long term , we believe that the u.s. home products market will benefit from favorable population and immigration trends , which will drive demand for new housing units , and from aging existing housing stock that will continue to need to be repaired and remodeled . we may be impacted by fluctuations in raw material and transportation costs and promotional activity among our competitors . we strive to offset the potential unfavorable impact of these items with productivity initiatives and price increases . during the past two years ended december 31 , 2014 , our net sales grew at a compounded annual rate of 13 % as we benefited from an improving u.s. home products market , share gains , growth in international markets and acquisitions . operating income grew at a compounded annual rate of 68 % with operating margins improving from 5 % in 2012 to 10 % in 2014. growth in operating income was primarily due to higher sales volume , control and leverage of our operating expenses , changes to our portfolio of businesses , the benefits of productivity programs , and lower restructuring and impairment charges . during 2014 , the u.s. home products market grew due to expansion of both new home construction and repair and remodel activities . we believe new housing construction experienced high-single digit growth in 2014 compared to 2013 and spending for home repair and remodeling increased approximately 4 to 5 % . in 2014 , net sales grew 8 % and operating income increased 25 % due to higher sales volume primarily resulting from u.s. home products market growth , the acquisitions of woodcrafters home products holding , llc ( woodcrafters ) in 2013 and john d. brush & co. , inc. ( sentrysafe ) in 2014 , and productivity improvements . during 2013 , the u.s. home products market also grew due to expansion of both new home construction and repair and remodel activities . we believe new housing construction grew in the high teens ( % ) in 2013 compared to 2012 and spending for home repair and remodeling increased approximately 5 % to 6 % . we experienced strengthening in larger ticket repair and remodel activities , which had previously been lagging the overall market , and are particularly impactful to our cabinet products . story_separator_special_tag in 2013 , financial results included : > the impact of the woodcrafters acquisition , which added approximately $ 115 million of net sales , > asset impairment charges in our cabinets segment of $ 21.2 million ( $ 13.8 million after tax ) associated with the abandonment of certain internal use software , > defined benefit plan recognition of actuarial losses , recorded in the corporate segment , of $ 5.2 million ( $ 3.3 million after tax ) compared to $ 42.2 million ( $ 26.2 million after tax ) in 2012. this change was primarily due to a higher than expected increase in pension plan assets and higher discount rates in 2013 , as well as lower postretirement liabilities due to plan amendments to reduce health benefits , > restructuring and other charges of $ 3.7 million before tax ( $ 2.8 million after tax ) , primarily associated with supply chain initiatives , > the impact of foreign exchange , which had an unfavorable impact compared to 2012 , of approximately $ 7 million on net sales and approximately $ 1 million on operating income and net income . the effects of foreign exchange on the company 's results are principally associated with movements in the canadian dollar and > income from discontinued operations of $ 21.9 million , net of tax . in 2012 , financial results included : > defined benefit plan recognition of actuarial losses , recorded in the corporate segment , of $ 42.2 million ( $ 26.2 million after tax ) , primarily due to a decrease in the discount rate used to value our pension and other postretirement obligations , > asset impairment charges of $ 13.2 million ( $ 8.1 million after tax ) associated with tradenames in the doors segment ( $ 7.3 million before tax ) and the cabinets segment ( $ 5.9 million before tax ) . 22 these charges were primarily the result of an increase in our market-participant cost of capital discount rates . one tradename in the cabinets segment was also impacted by reduced revenue growth expectations for high-end discretionary cabinet purchases developed during our annual planning process that was completed in the fourth quarter in 2012 , > restructuring and other charges of $ 13.6 million before tax ( $ 8.9 million after tax ) , primarily associated with cabinet manufacturing facility closures and > income from discontinued operations of $ 11.4 million , net of tax . 2014 compared to 2013 total fortune brands net sales net sales increased $ 310.0 million , or 8 % . the increase was due to the benefit of the acquisitions of woodcrafters and sentrysafe ( approximately $ 165 million in aggregate ) , higher sales volume primarily from the continuing improvement in u.s. market conditions for home products , price increases to help mitigate material cost increases , and favorable product mix . these increases were partially offset by the impact of the planned exit from low margin builder direct cabinet business in the western u.s. ( approximately $ 53 million ) and approximately $ 25 million of unfavorable foreign exchange . cost of products sold cost of products sold increased $ 238.2 million , or 10 % , due to higher sales volume , material cost increases and higher costs associated with manufacturing capacity increases to support long-term growth , as well as the $ 126.0 million impact of the acquisitions of sentrysafe and woodcrafters . these cost increases were partially offset by the benefit of productivity improvements . selling , general and administrative expenses selling , general and administrative expenses increased $ 4.6 million due to higher volume-related costs and the $ 19.0 million impact of the acquisitions of sentrysafe and woodcrafters , partially offset by lower employee-related costs . selling , general and administrative expenses were also unfavorable due to higher expense from actuarial losses related to defined benefits plans ( $ 10.7 million in 2014 compared to $ 2.5 million in 2013 ) . amortization of intangible assets amortization of intangible assets increased $ 3.7 million due to the acquisitions of woodcrafters ( $ 2.9 million incremental ) and sentrysafe ( $ 0.8 million ) . restructuring charges restructuring charges of $ 7.0 million in 2014 related to severance in security , plumbing and corporate , partially offset by a benefit from a foreign currency gain associated with dissolution of a foreign entity in the plumbing segment . restructuring charges of $ 2.8 million in 2013 related to supply chain initiatives . 23 asset impairment charge no asset impairment charges were recorded in 2014 in operating income . in 2013 , our cabinets segment completed an evaluation of its information technology strategy . as a result of this evaluation , the segment abandoned certain software developed for internal use and recorded an impairment charge of $ 21.2 million , which was recorded in operating income and reduced property , plant and equipment . operating income operating income increased $ 80.5 million , or 25 % , primarily due to higher sales volume from our growth initiatives and improving u.s. home products market conditions , the benefit from the woodcrafters and sentrysafe acquisitions ( approximately $ 9 million in aggregate ) and improved product mix . operating income was unfavorably impacted by planned costs associated with manufacturing capacity increases to support long-term growth . operating income was also impacted by approximately $ 13 million of unfavorable foreign exchange . in addition , the following items had a significant impact on operating income trends : replace_table_token_10_th interest expense interest expense increased $ 3.2 million primarily due to higher average borrowings .
| results by segment cabinets net sales increased $ 145.3 million , or 9 % , primarily due to the benefit of the acquisition of woodcrafters ( approximately $ 100 million ) and strength in the repair and remodel market . net sales also benefited from favorable product mix and price increases to help mitigate raw material cost increases . net sales were unfavorably affected by the impact of the planned exit from low margin builder direct business in the western u.s. ( approximately $ 53 million ) and approximately $ 15 million of unfavorable foreign exchange . operating income increased $ 40.8 million , or 42 % , due to the acquisition of woodcrafters ( approximately $ 12 million ) and the absence in 2014 of the 2013 asset impairment charge of $ 21.2 million . operating income also benefited from productivity improvements , lower employee-related costs , price increases to help mitigate raw material cost increases ( wood-related ) and improved product mix . operating income was unfavorably impacted by higher costs associated with manufacturing capacity increases to support long-term growth . plumbing net sales increased $ 44.0 million , or 3 % , due to higher sales volume in the u.s. driven primarily by improving u.s. market conditions , price increases to help mitigate raw material cost increases and approximately $ 13 million in higher international sales , primarily china and canada . these benefits were partially offset by approximately $ 10 million of unfavorable foreign exchange . operating income increased $ 30.6 million , or 13 % , due to higher sales volume , price increases to help mitigate raw material cost increases and cost saving initiatives . these benefits were partially offset by planned strategic and supply chain initiatives to increase capacity for long-term growth , as well as unfavorable foreign exchange of approximately $ 10 million .
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the fair value of each option grant was estimated on the date of grant using the black‑scholes option‑pricing model with the following assumptions : 2016 expected dividend yield 0 % expected stock price volatility 63 % - 65 % risk-free interest rate 1.83 % - 2.04 % expected life of options 10 years the weighted average fair value of options granted during fiscal year 2016 was $ 2.10 . the following table summarizes the company 's stock option activity during the reported fiscal years : replace_table_token_13_th the company recognized $ 203,889 and $ 66,372 in stock-based compensation for the years ended june 30 , 2016 and 2015 , respectively , story_separator_special_tag overview our principal business is the manufacturing , distribution and marketing of physical medicine products . we offer a broad line of medical equipment including therapy devices , medical supplies and soft goods , treatment tables and rehabilitation equipment . our products are sold to and used primarily by physical therapists , chiropractors , sports medicine practitioners , and podiatrists . our fiscal year ends on june 30. reference to fiscal year 2016 refers to the year ended june 30 , 2016. story_separator_special_tag 6pt ; color : # 000000 ; text-align : left ; line-height : 11.4pt ; text-indent : 36pt '' > interest expense decreased by approximately $ 40,000 in fiscal year 2016 , to approximately $ 290,000 , compared to approximately $ 330,000 in fiscal year 2015. the reduction in interest expense is directly related to the payoff and termination of our line of credit in the third quarter of fiscal year 2016. exclusive of interest on the line of credit , components of our interest expense include imputed interest from the sale/leaseback of our corporate headquarters facility , mortgage interest on our tennessee property and a small amount of interest for equipment loans for office furnishings and vehicles . most of the $ 290,000 interest expense in fiscal year 2016 ( $ 220,000 ) was imputed interest related to the lease . 19 loss before income tax benefit pre-tax loss in fiscal year 2016 was $ 2.0 million , compared to $ 1.4 million in fiscal year 2015. the increase in pre-tax loss is due primarily to ( 1 ) $ 770,000 in severance expense payable to two former executives ; ( 2 ) $ 1.0 million increase in expenses associated with increased sg & a and ( 3 ) $ 145,000 increase in r & d , all of which was partially offset by increased gross profit associated with increased sales as discussed above . pre-tax losses in fiscal year 2015 also included incremental inventory write offs of approximately $ 840,000 in excess of our $ 120,000 allowance , and approximately $ 255,000 in aborted acquisition expense . income taxes income tax benefit was approximately $ 65,000 in fiscal year 2016 , compared to income tax provision of $ 850,000 in fiscal year 2015. in fiscal year 2015 , the company determined the valuation allowance was required and as a result implemented a valuation allowance of $ 1.4 million all in the fourth quarter of fiscal year 2015. the recording of this valuation allowance resulted in recording a tax expense of $ 850,000 on the 2015 fiscal year financial statements . see note 9 to the consolidated financial statements as well as `` critical accounting policies and estimates – deferred income tax assets '' for more information regarding the valuation allowance and its impact on the effective tax rate for 2016. net loss net loss for fiscal year 2016 was $ 1.9 million , compared to $ 2.3 million for the year ended june 30 , 2015. our 2016 results include a $ 745,000 non-cash deferred tax asset valuation allowance offsetting all but $ 65,000 in tax benefit for the year , $ 770,000 severance expense , and $ 270,000 non-cash inventory write off , as discussed above . in fiscal year 2015 , the net loss included a non-cash deferred tax asset valuation allowance of $ 1.4 million and $ 840,000 in non-cash inventory write off in excess of our allowance . net loss applicable to common shareholders net loss applicable to common shareholders was $ 2.3 million or $ 0.84 per share , compared to $ 4.4 million , or $ 1.73 per share for the year ended june 30 , 2015. fiscal year 2015 included a deemed dividend of $ 2.1 million associated with a beneficial conversion feature triggered by the sale of our series a preferred to affiliates of prettybrook as detailed in our report filed on form 10-k for the fiscal year ended june 30 , 2015. also included in the net loss applicable to common shareholders in fiscal year 2015 was a valuation allowance against deferred tax assets of $ 1.4 million . in fiscal year 2016 , the net loss applicable to common shareholders included a valuation allowance against deferred tax assets of approximately $ 745,000. fiscal year 2016 also included recognition of dividends paid on our series a preferred of $ 372,000 compared to $ 1,000 in fiscal year 2015. the dividends paid in fiscal year 2016 , equate to approximately $ 0.13 per share . liquidity and capital resources we have financed operations through cash from operations and available cash reserves . working capital decreased by $ 1.9 million to $ 5.8 million as of june 30 , 2016 , inclusive of the current portion of long-term obligations and credit facilities , compared to working capital of $ 7.7 million as of june 30 , 2015. as of june 30 , 2016 the company did not have in place a working capital line of credit . however , a $ 1.0 million working capital line of credit facility was put in place in september of 2016 and is fully available to the company . story_separator_special_tag million of imputed interest . 21 inflation our revenues and net income have not been unusually affected by inflation or price increases for raw materials and parts from vendors . stock repurchase plans in 2011 , our board of directors adopted a stock repurchase plan authorizing repurchases of shares in the open market , through block trades or otherwise . decisions to repurchase shares under this plan are based upon market conditions , the level of our cash balances , general business opportunities , and other factors . the board periodically approves the dollar amounts for share repurchases under the plan . as of june 30 , 2016 , approximately $ 450,000 remained available under the board 's authorization for purchases under the plan . there is no expiration date for the plan . no purchases were made under this plan during the year ended june 30 , 2016 , or during the past four fiscal years . critical accounting policies this management 's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements , which have been prepared in accordance with gaap . the preparation of these financial statements requires estimates and judgments that affect the reported amounts of our assets , liabilities , net sales and expenses . management bases estimates on historical experience and other assumptions it believes to be reasonable given the circumstances and evaluates these estimates on an ongoing basis . actual results may differ from these estimates under different assumptions or conditions . see note 15 to our consolidated financial statements for the impact of recent accounting pronouncements . we believe that the following critical accounting policies involve a high degree of judgment and complexity . see note 1 to our consolidated financial statements for fiscal year 2016 , for a complete discussion of our significant accounting policies . the following summary sets forth information regarding significant estimates and judgments used in the preparation of our consolidated financial statements . inventory reserves the nature of our business requires that we maintain sufficient inventory on hand at all times to meet the requirements of our customers . we record finished goods inventory at the lower of standard cost , which approximates actual cost ( first-in , first-out ) or market . raw materials are recorded at the lower of cost ( first-in , first-out ) or market . inventory valuation reserves are maintained for the estimated impairment of the inventory . impairment may be a result of slow-moving or excess inventory , product obsolescence or changes in the valuation of the inventory . in determining the adequacy of reserves , we analyze the following , among other things : · current inventory quantities on hand ; · product acceptance in the marketplace ; · customer demand ; · historical sales ; · forecast sales ; · product obsolescence ; · strategic marketing and production plans · technological innovations ; and · character of the inventory as a distributed item , finished manufactured item or raw material . any modifications to estimates of inventory valuation reserves are reflected in cost of goods sold within the statements of operations during the period in which such modifications are determined necessary by management . as of june 30 , 2016 , and 2015 , our inventory valuation reserve balance , which established a new cost basis , was approximately $ 415,000 and $ 360,000 , respectively , and our inventory balance was $ 5.0 million and $ 5.4 million , net of reserves , respectively . 22 during fiscal year 2016 , we recorded a $ 270,000 non-cash write off of inventory based on two factors : 1 ) non-performing inventory related to our amerinet gpo contract and 2 ) defective products . we do not anticipate these inventory write offs in the future beyond our current allowance of $ 120,000 annually . revenue recognition our sales force and distributors sell our products to end users , including physical therapists , professional trainers , athletic trainers , chiropractors , and medical doctors . sales revenues are recorded when products are shipped fob shipping point under an agreement with a customer , risk of loss and title have passed to the customer , and collection of any resulting receivable is reasonably assured . amounts billed for shipping and handling of products are recorded as sales revenue . costs for shipping and handling of products to customers are recorded as cost of sales . allowance for doubtful accounts we must make estimates of the collectability of accounts receivable . in doing so , we analyze historical bad debt trends , customer credit worthiness , current economic trends and changes in customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts . our accounts receivable balance was $ 3.5 million and $ 3.3 million , net of allowance for doubtful accounts of $ 390,000 and $ 415,000 , as of june 30 , 2016 , and 2015 , respectively . deferred income tax assets a valuation allowance is required when there is significant uncertainty as to the realizability of deferred tax assets . the realization of deferred tax assets is dependent upon our ability to generate sufficient taxable income within the carryforward periods provided for in the tax law for each tax jurisdiction . we have considered the following possible sources of taxable income when assessing the realization of our deferred tax assets : · future reversals of existing taxable temporary differences ; · future taxable income or loss , exclusive of reversing temporary differences and carryforwards ; · tax-planning strategies ; and · taxable income in prior carryback years . we considered both positive and negative evidence in determining the continued need for a valuation allowance , including the following : positive evidence : · current forecasts indicate that we will generate pre-tax income and taxable income in the future . however , there can be no assurance that the new strategic plans will result in profitability .
| results of operations fiscal year 2016 compared to fiscal year 2015 net sales net sales in fiscal year 2016 , increased $ 1.3 million or 4.4 % to $ 30.4 million , compared to $ 29.1 million in fiscal year 2015. net sales in the fourth quarter of fiscal year 2016 increased approximately $ 260,000 or 2.8 % to $ 8.1 million , compared to $ 7.9 million in the fourth quarter of 2015. the rate of sales growth throughout fiscal 2016 was driven by new clinic openings , clinic expansions , and addition of new sales management and personnel , as well as strengthening demand in our core domestic market . sales of capital equipment ( both proprietary and distributed ) , especially the dynatron solaris ® line of products , were the leading growth categories in 2016. we believe that the upward trend in sales indicates increased customer confidence in our markets . sales of proprietary manufactured physical medicine products represented approximately 44 % of total physical medicine product sales in fiscal years 2016 and 2015. distribution of products manufactured by other suppliers accounted for the balance of our physical medicine product sales in those years . in fiscal years 2016 and 2015 , sales of physical medicine products accounted for 91.7 % and 91.4 % , respectively . chargeable repairs , billable freight and a small amount of revenue from products outside of physical medicine accounted for the balance of revenues in both years . 18 during the fiscal year ended june 30 , 2016 , we phased out the sales of our aesthetic product line known as synergie ® . in fiscal years 2016 and 2015 , sales of synergie ® were approximately $ 110,000 and $ 160,000 , respectively . these sales were included in the non-physical medicine product revenue .
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note 3 – licensed technology on may 15 , 2015 , we acquired abeona therapeutics llc which had a an exclusive license through nationwide children 's hospital to the ab-101 and ab-102 patent portfolios for developing treatments for patients with sanfilippo syndrome type a and type b. the license is amortized over the life of the license of 20 years . f- 10 on august 3 , 2016 , we announced we entered into an agreement ( the “ eb agreement ” ) with eb research partnership ( “ ebrp ” ) and epidermolysis bullosa medical research foundation ( “ ebmrf ” ) to collaborate on gene therapy treatments for eb . the eb agreement became effective august 3 , 2016 , on the execution of two licensing agreements with the board of trustees of leland stanford junior university ( “ stanford ” ) described below . we also entered into a license with stanford for the aav-based gene therapy eb-201 ( aav dj col7a1 ) technology , and we shall perform preclinical development and perform clinical trials of a gene therapy treatment for eb based upon such in-licensed technology . eb-201 ( aav dj col7a1 ) is a pre-clinical candidate targeting a novel , aav-mediated gene editing and delivery approach ( known as homologous recombination ) to correct gene mutations in skin cells ( keratinocytes ) for patients with recessive dystrophic epidermolysis bullosa ( rdeb ) . the licenses are amortized over the life of the license of 20 years . on september 22 , 2014 , we entered into an exclusive , worldwide , licensing agreement with plasma technologies llc ( “ plasmatech ” ) to obtain rights to utilize and to sub-license to other pharmaceuticals firms , its patented methods for the extraction of therapeutic biologics from human plasma . the license was to be amortized over the life of the patent of 11 years . under the terms of the licensing agreement , as amended on january 23 , 2015 , we paid a license fee of $ 1 million in cash , will pay $ 4,000,000 in cash or 1,096,151 shares of our common stock in 2017 and other possible milestones . on may 26 , 2017 , we entered into agreements with plasmatech and acestor therapeutics llc ( “ acestor ” ) . abeona would hold an 80 % membership interest in acestor and plasmatech would hold the remaining 20 % membership interest in acestor . acestor was formed for the purposes of seeking additional financing in the amount of approximately $ 5,000,000 to develop and commercialize the technology of that certain license agreement for certain patent rights that was granted to abeona from plasmatech on september 19 , 2014 and amended january 23 , 2015 ( “ license agreement ” ) . the license agreement was transferred to acestor and the amortization of the licensed technology ceased on may 26 , 2017. in addition , abeona 's payment obligation of $ 4,000,000 to plasmatech was waived and replaced with an obligation of acestor to pay plasmatech 10 % of the aggregate proceeds in respect of any financing ( whether public of private ) undertaken by acestor on or before november 26 , 2017. a gain of $ 127,000 to reflect this transaction was recorded in the second quarter of 2017. in december 2017 the agreements were terminated and the technology was returned to plasmatech . licensed technology consists of the following : replace_table_token_12_th amortization on licensed technology was $ 534,000 and $ 677,000 for the years ended december 31 , 2017 and 2016 , respectively . the aggregate estimated amortization expense for intangible assets remaining as of december 31 , 2017 is as follows ( in thousands ) : replace_table_token_13_th f- 11 note 4 – 401 ( k ) plan we have a tax-qualified employee savings and retirement plan ( the 401 ( k ) plan ) covering all our employees . pursuant to the 401 ( k ) plan , employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit ( $ 18,000 in both 2017 and 2016 ) and to have the amount of such reduction contributed to the 401 ( k ) plan . the 401 ( k ) plan is intended to qualify under section 401 of the internal revenue code so that contributions by employees or by us to the 401 ( k ) plan , and income earned on 401 ( k ) plan contributions , are not taxable to employees until withdrawn from the 401 ( k ) plan , and so that contributions by us , if any , will be deductible by us when made . at the direction of each participant , we invest the assets of the 401 ( k ) plan in any of over 50 investment options . company contributions under the 401 ( k ) plan were $ 0 in 2017 and 2016. note 5 – commitments and contingencies operating leases at december 31 , 2017 , we had an operating lease for our story_separator_special_tag the following discussion should be read in conjunction with our consolidated financial statements and related notes included in this form 10-k. abeona therapeutics inc. ( together with our subsidiaries , “ we , ” “ our , ” “ abeona ” or the “ company ” ) is a delaware corporation . we are a clinical-stage biopharmaceutical company developing cell and gene therapies for life-threatening rare genetic diseases . story_separator_special_tag our lead programs include eb-101 ( gene-corrected skin grafts ) for recessive dystrophic epidermolysis bullosa ( rdeb ) , abo-102 ( aav-sgsh ) , an adeno-associated virus ( aav ) based gene therapy for sanfilippo syndrome type a ( mps iiia ) and abo-101 ( aav naglu ) , an aav based gene therapy for sanfilippo syndrome type b ( mps iiib ) . we are also developing abo-201 ( aav-cln3 ) gene therapy for juvenile batten disease ( jncl ) , abo-202 ( aav-cln1 ) for treatment of infantile batten disease ( incl ) , eb-201 for epidermolysis bullosa ( eb ) , abo-301 ( aav-fancc ) for fanconi anemia ( fa ) disorder and abo-302 using a novel crispr/cas9-based gene editing approach to gene therapy for rare blood diseases . in addition we are developing a proprietary vector platform , aim , for next generation product candidates . story_separator_special_tag · the ability to establish and maintain effective commercialization arrangements and activities ; and · successful regulatory filings . we have devoted substantially all of our efforts and resources to research and development conducted on our own behalf . the following table summarizes research and development spending by project category , which spending includes , but is not limited to , payroll and personnel expense , lab supplies , preclinical expense , development cost , clinical trial expense , outside manufacturing expense and consulting expense : replace_table_token_2_th ( 1 ) cumulative spending from inception of the company or project through december 31 , 2017 . ( 2 ) includes other projects which the company is no longer focused . due to uncertainties and certain of the risk factors described above , including those relating to our ability to successfully commercialize our drug candidates , our ability to obtain necessary additional capital to fund operations in the future , our ability to successfully manufacture our products and our product candidates in clinical quantities or for commercial purposes , government regulation to which we are subject , the uncertainty associated with preclinical and clinical testing , intense competition that we face , market acceptance of our products , the potential necessity of licensing technology from third parties and protection of our intellectual property , it is not possible to reliably predict future spending or time to completion by project or product category or the period in which material net cash inflows from significant projects are expected to commence . if we are unable to timely complete a particular project , our research and development efforts could be delayed or reduced , our business could suffer depending on the significance of the project and we might need to raise additional capital to fund operations , as discussed in the risk factors above , including without limitation those relating to the uncertainty of the success of our research and development activities and our ability to obtain necessary additional capital to fund operations in the future . as discussed in such risk factors , delays in our research and development efforts and any inability to raise additional funds could cause us to eliminate one or more of our research and development programs . we plan to continue our policy of investing any available funds in certificates of deposit , money market funds , government securities and investment-grade interest-bearing securities . we do not invest in derivative financial instruments . 31 we do not believe inflation or changing prices have had a material impact on our revenue or operating costs in the past three years . climate change we do not believe there is anything unique to our business which would result in climate change regulations having a disproportional effect on us as compared to u.s. industry overall . critical accounting policies and estimates the preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the u.s. requires us to make estimates and assumptions that affect the 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 reported period . in applying our accounting principles , we must often make individual estimates and assumptions regarding expected outcomes or uncertainties . as you might expect , the actual results or outcomes are often different than the estimated or assumed amounts . these differences are usually minor and are included in our consolidated financial statements as soon as they are known . our estimates , judgments and assumptions are continually evaluated based on available information and experience . because of the use of estimates inherent in the financial reporting process , actual results could differ from those estimates . receivables receivables are reported in the balance sheets at the outstanding amount net of an allowance for doubtful accounts . we continually evaluate the creditworthiness of our customers and their financial condition and generally do not require collateral . the allowance for doubtful accounts is based upon reviews of specific customer balances , historic losses , and general economic conditions . as of december 31 , 2017 and 2016 , no allowance was recorded as all accounts were considered collectible . licensed technology we maintain licensed technology on our consolidated balance sheet until either the licensed technology agreement underlying it is completed or the asset becomes impaired . when we determine that an asset has become impaired or we abandon a project , we write down the carrying value of the related intangible asset to its fair value and take an impairment charge in the period in which the impairment occurs . generally licensed technology is amortized over the life of the patent or the agreement . we test our intangible assets for impairment on an annual basis , or more frequently if indicators are present or changes in circumstance suggest that impairment may exist . events that could result in an impairment , or trigger an interim impairment assessment , include the receipt
| results of operations comparison of years ended december 31 , 2017 and december 31 , 2016 our licensing revenue for the years ended december 31 , 2017 and 2016 was $ 602,000. we recognize licensing revenue over the period of the performance obligation under our licensing agreements . we recorded royalty revenue for mugard of $ 235,000 for the year ended december 31 , 2017 and $ 287,000 for the same period of 2016 , a decrease of $ 52,000. we licensed mugard to amag and norgine and currently receive quarterly royalties under our agreements . total research and development spending for the year ended december 31 , 2017 was $ 16,989,000 , as compared to $ 10,655,000 for the same period of 2016 , an increase of $ 6,334,000. the increase in expenses was primarily due to : · increased clinical and development work for the manufactured product for eb-101 , abo-102 & abo-101 and other gene therapy products ( $ 4,449,000 ) ; · increased salary and related costs ( $ 619,000 ) due to hiring additional scientific staff ; · increased stock option compensation expense ( $ 418,000 ) ; · increased travel and entertainment expense ( $ 286,000 ) ; · increased scientific consulting expense ( $ 236,000 ) ; and · increased other net decreases in research spending ( $ 326,000 ) .
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forward-looking statements are typically identified by use of terms such as “ may , ” “ believe , ” “ expect , ” “ anticipate , ” “ intend , ” “ estimate , ” “ project , ” “ target , ” “ goal , ” “ plan , ” “ should , ” “ will , ” “ predict , ” “ potential , ” and similar expressions that convey the uncertainty of future events or outcomes . such statements involve known and unknown risks , uncertainties , and other factors which may cause the actual results , performance , or achievements of the company to be materially different from future results , performance or achievements expressed or implied by such forward-looking statements . such factors include , but are not limited to , the ability of the company to implement its acquisition strategy and operating strategy ; the company 's ability to manage planned growth ; changes in economic cycles ; financing risks ; the outcome of current and future litigation , regulatory proceedings or inquiries ; changes in laws or regulations or interpretations of current laws and regulations that impact the company 's business , assets or classification as a real estate investment trust ; and competition within the hotel and real estate industry . although the company believes that the assumptions underlying the forward-looking statements contained herein are reasonable , any of the assumptions could be inaccurate , and therefore there can be no assurance that such statements included in this annual report will prove to be accurate . in light of the significant uncertainties inherent in the forward-looking statements included herein , the inclusion of such information should not be regarded as a representation by the company or any other person that the results or conditions described in such statements or the objectives and plans of the company will be achieved . in addition , the company 's qualification as a real estate investment trust involves the application of highly technical and complex provisions of the internal revenue code . readers should carefully review the company 's financial statements and the notes thereto , as well as the risk factors described in the company 's filings with the securities and exchange commission and item 1a in this report . any forward-looking statement that the company makes speaks only as of the date of this report . the company undertakes no obligation to publically update or revise any forward-looking statements or cautionary factors , as a result of new information , future events , or otherwise , except as required by law . overview apple reit nine , inc. , together with its wholly owned subsidiaries ( the “ company ” ) , was formed to invest in income-producing real estate in the united states . the company was initially capitalized november 9 , 2007 , with its first investor closing on may 14 , 2008. the company completed its best-efforts offering of units ( each unit consists of one common share and one series a preferred share ) in december 2010. the company has elected to be treated as a real estate investment trust ( “ reit ” ) for federal income tax purposes . prior to the company 's first hotel acquisition on july 31 , 2008 , the company had no revenue , exclusive of interest income . as of december 31 , 2012 , the company owned 89 hotels ( one acquired during 2012 , 11 acquired and one newly constructed hotel opened during 2011 , 43 acquired during 2010 , 12 acquired during 2009 and 21 acquired during 2008 ) . accordingly , the results of operations include only results from the date of ownership of the properties . in august 2011 , the company entered into a contract for the potential sale of its 406 acres of land and land improvements located on 110 sites in the ft. worth , texas area ( the “ 110 parcels ” ) for a total sale price of $ 198.4 million . the 110 parcels were acquired in april 2009 for a total purchase price of $ 147.3 million and were leased to a subsidiary of chesapeake energy corporation under a long term lease for the production of natural gas . on april 27 , 2012 , the company completed the sale of its 110 parcels and received approximately $ 138.4 million in cash proceeds and issued a note receivable totaling $ 60.0 million to the purchaser . the operating results related to the 110 parcels have been included in discontinued operations and are not included in the results of operations summary below . 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 . beginning in 2011 and continuing throughout 2012 , the hotel industry and company 's revenues and operating income have shown improvement from the significant decline in the industry during 2008 through 2010. although there is no way to predict future general economic 23 index conditions , and there are several key factors that continue to negatively affect the economic recovery in the united states and add to general market uncertainty , including but not limited to , the continued high levels of unemployment , the slow pace of the economic recovery in the united states and the uncertainty surrounding the fiscal policy of the united states , the company and industry are forecasting a mid-single digit percentage increase in revenue for 2013 as compared to 2012 for comparable hotels . story_separator_special_tag replace_table_token_7_th 25 index replace_table_token_8_th 26 index city state brand manager date acquired rooms gross purchase price austin tx hilton garden inn white 11/2/2010 117 $ 16,000 novi mi hilton garden inn white 11/2/2010 148 16,200 warrenville il hilton garden inn white 11/2/2010 135 22,000 schaumburg il hilton garden inn white 11/2/2010 166 20,500 salt lake city ut springhill suites white 11/2/2010 143 17,500 austin tx fairfield inn & suites white 11/2/2010 150 17,750 austin tx courtyard white 11/2/2010 145 20,000 chandler az courtyard white 11/2/2010 150 17,000 chandler az fairfield inn & suites white 11/2/2010 110 12,000 tampa fl embassy suites white 11/2/2010 147 21,800 andover ma springhill suites marriott 11/5/2010 136 6,500 philadelphia ( collegeville ) pa courtyard white 11/15/2010 132 20,000 holly springs nc hampton inn & suites lba 11/30/2010 124 14,880 philadelphia ( malvern ) pa courtyard white 11/30/2010 127 21,000 arlington tx hampton inn & suites western 12/1/2010 98 9,900 irving tx homewood suites western 12/29/2010 77 10,250 mount laurel nj homewood suites tharaldson 1/11/2011 118 15,000 west orange nj courtyard tharaldson 1/11/2011 131 21,500 texarkana tx hampton inn & suites intermountain 1/31/2011 81 9,100 fayetteville nc home2 suites lba 2/3/2011 118 11,397 manassas va residence inn tharaldson 2/16/2011 107 14,900 san bernardino ca residence inn tharaldson 2/16/2011 95 13,600 alexandria ( 1 ) va springhill suites marriott 3/28/2011 155 24,863 dallas tx hilton hilton 5/17/2011 224 42,000 santa ana ca courtyard dimension 5/23/2011 155 24,800 lafayette la springhill suites lba 6/23/2011 103 10,232 tucson az towneplace suites western 10/6/2011 124 15,852 el paso tx hilton garden inn western 12/19/2011 145 19,974 nashville tn home2 suites vista 5/31/2012 119 16,660 total 11,371 $ 1,546,839 ( 1 ) the company acquired land and began construction for this hotel during 2009. hotel construction was completed by the company and the hotel opened for business on march 28 , 2011. the gross purchase price includes the acquisition of land and construction costs . the purchase price for the properties acquired through december 31 , 2012 , net of debt assumed , was funded primarily by the company 's best-efforts offering of units , completed in december 2010. the company assumed approximately $ 122.4 million of debt secured by 13 of its hotel properties and $ 3.8 million of unsecured debt in connection with one of its hotel properties . the company also used the proceeds of its best-efforts offering to pay approximately $ 30.5 million , representing 2 % of the gross purchase price for these properties , as a brokerage commission to apple suites realty group , inc. ( “ asrg ” ) , 100 % owned by glade m. knight , the company 's chairman and chief executive . the company leases all of its hotels to its wholly-owned taxable reit subsidiary ( or a subsidiary thereof ) under master hotel lease agreements . no goodwill was recorded in connection with any of the acquisitions . development project on october 14 , 2009 , the company entered into a ground lease for approximately one acre of land located 27 index in downtown richmond , virginia . in february 2012 , the company terminated the lease and entered into a contract to purchase the land for $ 3.0 million , which was completed in july 2012. in conjunction with the acquisition , the company paid as a brokerage commission to asrg approximately $ 0.06 million , representing 2 % of the gross purchase price , which was capitalized as part of the acquisition cost of the land . the company acquired the land for the development of adjoining courtyard and residence inn hotels , which is expected to begin in early 2013 and be completed within two years . upon completion , the courtyard and residence inn are expected to contain approximately 135 and 75 guest rooms , respectively and are planned to be managed by white . the company expects to spend a total of approximately $ 30 million to develop the hotels and has spent approximately $ 1.1 million in development costs as of december 31 , 2012. if the company does not begin vertical construction by july 2013 , the seller of the property has an option to acquire the land equal to the amount of the company 's total cost . management and franchise agreements each of the company 's 89 hotels are operated and managed under separate management agreements , by affiliates of one of the following companies : dimension development two , llc ( “ dimension ” ) , gateway hospitality group , inc. ( “ gateway ” ) , hilton management llc ( “ hilton ” ) , intermountain management , llc ( “ intermountain ” ) , lbam-investor group , l.l.c . ( “ lba ” ) , fairfield fmc , llc and springhill smc , llc , subsidiaries of marriott international ( “ marriott ” ) , mhh management , llc ( “ mckibbon ” ) , raymond management company , inc. ( “ raymond ” ) , stonebridge realty advisors , inc. ( “ stonebridge ” ) , tharaldson hospitality management , llc ( “ tharaldson ” ) , vista host , inc. ( “ vista ” ) , texas western management partners , l.p. ( “ western ” ) or white lodging services corporation ( “ white ” ) . the agreements generally provide for initial terms of one to 30 years . fees associated with the agreements generally include the payment of base management fees , incentive management fees , accounting fees , and other fees for centralized services which are allocated among all of the hotels that receive the benefit of such services . base management fees are calculated as a percentage of gross revenues . 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 , 2012 , 2011 and 2010 , the company incurred approximately $ 12.3 million , $ 10.6
| general and administrative expense 9,227 3 % 8,189 3 % 13 % acquisition related costs 464 5,275 -91 % depreciation 52,748 48,415 9 % interest expense , net 6,745 4,371 54 % number of hotels 89 88 1 % average market yield ( 1 ) 123 122 1 % adr $ 111 $ 107 4 % occupancy 72 % < td
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our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors , including , but not limited to , those set forth in the section titled “ risk factors ” and in other parts of this annual report on form 10-k. our historical results are not necessarily indicative of the results that may be expected for any period in the future , and our interim results are not necessarily indicative of the results we expect for the full fiscal year or any other period . the company has elected to omit a discussion and analysis of the financial condition and results of operations of certain 2017 items and year-to-year comparisons between 2018 and 2017. such discussion and analysis can be found in “ management 's discussion and analysis of financial condition and results of operations ” in part ii , item 7 of the company 's annual report on form 10-k for the year ended december 31 , 2018 , which was filed with the sec on march 18 , 2019 and is incorporated by reference herein . overview sailpoint is the leading provider of enterprise identity governance solutions . our sailpoint predictive identity platform provides organizations with critical visibility into who currently has access to which resources , who should have access to those resources , and how that access is being used . we offer both software and software as a service ( “ saas ” ) solutions , which empower our customers to efficiently and securely govern the digital identities of employees , contractors , business partners , software bots and other human and non-human users , and manage their constantly changing access rights to enterprise applications and data across hybrid it environments , spanning on-premises , cloud and mobile applications and file storage platforms . we help customers enable their businesses with more agile and innovative it , streamline delivery of access to their businesses , enhance their security posture and better meet compliance and regulatory requirements . our customers include many of the world 's largest and most complex organizations , including commercial enterprises , financial institutions and governments . we believe that our sailpoint predictive identity platform is a critical , foundational layer of a modern cyber security strategy . its open architecture allows it to complement and build upon traditional perimeter- and endpoint-centric security solutions , which on their own are increasingly insufficient to secure organizations , and their applications and data . we were founded by visionary industry veterans to develop a new category of identity management solutions and address emerging identity governance challenges . since our inception , we have focused on driving innovation in the identity market , with our key milestones including : in 2007 , we pioneered identity governance through our release of identityiq , our on-premises identity governance solution ; in 2010 , we revolutionized provisioning by integrating it with identityiq into a single solution ; in 2013 , we introduced our saas identity governance offering , identitynow ; in 2015 , we extended identity governance by adding our identity governance for data stored in files solution , securityiq ( now referred as the file access manager module within identityiq ) , which manages user access to unstructured data , a rapidly growing area of risk ; and in 2017 , we further extended identity governance with the introduction of our advanced identity analytics offering , identityai , which is designed to use machine learning technologies to enable rapid detection of security threats before they turn into security breaches . our solutions address the complex needs of global enterprises and mid-market organizations . as of december 31 , 2019 , 1,469 customers across a wide variety of industries were using our products to enable and secure digital identities across the globe . no single customer represented more than 10 % of our revenue for the year ended december 31 , 2019 or 2018. for the years ended december 31 , 2019 and 2018 , our revenue was $ 288.5 million and $ 248.9 million , respectively . for the year ended december 31 , 2019 , we had a net loss of $ 8.5 million compared to net income of $ 3.7 million for the year ended december 31 , 2018. for the years ended december 31 , 2019 and 2018 , our net cash provided by operations was $ 50.1 million and $ 37.5 million , respectively . 42 our success is principally dependent on our ability to deliver compelling solutions to attract new customers and retain existing customers . delivering these solutions is challenging because our customers have large , complex it environments , often rely on both legacy and innovative technologies , and deploy differen t business models , including on- premise s and cloud models . rising security threats and evolving regulations and compliance standards for cyber security , data protection , privacy and internal it controls create new opportunities for our industry and require us to adapt our solutions to be successful . maintaining our historical growth rates is also challenging because our growth strategy depends in part on our ability to expand our global presence , increase the number of companies we can address with our current solutions , and invest in new vertical markets , while competing against much larger companies with more recognizable brands and financial resources . although we seek to grow rapidly , we also focus on managing our net cash from operations while continuing to invest in our platform and to deliver innovative solutions to our customers . we believe enterprises are increasingly embracing the cloud to house their critical security infrastructure . as a result , a growing number of enterprises are changing their approach to identity governance and now prefer saas in place of purchasing software via a license and independently operating their identity infrastructure . this industry shift aligns well with our current product strategy . story_separator_special_tag in addition , we focus on three distinct opportunities to increase sales to existing customers : ( i ) expand the number of digital identities ; ( ii ) up-sell additional modules or target storage systems , as applicable , within a single solution ; and ( iii ) cross-sell additional solutions . as part of our product strategy for the sailpoint predictive identity platform , we acquired orkus , inc. ( “ orkus ” ) and overwatch.id , inc. ( “ overwatch.id ” ) . orkus is engaged in the development and license of software products to assist customers in monitoring and controlling access and authorization across hybrid cloud assets . overwatch.id is engaged in the development and license of software products focused on access controls security for cloud applications , cloud computing , hybrid it environments , and on-premises infrastructure . see note 5 “ business combinations ” in our notes to our consolidated financial statements included in this annual report for more information . key factors affecting our performance our historical financial performance has been , and we expect our financial performance in the future to be , driven by our ability to : add new customers within existing markets . based on data from s & p global market intelligence , we believe that we have penetrated approximately 2 % of over 65,000 companies in the countries where we have customers today . as a result , there is significant opportunity to expand our footprint in our existing markets through new , greenfield installations and displacement of our competitors ' legacy solutions . we plan to grow our sales organization , expand and leverage our channel partners and enhance our marketing efforts . g enerate additional sales to existing customers . we believe that our existing customer base provides us with a significant opportunity to drive incremental sales . in most cases , our customers initially purchase a subset of the modules or offerings we provide based on their immediate need . we focus on generating more revenue from the modules that our customers have already purchased from us as our customers grow the number of identities our solutions manage and govern and as our customers deploy our solutions across other business units or geographies within their organizations . this is especially true when it comes to our new and expanded saas offerings , including ai and cloud governance . over time , we also identify up-selling and cross-selling opportunities and seek to sell additional modules and offerings to our existing customers . 44 retain customers . we believe that our ability to retain our customers is an important component of our growth strategy and reflects the long-term value of our customer relationships . for example , when we add a new customer , we generate new license revenue . if the customer renews , we generate incremental maintenance revenue . as we add new identityiq customers , our high renewal rates result in maintenance revenue . our key strategies to maintain our high renewal rates include focusing on the quality and reliability of our solutions , customer service and support to ensure our customers receive value from our solutions , providing consistent software upgrades and having dedicated customer success teams . expand into new markets . we expect to continue to invest significantly in sales , marketing and customer service , as well as our indirect channel partner network , to expand into new geographies and vertical markets . we believe that our market opportunity is large and growing and that the global cyber security market represents a significant growth opportunity for us . in 2019 , we generated only 29 % of our revenue outside of the united states . we plan to leverage our existing strong relationships with global system integrators and channel partners to grow our presence in europe , asia pacific and other international markets . key business metrics in addition to our gaap financial information such as revenue and net income discussed above , we monitor the following key metrics to help us measure and evaluate the effectiveness of our operations : replace_table_token_4_th ( 1 ) the comparative information for 2017 has not been adjusted to reflect the adoption of the revised revenue recognition standard and is reported in accordance with asc 605. see note 3 “ revenue recognition ” of our 2018 annual report for additional information related to our adoption of the revised revenue recognition standard ( asc 606 ) . number of customers . we believe that the size of our customer base is an indicator of our market penetration and that our net customer additions are an indicator of the growth of our business and our future revenue opportunity . we define a customer as a distinct entity , division or business unit of an organization that receives support or has the right to use our cloud-based solutions as of the specified measurement date . subscription revenue as a percentage of total revenue . subscription revenue is a portion of our total revenue and is derived from ( i ) identityiq , maintenance and support agreements , but not licenses , and ( ii ) identitynow and identityai , our saas offerings where customers enter into subscription agreements with us . as we generally sell our solutions on a per-identity basis , our saas subscription revenue for any customer is primarily determined by the number of identities that the customer is entitled to govern , and the ongoing price paid per-identity under a maintenance and support agreement . thus , we consider our subscription revenue to be the recurring portion of our revenue base and believe that its continued growth as a percentage of total revenue will lead to a more predictable revenue model and increase our visibility to future period total revenues . because we recognize our subscription revenue ratably over the duration of those agreements , a portion of the revenue we recognize each period is derived from agreements we entered into in prior periods .
| results of operations the following table sets forth our results of operations for the periods indicated : replace_table_token_5_th ( 1 ) the comparative information for 2017 has not been adjusted to reflect the adoption of the revised revenue recognition standard and is reported in accordance with asc 605. see note 3 “ revenue recognition ” of our 2018 annual report for additional information related to our adoption of the revised revenue recognition standard ( asc 606 ) . ( 2 ) includes stock-based compensation expense as follows : replace_table_token_6_th 48 the following table sets forth the consolidated statements of operations data for each of the periods presented as a percentage of total revenue : replace_table_token_7_th ( 1 ) the comparative information for 2017 has not been adjusted to reflect the adoption of the revised revenue recognition standard and is reported in accordance with asc 605. see note 3 “ revenue recognition ” of our 2018 annual report for additional information related to our adoption of the revised revenue recognition standard ( asc 606 ) . comparison of the years ended december 31 , 2019 and 2018 revenue replace_table_token_8_th license revenue . license revenue decreased by $ 2.2 million , or 2 % , for the year ended december 31 , 2019 compared to the year ended december 31 , 2018. while we increased revenue in follow-on license revenue from existing customers 4 % year-over-year , the increase was offset by a 5 % year-over-year decrease from new customers . during the year ended december 31 , 2019 , license revenue from new customers was $ 63.6 million and license revenue from existing customers was $ 39.2 million . our customer base increased by 296 , or 25 % , from 1,173 customers at december 31 , 2018 to 1,469 customers at december 31 , 2019. our revenue from any single customer is determined by the number of identities the customer is entitled to govern as well as the number of modules and solutions purchased .
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our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors , including but not limited to those set forth under the risk factors section of this report and elsewhere in this annual report on form 10-k. overview we are a biopharmaceutical company focused on the development and commercialization of products for the treatment of central nervous system disorders . we commenced operations in 2003 and our product portfolio includes : hetlioz ® , a product for the treatment of non-24 for which a nda was approved by the fda in january 2014 and launched commercially in the u.s. in april 2014. fanapt ® , a product for the treatment of schizophrenia , the oral formulation of which was being marketed and sold in the u.s. by novartis until december 31 , 2014. on december 31 , 2014 , novartis transferred all the u.s. and canadian commercial rights to the fanapt ® franchise to vanda . see settlement agreement with novartis footnote to the consolidated financial statements included in part ii of this annual report on form 10-k for information . additionally , our distribution partners launched fanapt ® in israel and mexico in 2014. tradipitant , a small molecule neurokinin-1 receptor ( nk-1r ) antagonist , which is presently in clinical development the treatment of chronic pruritus in atopic dermatitis . results from a phase ii study for the treatment of chronic pruritus in atopic dermatitis were announced in march 2015. clinical evaluation is ongoing to assess potential future development activities . trichostatin a , a small molecule histone deacetylase ( hdac ) inhibitor . aqw051 , a phase ii alpha-7 nicotinic acetylcholine receptor partial agonist . operational highlights hetlioz ® net product sales in the u.s. grew to $ 6.0 million in the fourth quarter of 2014 , a 15 % increase , compared to $ 5.2 million in the third quarter of 2014. hetlioz ® net product sales were $ 12.8 million for the full year 2014. since the u.s. commercial launch of hetlioz ® in april 2014 , over 760 new patient prescriptions have been written for hetlioz ® , including over 220 in the fourth quarter of 2014. as of december 31 , 2014 , over 470 patients had initiated hetlioz ® treatment and over 330 patients were on active treatment , reflecting a cumulative persistence rate of approximately 70 % . the hetlioz ® maa in the european union ( eu ) is under review with a regulatory decision expected in the third quarter of 2015. tasimelteon life cycle management activities are ongoing and include a sms observational study with results expected in the first half of 2015 and preparations for a clinical development program for pediatric non-24 . pursuant to the terms of the settlement agreement with novartis on december 31 , 2014 , vanda and novartis dismissed the fanapt ® arbitration and released each other from any related claims . in addition , novartis ( i ) transferred all u.s. and canadian rights in the fanapt ® franchise to us , ( ii ) purchased $ 25.0 million of our common stock at a price per share equal to $ 13.82 , and ( iii ) granted to us an exclusive worldwide license to aqw051 , a phase ii alpha-7 nicotinic acetylcholine receptor partial agonist . in connection with the settlement agreement , the 2009 amended sublicense agreement was terminated . 49 results of the phase ii study ( 2101 ) of tradipitant for the treatment of chronic pruritus in atopic dermatitis were announced in march 2015. this study showed no significant difference from placebo on the pre-specified primary endpoint . vanda believes this proof of concept study was informative , in that through subsequent analyses , it revealed significant and clinically meaningful responses at the time of their pruritus assessments across multiple outcomes evaluated in individuals with higher blood plasma levels of tradipitant . clinical evaluation is ongoing to assess potential future development activities . since we began operations in march 2003 , we have devoted substantially all of our resources to the in-licensing , clinical development and commercialization of our products . our ability to generate meaningful product sales and achieve profitability largely depends on our ability to successfully commercialize hetlioz ® and fanapt ® and in the u.s. , on our ability , alone or with others , to complete the development of our products , and to obtain the regulatory approvals for and to manufacture , market and sell our products . the results of our operations will vary significantly from year-to-year and quarter-to-quarter and depend on a number of factors , including risks related to our business , risks related to our industry , and other risks which are detailed in risk factors reported in item 1a of part i of this annual report on form 10-k. critical accounting policies the preparation of our consolidated 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 our financial statements , as well as the reported revenues and expenses during the reported periods . 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 apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . a summary of our significant accounting policies appears in the notes to our audited consolidated financial statements for the year ended december 31 , 2014 included in this annual report on form 10-k. however , we believe that the following accounting policies are important to understanding and evaluating our reported financial results , and we have accordingly included them in this discussion . inventory . story_separator_special_tag medicare part d coverage gap : medicare part d prescription drug benefit mandates manufacturers to fund approximately 50 % of the medicare part d insurance coverage gap for prescription drugs sold to eligible patients . estimates for expected medicare part d coverage gap are based in part on historical invoices received and on actual and pending prescriptions for which we have validated the insurance benefits . funding of the coverage gap is generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter 's activity , plus an accrual balance for known prior quarter activity . if actual future funding varies from estimates , we may need to adjust accruals , which would affect net sales in the period of adjustment . service fees : we also incur specialty pharmacy fees for services and their data . these fees are based on contracted terms and are known amounts . we accrue service fees at the time of revenue recognition , resulting in a reduction of product sales revenue and the recognition of an accrued liability , unless it receives an identifiable and separate benefit for the consideration and it can reasonably estimate the fair value of the benefit received . in which case , service fees are recorded as selling , general and administrative expense . 51 co-payment assistance : patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance . co-pay assistance utilization is based on information provided by our third-party administrator . the allowance for co-pay assistance is based on actual and pending sales for which we have validated the insurance benefits . prompt-pay : specialty pharmacies are offered discounts for prompt payment . we expect that the specialty pharmacy will earn prompt payment discounts and , therefore , deducts the full amount of these discounts from total product sales when revenues are recognized . product returns : consistent with industry practice , we generally offer direct customers a limited right to return as defined within our returns policy . we consider several factors in the estimation process , including expiration dates of product shipped to specialty pharmacies , inventory levels within the distribution channel , product shelf life , prescription trends and other relevant factors . there were no discounts or rebates associated with fanapt ® product sales recognized in the period ended december 31 , 2014. our partners have a limited right to return fanapt ® . once fanapt ® has been delivered to our partners it generally may not be returned for any reason other than product recall . the following table summarizes sales discounts and allowance activity as of december 31 , 2014. replace_table_token_5_th license revenue . our license revenues were derived from the amended and restated sublicense agreement with novartis and include an upfront payment and future milestone and royalty payments . pursuant to the amended and restated sublicense agreement , novartis had the right to commercialize and develop fanapt ® in the u.s. and canada . under the amended and restated sublicense agreement , we received an upfront payment of $ 200.0 million . revenue related to the upfront payment was recognized ratably from the date the amended and restated sublicense agreement became effective ( november 2009 ) through the expected duration of the novartis commercialization of fanapt ® in the u.s. which was estimated to be through the expiry of the fanapt ® composition of patent , including a granted hatch-waxman extension ( november 2016 ) . in connection with the settlement agreement with novartis , we recognized the remaining deferred revenue as of december 31 , 2014 as part of the gain on arbitration settlement . see settlement agreement with novartis footnote to the consolidated financial statements included in part ii of this annual report on form 10-k for information . employee stock-based compensation . we use the black-scholes-merton option pricing model to determine the fair value of stock options . the determination of the fair value of stock options on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables . these variables include the expected stock price volatility over the expected term of the awards , actual and projected employee stock option exercise behaviors , risk-free interest rate and expected dividends . expected volatility rates are based on the historical volatility of our publicly traded common stock and other factors . beginning in 2014 , we started using a mid-point scenario to calculate the weighted average expected term of stock options granted , which combines our historical exercise data with hypothetical exercise data for unexercised stock options . prior to 2014 , the expected term assumption was determined using the simplified method . the risk-free interest rates are based on the u.s. treasury yield for a period consistent with the expected term of the option in effect at the time of the grant . we have not paid dividends to our stockholders since our inception ( other than a dividend of preferred share purchase rights which was declared in september 2008 ) and do not plan to pay dividends in the foreseeable future . employee stock-based compensation expense for a period 52 is also affected by the expected forfeiture rate for the respective option grants . if our estimates of the fair value of these equity instruments or expected forfeitures are too high or too low , it would have the effect of overstating or understating expenses . in january 2014 , we elected to change our method of accounting for the attribution of compensation cost for stock options with graded-vesting and only service conditions to the straight-line method . previously , attribution was based on the accelerated attribution method , which treated each vesting tranche as an individual award and amortized them concurrently .
| results of operations we anticipate that our results of operations will fluctuate for the foreseeable future due to several factors , including our and our partners ' ability to successfully commercialize our products , any possible payments made or received pursuant to license or collaboration agreements , progress of our research and development efforts , the timing and outcome of clinical trials and related possible regulatory approvals . our limited operating history makes predictions of future operations difficult or impossible . since our inception , we have incurred significant losses resulting in an accumulated deficit of $ 288.0 million as of december 31 , 2014. our total stockholders ' equity was $ 160.8 million as of december 31 , 2014 , and reflects net proceeds of $ 62.3 million from the public offering of common stock completed in october 2014 and $ 25.0 million from the issuance of common stock to novartis . 53 year ended december 31 , 2014 compared to year ended december 31 , 2013 revenues . total revenues increased by $ 16.3 million , or 48 % , to $ 50.2 million for the year ended december 31 , 2014 compared to $ 33.9 million for the year ended december 31 , 2013. during the years ended december 31 , 2014 and 2013 , revenues consisted of the following : replace_table_token_7_th hetlioz ® was commercially launched in the u.s. in april 2014. fanapt ® product sales consists of shipments to our distribution partner for the sale of fanapt ® in israel . royalty revenues for the years ended december 31 , 2014 and 2013 represent amounts due from novartis based on u.s. sales of fanapt ® by novartis . license revenues for the years ended december 31 , 2014 and 2013 represent amortization of deferred revenue from the $ 200.0 million up-front license fee received from novartis .
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some of the information contained in this discussion and analysis or included elsewhere in this annual report , including information with respect to our plans and strategy for our business , includes forward-looking statements that involve risks , uncertainties and assumptions . our actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors , including those discussed under `` cautionary statement regarding forward-looking statements '' , `` item 1a . risk factors '' and elsewhere in this annual report . 49 replace_table_token_5_th 50 business overview we are a multi-faceted insurance group that offers innovative capital release solutions and specialty underwriting capabilities through our network of group companies in bermuda , the united states , the united kingdom , continental europe , australia , and other international locations . our core focus is acquiring and managing insurance and reinsurance companies and portfolios of insurance and reinsurance business in run-off . since the formation of our bermuda-based holding company in 2001 , we have completed over 90 acquisitions or portfolio transfers . the substantial majority of our acquisitions have been in the non-life run-off business , which generally includes property and casualty , workers ' compensation , asbestos and environmental , construction defect , marine , aviation and transit , and other closed business . while our core focus remains acquiring and managing non-life run-off business , we expanded our business to include active underwriting through our acquisitions of atrium and starstone in 2013 and 2014 , respectively . we partnered with trident in the atrium and starstone acquisitions , with enstar owning a 59.0 % interest , trident owning a 39.3 % interest , and dowling owning a 1.7 % interest . we also expanded our portfolio of run-off businesses in 2013 to include closed life and annuities , primarily through our acquisition of pavonia . however , we disposed of pavonia , which made up the majority of our life and annuities business , in 2017. our businesses strategies are discussed in `` item 1. business - company overview '' , `` - business strategy '' , `` -strategic growth '' and `` - recent acquisitions and significant new business . '' key pe rformance indicator our primary corporate objective is growing our fully diluted book value per share . this is driven primarily by growth in our net earnings , which is in turn driven in large part by successfully completing new acquisitions , effectively managing companies and portfolios of business that we have acquired , and executing on our active underwriting strategies . the drivers of our book value growth are discussed in `` item 1. business - business strategy . '' during 2018 , our book value per share on a fully diluted basis decreased by 2.0 % to $ 155.94 per share . the decrease was primarily attributable to net losses of $ 162.4 million , which were primarily driven by unrealized losses on investments and by adverse development in the reserves for our starstone segment . see `` item 6. selected financial data '' herein for the computation of fully diluted book value per share . the growth of our fully diluted book value per share since becoming a public company is shown in the table below . 51 the table below summarizes the calculation of our fully diluted book value per ordinary share as of december 31 , 2018 and 2017 : replace_table_token_6_th ( 1 ) there are warrants outstanding to acquire 175,901 series c non-voting ordinary shares for an exercise price of $ 115.00 per share , subject to certain adjustments ( the `` warrants '' ) . the warrants were issued in april 2011 and expire in april 2021. the warrant holder may , at its election , satisfy the exercise price of the warrants on a cashless basis by surrender of shares otherwise issuable upon exercise of the warrants in accordance with a formula set forth in the warrants . 52 current outlook run-off our business strategy includes generating growth through acquisitions and reinsurance transactions , particularly in our non-life run-off segment , and during 2018 we completed six significant reinsurance transactions with zurich insurance group ( `` zurich '' ) , neon underwriting limited ( `` neon '' ) , novae syndicate 2007 ( `` novae '' ) , the coca-cola company ( `` coca-cola '' ) , allianz se ( `` allianz '' ) and maiden reinsurance ltd. ( `` maiden re '' ) in which we assumed aggregate gross and net reserves , including fair value adjustments , of $ 2,153.1 million and $ 1,780.3 million , respectively . in 2018 , we also completed the acquisition of m aiden reinsurance north america , inc. ( “ maiden re north america ” ) , in which we assumed gross reserves of $ 1,027.4 million . as of december 31 , 2018 , our non-life run-off gross and net reserves were $ 7.5 billion and $ 6.1 billion , respectively , and we continue to evaluate opportunities for future growth . on september 30 , 2018 , we completed the acquisition of yosemite insurance company , which is now domiciled in oklahoma . although the acquired balances were not material , the transaction is notable for its strategic value . the state of oklahoma has enacted insurance business transfer legislation , which became effective november 1 , 2018. the legislation will allow us to acquire u.s. loss reserves from insurers and reinsurers domiciled in any u.s. state via a court-approved statutory novation process . we manage claims in a professional and disciplined manner , drawing on our global team of in-house claims management experts as we aim to proactively manage risks and claims efficiently . we employ an opportunistic commutation strategy in which we negotiate with policyholders and claimants with a goal of commuting or settling existing insurance and reinsurance liabilities at a discount to the ultimate liability and also to avoid unnecessary legal and other associated run-off fees and expense . story_separator_special_tag brexit there has been volatility in the financial and foreign exchange markets following the brexit referendum on june 23 , 2016 , and this is expected to continue . on march 29 , 2017 , article 50 of the lisbon treaty was triggered , which allows two years for the united kingdom and the 27 remaining european union members to reach an agreement with regard to the terms on which the united kingdom will leave the european union , subject to an extension of the two year deadline beyond march 29 , 2019 being agreed between the united kingdom and the remaining european union members . for companies based in the united kingdom , including certain of our active underwriting and run-off companies , there continues to be heightened uncertainty regarding trading relationships with countries in the european union after brexit , pending the conclusion of the brexit negotiations between the united kingdom and the european union . both our starstone and atrium operations have well-diversified sources of premium , which may mitigate the potential impact of brexit . the majority of business written in starstone and atrium is in u.s. dollars , so the impact of currency volatility on those segments has not been significant . in addition , starstone already has established operations within the european economic area . on may 23 , 2018 , lloyd 's announced that it had received license approval from the belgian insurance regulator for lloyd 's insurance company sa , which will be able to write non-life risks from the european economic area . in the near-term , access to markets is unaffected , and all contracts entered into up until brexit are expected to remain valid into the post-brexit period . with specific reference to our run-off business , we are expanding upon our existing run-off capabilities within the european union for the purpose of receiving transfers of new run-off business . we have also investigated the post-brexit additional requirements in each applicable state for the continued payment of policyholders ' claims in respect of the existing run-off business of our united kingdom non-life run-off companies . 54 underwriting ratios in presenting our results for the atrium and starstone segments , we discuss the loss ratio , acquisition cost ratio , operating expense ratio , and the combined ratio of our active underwriting operations within these segments . management believes that these ratios provide the most meaningful measure for understanding our underwriting profitability . these measures are calculated using gaap amounts presented on the statements of earnings for both atrium and starstone . the loss ratio is calculated by dividing net incurred losses and lae by net premiums earned . the acquisition cost ratio is calculated by dividing acquisition costs by net premiums earned . the operating expense ratio is calculated by dividing operating expenses by net premiums earned . the combined ratio is the sum of the loss ratio , the acquisition cost ratio and the operating expense ratio . the atrium segment also includes corporate expenses that are not directly attributable to the underwriting results in the segment . the corporate expenses include general and administrative expenses related to amortization of the definite-lived intangible assets in the holding company , and expenses relating to atrium underwriters limited ( `` aul '' ) employee salaries , benefits , bonuses and current year share grant costs . the aul general and administrative expenses are incurred in managing the syndicate . these are principally funded by the profit commission fees earned from syndicate 609 , which is a revenue item not included in the insurance ratios . 55 consolidated results of operations - for the years ended december 31 , 2018 , 2017 and 2016 the following table sets forth our consolidated statements of earnings for the years ended december 31 , 2018 , 2017 and 2016 . for a discussion of the critical accounting policies that affect the results of operations , see `` critical accounting policies '' below . replace_table_token_7_th story_separator_special_tag style= '' font-family : arial ; font-size:10pt ; color : # 000000 ; font-style : italic ; '' > income taxes - we recorded an income tax benefit of $ 6.1 million in 2018 , compared to an income tax benefit of $ 6.4 million in 2017 , a change of $ 0.3 million . our effective tax rate was 2.8 % in 2018 compared with ( 2.0 ) % in 2017 , primarily relating to the geographic distribution of our pre-tax net earnings ( losses ) between our taxable and non-taxable jurisdictions in 2018 , compared to changes relating to u.s. tax reform , which resulted in a tax benefit of $ 5.7 million in 2017 ; and our non-gaap operating income 1 , which excludes the impact of unrealized losses on fixed maturity securities and other items , was $ 61.6 million for the year ended december 31 , 2018 , a decrease of $ 221.7 million from non-gaap operating income of $ 283.3 million for the year ended december 31 , 2017 . 1 non-gaap financial measure . for a reconciliation of non-gaap operating income to net earnings ( loss ) calculated in accordance with gaap , see `` non-gaap financial measures '' below . 2017 versus 2016 : we reported consolidated net earnings attributable to enstar group limited ordinary shareholders of $ 311.5 million in 2017 , compared to $ 264.8 million in 2016 , an increase of $ 46.7 million . our results were impacted by the loss portfolio transfer reinsurance transactions we completed during 2017 with rsa and qbe , and during 2016 with allianz , coca-cola and neon . the most significant drivers of the change in our financial performance during 2017 as compared to 2016 included : non-life run-off segment - net reduction in the liability for net incurred losses and lae within our non-life run-off segment was one of the predominant drivers of our consolidated earnings in 2017 , contributing $ 190.7 million to consolidated net earnings .
| highlights consolidated results of operations for 2018 consolidated net losses of $ 162.4 million and basic and diluted losses per share of $ 7.84 non-gaap operating income 1 of $ 61.6 million and diluted non-gaap operating income per ordinary share 1 of $ 2.95 net earnings from non-life run-off segment of $ 25.2 million net premiums earned of $ 895.6 million , including $ 146.3 million and $ 715.0 million in our atrium and starstone segments , respectively 56 combined ratios of 94.5 % and 135.1 % for the active underwriting operations within our atrium and starstone segments , respectively net investment income of $ 270.7 million and net realized and unrealized losses of $ 412.9 million 1 non-gaap financial measure . for a reconciliation of non-gaap operating income to net earnings ( loss ) calculated in accordance with gaap and diluted non-gaap operating income per ordinary share to diluted net earnings ( loss ) per ordinary share calculated in accordance with gaap , see `` non-gaap financial measures '' below . consolidated financial condition as at december 31 , 2018 total investments , cash and funds held of $ 12,545.9 million total reinsurance balances recoverable on paid and unpaid losses of $ 2,029.7 million total a ssets of $ 16,556.3 million total gross reserves for losses and lae of $ 9,409.5 million , with $ 1,111.8 million and $ 1,761.8 million of net reserves acquired and assumed , respectively , in our non-life run-off operations during 2018 total shareholders ' equity , including preferred shares , of $ 3,901.9 million and redeemable noncontrolling interest of $ 458.5 million .
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unless noted otherwise , all references to fbl financial group , inc. ( we or the company ) include all of its direct and indirect subsidiaries , including its insurance subsidiaries farm bureau life insurance company ( farm bureau life ) and greenfields life insurance company ( greenfields life ) . in this discussion and analysis , we explain our consolidated results of operations , financial condition and where appropriate , factors that management believes may affect future performance , including : our revenues and expenses in the periods presented , changes in revenues and expenses between periods , sources of earnings and changes in stockholders ' equity , impact of these items on our overall financial condition and expected sources and uses of cash . we have organized our discussion and analysis as follows : first , we discuss our business and drivers of profitability . we then describe the business environment in which we operate including factors that affect operating results . we highlight significant events that are important to understanding our results of operations and financial condition . we then review the results of operations beginning with an overview of the total company results , followed by a more detailed review of those results by operating segment . finally , we discuss critical accounting policies and recently issued accounting standards . the critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management 's most difficult or complex judgment . story_separator_special_tag business generally benefits from moderate to strong economic expansion . conversely , a lackluster economy characterized by higher unemployment , lower family income , lower consumer spending , muted corporate earnings growth and lower business investment could adversely impact the demand for our products in the future . we also may experience a higher incidence of claims , lapses or surrenders of policies during such times . we can not predict whether or when such actions may occur , or what impact , if any , such actions could have on our business , results of operations , cash flows or financial condition . economic and other environmental factors that may impact our business include , but are not limited to , the following : the impact of the recent united states presidential election on economic , trade , regulatory and tax policies is uncertain . gross domestic product increased at an annual rate of 1.6 % during 2016 based on recent estimates . u.s. unemployment was estimated to be 4.7 % at year-end 2016. u.s. net farm income is estimated to have decreased 17.2 % and farm real estate value is estimated to have decreased 0.5 % during 2016 according to recent u.s. department of agriculture estimates . the u.s. 10-year treasury yield increased during 2016 from 2.27 % at december 31 , 2015 to 2.45 % at december 31 , 2016. continued uncertainty as to actions the united states congress will take to address the national debt , including potential actions to change the tax advantages of life insurance . the pending department of labor fiduciary rule , which expands the regulation of sales of insurance products used in retirement plans . see part 1 , item 1a for further discussion of this proposal . the benchmark u.s. 10-year treasury yield spent most of 2016 below 2 % , averaging 1.83 % for the year . the yield rose after the u.s. presidential election to 2.45 % at december 31 , 2016 , which partially offset tightening credit spreads during 2016. while the recent increase in yields is a positive sign , market yields remain low and continue to negatively impact our investment yields as well as the interest we credit on our interest-sensitive products . our average investment portfolio yield declined during 2016 as yields on new acquisitions were generally lower than the average portfolio yield . low crediting rates pose challenges to maintaining attractive annuity and universal life products , although our rates are comparable to other insurance companies , allowing us to maintain our competitive position within the market . during the second quarter of 2016 , we unlocked assumptions used to amortize deferred policy acquisition costs to reflect the expectation of lower earned spread rates , primarily driven by the expected continuation of low market interest rates . see the segment discussion and “ financial condition ” section that follows for additional information regarding the impact of low market interest rates on our business . 25 results of operations for the three years ended december 31 , 2016 replace_table_token_11_th ( 1 ) operating income is a non-gaap measure of earnings . ( 2 ) amounts are net of adjustments , as applicable , to amortization of unearned revenue reserves , deferred sales inducements , deferred acquisition costs and value of insurance in force acquired , as well as changes in interest sensitive product reserves and income taxes attributable to these items . ( 3 ) average invested assets and annualized yield exclude investments in securities and indebtedness of related parties . our net income decreased during 2016 , compared to 2015 , primarily due to lower realized investment gains related to higher impairment charges as well as fewer sales of investments in a gain position . net income and operating income were positively impacted by increased earnings from an increase in the volume of business in force , partially offset by lower other investment related-income and the impact of unlocking . our net income increased during 2015 , compared to 2014 , primarily due to higher realized investment gains . net income and operating income were negatively impacted by decreased earnings from increases in death benefits and expenses , partially offset by the impact of an increase in the volume of business in force and higher other investment-related income . story_separator_special_tag amortization of deferred acquisition costs , deferred sales inducements , the value of insurance in force and unearned revenue reserves changed in 2016 and 2015 , compared to prior periods , due to changes in actual and expected profits on the underlying business . amortization , as well as reserves held on certain interest sensitive products , also changed due to the impact of unlocking . unlocking generally reflects changes in our projected earned spreads , policy lapses , premium persistency and mortality assumptions . during 2016 and 2014 , we also unlocked our assumptions as a result of our analysis of the impact of the low interest rate environment on projected investment and spread income . the impact of unlocking on pre-tax operating income was as follows : replace_table_token_17_th ( 1 ) pre-tax operating income is a non-gaap measure of earnings . death benefits , net of reinsurance and reserves released , decreased in 2016 , compared to 2015 , due to decreases in the number of claims . the increase in 2015 , compared with 2014 , was due to increases in the number of claims and the average size of claims . the weighted average yield on cash and invested assets for interest sensitive life insurance products decreased in 2016 , compared to 2015 , due to lower other investment-related income and lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments , compared with the average existing portfolio yield . the weighted average yield on cash and invested assets remained level in 2015 , compared to 2014 , as the impact of lower yields on new investment acquisitions was offset by higher other investment-related income from prepayment fees . see the `` financial condition '' section that follows for additional information regarding the yields obtained on investment acquisitions . weighted average interest crediting rates on our interest sensitive life insurance products decreased due to crediting rate actions taken on various products in 2016 , 2015 and 2014 in response to the declining portfolio yield . 30 replace_table_token_18_th replace_table_token_19_th ( 1 ) pre-tax operating income is a non-gaap measure of earnings . ( 2 ) includes prepayment fee income and adjustments to the amortization of premium or discounts from changes in our prepayment speed assumptions . pre-tax operating income for the corporate and other segment increased in 2016 , compared to 2015 , primarily due to decreases in pre-tax equity loss and amortization of deferred acquisition costs from the impact of unlocking and market performance on our variable business , partially offset by increases in death benefits . pre-tax operating income decreased in 2015 , compared to 2014 , primarily due to increases in pre-tax equity loss and in the amortization of deferred acquisition costs from the impact of unlocking and market performance on our variable business . death benefits , net of reinsurance and reserves released , increased in 2016 and 2015 , compared to prior periods , due to increases in the number of claims and in the average claim size . amortization of deferred acquisition costs , deferred sales inducements , and unearned revenue reserves changed in 2016 and 2015 , compared to prior periods , primarily due to the impact of unlocking and market performance on our variable business . unlocking generally reflects changes in projected earned spreads , separate account performance and withdrawal and mortality assumptions . during 2016 and 2014 , we also unlocked our assumptions as a result of our analysis of the impact of the low 31 interest rate environment on projected investment and spread income . the impact of unlocking on pre-tax operating income for the three years was as follows : replace_table_token_20_th ( 1 ) pre-tax operating income is a non-gaap measure of earnings . other income and other expenses includes fees and expenses from sales of brokered products and operating results of our non-insurance subsidiaries , which include management , advisory , marketing and distribution services and leasing activities . equity loss , before tax , includes our proportionate share of gains and losses attributable to our ownership interest in partnerships , joint ventures and certain companies where we exhibit some control but have a minority ownership interest . given the timing of availability of financial information from our equity investees , we consistently use information that is as much as three months in arrears for certain of these entities . several of these entities are investment companies whose operating results are derived primarily from unrealized and realized gains and losses generated by their investment portfolios . as is normal with these types of entities , the level of these gains and losses is subject to fluctuation from period to period depending on the prevailing economic environment , changes in prices of bond and equity securities held by the investment partnerships , timing and success of initial public offerings or exit strategies , and the timing of the sale of investments held by the partnerships and joint ventures . our low income housing tax credit investments generate pre-tax losses but after-tax gains as the related tax credits are realized . the timing of the realization of tax credits is subject to fluctuation from period to period due to the timing of housing project completions and the approval of tax credits . equity income , net of related income taxes , was as follows : replace_table_token_21_th 32 income taxes on operating income the effective tax rate on operating income was 22.0 % for 2016 , 22.2 % for 2015 and 23.2 % for 2014 . the effective tax rates differ from the federal statutory rate of 35 % primarily due to the impact of low income housing credits from equity method investees and tax-exempt interest and dividend income . the effective tax rate decreased in 2016 and 2015 , compared to the prior year , primarily due to increases in tax credits from low income housing tax credit investments . see note 5 to our consolidated financial statements included in item 8 for additional information on income taxes .
| overview and profitability we operate predominantly in the life insurance industry through our principal subsidiary , farm bureau life . farm bureau life markets individual life insurance policies and annuity contracts to farm bureau members and other individuals and businesses in the midwestern and western sections of the united states through an exclusive agency force . several subsidiaries support various functional areas of farm bureau life and other affiliates by providing investment advisory , marketing and distribution , and leasing services . in addition , we manage two farm bureau affiliated property-casualty companies . we analyze operations by reviewing financial information regarding our primary products that are aggregated in annuity and life insurance product segments . in addition , our corporate and other segment includes various support operations , corporate capital and other product lines that are not currently underwritten by the company . we use operating income , in addition to net income , to measure our performance . operating income , for the periods presented , consists of net income adjusted to exclude the impact of realized gains and losses on investments and the change in net unrealized gains and losses on derivatives , which can fluctuate greatly from period to period . these fluctuations make it difficult to analyze core operating trends . in addition , for derivatives not designated as hedges , there is a mismatch between the valuation of the asset and liability when deriving net income ( loss ) . specifically , call options relating to our indexed business are one-year assets while the embedded derivative in the indexed contacts represent the rights of the contract holder to receive index credits over the entire period the indexed annuities are expected to be in force . operating income is not a measure used in financial statements prepared in accordance with u.s. generally accepted accounting principles ( gaap ) , but is a common life insurance industry measure of performance .
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the company settled this conversion of the 3.75 % notes in july 2014 by providing cash of $ 28.5 million for the principal amount of the outstanding 3.75 % notes converted and issuing 348,535 shares of common stock for the conversion premium totaling $ 12.6 million , for a total consideration paid of $ 41.1 million . the company settled the redemption of the remaining $ 0.3 million in principal amount in exchange for a cash payment of $ 0.3 million representing principal and accrued and unpaid interest . the company allocated $ 27.9 million of the total consideration paid to the debt and $ 13.5 million to equity . the company recorded a loss on extinguishment of debt of $ 23.2 million in connection with the repurchase and redemption of the 3.75 % notes during the year ended december 31 , 2014 , representing the excess of the $ 140.3 million allocated to the debt over its carrying value , net of deferred financing costs . certain features related to a portion of the 3.75 % notes , including the holders ' ability to require the company to repurchase their notes and the higher interest payments required in an event of default , were considered embedded derivatives and were required to be bifurcated and accounted for at fair value . the company assessed the value of these embedded derivatives at each balance sheet date . no cash interest expense was recorded related to the 3.75 % notes in the year ended december 31 , 2015 . cash interest expense related to the 3.75 % notes outstanding was $ 2.4 million and $ 5.4 million in the years ended december 31 , 2014 and 2013 , respectively . there was no non-cash interest expense recorded in the year ended december 31 , 2015 related to the 3.75 % notes , compared to $ 4.9 million and $ 10.8 million in years ended december 31 , 2014 and 2013 , respectively . as of december 31 , 2014 , no amounts remain outstanding related to the 3.75 % notes . 2 % convertible senior notes in june 2014 , the company sold $ 201.3 million in principal amount of the 2 % notes due june 15 , 2019 . the interest rate on the notes is 2 % per annum , payable semi-annually in arrears in cash on june 15 and december 15 of each year . the 2 % notes are convertible into the company 's common stock at an initial conversion rate of 21.5019 shares of common stock per $ 1,000 principal amount of the 2 % notes , which is equivalent to a conversion price of approximately $ 46.51 per share , subject to adjustment under certain circumstances . 60 insulet corporation notes to consolidated financial statements ( continued ) the company recorded a debt discount of $ 35.6 million related to the 2 % notes . the debt discount was recorded as additional paid-in capital to reflect the value of the company 's nonconvertible debt borrowing rate of 6.2 % per annum . this debt discount is being amortized as non-cash interest expense over the five year term of the 2 % notes . the company incurred deferred financing costs related to this offering of approximately $ 6.7 million , of which $ 1.2 million has been reclassified as an offset to the value of the amount allocated to equity . the remainder is recorded as a reduction to debt in the consolidated balance sheet and is being amortized as non-cash interest expense over the five year term of the 2 % notes . the 2 % notes contain provisions that allow for additional interest to the holders of the notes upon the failure to timely file documents or reports that the company is required to file with the sec . the additional interest is at a rate of 0.25 % per annum of the principal amount of the notes outstanding for the first 180 days and 0.50 % per annum of the principal amount of the notes outstanding for a period up to 360 days . if the company is purchased by a company outside of the us , then additional taxes may be required to be paid by the company under the terms of the 2 % notes . the company determined that the higher interest and tax payments required in certain circumstances are considered embedded derivatives and should be bifurcated and accounted for at fair value . the company assesses the value of the embedded derivatives at each balance sheet date . the derivatives had de minimis value at the balance sheet date . cash interest expense related to the 2 % notes was $ 4.0 million and $ 2.3 million in the years ended december 31 , 2015 and 2014 , respectively . non-cash interest expense related to the 2 % notes was $ 7.7 million and $ 4.0 million in the years ended december 31 , 2015 and 2014 , respectively . as of december 31 , 2015 , the company included $ 171.7 million on its balance sheet in long-term debt related to the 2 % notes . note 6 . capital lease obligations as of december 31 , 2015 and 2014 , the company has approximately $ 13.7 million and $ 8.0 million of manufacturing equipment acquired under capital leases , included in property and equipment , respectively . the obligations under the capital leases are being repaid in equal monthly installments over 24 to 36 month terms and include principal and interest payments with an effective interest rate of 13 % to 17 % . story_separator_special_tag income tax expense in the years ended december 31 , 2015 and 2014 income tax expense was $ 0.3 million and $ 0.1 million , respectively . income tax expense is comprised of a current and deferred portion . the current portion primarily related to state and foreign taxes and the deferred portion primarily related to federal and state tax amounts . 40 additional information regarding income tax expenses is provided in note 16 to the consolidated financial statements included under item 8 of this form 10-k. comparison of the years ended december 31 , 2014 and december 31 , 2013 revenue total revenue increased $ 41.6 million in the year ended 2014 compared to the same period in 2013 , primarily the result of an increase in u.s. and international omnipod revenue , partially offset by lower revenue from neighborhood diabetes . our u.s. omnipod revenue increased to $ 173.6 million , up $ 22.2 million , or 15 % , reflecting growth in our installed base of omnipod users . our international omnipod revenue increased to $ 50.0 million , up $ 25.5 million , reflecting increased installed base as well as increased stock of on hand inventory from our international distributor during 2014. our neighborhood diabetes revenue decreased to $ 59.7 million , down $ 4.1 million , or 6 % , reflecting a reduction in revenue related to certain mail-order diabetic testing supplies such as blood glucose testing strips and lancets to medicare beneficiaries that we were no longer eligible to service under the medicare durable medical equipment , prosthetics , orthotics , and supplies ( `` dmepos '' ) competitive bidding program , which took effect on july 1 , 2013. cost of revenue in the year ended december 31 , 2014 , cost of revenue increased $ 10.7 million compared to the same period in 2013 primarily due to higher sales volumes in the united states and internationally . these increases were partially offset by lower per-unit costs of the omnipod system resulting from cost savings on raw materials , volume discounts from our suppliers and increased absorption of manufacturing overhead driven by increased production volumes . gross margin gross margin in the year ended 2014 increased by approximately 4 points compared to the same period in 2013 due to efficiencies in the manufacturing process . research and development research and development expenses increased $ 6.1 million to $ 27.9 million for the year ended december 31 , 2014 , compared to $ 21.8 million for the same period in 2013 . the increase was primarily the result of expenses related to our development projects and included a $ 3.3 million increase in employee related expenses . additionally , we incurred a $ 2.0 million increase in consulting and temporary labor related to our development projects and a $ 0.5 million increase in supplies and consumables . sales and marketing sales and marketing expenses increased $ 5.1 million to $ 60.8 million for the year ended december 31 , 2014 , compared to $ 55.7 million for the same period in 2013 . the increase was primarily the result of a $ 3.5 million increase in employee related expenses including management transition costs and stock-based compensation and costs related to the addition of employees as we continue to expand our sales force . additionally , we incurred a $ 1.2 million increase in costs associated with marketing campaigns and other advertising costs . general and administrative general and administrative expenses increased $ 2.7 million to $ 66.8 million for the year ended december 31 , 2014 , compared to $ 64.1 million for the same period in 2013 the increase included approximately $ 9.1 million related to management retirement and transition costs , an increase of $ 1.2 million in employee related expenses including stock compensation and $ 0.5 million in infrastructure costs . the increase was partially offset by a year over year decrease of $ 4.0 million in legal expenses , $ 2.5 million of nonrecurring impairment charges for equipment no longer being used which was recorded in 2013 , a decrease of $ 0.9 million in amortization expense related to the customer relationship asset acquired in the june 2011 acquisition of neighborhood diabetes , and a decrease of $ 0.7 million in shipping expenses . interest and other expense , net interest and other expense , net was $ 39.1 million and $ 15.7 million for the years ended december 31 , 2014 and 2013 , respectively . the significant change in interest and other expense , net was primarily related to the loss from extinguishment of long-term debt of $ 23.2 million in 2014 , as well as the change in interest rate on our long-term debt to 2 % in mid 2014 from 3.75 % in the prior periods . income tax expense 41 income tax expense was $ 0.1 million for both the years ended december 31 , 2014 and 2013. income tax expense is comprised of a current and deferred portion . the current portion primarily related to state and foreign taxes and the deferred portion primarily related to federal and state tax amounts . liquidity and capital resources as of december 31 , 2015 , we had $ 122.7 million in cash and cash equivalents . we believe that our current cash and cash equivalents , together with the cash expected to be generated from sales , will be sufficient to meet our projected operating and debt service requirements for at least the next twelve months .
| 2015 revenue results : total revenue of $ 324.2 million ◦ u.s. omnipod revenue of $ 186.8 million ◦ international omnipod revenue of $ 40.3 million ◦ drug delivery revenue of $ 34.0 million ◦ neighborhood diabetes revenue of $ 63.1 million . our long-term financial objective is to achieve and sustain profitable growth . our efforts in 2016 will be focused primarily on the expansion of our customer base in the united states and internationally and increasing our profitability . achieving these objectives is expected to require additional investments in certain personnel and initiatives , as well as enhancements to our manufacturing efficiency and effectiveness . we believe that we will continue to incur net losses in the near term in order to achieve these objectives . however , we believe that the accomplishment of our near term objectives will have a positive impact on our financial condition in the future . 37 components of financial operations revenue . we derive most of our revenue from global sales of the omnipod system . our revenue also includes ( i ) sales through neighborhood diabetes of other diabetes related products including blood glucose testing supplies , traditional insulin pumps , pump supplies and other pharmaceuticals to customers and third-party distributors who resell the product to customers and ( ii ) sales of devices based on the omnipod technology platform to global pharmaceutical and biotechnology companies for the delivery of subcutaneous drugs across multiple therapeutic areas . in june 2011 , we entered into a development agreement with a u.s. based pharmaceutical company ( the `` development agreement ” ) . under the development agreement , we were required to perform design , development , regulatory , and other services to support the pharmaceutical company as it worked to obtain regulatory approval to use our drug delivery technology as a delivery method for its pharmaceutical .
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prepaid expenses and other current assets prepaid expenses and other current assets consisted of the following ( in thousands ) : replace_table_token_49_th 72 property and equipment property and equipment consisted story_separator_special_tag the following discussion contains forward-looking statements , including , without limitation , our expectations and statements regarding our outlook and future revenues , expenses , results of operations , liquidity , plans , strategies and objectives of management and any assumptions underlying any of the foregoing . our actual results may differ significantly from those projected in the forward-looking statements . factors that might cause future actual results to differ materially from our recent results or those projected in the forward-looking statements include , but are not limited to , those discussed in the section titled of this annual report on form 10-k risk factors. except as required by law , we assume no obligation to update the forward-looking statements or our risk factors for any reason . overview we are a leading provider of enterprise cloud computing applications . we provide a comprehensive customer and collaboration relationship management , or crm , service to businesses of all sizes and industries worldwide and we provide a technology platform for customers and developers to build and run business applications . we were founded in february 1999 and began offering our enterprise crm application service in february 2000. since then , we have augmented our crm service with new editions and enhanced features . we introduced our force.com platform to customers and developers so they can build complementary applications to extend beyond crm . in 2010 we introduced our appexchange directory of enterprise cloud computing applications that are integrated with our crm service and in most cases have been developed on our platform by third parties . we also introduced chatter , a collaboration application for the enterprise to connect and share information securely and in real-time . our objective is to be the leading provider of crm application services and to be the leading platform on which our customers and partners build cloud computing applications . key elements of our strategy include : strengthening our existing crm applications and extending into new functional areas within crm ; pursuing new customers and new territories aggressively ; deepening relationships with our existing customer base ; continuing to lead the industry transformation to the next phase of cloud computing ; and encouraging the development of third-party applications on our force.com cloud computing platform . we believe the factors that will influence our ability to achieve our objectives include our prospective customers ' willingness to migrate to an enterprise cloud computing application service ; the performance and security of our service ; our ability to continue to release , and gain customer acceptance of , new and improved features ; our ability to successfully integrate acquired businesses and technologies ; successful customer adoption and utilization of our service ; acceptance of our service in markets where we have few customers ; the emergence of additional competitors in our market and improved product offerings by existing and new competitors ; the location of new data centers ; third-party developers ' willingness to develop applications on our platform ; and general economic conditions which could affect our customers ' ability and willingness to purchase our application service , delay the customers ' purchasing decision or affect renewal rates . to address these factors , we will need to , among other things , continue to add substantial numbers of paying subscriptions , upgrade our customers to fully featured versions such as our unlimited edition , provide high quality technical support to our customers and encourage the development of third-party applications on our force.com platform . we plan to invest for future growth by expanding our data center capacity . we also plan to hire additional personnel , particularly in direct sales , other customer-related areas and research and development . as part of our growth plans , we intend to continue focus on retaining customers at the time of renewal . 33 additionally , we plan to : expand our domestic and international selling and marketing activities ; continue to develop our brands ; add additional distribution channels ; increase our research and development activities to upgrade and extend our service offerings ; develop new services and technologies and integrate acquired technologies ; and add to our global infrastructure to support our growth . we also regularly evaluate acquisitions or investment opportunities in complementary businesses , joint ventures , services and technologies in an effort to expand our service offerings . we expect to continue to make such investments and acquisitions in the future . as such , we plan to reinvest a significant portion of our incremental revenue in fiscal 2012 to grow our business and continue our leadership role in the cloud computing industry . we expect diluted earnings per share for fiscal 2012 to be significantly lower than diluted earnings per share for fiscal 2011. in november 2010 , we paid $ 278.0 million in cash for approximately 14 acres of undeveloped real estate in san francisco , california , including entitlements and improvements associated with the land , and perpetual parking rights in an existing garage , which we plan to develop into our global headquarters . during fiscal 2011 we acquired several companies to strengthen and extend our service offerings . we spent approximately $ 403.3 million , net of cash acquired , for these companies . in december 2000 , we established a japanese joint venture , kabushiki kaisha salesforce.com ( salesforce japan ) , with sunbridge , inc. , a japanese corporation , to assist with our sales efforts in japan . during fiscal 2011 , we acquired sunbridge 's and other shareholders ' interest in , and increased our ownership from 72 percent to 100 percent of , salesforce japan for cash payments totaling $ 172.0 million . story_separator_special_tag the year on year compounding effect of this seasonality in both billing patterns and overall new business is causing the value of invoices that we generate in the fourth quarter for both new and existing customers to increase as a proportion of our total annual billings . 35 accordingly , the sequential quarterly changes in accounts receivable and the related deferred revenue during the first three quarters of our fiscal year are not necessarily indicative of the billing activity that occurs in the fourth quarter . replace_table_token_6_th cost of revenues and operating expenses cost of revenues . cost of subscription and support revenues primarily consists of expenses related to hosting our service and providing support , the costs of data center capacity , depreciation or operating lease expense associated with computer equipment , allocated overhead and amortization expense associated with capitalized software related to our application service and acquired technology . we allocate overhead such as rent and occupancy charges based on headcount . employee benefit costs and taxes are allocated based upon a percentage of total compensation expense . as such , general overhead expenses are reflected in each cost of revenue and operating expense category . cost of professional services and other revenues consists primarily of employee-related costs associated with these services , including stock-based expenses , the cost of subcontractors and allocated overhead . the cost of providing professional services is significantly higher as a percentage of revenue than for our enterprise cloud computing subscription service due to the direct labor costs and costs of subcontractors . we intend to continue to invest additional resources in our enterprise cloud computing application service . for example , we plan to open additional data centers in the future . additionally , as we acquire new businesses and technologies , the amortization expense associated with this activity will be included in cost of revenues . the timing of these additional expenses will affect our cost of revenues , both in terms of absolute dollars and as a percentage of revenues , in the affected periods . research and development . research and development expenses consist primarily of salaries and related expenses , including stock-based expenses , the costs of our development and test data center and allocated overhead . we continue to focus our research and development efforts on adding new features and services , integrating acquired technologies , increasing the functionality and enhancing the ease of use of our enterprise cloud computing application service . our proprietary , scalable and secure multi-tenant architecture enables us to provide all of our customers with a service based on a single version of our application . as a result , we do not have to maintain multiple versions , which enables us to have relatively lower research and development expenses as compared to traditional enterprise software companies . we expect that in the future , research and development expenses will increase in absolute dollars as we upgrade and extend our service offerings , develop new technologies and integrate acquired businesses and technologies . 36 marketing and sales . marketing and sales expenses are our largest cost and consist primarily of salaries and related expenses , including stock-based expenses , for our sales and marketing staff , including commissions , payments to partners , marketing programs and allocated overhead . marketing programs consist of advertising , events , corporate communications and brand building and product marketing activities . we plan to continue to invest in marketing and sales by expanding our domestic and international selling and marketing activities , building brand awareness and sponsoring additional marketing events . we expect that in the future , marketing and sales expenses will increase in absolute dollars and continue to be our largest cost . general and administrative . general and administrative expenses consist of salaries and related expenses , including stock-based expenses , for finance and accounting , human resources and management information systems personnel , legal costs , professional fees , other corporate expenses and allocated overhead . we expect that in the future , general and administrative expenses will increase in absolute dollars as we invest in our infrastructure and we incur additional employee related costs , professional fees and insurance costs related to the growth of our business and international expansion . we expect general and administrative costs as a percentage of total revenues to remain flat for the next several quarters . stock-based expenses . our cost of revenues and operating expenses include stock-based expenses related to option and stock awards to employees and non-employee directors . we recognize our share-based payments as an expense in the statement of operations based on their fair values and vesting periods . if our grant activity remains consistent and our stock price increases in the future , stock-based expenses will rise . these charges have been significant in the past and we expect that they will increase as we hire more employees and seek to retain existing employees . joint venture in december 2000 , we established a japanese joint venture , kabushiki kaisha salesforce.com ( salesforce japan ) , with sunbridge , inc. , a japanese corporation , to assist us with our sales efforts in japan . during fiscal 2011 , we acquired sunbridge 's and other shareholders ' interest in , and increased our ownership from 72 percent to 100 percent of , salesforce japan . as a result of our purchase of the shares held by sunbridge , the joint venture agreement terminated according to its terms . as we did not obtain 100 percent ownership until the fourth quarter of fiscal 2011 , we recorded a noncontrolling interest in our consolidated statement of operations for fiscal 2011 , which reflects the interest that we did not control in salesforce japan 's results in fiscal 2011 and all prior years presented . critical accounting policies and estimates our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the united states .
| results of operations the following tables set forth selected data for each of the periods indicated ( in thousands ) . replace_table_token_7_th as of january 31 , 2011 2010 balance sheet data : cash , cash equivalents and marketable securities $ 1,407,557 $ 1,727,048 deferred revenue , current and noncurrent 934,941 704,348 ( 1 ) includes the effects of the retrospective adoption of the accounting guidance involving the presentation guidance of noncontrolling interest . we adopted the accounting guidance in the first quarter of fiscal 2010. replace_table_token_8_th 40 cost of revenues and operating expenses include the following amounts related to stock-based awards . replace_table_token_9_th cost of revenues and marketing and sales expenses include the following amounts related to amortization of purchased intangibles . replace_table_token_10_th the following tables set forth selected consolidated statements of operations data for each of the periods indicated as a percentage of total revenues . replace_table_token_11_th 41 replace_table_token_12_th fiscal years ended january 31 , 2011 and 2010 revenues . replace_table_token_13_th total revenues were $ 1.7 billion for fiscal 2011 , compared to $ 1.3 billion during the same period a year ago , an increase of $ 351.6 million , or 27 percent . subscription and support revenues were $ 1.6 billion , or 94 percent of total revenues , for fiscal 2011 , compared to $ 1.2 billion , or 93 percent of total revenues , during the same period a year ago . the increase in subscription and support revenues was due primarily to new customers , upgrades and additional subscriptions from existing customers and improved renewal rates as compared to a year ago .
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md & a includes the following sections : business we are a leading provider of medical device solutions focused on the diagnosis and treatment of central nervous and sensory system disorders for patients of all ages . year 2020 overview our consolidated revenue decreased by $ 79.5 million for the year ended december 31 , 2020 compared to the year ended december 31 , 2019. this decrease was driven by a decline in demand for our neuro and hearing and balance products as a result of the covid-19 global pandemic . net loss was $ 16.6 million , or $ 0.49 per share in the year ended december 31 , 2020 , compared with net loss of $ 15.7 million , or $ 0.47 per share in the prior year . this decrease in income was primarily driven by lower revenue resulting from the covid-19 pandemic on global demand for our products and impairment of intangibles related to end of sale products partly offset by a reduction in operating expenses . while we experienced a net loss , we generated cash flow from operations of $ 34.4 million . reorganization on january 15 , 2019 , natus announced the implementation of a new organizational structure designed to improve operational performance , increase our focus on innovation and increase profitability . we consolidated our three business units , neuro , newborn care and hearing & balance , formerly otometrics , into “ one natus . '' this initiative was designed to create a single , unified company with globally led operational teams in sales & marketing , manufacturing , r & d , quality , and general and administrative functions . we expect to continue to see increased transparency , efficiency and cross-functional collaboration across common technologies , processes and customer channels . covid-19 update healthcare providers and patients continue to depend on our products and services every day . our team members and partners are continuing to maintain our supply chain , manufacturing and delivery of our products and services . the health and welfare of our employees , our customers and our partners remain our top priority as we continue our business operations . we have implemented safeguards in our facilities to protect team members , including social distancing practices , work from home and other measures consistent with specific regulatory requirements and guidance from health authorities . as an essential supplier of healthcare products and services , all of our manufacturing , engineering , sales and customer support functions remain fully operational and will continue to support customers with vital supplies , service and equipment . we have taken actions to reduce costs , including reducing travel and discretionary expenses . we will continue to prioritize spending to allow continued investment in products and services that are key elements of our stated strategy for profitable growth in the years ahead . impact to our supply chain many of our materials are single source and require lengthy qualification periods . disruptions in our supply chain could negatively impact our ability to produce and supply our finished products . we have made strategic investments in inventory to help mitigate potential supply chain disruptions . these investments include increased inventory and firm purchase orders beyond our typical timeframe in order to secure capacity at our key suppliers . to date , we have not incurred any significant supply disruptions and we believe our suppliers are positioned well to provide us with the materials we need to meet our demand . the health and safety of our suppliers is also a priority for us and we have transitioned collaboration with our suppliers to online technology so that we can continue our business operations . liquidity in 2019 , we completed a restructuring of the company and strengthened our balance sheet by generating over $ 60.0 million in cash from operations and paying down $ 55.0 million in debt . at the end of the first quarter of 2020 we drew an additional $ 60.0 million on our credit line as a precaution to ensure we have the necessary capital to continue to reliably serve our customers during an extended period of uncertainty . during the third quarter of 2020 we amended our credit agreement 33 which extended the maturity date of the original agreement from september 23 , 2021 to september 25 , 2023 , reduced the aggregate revolving credit facility from $ 225.0 million to $ 150.0 million , and amended certain covenants . during the year ended december 31 , 2020 , we repaid $ 58.0 million in debt and continued to maintain a strong cash position ending the period with $ 82.1 million in cash . some hospitals and clinics delayed payments for products and services and we have worked with our customers to arrange mutually acceptable payment terms during this uncertain time . looking ahead , we expect revenues and margins to improve , but remain below historical levels . we see our customers adapting to the covid environment with elective procedures resuming , which we believe will result in increased capital spending , improving our business for the foreseeable future . while we believe that we have sufficient liquidity to operate the company for the foreseeable future , should negative economic conditions persist for an extended period of time , we are evaluating additional measures we could take to improve our liquidity position . impact to fair-value of intangible assets we have reviewed the assets on our balance sheet , particularly goodwill and significant intangible assets for indications of impairment related to covid-19 and determined that there are no indicators of impairment at this time . the values of these assets are particularly sensitive to our market cap and the long term value of their cash flows . if these conditions change significantly , we may need to record an impairment to their value . story_separator_special_tag adjustments to the value of inventory establish a new cost basis and are considered permanent even if circumstances later suggest that increased carrying amounts are recoverable . if demand is higher than expected , we may sell inventory that had previously been written down . income taxes we account for income taxes under the assets and liability method , which requires the recognition of deferred tax assets and liabilities for expected future tax consequences of events that have been included in the financial statements . under this method , deferred tax assets and liabilities are determined based on the differences between the financial statements carrying value of assets and liabilities and the tax basis of those assets and liabilities , using enacted tax rates in effect for the year in which the differences are expected to reverse . the effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date . we record net deferred tax assets to the extent it is more likely than not that the assets will be realized . the ultimate recovery of deferred tax assets is dependent upon the amount and timing of future taxable income and other factors such as the taxing jurisdiction in which the asset is to be recovered . a high degree of judgment is required to determine if , and the extent to which , valuation allowances should be recorded against deferred tax assets . in making such determination , we consider all available positive and negative evidence , including future reversals of existing taxable temporary differences , projected future taxable income , tax planning strategies and recent financial operations . based on all available evidence , both positive and negative , and the weight of that evidence to the extent such evidence can be objectively verified , we determine whether it is more likely than not that all or a portion of the deferred tax assets will be realized . the main factors we consider include : cumulative earnings or losses in recent years , adjusted for certain nonrecurring items ; expected earnings or losses in future years ; and 35 the availability , or lack thereof , of taxable income in prior carryback periods that would limit realization of the carryforward period associated with the deferred tax assets and liabilities to the extent that we have recorded a valuation allowance on certain deferred tax assets that are determined to be realizable in the future , we adjust the valuation allowance which reduces the provision for income taxes . we recognize the tax benefits of uncertain tax positions in the financial statements as defined in asc topic 740 , income tax . in the ordinary course of business , there is inherent uncertainty in quantifying our income tax positions . we assess our income tax positions and record deferred income tax benefits for all tax years subject to examination based upon management 's evaluation of the facts , circumstances and information available at the reporting date about the ability to realize the benefit of the deferred tax assets or tax positions . when the tax position is deemed more likely than not of being sustained , we recognize the largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon settlement as defined in asc 740-10-05. for those income tax positions where it is not more likely than not that an income tax benefit will be sustained in the future , we do not recognize a deferred tax benefit in our financial statements . we record interest and penalties , net of any applicable tax benefit , related to income taxes , if any , as a component of the provision for income taxes when applicable . 36 story_separator_special_tag style= '' margin-top:14pt ; text-indent:27pt '' > intangibles amortization decreased in the year ended december 31 , 2019 compared to the prior year . the decrease is related to our restructuring initiatives , which included an impairment charge of $ 5.6 million in 2018 related to the end of life of our bio-logic core technology that did not recur in 2019. restructuring restructuring costs increased during the year ended december 31 , 2019 compared to the prior year . this increase was driven by the restructuring initiatives announced in january 2019. we recorded an impairment related to the sale of medix , which included the recognition of deferred foreign currency related adjustments in accumulated other comprehensive income , of $ 24.8 million , net of tax , and an adjustment of $ 4.6 million for assets with a book value in excess of their fair market value . the increase was also driven by restructuring expenses incurred related to exiting the gnd business and our restructuring initiatives . other income ( expense ) , net other income ( expense ) , net consists of interest income , interest expense , net currency exchange gains and losses , and other miscellaneous income and expense . we reported other expense , net of $ 5.6 million in the year ended december 31 , 2019 , compared to $ 7.7 million in the prior year . we reported $ 0.8 million of foreign currency exchange losses in the year ended december 31 , 2019 versus $ 0.8 million of foreign currency losses in the prior year . interest expense was $ 4.9 million in the year ended december 31 , 2019 compared to $ 6.8 million in the prior year . the reduction in interest expense was driven by accelerated payments on our outstanding debt . interest income was $ 0.3 million in both the year ended december 31 , 2019 and the prior year . provision for income tax the effective tax rate ( “ etr ” ) for the year ended december 31 , 2019 was 26.3 % as compared to 28.9 % for the prior year .
| results of operations the following table sets forth for the periods indicated selected consolidated statement of income data as a percentage of total revenue . our historical operating results are not necessarily indicative of the results for any future period . replace_table_token_10_th comparison of 2020 and 2019 revenue replace_table_token_11_th for the year ended december 31 , 2020 , neuro revenue decreased by 18 % compared to the prior year . devices and systems revenue decreased by 18 % and supplies revenue decreased by 15 % compared to the prior year due primarily to the impact of the global covid-19 pandemic . services revenue decreased 100 % compared to the prior year due to our exit from the gnd business in january 2019 . 37 for the year ended december 31 , 2020 , newborn care revenue decreased by 6 % compared to the prior year . devices and systems revenue decreased by 3 % and supplies revenue decreased 5 % compared to the prior year due to the impact of the covid-19 pandemic . services revenue decreased by 14 % compared to the prior year primarily due to our exit from the peloton business as of december 31 , 2019 and was partly offset by the ramp up in activity under our agreement with pediatrix over 2020. for the year ended december 31 , 2020 , hearing & balance revenue decreased 23 % compared to the prior year due to the impact of the covid-19 pandemic . cost of revenue and gross profit replace_table_token_12_th for the year ended december 31 , 2020 , our gross profit as a percentage of sales decreased by 6.8 % compared to the prior year .
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the company recognizes license revenues pursuant to strategic collaboration and distribution agreements under which the company receives payments for the achievement of testing validation , regulatory progress and commercialization events . as these activities and payments are associated with exclusive rights that the company provides in connection with strategic collaboration and distribution agreements over the term of the agreements , revenues related to the payments received are deferred and recognized over the term story_separator_special_tag you should read the following discussion of our financial condition and results of operations in connection with our consolidated financial statements and the related notes included in part ii-item 8-financial statements and supplementary data in this annual report on form 10-k. in addition to our historical consolidated financial information , the following discussion contains forward-looking statements that reflect our plans , estimates , and beliefs . our actual results could differ materially from those discussed in the forward-looking statements . factors that could cause or contribute to these differences include those discussed below and elsewhere in this annual report on form 10-k , particularly in part i-item 1a-risk factors. overview we make bio-based pest management and plant health products . bio-based products are comprised of naturally occurring microorganisms , such as bacteria and fungi , and plant extracts . our current products target the major markets that use conventional chemical pesticides , including certain agricultural and water markets , where our bio-based products are used as alternatives for , or mixed with , conventional chemical products . we also target new markets for which there are no available conventional chemical pesticides , the use of conventional chemical products may not be desirable or permissible because of health and environmental concerns ( including for organically certified crops ) or because the development of pest resistance has reduced the efficacy of conventional chemical pesticides . we believe our current portfolio of epa-approved and registered biopesticide products and our pipeline address the growing global demand for effective , efficient and environmentally responsible products to control pests , increase crop yields and reduce crop stress . the agricultural industry is increasingly dependent on effective and sustainable pest management practices to maximize yields and quality in a world of increased demand for agricultural products , rising consumer awareness of food production processes and finite land and water resources . in addition , our research has shown that the global market for biopesticides is growing substantially faster than the overall market for pesticides . this demand is in part a result of conventional growers acknowledging that there are tangible benefits to adopting bio-based pest management products into integrated pest management ( ipm ) programs , as well as increasing consumer demand for organic food . we seek to capitalize on these global trends by providing both conventional and organic growers with solutions to a broad range of pest management needs through strategies such as adding new products to our product portfolio , continuing to broaden the commercial applications of our existing product lines , leveraging growers ' positive experiences with existing product lines , and educating growers with on-farm product demonstrations and controlled product launches with key target customers and other early adopters . we believe this approach enables us to stay ahead of our competition in providing innovative pest management solutions , enhances our sales process at the distributor level and helps us to capture additional value from our products . although our long-term , global vision for our business and our commitment to that vision remain fundamentally unchanged , to date , we have not achieved anticipated growth in sales of our products , which has resulted in an increase in inventory write-offs , higher proportional operating expenses levels , increases in costs of goods sold , and decreases in product margins . in response to the business challenges reflected in our financial results for recent periods , since the second half of 2014 , we have been implementing a prioritization plan to focus our resources on continuing to improve and promote our commercially available products , advancing product candidates that are expected to have the greatest impact on near-term growth potential and expanding international presence and commercialization . our goal has been to reduce expenses , conserve cash and improve operating efficiencies , to extract greater value from our products and product pipeline and to improve our communication to and connection with the global sustainability movement that is core to our cultural values . in connection with this new strategy , we have significantly reduced overall headcount , while building a new sales and marketing organization with increased training and ability to educate and support customers as well as providing our product development staff with greater responsibility for technical sales support , field trials and 54 demonstrations to promote sales growth . in addition , while we believe that we have developed a robust pipeline of novel product candidates , we are currently limiting our internal efforts on five promising product candidates . simultaneously , we are seeking collaborations with third parties to develop and commercialize more early stage candidates on which we have elected not to expend significant resources given our reduced budget . we believe collectively , these measures , together with our competitive strengths , including our leadership in the biologicals industry , commercially available products , robust pipeline of novel product candidates , proprietary discovery and development processes and industry experience , position us for growth . we sell our crop protection products to leading agrichemical distributors while also working directly with growers to increase existing and generate new product demand . to date , we have marketed our bio-based pest management and plant health products for agricultural applications to u.s. growers , through distributors and our own sales force , and we have focused primarily on high value specialty crops such as grapes , citrus , tomatoes , and leafy greens . story_separator_special_tag due to prioritization constraints , we have not committed resources to zequanox sufficient to market it full-scale , and our collaboration efforts with regard to this product may not result in increased sales . in addition , the departure of our former chief operating officer and significant members of our sales staff in the third quarter of 2014 and subsequent turnover in our sales and marketing department disrupted the 2014 launch of venerate as well as growth in sales of our other commercialized products , including regalia and grandevo . since 2011 , we have also recognized revenues from our strategic collaboration and distribution agreements , which amounted to $ 0.2 million for each of the years ended december 31 , 2014 , 2013 and 2012 , excluding related party revenues . for the years ended december 31 , 2014 and 2013 , we recognized $ 0.3 million and $ 0.1 million , respectively , of related party revenues under these agreements based on the terms of our commercial agreement with syngenta , an affiliate of one of our 5 % stockholders . there were no related party revenues recognized under these agreements for the year ended december 31 , 2012. we currently sell our crop protection products through the same leading agricultural distributors used by the major agrichemical companies . distributors with 10 % or more of our total revenues in any one of the periods presented consist of the following : replace_table_token_4_th while we expect product sales to a limited number of distributors to continue to be our primary source of revenues , as we continue to develop our pipeline and introduce new products to the marketplace , we anticipate that our revenues stream will be diversified over a broader product portfolio and customer base . 56 our cost of product revenues was $ 9.4 million , $ 7.2 million and $ 4.3 million for the years ended december 31 , 2014 , 2013 and 2012 , respectively . cost of product revenues included $ 0.6 million , $ 0.4 million and $ 0.1 million of cost of product revenues to related parties for the years ended december 31 , 2014 , 2013 and 2012 , respectively . gross margins were a negative 3 % for the year ended december 31 , 2014 , compared to 14 % and 39 % for the years ended december 31 , 2013 and 2012 , respectively . cost of product revenues consists principally of the cost of inventory which includes the cost of raw materials , and third-party services and allocation of operating expenses of our manufacturing plant related to procuring , processing , formulating , packaging and shipping our products . cost of product revenues also include charges recorded for write-downs of inventory which has increased in recent years and , beginning in 2014 , idle capacity at our manufacturing plant when the manufacturing plant was placed into service . we expect our cost of product revenues related to the cost of inventory to increase and cost of product revenues relating to write-downs of inventory and idle capacity of our manufacturing plant to decrease as we expand sales and increase production of our existing commercial products regalia , grandevo , venerate and zequanox and introduce new products to the market . our cost of product revenues related to the cost of inventory has increased as a percentage of total revenues primarily due to a change in product mix , with grandevo representing an increased percentage of total revenues as grandevo is early in its life cycle . we expect to see a gradual increase in gross margin over the life cycle of each of our products , including grandevo , as we improve production processes , gain efficiencies and increase product yields . these increases may be offset by additional charges for inventory write-downs and idle capacity at our manufacturing plant until overall volume in the plant increases significantly . our research , development and patent expenses have historically comprised a significant portion of our operating expenses , amounting to $ 19.3 million , $ 17.9 million and $ 12.7 million for the years ended december 31 , 2014 , 2013 and 2012 , respectively . we have reduced the size of our research and development staff compared to prior periods and are reducing costs spent on various research and development and patent efforts as part of our efforts to streamline business operations and focus on our pipeline product priorities . however , we have made , and will continue to make , substantial investments in research and development and we intend to continue to devote significant resources toward the advancement of product candidates that are expected to have the greatest impact on near-term growth potential . simultaneously , we are seeking collaborations with third parties to develop and commercialize more early stage candidates , which we have elected not to expend significant resources on given our reduced budget . selling , general and administrative expenses incurred to establish and build our market presence and business infrastructure have generally comprised the remainder of our operating expenses , amounting to $ 29.0 million , $ 15.0 million and $ 10.3 million for the years ended december 31 , 2014 , 2013 and 2012 , respectively . while we have reduced headcount in comparison to prior periods overall , in connection with our new strategy , we have been building a new sales and marketing organization which provides for increased training and a better ability to educate and support customers as well as transitioning our product development staff to undertake greater responsibility for technical sales support , field trials and demonstrations to promote sales growth . we expect that in the future , our selling , general and administrative expenses will increase due to our expanded product portfolio and due to additional costs incurred relating to being a public company .
| results of operations the following table sets forth certain statements of operations data as a percentage of total revenues : replace_table_token_5_th ( 1 ) includes 6 % , 4 % and 2 % in cost of product revenues to related parties for the years ended december 31 , 2014 2013 , and 2012 , respectively . see note 18 of our accompanying notes to consolidated financial statements included in part ii-item 8-financial statements and supplementary data in this annual report on form 10-k for further discussion . comparison of the years ended december 31 , 2014 , 2013 and 2012 product revenues replace_table_token_6_th 64 our product revenues increased by approximately $ 0.2 million , or 2 % , in 2014 compared to 2013 and $ 0.8 million , or 12 % , in 2013 compared to 2012. beginning in 2013 and continuing into 2014 , as a result of additional terms being offered to customers , revenue was deferred for certain sales transactions and is being recognized on a sell-through basis compared to 2012 where all sales transactions were recognized on a sell-in basis . product revenues increased in 2014 compared to 2013 primarily due to the recognition of revenue that was deferred in 2013. the extended drought in california and other markets has reduced demand for our products as fewer acres are planted , in addition , the departures of our former chief operating officer and significant members of our sales staff in the third quarter of 2014 and subsequent turnover in our sales and marketing department disrupted the 2014 launch of venerate as well as growth in sales of our other commercialized products .
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the company currently has the following tax years open to examination by major taxing jurisdictions : tax years : united states federal 2009 – 2011 state of california 2008 – 2011 state of massachusetts 2009 – 2011 state of oregon 2009 – 2011 sweden story_separator_special_tag overview flir systems , inc. ( “ flir , ” the “ company , ” “ we , ” “ us , ” or “ our ” ) is a world leader in sensor systems that enhance perception and awareness . we were founded in 1978 and have since become a premier designer , manufacturer , and marketer of thermal imaging systems . our advanced sensors and integrated sensor systems enable the gathering and analysis of critical information through a wide variety of applications in commercial , industrial , and government markets worldwide . our goal is to both enable our customers to benefit from the valuable information produced by advanced sensing technologies and to deliver sustained superior financial performance for our shareholders . we create value for our customers by providing advanced surveillance and tactical defense capabilities , improving personal and public safety and security , facilitating air , ground , and maritime navigation , enhancing enjoyment of the outdoors , providing infrastructure inefficiency information , conveying pre-emptive structural deficiency data , displaying process irregularities , and enabling commercial business opportunities through our continual support and development of new thermal imaging data and analytics applications . our business model meets the needs of a multitude of customers – we sell off-the-shelf products to a wide variety of markets in an efficient , timely , and affordable manner as well as offer a variety of system configurations to suit specific customer requirements . centered on the design of products for low cost manufacturing and high volume distribution , our commercial operating model has been developed over time and provides us with a unique ability to adapt to market changes and meet our customers ' needs . our business is organized into two divisions : commercial systems and government systems . within these divisions , we have five reporting segments : thermal vision & measurement and raymarine , which comprise the commercial systems division ; and surveillance , detection and integrated systems , which make up our government systems division . for a more detailed description of our segments , see “ business segments ” within item 1. international revenue accounted for approximately 49 percent , 48 percent and 47 percent of our revenue in 2012 , 2011 and 2010 , respectively . we anticipate that international sales will continue to account for a significant percentage of revenue in the future . we have exposure to foreign exchange fluctuations and changing dynamics of foreign competitiveness based on variations in the value of the united states dollar relative to other currencies . factors contributing to this variability include significant manufacturing activity in europe , significant sales denominated in currencies other than the united states dollar , and cross currency fluctuations between such currencies as the united states dollar , euro , swedish kroner and british pound sterling . the impact of those fluctuations is reflected throughout our consolidated financial statements , but in the aggregate , did not have a material impact on our results of operations . we experience fluctuations in orders and sales due to seasonal variations and customer sales cycles , such as the seasonal pattern of contracting by the united states and certain foreign governments , the desire of customers to take delivery of equipment prior to fiscal year ends due to funding considerations , and the tendency of commercial enterprises to fully utilize annual capital budgets prior to expiration . such events have resulted and could continue to result in fluctuations in quarterly results in the future . as a result of such quarterly fluctuations in operating results , we believe that quarter-to-quarter comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indicators of future performance . we expect that the challenging world-wide economic conditions that impacted revenue performance in 2012 will continue to impact our business going forward . more specifically , reduced spending by united states and middle east government agencies , the continuing eurozone crisis , the impact in the united states of the year-end 2012 expiration of income and payroll tax cuts , and , in the absence of action by the united states congress to the contrary , potential material reductions in federal spending resulting from the budget control act of 2011 , among other global economic developments , all present challenges for us and render predictions regarding future performance difficult to make . critical accounting policies and estimates this discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements , which have been prepared in accordance with united states generally accepted accounting principles . the preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , revenues and expenses , and related disclosure of contingent assets and liabilities . we evaluate our estimates , including those related to revenue recognition , bad debts , inventories , goodwill , warranty obligations , contingencies and income taxes on an on-going basis . we base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . senior management has discussed the development , selection and disclosure of these estimates with the audit committee of our 27 board of directors . we believe the following critical accounting policies and the related judgments and estimates affect the preparation of our consolidated financial statements . revenue recognition . story_separator_special_tag we are subject to the possibility of loss contingencies arising in the normal course of business . we consider the likelihood of loss or impairment of an asset or the incurrence of a liability , as well as our ability to reasonably estimate the amount of loss in determining loss contingencies . an estimated loss is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount can be reasonably estimated . we regularly evaluate current information available to us to determine whether such accruals should be adjusted . income taxes . we record our deferred tax assets when the benefits are more likely than not to be recognized . valuation allowances against deferred tax assets are recorded when a determination is made that the deferred tax assets are not more likely than not to be realized in the future . in making that determination , on a jurisdiction by jurisdiction basis , we estimate our future taxable income based upon historical operating results and external market data . future levels of taxable income are dependent upon , but not limited to , general economic conditions , competitive pressures and other factors beyond our control . as of december 31 , 2012 , we have determined that a valuation allowance against our net deferred tax assets of $ 9.3 million is required . if we should determine that we may be unable to realize our deferred tax assets to the extent reported , an adjustment to the deferred tax assets would be recorded in the period such determination is made . consolidated operating results the following table sets forth for the indicated periods certain items as a percentage of revenue : replace_table_token_4_th _ ( 1 ) totals may not recompute due to rounding the following discussion of operating results provides an overview of our operations by addressing key elements in our consolidated statements of income . the “ segment operating results ” section that follows describes the contributions of each of our business segments to our consolidated revenue and earnings from operations for 2012 , 2011 and 2010 . given the nature of our business , we believe revenue and earnings from operations ( including operating margin percentage ) are most relevant to an understanding of our performance at a segment level . additionally , at the segment level we disclose backlog , which represents orders received for products or services for which a sales agreement is in place and delivery is expected within twelve months . the operating results for 2012 do not include any amounts for either lorex or traficon as any such amounts were not significant . revenue . revenue for 2012 totaled $ 1,405.4 million , a decrease of 9.0 percent from 2011 revenue of $ 1,544.1 million . each of our operating segments , except integrated systems , reported decreases in year over year revenues due to continued reductions in demand for our products from united states government and middle east government agencies and weaker world-wide economic conditions resulting in lower demand for many of our commercial product lines . the decline of $ 138.7 million in year over year revenue included a decline of $ 71.3 million from united states government customers . 29 revenue for 2011 totaled $ 1,544.1 million , an increase of 11.2 percent over 2010 revenue of $ 1,388.4 million . the increase was primarily due to increased revenue from our thermal vision and measurement segment , and a full year of revenues reported by raymarine holdings , ltd. ( “ raymarine ” ) which was acquired on may 14 , 2010 , and icx technologies , inc. ( “ icx ” ) which was acquired on october 4 , 2010. excluding revenue from raymarine and icx , revenue for the year ended december 31 , 2011 was flat compared to the same period in 2010 as revenue from our thermal vision and measurement segment increased by 14.9 percent in 2011 compared to the same period in 2010 , while revenue from our surveillance segment declined by 14.0 percent in 2011 compared to the same period in 2010. international revenue in 2012 totaled $ 687.5 million , representing 48.9 percent of revenue . this compares with international revenue in 2011 which totaled $ 740.6 million , representing 48.0 percent of revenue and $ 653.7 million in 2010 , representing 47.1 percent of revenue . while the sales mix between united states and international sales may fluctuate from year to year , we expect revenue from customers outside the united states to continue to comprise a significant portion of our total revenue on a long-term basis . cost of goods sold . cost of goods sold for the year ended december 31 , 2012 and 2011was $ 674.0 million and $ 715.5 million , respectively . the year over year decrease in cost of goods sold primarily relate to the lower year over year revenues and changes in product mix . in the year ended december 31 , 2012 , costs of goods sold included restructuring charges of $ 3.8 million , primarily for work force reductions in our thermal vision and measurement and detection segments ; in the year ended december 31 , 2011 , costs of goods sold included restructuring charges of $ 0.9 million . for the year ended december 31 , 2011 , costs of goods sold included charges of $ 7.3 million for the amortization of fair value adjustments on inventory acquired through the acquisition of icx in 2010. cost of goods sold in 2011 of $ 715.5 million was an increase of $ 90.7 million , or 14.5 percent , over cost of goods sold of $ 624.8 million in 2010. the increase was primarily due to the increase in revenues year over year as discussed above . for the year ended december 31 , 2010 , cost of goods sold included charges of $ 3.6 million for the amortization of fair value adjustments on inventory of icx .
| segment operating results as of january 1 , 2011 , we merged the thermography and commercial vision systems operating segments into the thermal vision and measurement operating segment . raymarine was acquired on may 14 , 2010 , creating the raymarine operating segment . finally , icx was acquired on october 4 , 2010 and the icx operating results for the period from acquisition through december 31 , 2010 was reported as a separate segment . effective as of january 1 , 2011 , icx results are reported as our detection and integrated system segments , and a portion is reported in our surveillance segment . beginning january 1 , 2011 , the former government systems operating segment is also included in the surveillance operating segment . thermal vision and measurement thermal vision and measurement operating results are as follows ( in millions ) : replace_table_token_5_th thermal vision and measurement revenue decreased by 4.9 percent in 2012 compared to 2011 , primarily due to lower revenues in the cores and components product line and the premium thermography product lines . revenue declined in all geographies due to world-wide economic weaknesses which were particularly significant in our europe , middle east and africa regions . united states revenue was adversely impacted by lower revenue from cores and components customers . earnings from operations decreased by 12.0 percent due to the flow through of lower revenues and lower absorption of factory costs partially offset by a 5.5 percent reduction in operating expenses . revenue increased by 14.9 percent in 2011 compared to 2010 primarily due to increased unit deliveries from several of the segment 's product lines including thermography , cores and components , and maritime . earnings from operations increased by 18.9 percent due to the increase in revenue and manufacturing efficiencies resulting from higher production volumes and lower material costs on new products .
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`` ) , performance units and performance shares equivalent to up to 3,050,000 shares of common stock . the number of shares of common stock available for issuance under the 2012 plan includes an annual increase on january 1 of each year starting on january 1 , 2014 by an amount equal to the least of 3,050,000 shares ; 5 % of the outstanding shares of stock as of the last day of the immediately preceding fiscal year ; or an amount determined by the board of directors . options may be granted with an exercise price that is at least equal to the fair market value of the company 's stock at the date of grant and are exercisable story_separator_special_tag you should read the following discussion in conjunction with the section titled `` selected consolidated financial and other data '' and our consolidated financial statements and the related notes included elsewhere in this annual report on form 10-k. in addition to historical information , this discussion contains forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from our expectations , as discussed in `` forward-looking statements '' in part i of this annual report on form 10-k. factors that could cause such differences include , but are not limited to , those described in the section titled `` risk factors '' and elsewhere in this annual report on form 10-k. overview we are a pioneer and leading provider of cloud security and compliance solutions that enable organizations to identify security risks to their it infrastructures , help protect their it systems and applications from ever-evolving cyber attacks and achieve compliance with internal policies and external regulations . our cloud solutions address the growing security and compliance complexities and risks that are amplified by the dissolving boundaries between internal and external it infrastructures and web environments , the rapid adoption of cloud computing and the proliferation of geographically dispersed it assets . our integrated suite of security and compliance solutions delivered on our qualysguard cloud platform enables our customers to identify their it assets , collect and analyze large amounts of it security data , discover and prioritize vulnerabilities , recommend remediation actions and verify the implementation of such actions . organizations use our integrated suite of solutions delivered on our qualysguard cloud platform to cost-effectively obtain a unified view of their security and compliance posture across globally-distributed it infrastructures . we were founded and incorporated in december 1999 with a vision of transforming the way organizations secure and protect their it infrastructure and applications and initially launched our first cloud solution , qualysguard vulnerability management , in 2000. this solution has provided the substantial majority of our revenues to date , representing 84 % , 87 % and 90 % of total revenues in 2013 , 2012 and 2011 , respectively . as this solution gained acceptance , we introduced new solutions to help customers manage increasing it security and compliance requirements . in 2006 , we added our pci compliance solution , and in 2008 , we added our policy compliance solution . in 2009 , we broadened the scope of our cloud services by adding web application scanning . we continued our expansion in 2010 , launching malware detection service and qualys secure seal for automated protection of websites . in 2012 , we introduced our virtualized private cloud platform as an additional deployment option of our solutions for customers and partners . we provide our solutions through a software-as-a-service model , primarily with renewable annual subscriptions . these subscriptions require customers to pay a fee in order to access our cloud solutions . we invoice our customers for the entire subscription amount at the start of the subscription term , and the invoiced amounts are treated as deferred revenues and are recognized ratably over the term of each subscription . historically , we have experienced significant revenue growth from existing customers as they renew and purchase additional subscriptions . revenues from customers existing at or prior to december 31 , 2012 grew $ 8.7 million to $ 100.1 million during 2013 . we expect this trend to continue . we market and sell our solutions to enterprises , government entities and to small and medium-sized businesses across a broad range of industries , including education , financial services , government , healthcare , insurance , manufacturing , media , retail , technology and utilities . as of december 31 , 2013 , we had over 6,700 customers in more than 100 countries , including a majority of each of the forbes global 100 and fortune 100. in 2013 , 2012 and 2011 , approximately 70 % , 68 % and 67 % , respectively , of our revenues were derived from customers in the united states . we sell our solutions to enterprises and government entities primarily through our field sales force and to small and medium-sized businesses through our inside sales force . we generate a significant portion of sales through our channel partners , including managed service providers , value-added resellers and consulting firms in the united states and internationally . we have had continued revenue growth over the past three years . our revenues increased from $ 76.2 million in 2011 to $ 91.4 million in 2012 , and reached $ 108.0 million in 2013 , representing period-over-period increases of $ 15.2 million , and $ 16.5 million , or 20 % and 18 % , respectively . we generated net income of $ 2.0 million in 2011 , $ 2.3 million in 2012 , and $ 1.6 million in 2013 . 40 on september 28 , 2012 , our common stock commenced trading on the nasdaq stock market under the trading symbol “ qlys , ” and on october 3 , 2012 we closed our initial public offering . in our initial public offering , we sold and issued 7,836,250 shares and certain selling stockholders sold an additional 875,000 shares . story_separator_special_tag operating expenses research and development research and development expenses consist primarily of personnel expenses , comprised of salaries , benefits , performance-based compensation and stock-based compensation , for our research and development teams . other expenses include third-party contractor fees , amortization of intangibles related to prior acquisitions and overhead allocations . all research and development costs are expensed as incurred . we expect to continue to devote substantial resources to research and development in an effort to continuously improve our existing solutions as well as develop new solutions and expect that research and development expenses will increase in absolute dollars . 42 sales and marketing sales and marketing expenses consist primarily of personnel expenses , comprised of salaries , benefits , sales commissions , performance-based compensation and stock-based compensation for our worldwide sales and marketing teams . other expenses include marketing and promotional events , lead-generation marketing programs , public relations , travel and overhead allocations . all costs are expensed as incurred , including sales commissions . sales commissions are expensed in the quarter in which the related order is received and are paid in the month subsequent to the end of that quarter , which results in increased expenses prior to the recognition of related revenues . our new sales personnel are typically not immediately productive , and the resulting increase in sales and marketing expenses we incur when we add new personnel may not result in increased revenues if these new sales personnel fail to become productive . the timing of our hiring of sales personnel and the rate at which they generate incremental revenues may affect our future operating results . we expect to invest significantly in additional sales personnel and more marketing programs as we introduce new solutions to our platform , which will increase sales and marketing expenses in absolute dollars . general and administrative general and administrative expenses consist primarily of personnel expenses , comprised of salaries , benefits , performance-based compensation and stock-based compensation , for our executive , finance and accounting , legal , human resources and internal information technology support teams as well as professional services , insurance , fees , certain other corporate governance-related expenses , and overhead allocations . we expect that general and administrative expenses will increase in absolute dollars as we continue to add personnel and incur professional services to support our continued growth and operate as a public company , including compliance with section 404 of the sarbanes-oxley act . other income ( expense ) , net our other income ( expense ) , net consists primarily of interest and investment income from our short-term and long-term investments ; foreign exchange gains and losses , the majority of which result from fluctuations between the u.s. dollar and the euro , british pound and japanese yen ; and interest expense associated with our capital leases . provision for income taxes our provision for income taxes consists primarily of corporate income taxes resulting from profits generated in foreign jurisdictions by wholly-owned subsidiaries , along with state income taxes payable in the united states . the provision for income taxes also includes changes to unrecognized tax benefits related to uncertain tax positions . income taxes are accounted for under the asset and liability method . deferred tax assets and liabilities are recognized for the tax impact of timing differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards . deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled . the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the statutory rate change is enacted into law . we maintain a valuation allowance on our u.s. federal and state net deferred tax assets . our cash tax expense is impacted by each jurisdiction 's individual tax rates , laws on timing of recognition of income and deductions and availability of net operating losses and tax credits . given the valuation allowance and sensitivity of current cash taxes to local rules , our effective tax rate could fluctuate significantly on a quarterly basis , to the extent earnings are lower than anticipated in countries that have lower statutory rates and higher than anticipated in countries that have higher statutory rates , and also due to changes in our earnings projections , by changes in the valuation of our deferred tax assets or liabilities , or by changes in tax laws , regulations , or accounting principles , as well as certain discrete items . 43 story_separator_special_tag > provision for income taxes increased $ 0.1 million in 2013 compared to 2012 , primarily due to increases in foreign and state taxes and also due to a reduction of the liability for uncertain tax positions for closure of tax years in foreign jurisdictions in 2012. comparison of years ended december 31 , 2012 and 2011 revenues year ended december 31 , change 2012 2011 $ % ( in thousands , except percentages ) revenues $ 91,420 $ 76,212 $ 15,208 20 % revenues increased $ 15.2 million in 2012 compared to 2011. revenues from customers existing at or prior to december 31 , 2011 grew $ 7.8 million to $ 84.0 million in 2012 due to increased subscriptions . subscriptions from new customers added in 2012 contributed $ 7.4 million to the increase in revenues . of the total increase of $ 15.2 million , $ 11.6 million was from customers in the united states and the remaining $ 3.6 million was from customers in foreign countries . the growth in revenues reflects increased demand for our solutions .
| results of operations the following tables set forth selected consolidated statements of income data for each of the periods presented . replace_table_token_11_th ( 1 ) includes stock-based compensation as follows : replace_table_token_12_th 44 the following table sets forth selected consolidated statements of income data for each of the periods presented as a percentage of revenues . replace_table_token_13_th comparison of years ended december 31 , 2013 and 2012 revenues year ended december 31 , change 2013 2012 $ % ( in thousands , except percentages ) revenues $ 107,962 $ 91,420 $ 16,542 18 % revenues increased $ 16.5 million in 2013 compared to 2012 . revenues from customers existing at or prior to december 31 , 2012 grew $ 8.7 million to $ 100.1 million in 2013 due to increased subscriptions . subscriptions from new customers added in 2013 contributed $ 7.8 million to the increase in revenues . of the total increase of $ 16.5 million , $ 12.9 million was from customers in the united states and the remaining $ 3.6 million was from customers in foreign countries . the growth in revenues reflects increased demand for our solutions . cost of revenues replace_table_token_14_th cost of revenues increased $ 6.3 million in 2013 compared to 2012 , primarily due to a $ 2.3 million increase in depreciation expenses primarily related to additional computer hardware and software for our new and existing data centers ; increased personnel expenses of $ 1.9 million , principally driven by the addition of employees in our operations staff ; increased data center costs of $ 0.9 million , driven by new data centers , expanded storage and other data center-related costs ; and increased third-party software maintenance expense of $ 0.7 million .
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for a detailed discussion of these risks and uncertainties , see the “ risk factors ” section in item 1a of part i of this form 10-k. we caution the reader not to place undue reliance on these forward-looking statements , which reflect management 's analysis only as of the date of this form 10-k. we undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this form 10-k. overview we are a biopharmaceutical company with a focus on the development and commercialization of innovative products to enhance cancer care . we in-license from pfizer the global development and commercialization rights to pb272 ( neratinib ( oral ) ) , pb272 ( neratinib ( intravenous ) ) and pb357 . neratinib is a potent irreversible tki that blocks signal transduction through the epidermal growth factor receptors , her1 , her2 and her4 . currently , we are primarily focused on the development and commercialization of the oral version of neratinib , and our most advanced drug candidates are directed at the treatment of her2-positive breast cancer and her2 mutated cancers . we believe neratinib has clinical application in the treatment of several other cancers as well , including other tumor types that over-express or have a mutation in her2 , such as breast cancer , cervical cancer , lung cancer or other solid tumors . prior to 2017 , our efforts and resources were focused primarily on acquiring and developing our pharmaceutical technologies , raising capital and recruiting personnel . in 2017 , the fda approved nerlynx , formally known as pb272 ( neratinib ( oral ) ) , for the extended adjuvant treatment of adult patients with early stage her2-overexpressed/amplified breast cancer following trastuzumab-based therapy . in 2018 , the ec granted marketing authorization for nerlynx in the european union for the extended adjuvant treatment of adult patients with early state hormone receptor positive her-2-overexpressed/amplified breast cancer and who are less than one year from the completion of prior adjuvant trastuzumab-based therapy . we have entered into exclusive sub-license agreements with various parties to pursue regulatory approval , if necessary , and commercialize nerlynx , if approved , in various specified regions outside of the united states , including europe ( excluding russia and ukraine ) , canada , china , southeast asia , and various countries and territories in central and south america . we plan to continue to pursue commercialization of nerlynx in other countries outside the united states , if approved . our expenses to date have been related to hiring staff , commencing company-sponsored clinical trials and the build out of our corporate infrastructure and , since 2017 , the commercial launch of nerlynx . accordingly , our success depends not only on the safety and efficacy of our product candidates , but also on our ability to finance product development . to date , our major sources of working capital have been proceeds from product and license revenue , public offerings of our common stock , proceeds from our credit facility and sales of our common stock in private placements . summary of income and expenses product revenue , net product revenue , net consists of revenue from sales of nerlynx . we sell nerlynx to a limited number of specialty pharmacies and specialty distributors in the united states . we record revenue at the net sales price , which includes an estimate for variable consideration for which reserves are established . variable consideration consists of trade discounts and allowances , product returns , provider chargebacks and discounts , government rebates and other incentives . license revenue license revenue consists of consideration earned for performance obligations satisfied pursuant to our sub-license agreements . royalty revenue royalty revenue consists of consideration earned related to product sales made by our sub-licensees in their respective territories pursuant to our license agreements . 59 cost of sales cost of sales consists of third-party manufacturing costs , freight , and indirect overhead costs associated with sales of nerlynx . cost of product sales may also include period costs related to royalty charges payable to pfizer , the amortization of a milestone payment made to pfizer after obtaining fda approval of nerlynx , certain inventory manufacturing services , inventory adjustment charges , unabsorbed manufacturing and overhead costs , and manufacturing variances . selling , general and administrative expenses selling , general and administrative , or sg & a , expenses consist primarily of salaries and related personnel costs , including stock-based compensation expense , professional fees , business insurance , rent , general legal activities , and other corporate expenses . internal expenses primarily consist of payroll-related costs , but also include facilities and equipment costs , travel expenses and supplies . external expenses primarily consist of legal fees , insurance expenses and consulting for activities such as sales , marketing and software implementations to support corporate growth . research and development expenses research and development , or r & d , expenses include costs associated with services provided by consultants who conduct clinical services on our behalf , contract organizations for manufacturing of clinical materials and clinical trials . during the years ended december 31 , 2019 , 2018 and 2017 , our r & d expenses consisted primarily of clinical research organization , or cro , fees ; fees paid to consultants ; salaries and related personnel costs ; and stock-based compensation . we expense our clinical r & d costs as they are incurred . internal r & d expenses primarily consist of payroll-related costs , but also include equipment costs , travel expenses and supplies . story_separator_special_tag this included the purchase of available-for-sale securities of approximately $ 107.5 million and cash used for the purchase of property and equipment of approximately $ 0.6 million in connection with the expansion of our salesforce and the commercial launch of nerlynx , offset by the maturity of available-for-sale securities of approximately $ 50.5 million . financing activities during the year ended december 31 , 2019 , cash used in financing activities was approximately $ 67.1 million , which consisted of $ 80.0 million in debt repayments , approximately $ 7.8 million in debt extinguishment costs , and approximately $ 5.6 million in debt issuance costs , offset by $ 25.0 million in proceeds from long-term debt and approximately $ 1.3 million in net proceeds from the exercise of stock options . during the year ended december 31 , 2018 , cash provided by financing activities was approximately $ 108.5 million , which consisted of $ 105.0 million of incremental proceeds from the amended credit facility and approximately $ 7.7 million of net proceeds from the exercise of stock options , partially offset by approximately $ 4.2 million in debt issuance costs . loan and security agreement in october 2017 , we entered into a loan and security agreement with silicon valley bank , or svb , as administrative agent , and the lenders party thereto from time to time , or the original lenders , including oxford and svb . pursuant to the terms of the credit facility provided for by the loan and security agreement , or the original credit facility , we borrowed $ 50 million . in may 2018 , we entered into an amendment to the loan and security agreement , which provided for an amended credit facility , or the amended credit facility . under the amended credit facility , the original lenders agreed to make term loans available to us in an aggregate amount of $ 155 million , consisting of ( i ) a term loan in an aggregate amount of $ 125 million , the proceeds of which , in part , were used to repay the $ 50 million we borrowed under the original credit facility , and ( ii ) a term loan in an aggregate amount of $ 30 million that we drew in december 2018 , which was available to us under the amended credit facility as a result of achieving a specified minimum revenue milestone . we were in compliance with all applicable financial covenants during the entire term of the amended credit facility . on june 28 , 2019 , or the effective date , we entered into a new credit facility , or the new credit facility , with oxford , as collateral agent , and the lenders party thereto from time to time , including oxford , pursuant to which we repaid the $ 155.0 million outstanding under the amended credit facility , as well as all applicable exit and prepayment fees owed to the original lenders under the amended credit facility , using cash on hand and $ 100.0 million in new borrowings from the new credit facility . under the new credit facility , we issued to oxford new and or replacement secured promissory notes in an aggregate principal amount for all such promissory notes of $ 100.0 million evidencing the new credit facility . no additional capacity remains available to us under the new credit facility . the new credit facility is secured by substantially all of our personal property other than our intellectual property . we also pledged 65 % of the issued and outstanding capital stock of our subsidiaries , puma biotechnology ltd. and puma biotechnology b.v. the new credit facility limits our ability to grant any interest in our intellectual property to certain permitted licenses and permitted encumbrances set forth in the agreement . the term loans under the new credit facility bear interest at an annual rate equal to the greater of ( i ) 9.0 % and ( ii ) the sum of ( a ) the “ prime rate , ” as reported in the wall street journal on the last business day of the month that immediately precedes the month in which the interest will accrue , plus ( b ) 3.5 % . we are required to make monthly interest-only payments on each term loan under the new credit facility commencing on the first calendar day of the calendar month following the funding date of such term loan , and continuing on the first calendar day of each calendar month thereafter through august 1 , 2021 , or the amortization date . commencing on the amortization date , and continuing on the first calendar day of each calendar month thereafter , we will make consecutive equal monthly payments of principal , together with applicable interest , in arrears to each lender under the new credit facility , calculated pursuant to the new credit facility . all unpaid principal and accrued and unpaid interest with respect to each term loan under the new credit facility is due and payable in full on june 1 , 2024 , or the maturity date . upon repayment of such term loans , we are also required to make a final payment to the new lenders equal to 7.5 % of the aggregate principal amount of such term loans outstanding as of the effective date .
| results of operations the following summarizes our results of operations for the years ended december 31 , 2019 and 2018. for discussion related to the results of operations and changes in financial condition for the year ended december 31 , 2018 compared to the year ended december 31 , 2017 , please refer to item 7 of part ii , “ management 's discussion and analysis of financial condition and results of operations ” in our annual report for the year ended december 31 , 2018 , which was filed with the united states securities and exchange commission on march 1 , 2019. total revenue total revenue was approximately $ 272.3 million for the year ended december 31 , 2019 , compared to $ 251.0 million for the year ended december 31 , 2018. product revenue , net product revenue , net was approximately $ 211.6 million for the year ended december 31 , 2019 , compared to $ 200.5 million for the year ended december 31 , 2018. the increase in product revenue , net was primarily attributable to a 10 % increase in gross selling price that occurred in the first quarter of 2019 and again in the third quarter of 2019 , partially offset by an increase in variable consideration of approximately 14 % for the year ended december 31 , 2019 as compared to approximately 7 % for the year ended december 31 , 2018 . the increase in variable consideration is primarily due to a increase in government rebates .
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the discussion below contains forward-looking statements within the meaning of section 27a of the securities act of 1933 , as amended , and section 21e of the securities exchange act of 1934 , as amended . these forward-looking statements involve risks and uncertainties including , but not limited to : demand and acceptance of services offered by us , our ability to achieve and maintain acceptable cost levels , pricing levels and actions by competitors , regulatory matters , general economic conditions , and changing business strategies . forward-looking statements are subject to a number of factors that could cause actual results to differ materially from our expressed or implied expectations , including , but not limited to our performance in future periods , our ability to generate working capital from operations , the adequacy of our insurance coverage , and the results of litigation or investigations . our forward-looking statements can be identified by the use of terminology such as “ anticipates , ” “ expects , ” “ intends , ” “ believes , ” “ will ” or the negative thereof or variations thereon or comparable terminology . except as required by law , we undertake no obligation to publicly update or revise any forward-looking statement , whether as a result of new information , future events or otherwise . overview ebix is a leading international supplier of on-demand software and e-commerce solutions to the insurance , financial , and healthcare industries . ebix provides application software products for the insurance industry including carrier systems , agency systems and exchanges , as well as custom software development . approximately 77 % of the company 's revenues are recurring . rather than license our products in perpetuity , we typically either license them for a few years with ongoing support revenues , or license them on a limited term basis using a subscription hosting or asp model . our goal is to be the leading powerhouse of back-end insurance transactions in the world . during 2015 , combined subscription-based and transaction-based revenues increased by $ 37.2 million to $ 204.8 million , while as a percentage of the company 's total revenues decreased to 77 % in 2015 , as compared to 78 % in the year 2014. subscription based revenues increased by $ 39.3 million to $ 174.5 million , and as a percentage of the company 's total revenues increased to 66 % in 2015 , as compared to 63 % in the year 2014. the company 's technology vision is to focus on the convergence of all insurance processes in a manner such that data can seamlessly flow from entity to entity once an initial data entry has been made . our customers include many of the top insurance and financial sector companies in the world . the insurance markets have seen a steady increase in initiatives to reduce paper-based processes and facilitate improvements in efficiency both at the back-end side and also at the consumer-end side . such consolidation has involved both insurance carriers and insurance brokers and is directly impacting the manner in which insurance products are distributed . management believes the insurance industry will continue to experience significant change and increased efficiencies through online exchanges as reduced paper-based processes are becoming increasingly a norm across the world insurance markets . management focuses on a variety of key indicators to monitor operating and financial performance . these performance indicators include measurements of revenue growth , operating income , operating margin , income from continuing operations , diluted earnings per share , and cash provided by operating activities . we monitor these indicators , in conjunction with our corporate governance practices , to ensure that our business is efficiently managed and that effective controls are maintained . the key performance indicators for the twelve months ended december 31 , 2015 , 2014 , and 2013 were as follows : replace_table_token_6_th 22 story_separator_special_tag decreased reported consolidated operating revenues by $ ( 10.7 ) million , $ ( 3.2 ) million , and $ ( 3.8 ) million , respectively . the specific components of our revenue and the changes experienced during the past year are discussed immediately below . exchange division revenues increased by $ 21.3 million , or 13 % , principally due to new exchange clients , and cross selling of products and services to existing clients as facilitated by the 2014 acquisitions of i3 , healthcare magic , oakstone . broker systems division revenue decreased by $ 3.5 million , or 19 % , principally due to the effects of exchange rate fluctuations adversely effecting our australian operations . during the past two years the reported revenues in the broker systems channel have been decreasing due essentially to the effects of changing currency exchange rates . from 2013 to 2015 , in terms of native currencies , the broker systems channel revenues have increased . risk compliance solutions division revenues increased by $ 34.1 million , or 156 % , due primarily to the consulting service revenues generated by the 2015 business acquisition of pb systems , and the 2014 business acquisitions of i3 and vertex . carrier systems division revenue decreased by $ 785 thousand , or 15 % , due the effect of certain completed projects resulting in decreased professional services . costs of services provided costs of services provided , which includes costs associated with customer support , consulting , implementation , and training services , increased $ 25.0 million or 53 % , from $ 47.4 million in 2014 to $ 72.4 million in 2015 . correspondingly , the company 's gross margin decreased modestly from 77.9 % in 2014 to 72.7 % in 2015. the increase in the company 's costs of services provided is due to additional personnel , consulting , and customer support costs associated with the 2015 and 2014 business acquisitions of pb systems , vertex , oakstone , and i3 . story_separator_special_tag presented in the table below is the breakout of our revenues for each of those product channels for the years ended december 31 , 2014 and 2013. replace_table_token_10_th during the twelve months ended december 31 , 2014 our total revenue increased $ 9.6 million , or 5 % , to $ 214.3 million compared to $ 204.7 million in 2013. the company continues to leverage product cross-selling opportunities across all channels , as facilitated by our operating philosophy and business acquisition strategy . with respect to business acquisitions completed during the fiscal years 2014 and 2013 on a pro forma basis , as disclosed in the table in note 4 “ pro forma financial information ” to the enclosed consolidated financial statements , combined pro forma revenues increased 2.3 million or 0.9 % to $ 262.7 million for the year 2014 from the $ 260.5 million of pro forma revenue for the year 2013 , with the change in exchange rates adversely effecting reported revenues by ( $ 3.2 ) million , whereas there was a 4.7 % increase in reported revenues for the same comparative periods . the cause for the difference between the 4.7 % increase in reported 2014 revenue versus 2013 revenue , as compared to the 1.2 % increase in 2014 pro forma versus 2013 pro forma revenue is due to the effect of combining the additional revenue derived from those businesses acquired during the years 2014 and 2013 , specifically curepet , healthcare magic , vertex , oakstone , i3 , and qatarlyst with the company 's pre-existing operations . the 2014 and 2013 pro forma financial information assumes that all such business acquisitions were made on january 1 , 2013 , whereas the company 's reported financial statements for 2014 only includes the operating results from the businesses since the effective date that they were acquired by ebix , and thusly includes only eleven months of curepet , eight months of healthcare magic , three months of vertex , and one month each for oakstone and i3 . similarly , the 2013 pro forma financial information below includes a full year of results for healthcare magic , vertex , oakstone , i3 , and qatarlyst as if they had been acquired on january 1 , 2013 , whereas the company 's reported financial statements for the 2013 includes no actual financial results for healthcare magic , vertex , oakstone , i3 , and nine months of financial results for qatarlyst . the above pro forma analysis is based on the following premises : 2014 and 2013 pro forma revenue contains actual revenue of the acquired entities before acquisition date , as reported by the sellers , as well as actual revenue of the acquired entities after acquisition . growth in revenues of the acquired entities after acquisition date are only reflected for the period after their acquisition . revenue billed to existing clients from the cross selling of acquired products has been assigned to the acquired section of our business . any existing products sold to new customers acquired through the acquisition customer base , has also been assigned to the acquired section of our business . 2013 pro forma revenues include revenues from some product lines whose sale was discontinued after the acquisition date and revenues from some customers whose contracts were discontinued . this is typically done for efficiency and or competitive reasons . the impact from fluctuations of the exchange rates for the foreign currencies in the countries in which we conduct operations also partially affected reported revenues . during each of the years 2014 , 2013 , and 2012 the change in foreign currency exchange rates decreased reported consolidated operating revenues by $ ( 3.2 ) million , $ ( 3.8 ) million , and $ ( 1.2 ) million , respectively . the specific components of our revenue and the changes experienced during the past year are discussed further below . 27 exchange division revenues increased by $ 5.5 million , or 3 % , principally due to new exchange clients , and cross selling of products and services to existing clients as facilitated by the 2013 acquisition of qatarlyst , and the 2014 acquisitions of healthcare magic and oakstone . broker systems division revenue decreased by $ 430 thousand , or 2 % , principally due to the effects of exchange rate fluctuations in our foreign operations . risk compliance solutions division revenues increased by $ 6.1 million , or 39 % , due primarily to the business acquisitions of vertex in october 2014 , and i3 in december 2014 , which are both included in the the risk compliance solutions product channel . carrier systems division revenue decreased by $ 1.6 million , or 24 % , due the company 's reduced focus on license orientated revenues , and the effect of certain projects nearing completion resulting in decreased professional services . costs of services provided costs of services provided increased $ 6.9 million or 17 % , from $ 40.5 million in 2013 to $ 47.4 million in 2014. this increase is due to additional personnel , consulting , and customer support costs associated with the 2014 business acquisitions of vertex , oakstone , and i3 . product development expenses product development expenses increased $ 0.1 million , or 0 % , from $ 26.8 million in 2013 to $ 26.9 million in 2014. the company 's product development efforts were focused on the development of new technologies for insurance carriers , brokers and agents , and the development of new data exchanges for use in domestic and international insurance markets . sales and marketing expenses sales and marketing expenses decreased $ 2.0 million , or 13 % , from $ 15.8 million in 2013 to $ 13.8 million in 2014. this decrease is due to the reduced personnel costs associated with the continued deemphasis on certain products generating low operating income margins .
| results of operations replace_table_token_7_th twelve months ended december 31 , 2015 and 2014 operating revenue the company derives its revenues primarily from professional and support services , which includes subscription and transaction fees pertaining to services delivered over our exchanges or from our asp platforms , revenue generated from software development projects and associated fees for consulting , implementation , training , and project management provided to customers using our systems , and business process outsourcing revenue . ebix 's revenue streams come from four product channels . presented in the table below is the breakout of our revenues for each of those product channels for the years ended december 31 , 2015 and 2014 . replace_table_token_8_th during the twelve months ended december 31 , 2015 our total revenue increased $ 51.2 million , or 24 % , to $ 265.5 million compared to $ 214.3 million in 2014 . the company leverages product cross-selling opportunities across all channels , as facilitated by our operating philosophy and business acquisition strategy . with respect to business acquisitions completed during the fiscal years 2015 and 2014 on a pro forma basis , as disclosed in the table in note 4 “ pro forma financial information ” to the enclosed consolidated financial statements , combined pro forma revenues decreased $ 8.2 million or 2.9 % to $ 272.2 million for the year 2015 from the $ 280.5 million of pro forma revenue for the year 2014 , with the change in exchange rates adversely effecting reported revenues by ( $ 10.7 ) million , whereas there was a 23.9 % increase in reported revenues for the same comparative periods .
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this commentary should be read in conjunction with our consolidated financial statements and the notes thereto appearing under “ item 8 : financial statements and supplementary data. ” executive overview what businesses are we in ? we report financial results for two segments : government : our government segment includes sales of public safety communications systems , commercial two-way radio systems , devices , and software . service revenues included in the government segment are primarily those associated with the design , installation , maintenance and optimization of equipment for public safety networks . enterprise : our enterprise segment includes sales of rugged and enterprise-grade mobile computers and tablets , laser/imaging/rfid based data capture products , wlan and iden infrastructure and software . service revenues included in the enterprise segment are primarily maintenance contracts associated with the above products . what were our 2012 financial results ? we increased net sales by 6 % to $ 8.7 billion in 2012 , compared to net sales of $ 8.2 billion in 2011 . we generated operating earnings of $ 1.3 billion in 2012 , compared to $ 858 million in 2011 . operating margin was 14.4 % of net sales in 2012 , compared to 10.5 % of net sales in 2011 . we had earnings from continuing operations of $ 878 million , or $ 2.95 per diluted common share , in 2012 , compared to earnings from continuing operations of $ 747 million , or $ 2.20 per diluted common share , in 2011 . we generated cash from operating activities of $ 1.1 billion in 2012 , compared to $ 848 million of cash from operating activities in 2011 . we returned $ 2.4 billion in cash to shareholders through share repurchases and $ 270 million in cash dividends during 2012 . we issued $ 750 million of 3.750 % senior notes due 2022 and redeemed $ 400 million of 5.375 % senior notes due in november 2012. what were the financial results for our two operating segments in 2012 ? in the government segment : net sales were $ 6.0 billion in 2012 , an increase of 12 % compared to net sales of $ 5.4 billion in 2011 . on a geographic basis , net sales increased in all regions . operating margin improved in 2012 to 16.1 % from 11.5 % in 2011 , primarily due to the 12 % increase in net sales and increased leverage in operating expenses . operating earnings were $ 965 million in 2012 , compared to operating earnings of $ 616 million in 2011 . in the enterprise segment : net sales were $ 2.7 billion in 2012 , a decrease of 5 % compared to net sales of $ 2.8 billion in 2011 . on a geographic basis , net sales increased in asia and decreased in north america , latin america and europe , middle east , and africa ( `` emea '' ) . operating earnings were $ 291 million in 2012 , compared to operating earnings of $ 242 million in 2011 . operating margin increased in 2012 compared to 2011 , due to a decrease in other charges driven by lower intangible amortization , partially offset by decreased gross margins due to lower sales levels . what were our major accomplishments in 2012 ? in the government segment : in 2012 , sales , operating earnings , and operating leverage increased compared to 2011 . we saw strong growth across all of our major product lines , including systems infrastructure and subscribers . the 12 % increase in net sales was primarily driven by the continued transition from analog to digital , the replacement of aged public safety infrastructure , and the tiered expansion of our product portfolio . additionally , in north america we benefited from u.s. narrowbanding , as many existing public safety , professional and commercial analog systems were replaced with next generation digital systems , with enhanced features and a more efficient use of spectrum , providing additional channels and enabling new users to be added . during 2012 , our apco p-25 based astro technology continued to extend beyond north america , as we now have deployments in over 60 countries . additionally , we shipped our two millionth tetra terminal , and continued to expand our digital professional and commercial radio solution mototrbo . additionally , our services portfolio saw significant growth with the completion of the agreement with nsn to take over responsibility to implement and manage norway´s tetra public safety network . 24 in the enterprise segment : our sales decline in 2012 was driven by a challenging macro environment as many large customers continued to postpone deployments in the face of soft economic conditions . despite challenges in the macro environment , our engagement with customers who continue to invest in our mobile technologies , remains strong . our r & d and capital investments resulted in many new enhancements to our product portfolio , including the acquisition of psion plc ( `` psion '' ) , a u.k. based leader in mobile computing solutions . we extended retail thought leadership with innovative new products like the sb1 , mc40 and et1 tablet that help provide customer support while delivering significant operational efficiencies . within the data capture solutions product group we continued to strengthen our product portfolio by executing on the laser to imager transition , including the recent announcement of the mp6000 multi-plane imager based scanner , which sits inside the check-out counters used by retailers . looking forward in 2012 , we achieved a number of key accomplishments , including solid sales growth , operating earnings expansion and earnings per share growth , generating strong operating cash flow and significant capital returns to our shareholders , which positions us well as we begin 2013. the demand drivers for our business remain solid and we remain focused on improving operating leverage through targeted investments and disciplined cost management . story_separator_special_tag our negative effective tax rate in 2011 was primarily due to : ( i ) a $ 274 million tax benefit related to the reversal of a significant portion of the valuation allowance established on the u.s. deferred tax assets , and ( ii ) reductions in unrecognized tax benefits for facts that now indicate the extent to which certain tax positions are more-likely-than-not of being sustained , partially offset by an increase in the u.s. federal income tax accrual for repatriation of undistributed foreign earnings . while our effective tax rate may change from period to period due to non-recurring events , such as settlements of income tax audits and changes in valuation allowances , we generally expect our effective tax rate to be close to the u.s. statutory tax rate primarily due to our current repatriation strategy and the u.s. federal income tax accrual on undistributed foreign earnings . during 2012 , the company began to reorganize certain of its non-u.s. subsidiaries under a holding company structure in order to facilitate the efficient movement of non-u.s. cash and provide a platform to fund foreign investments , such as potential acquisitions and capital expenditures . when the reorganization is complete , the tax impact of future cash repatriations from these subsidiaries may be more favorable than under the existing structure . the valuation allowances on our deferred tax assets are discussed further in note 6 , “ income taxes , ” of our consolidated financial statements . our effective tax rate will change from period to period based on non-recurring events , such as the settlement of income tax audits , changes in valuation allowances and the tax impact of significant unusual or extraordinary items , as well as recurring factors including changes in the geographic mix of income and effects of various global income tax strategies . earnings from continuing operations after taxes , and excluding earnings attributable to noncontrolling interests , we had net earnings from continuing operations of $ 878 million , or $ 2.95 per diluted share , in 2012 , compared to $ 747 million , or $ 2.20 per diluted share , in 2011 . the increase in earnings from continuing operations in 2012 compared to 2011 was primarily attributable to : ( i ) $ 287 million decrease in other charges related to lower intangible asset amortization and net legal and related insurance matters , and ( ii ) $ 202 million increase in gross margin , partially offset by the $ 274 million benefit for the valuation allowance reversal recorded during 2011 . the increase in earnings per diluted share was primarily due to the increase in earnings from continuing operations and the reduction in shares outstanding as a result of our share repurchase program . earnings from discontinued operations after taxes , we had earnings from discontinued operations of $ 3 million , or $ 0.01 per diluted share , in 2012 , compared to earnings from discontinued operations of $ 411 million , or $ 1.21 per diluted share , in 2011 . the earnings from discontinued operations in 2011 were primarily from the operations of and the gain on the sale of the networks business . results of operations— 2011 compared to 2010 net sales net sales were $ 8.2 billion in 2011 , an 8 % increase compared to net sales of $ 7.6 billion in 2010. the increase in net sales reflects : ( i ) a $ 309 million , or 6 % increase in net sales in the government segment and ( ii ) a $ 277 million , or 11 % increase in net sales in the enterprise segment . gross margin gross margin was $ 4.1 billion , or 50.5 % of net sales in 2011 , compared to $ 3.8 billion , or 50.0 % of net sales , in 2010. gross margin dollars increased in both segments . the increase in gross margin as a percent of sales reflects higher gross margin in the government segment , driven by the increase in sales and favorable product mix , with margins remaining flat in the 29 enterprise segment driven by margin gains in certain product lines offset by the anticipated decline in iden , which has historically yielded strong margins . selling , general and administrative expenses sg & a expenses increased 2 % to $ 1.9 billion , or 23.2 % of net sales , in 2011 , compared to $ 1.9 billion , or 24.5 % of net sales , in 2010. the increase in sg & a expenses reflects higher sg & a expenses in both segments , primarily due to ( i ) increased sales incentives related to the increase in net sales and ( ii ) increased employee benefit-related expenses . the increases in employee benefit-related expenses are primarily due to an increase in pension-related expenses and the reinstatement of our 401 ( k ) matching contributions . research and development expenditures r & d expenditures of $ 1.0 billion , or 12.6 % of net sales were relatively flat in 2011 , compared to $ 1.0 billion , or 13.6 % of net sales in 2010. r & d expenditures were flat in 2011 compared to 2010 , which reflects higher r & d expenditures in the enterprise segment and lower r & d expenditures in the government segment . the slight increase in the enterprise segment was primarily due to investment in next-generation technologies and increased employee benefit-related expenses . the decrease in r & d expenditures in the government segment was primarily due to savings from cost reduction initiatives related to non employee expenses , partially offset by increased employee benefit expenses .
| results of operations replace_table_token_3_th * amounts attributable to motorola solutions , inc. common shareholders . * * percentages may not add due to rounding . 27 geographic market sales measured by the locale of the end customer as a percent of total net sales for 2012 , 2011 and 2010 are as follows : geographic market sales by locale of end customer replace_table_token_4_th results of operations— 2012 compared to 2011 net sales net sales were $ 8.7 billion in 2012 , a 6 % increase compared to net sales of $ 8.2 billion in 2011 . the increase in net sales reflects : ( i ) a $ 631 million , or 12 % increase in net sales in the government segment driven by broad based growth across the product portfolio , and ( ii ) a $ 136 million , or 5 % decrease in net sales in the enterprise segment driven by the anticipated decline in iden infrastructure sales , reduced information technology spending driven by macroeconomic uncertainty , and unfavorable foreign currency fluctuations . gross margin gross margin was $ 4.3 billion , or 50.0 % of net sales in 2012 , compared to $ 4.1 billion , or 50.5 % of net sales , in 2011 . the gross margin increase was driven by the 12 % increase in net sales in our government segment , offset by lower gross margin in our enterprise segment , primarily related to a decline in volume , including the decline in iden infrastructure sales , and unfavorable foreign currency fluctuations . the decrease in gross margin as a percent of sales reflects higher gross margin percent from product sales and lower gross margin percent from service sales . the decline in gross margin percentage from service sales primarily relates to : ( i ) the expansion of managed services , which generally have lower gross margin than our traditional service contracts , and ( ii ) unfavorable foreign currency fluctuations .
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since these amendments only relate to the reclassification of the income tax effects of the tax cuts and jobs act , the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected . these amendments require that an entity disclose a description of the accounting policy for releasing income tax effects from accumulated other comprehensive income . these amendments are effective for fiscal years beginning after december 15 , 2018 , and interim periods within those years . early adoption is permitted , including adoption in any interim period , for reporting periods for which financial statements have not yet been issued . these amendments should be applied either in the period of adoption or retrospectively story_separator_special_tag the following discussion and analysis presents our financial condition and results of operations on a consolidated basis . however , we conduct all of our material business operations through our wholly owned bank subsidiary , origin bank , and the discussion and analysis that follows primarily relates to activities conducted at the bank level . the following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes contained in item 8 of this report . to the extent that this discussion describes prior performance , the descriptions relate only to the periods listed , which may not be indicative of our future financial outcomes . in addition to historical information , this discussion contains forward-looking statements that involve risks , uncertainties and assumptions that could cause results to differ materially from management 's expectations . factors that could cause such differences are discussed in the sections titled `` cautionary note regarding forward-looking statements '' and `` item 1a . risk factors . '' we assume no obligation to update any of these forward-looking statements . critical accounting estimates our consolidated financial statements are prepared in accordance with united states generally accepted accounting principles ( `` gaap '' ) and with general practices within the financial services industry . application of these principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes . we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances . these assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available from independent , objective sources . we evaluate our estimates on an ongoing basis . use of alternative assumptions may have resulted in significantly different estimates . actual results may differ from these estimates . please refer to note 1 - significant accounting policies to our consolidated financial statements contained in item 8 of this report for a full discussion of our accounting policies , including estimates . we have identified the following accounting estimates that , due to the difficult , subjective or complex judgments and assumptions inherent in those estimates and the potential sensitivity of the financial statements to those judgments and assumptions , 40 are critical to an understanding of our financial condition and results of operations . we believe that the judgments , estimates and assumptions used in the preparation of the financial statements are appropriate . allowance for loan losses . our allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings . subsequent recoveries , if any , are credited to the allowance . the allowance for loan losses is evaluated on a regular basis by management and is based upon management 's periodic review of the collectability of the loans in light of historical experience , the nature and volume of the loan portfolio , adverse situations that may affect the borrower 's ability to repay , estimated value of any underlying collateral , and prevailing economic conditions . this evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available . loans are charged against the allowance for loan losses when management believes the loss is confirmed . mortgage servicing rights . we recognize as assets the rights to service mortgage loans based on the estimated fair value of the mortgage servicing right ( `` msr '' ) when loans are sold and the associated servicing rights are retained . we elected to account for the msr at fair value . the fair value of the msr is determined using a valuation model administered by a third party that calculates the present value of estimated future net servicing income . the model incorporates assumptions that market participants use in estimating future net servicing income , including estimates of prepayment speeds , discount rate , default rates , cost to service ( including delinquency and foreclosure costs ) , escrow account earnings , contractual servicing fee income and other ancillary income such as late fees . management reviews all significant assumptions quarterly . mortgage loan prepayment speeds , a key assumption in the model , is the annual rate at which borrowers are forecasted to repay their mortgage loan principal . the discount rate used to determine the present value of estimated future net servicing income , another key assumption in the model , is an estimate of the rate of return investors in the market would require for an asset with similar risk . both assumptions can , and generally will , change as market conditions and interest rates change . an increase in either the prepayment speed or discount rate assumption will result in a decrease in the fair value of the msr , while a decrease in either assumption will result in an increase in the fair value of the msr . in recent years , there have been significant market-driven fluctuations in loan prepayment speeds and discount rates . these fluctuations can be rapid and may continue to be significant . story_separator_special_tag or 72.3 % , from $ 30.1 million for the year ended december 31 , 2016. the decrease in provision expense was driven by significant provision expense recorded in 2016 on our energy lending portfolio . of the 2016 provision expense , $ 31.7 million was attributable to deterioration in our energy loan portfolio due to the decline in the price of oil and resulting downturn in the energy sector , partially offset by a net recovery in the remainder of our loan portfolio . net charge-offs for the twelve months ended december 31 , 2017 , were $ 21.7 million compared to $ 21.9 million for same period in 2016 , while net charge-offs for the energy portfolio were $ 14.6 million and $ 22.7 million for the same periods , respectively . our energy portfolio totaled $ 54.3 million at december 31 , 2017 , compared to $ 151.0 million at december 31 , 2016. noninterest income our primary sources of recurring noninterest income are service charges on deposit accounts , mortgage banking revenue , insurance commission and fee income , and other fee income . the table below presents the various components of and changes in our noninterest income for the periods indicated . replace_table_token_7_th year ended december 31 , 2018 , compared to year ended december 31 , 2017 noninterest income for the year ended december 31 , 2018 , increased by $ 12.1 million , or 41.3 % , to $ 41.2 million , compared to $ 29.2 million for the year ended december 31 , 2017. the increase in noninterest income during the year ended december 31 , 2018 , was largely driven by $ 12.7 million in losses incurred on non-mortgage loans held for sale in 2017 , with no comparable expense incurred during 2018. other contributing factors were increases in other income and insurance commission and fee income of $ 3.4 million and $ 2.5 million , respectively . the most significant driver of the increase in other noninterest income for the year ended december 31 , 2018 , compared to 2017 , was a positive valuation adjustment of $ 2.0 million on a common stock investment due to a recent accounting standard change . for more information on this accounting standard update , please refer to note 1 - significant accounting policies in the notes to the consolidated financial statements . the increase in insurance commission and fee income was primarily driven by the rcf acquisition in july 2018 , which significantly expanded the company 's insurance presence in the north louisiana market . partially offsetting the net increase in noninterest income was a $ 6.2 million decrease in mortgage banking revenue . this decrease was primarily due to a 67.2 % decline in the volume of mortgage loans sold , resulting in a $ 5.0 million decrease in gains on the sale of mortgage loans . the reduction in volume was primarily driven by the closing of a loan production office outside of our core geographic footprint that accounted for a significant portion of mortgage production , as we shifted our focus to retail originations within our core geographic banking footprint . also contributing to the decrease in volume on mortgage loans sold was a broader downturn in the mortgage industry . as part of this strategy , we also reduced the amount of third party originations in our mortgage pipeline during 2018 compared to 2017. year ended december 31 , 2017 , compared to year ended december 31 , 2016 44 noninterest income was $ 29.2 million , representing a decrease of $ 12.7 million , or 30.3 % , compared to the year ended december 31 , 2016. the decrease in noninterest income during the year ended december 31 , 2017 , was primarily driven by $ 12.7 million in losses incurred on non-mortgage loans held for sale in 2017 , with no comparable expense incurred during 2016. in addition , other income decreased by $ 2.5 million , or 38.6 % , to $ 4.1 million for the year ended december 31 , 2017 , compared to $ 6.6 million for the year ended december 31 , 2016. the decrease was primarily a result of a decrease in limited partnership income of $ 2.3 million . during the year ended december 31 , 2016 , we recognized a gain of $ 1.9 million as a result of the sale of certain assets held in one of our limited partnership investments . excluding this gain , we recorded income from our limited partnerships of $ 893,000 for the year ended december 31 , 2016 , compared to income of $ 444,000 for the year ended december 31 , 2017. the investment partnerships are small business investment companies , and our investments in these partnerships provide us credit toward our requirements under the community reinvestment act . partially offsetting the net decrease in noninterest income during the year ended december 31 , 2017 , compared to 2016 , was a $ 1.6 million increase in gains on sale and disposal of other assets . this was driven by the sale of a bank-owned tract of vacant land in 2017 for a gain of $ 1.5 million , with no corresponding sale during 2016. noninterest expense the following table presents the significant components of noninterest expense for the periods indicated : replace_table_token_8_th year ended december 31 , 2018 , compared to year ended december 31 , 2017 noninterest expense increased by $ 562,000 , or 0.4 % , in 2018 to $ 131.2 million , primarily due to increases in salaries and employee benefits , advertising and marketing expenses and other noninterest expense . salaries and employee benefits increased by $ 9.6 million , or 13.6 % , for the year ended december 31 , 2018 , compared to 2017. the increase was driven by increases in the cost of salaries and incentive compensation .
| general we are a financial holding company headquartered in ruston , louisiana . through our wholly owned bank subsidiary , origin bank , we provide a broad range of financial services to small and medium-sized businesses , municipalities , high net worth individuals and retail clients through 41 banking centers in louisiana , texas and mississippi . as a financial holding company operating through one segment , we generate the majority of our revenue from interest earned on loans and investments , service charges and fees on deposit accounts . we incur interest expense on deposits and other borrowed funds and noninterest expense , such as salaries and employee benefits and occupancy expenses . we analyze our ability to maximize income generated from interest earning assets and expense of our liabilities through our net interest margin . net interest margin is a ratio calculated as net interest income divided by average interest-earning assets . net interest income is the difference between interest income on interest-earning assets , such as loans , securities and interest-bearing cash , and interest expense on interest-bearing liabilities , such as deposits and borrowings . changes in market interest rates and the interest rates we earn on interest-earning assets or pay on interest-bearing liabilities , as well as in the volume and types of interest-earning assets , interest-bearing and noninterest-bearing liabilities and stockholders ' equity , are usually the largest drivers of periodic changes in net interest spread , net interest margin and net interest income . fluctuations in market interest rates are driven by many factors , including governmental monetary policies , inflation , deflation , macroeconomic developments , changes in unemployment , the money supply , political and international conditions and conditions in domestic and foreign financial markets .
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next generation ( `` nextgen '' ) software solutions to telecommunications , wireless and cable service providers and enterprises across industry verticals . with over 1,000 customers around the globe , including some of the largest telecommunications service providers and enterprises in the world , we enable service providers and enterprises to modernize their communications networks through software and provide secure rtc solutions to their customers and employees . by securing and enabling reliable and scalable ip networks , we help service providers and enterprises adopt the next generation of software-based virtualized and cloud communications technologies for service providers to drive new , incremental revenue while protecting their existing revenue streams . our software solutions provide a secure way for our customers to connect and leverage multivendor , multiprotocol communications systems and applications across their networks and the cloud , around the world and in a rapidly changing ecosystem of ip-enabled devices , such as smartphones and tablets . in addition , our software solutions secure cloud-based delivery of uc solutions - both for service providers transforming to a cloud-based network and for enterprises using cloud-based uc . we sell our software solutions through both direct sales and indirect channels globally , leveraging the assistance of resellers , and we provide ongoing support to our customers through a global services team with experience in design , deployment and maintenance of some of the world 's largest software ip networks . presentation unless otherwise noted , all financial amounts , excluding tabular information , in this management 's discussion and analysis of financial condition and results of operations ( `` md & a '' ) are rounded to the nearest thousand dollar amount , and all percentages , excluding tabular information , are rounded to the nearest percentage point . unless otherwise noted , all forward-looking statements in this md & a exclude the pending eci merger . business acquisitions pending merger on november 14 , 2019 , we entered into an agreement and plan of merger ( the `` eci merger agreement '' ) with eclipse communications ltd. , an indirect wholly-owned subsidiary of the company ( `` merger sub '' ) , ribbon communications israel ltd. , eci telecom group ltd. ( `` eci '' ) and eci holding ( hungary ) kft , pursuant to which merger sub will merge with and into eci , with eci surviving such merger as a wholly-owned subsidiary of the company ( the `` eci merger '' ) . our board of directors ( the `` board '' ) unanimously approved the eci merger agreement and the transactions contemplated thereby . our stockholders approved the issuance of 32.5 million shares of our common stock ( the `` eci stock consideration '' ) as partial consideration in the eci merger . as provided in the eci merger agreement , at the time of the closing , all equity securities of eci issued and outstanding immediately prior to the closing will be converted into the right to receive consideration consisting of $ 324 million in cash ( the `` eci cash consideration '' ) and the eci stock consideration , less the amount of indebtedness of eci . eci equityholders will also receive approximately $ 31 million from eci 's sale of real estate assets . we intend to fund the eci cash consideration with proceeds from a new $ 500 million credit facility that we expect to enter into with citizens bank , n.a . and santander bank , n.a. , as joint lead arrangers and bookrunners , in connection with the closing of the eci merger ( the “ 2020 credit facility ” ) . the 2020 credit facility consists of a $ 400 million term loan , which will be used in part to fund the merger , and a $ 100 million revolver that is projected to be undrawn at closing . the 2020 credit facility will retire our existing credit facility . immediately following the closing , it is expected that the former holders of eci will own approximately 23 % of our outstanding common shares . the eci merger is expected to close in the first quarter of 2020 , subject to regulatory approvals and customary closing conditions . anova data , inc. on february 28 , 2019 ( the `` anova acquisition date '' ) , we acquired the business and technology assets of anova data , inc. ( `` anova '' ) , a private company headquartered in westford , massachusetts ( the `` anova acquisition '' ) . anova is a provider of advanced analytics solutions and its nextgen products provide a cloud-native , streaming analytics platform for network and subscriber optimization and monetization . the company believes that the anova acquisition is reinforcing and extending 46 ribbon 's strategy to expand into network optimization , security and data monetization via big data analytics and machine learning . as consideration for the anova acquisition , we issued 2.9 million shares of our common stock with a fair value of $ 15.2 million to anova 's sellers and equity holders on the anova acquisition date and held back an additional 0.3 million shares of our common stock with a fair value of $ 1.7 million , some or all of which could be issued subject to post-closing adjustments ( the `` anova deferred consideration '' ) . the anova deferred consideration is included as a component of accrued expenses and other current liabilities in our consolidated balance sheet at december 31 , 2019. the anova acquisition has been accounted for as a business combination and the financial results of anova have been included in our consolidated financial statements for the period subsequent to the anova acquisition date . edgewater networks , inc. on august 3 , 2018 ( the `` edgewater acquisition date '' ) , we completed our acquisition of edgewater networks , inc. ( `` edgewater '' ) , a private company headquartered in san jose , california ( the `` edgewater acquisition '' ) . story_separator_special_tag year ended december 31 , 2018. story_separator_special_tag style= '' line-height:120 % ; text-align : left ; text-indent:30px ; font-size:10pt ; '' > we assumed genband 's restructuring liability aggregating $ 4 million at the merger date ( the `` genband restructuring initiative '' ) , primarily related to headcount reductions . in 2018 , we recorded $ 1 million of restructuring expense for changes in estimated costs for previously recorded initiatives , primarily changes in negotiated severance to employees in certain international locations and changes in estimated sublease income for restructured facilities . in connection with the adoption of asc 842 effective january 1 , 2019 , we wrote off the remaining restructuring accrual related to facilities . the genband restructuring initiative is complete , and we do not expect to record future expense in connection with this initiative . on july 25 , 2016 , we announced a program ( the `` 2016 restructuring initiative '' ) to further accelerate our investment in new technologies as the communications industry migrates to a cloud-based architecture and to pursue new strategic initiatives , such as new products and an expanded go-to-market footprint in selected geographies and discrete vertical markets . we have recorded an aggregate of $ 2 million of restructuring expense in connection with this initiative , primarily for severance and related costs . the actions under the 2016 restructuring initiative were completed in 2019 and accordingly , no additional expense will be recorded in connection with this initiative . in connection with the acquisition of taqua , we implemented a restructuring plan in the third quarter of 2016 to eliminate certain redundant positions within the combined companies . on october 24 , 2016 , the audit committee of our board ( the `` audit committee '' ) approved a broader taqua restructuring plan related to headcount and redundant facilities ( collectively , the `` taqua restructuring initiative '' ) . in connection with this initiative , we have recorded $ 2 million of restructuring expense for severance and related costs and estimated costs related to the elimination of redundant facilities . the actions under the taqua restructuring initiative have been completed and accordingly , no additional expense will be recorded in connection with this initiative . in connection with the adoption of asc 842 effective january 1 , 2019 , we wrote off the remaining restructuring accrual related to redundant facilities . critical accounting policies and estimates management 's discussion and analysis of the financial condition and results of operations is based upon our consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states of america . the preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , revenue and expenses , and related disclosure of contingent assets and liabilities . we base our estimates and judgments on historical experience , knowledge of current conditions and beliefs of what could occur in the future given available information . we consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment . if actual results differ significantly from management 's estimates and projections , there could be a material effect on our consolidated financial statements . the significant accounting policies that we believe are the most critical include revenue recognition , the valuation of inventory , loss 49 contingencies and reserves , stock-based compensation , business combinations , goodwill and intangible assets , accounting for leases and accounting for income taxes . revenue recognition . we account for revenue in accordance with asc 606 , revenue from contracts with customers ( `` asc 606 '' ) , which we adopted on january 1 , 2018 using the modified retrospective method . we derive revenue from two primary sources : products ( software and non-software products ) and services . software and non-software product revenue is generated from sales of our software with proprietary appliances that function together to deliver the products ' essential functionality . software and appliances are also sold on a standalone basis . services include customer support ( software updates and technical support ) , consulting , design services , installation services and training . a typical contract includes both product and services . generally , contracts with customers contain multiple performance obligations . for these contracts , we account for individual performance obligations separately if they are distinct . the transaction price is allocated to the separate performance obligations on a relative standalone selling price basis . ssps are typically estimated based on observable transactions when these services are sold on a standalone basis . the software licenses typically provide a perpetual right to use our software . we also sell term-based software licenses that expire and software-as-as-service ( `` saas '' ) -based software , which are referred to as subscription arrangements . we do not customize our software nor are installation services required , as the customer has a right to utilize internal resources or a third-party service company . the software and appliances are delivered before related services are provided and are functional without professional services or customer support . we have concluded that our software licenses are functional intellectual property that are distinct , as the user can benefit from the software on its own . the product revenue is typically recognized upon transfer of control or when the software is made available for download , as this is the point that the user of the software can direct the use of , and obtain substantially all of the remaining benefits from , the functional intellectual property . we do not recognize software revenue related to the renewal of subscription software licenses earlier than the beginning of the subscription period . appliance products are generally sold with software to provide the customer solution . service revenue includes revenue from customer support and other professional services . we offer warranties on our products .
| financial results we reported losses from operations of $ 189 million for 2019 and $ 65 million for 2018. we reported net losses of $ 130 million for 2019 and $ 77 million for 2018. our revenue was $ 563 million in 2019 and $ 578 million in 2018. our gross profit was $ 317 million in 2019 and $ 308 million in 2018. our gross profit as a percentage of revenue ( `` total gross margin '' ) was 56 % in 2019 and 53 % in 2018. our operating expenses were $ 507 million in 2019 and $ 374 million in 2018. our 2019 operating expenses included $ 164 million for the impairment of goodwill , $ 13 million of acquisition- and integration-related expenses , primarily related to the pending eci merger , and $ 16 million of restructuring expense , primarily related to severance and related costs . our 2018 operating expenses included $ 17 million of acquisition- and integration-related expenses , primarily related to the merger and , to a lesser extent , to the edgewater acquisition , and $ 17 million of restructuring expense , primarily related to severance and related costs . we recorded stock-based compensation expense of $ 13 million in 2019 and $ 11 million in 2018. the expense recorded in 2019 includes $ 2 million of incremental expense related to the accelerated vesting of rsus and psus held by our former president and chief executive officer , franklin hobbs , in connection with his separation from the company effective december 31 , 2019. see `` results of operations '' in this md & a for additional discussion of our results of operations for the years ended december 31 , 2019 and 2018. restructuring and cost reduction initiatives in june 2019 , we implemented a restructuring plan to further streamline our global footprint , improve our operations and enhance our customer delivery ( the `` 2019 restructuring initiative '' ) .
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or prove incorrect , could cause our results to differ materially from those expressed or implied by such forward-looking statements . factors that could cause or contribute to these differences include , but are not limited to , those identified below and those discussed in the section titled “ risk factors ” under part i , item 1a in this annual report on form 10-k. 1 pursuant to reg s-k this can be limited to just fiscal 2019 and 2018. option to include fiscal 2017 27 we operate on a 52- or 53-week fiscal year that ends on the sunday closest to february 1. each fiscal year generally is comprised of four 13-week fiscal quarters , although in the years with 53 weeks , the fourth quarter represents a 14-week period . overview we are a technology driven , omni-channel company that designs , manufactures and sells unique , high quality furniture comprised of modular couches called sactionals and premium foam beanbag chairs called sacs . we market and sell our products through modern and efficient showrooms and , increasingly , through online sales . we believe that our ecommerce centric approach , coupled with our ability to deliver our large upholstered products through nationwide express couriers , are unique to the furniture industry . the name “ lovesac ” was derived from our original innovative product , a premium foam beanbag chair , the sac . the sac was developed in 1995 and provided the foundation for the company . we believe that the large size , comfortable foam filling and irreverent branding of our sacs products have been instrumental in growing a loyal customer base and our positive , fun image . our sactionals product line currently represents a majority of our sales . sactionals are a couch system that consists of two components , “ seats ” and “ sides ” , which can be arranged , rearranged and expanded into thousands of configurations easily and without tools . our sactional products include a number of patented features relating to their geometry and modularity , coupling mechanisms and other features . we believe that these high quality premium priced products enhance our brand image and customer loyalty and expect them to continue to garner a significant share of our sales . sacs and sactionals come in a wide variety of colors and fabrics that allow consumers to customize their purchases in numerous configurations and styles . we provide lifetime warranties on our sactionals frames and the proprietary foam used in both product lines , and three-year warranties on our covers . our designed for life trademark reflects our dynamic product line that is built to last and evolve throughout a customer 's life . customers can continually update their sacs and sactionals with new covers , additions and configurations to accommodate the changes in their family and housing situations . we currently market and sell our products through 75 showrooms at top tier malls , lifestyle centers and street locations in 30 states in the u.s. our modern , efficient showrooms are designed to appeal to millennials and other purchasers looking for comfortable , enduring , premium furniture . they showcase the different sizes of our sacs , the myriad forms into which our sactionals can be configured , and the large variety of fabrics that can be used to cover our products . as part of our direct to consumer sales approach , we also sell our products through our ecommerce platform . we believe our products are uniquely suited to this channel . our foam-based sacs can be reduced to one-eighth of their normal size and each of our sactionals components weighs less than 50 pounds upon shipping . our showrooms and other direct marketing efforts work in concert to drive customer conversion in ecommerce . product overview we challenge the notion that a piece of furniture is static by offering a dynamic product line built to last and evolve throughout a customer 's life . our products serve as a set of building blocks that can be rearranged , restyled and re-upholstered with any new setting , mitigating constant changes in fashion and style . sactionals . we believe our sactionals platform is unlike competing products in its adaptability yet is comparable aesthetically to similarly priced premium couches and sectionals . our sactional products include a number of patented features relating to its geometry and modularity , coupling mechanisms and other features . utilizing only two , standardized pieces , “ seats ” and “ sides , ” and over 250 high quality , tight-fitting covers that are removable , washable , and changeable , customers can create numerous permutations of a sectional couch with minimal effort . customization is further enhanced with our specialty-shaped modular offerings , such as our wedge seat and roll arm side . our custom features and accessories can be added easily and quickly to a sactional to meet endless design , style and utility preferences , reflecting our designed for life philosophy . sactionals are built to meet the highest durability and structural standards applicable to fixed couches . sactionals are comprised of standardized units and we guarantee their compatibility over time , which we believe is a major pillar of their value proposition to the consumer . sacs . we believe that our sacs product line is a category leader in oversized beanbags . the sac product line offers 6 different sizes ranging from 22 pounds to 95 pounds with capacity to seat 3+ people on the larger model sacs . filled with durafoam , a proprietary blend of shredded foam , sacs provide serene comfort and guaranteed durability . their removable covers are machine washable and may be easily replaced with a wide selection of cover offerings . accessories . our accessories complement our sacs and sactionals by increasing their adaptability to meet evolving consumer demands and preferences . story_separator_special_tag as a result , the reporting of our comparable showroom sales may not be comparable to sales data made available by other companies . customer lifetime value and customer acquisition cost we calculate cac on an annual basis by dividing our expenses associated with acquiring new customers for a fiscal year by the number of new customers we acquire in that fiscal year . we include premium rent for locations above commercial rates , media costs to new customers , and a portion of showroom merchandising costs in our marketing expenses associated with acquiring new customers when calculating our cac . we believe that fiscal 2018 is the first fiscal year that our cac fully reflects the implementation of changes to our marketing . in fiscal 2018 we significantly increased our spending on marketing expenses and media costs . our marketing expenses for fiscal 2019 were equal to 11.1 % of revenue as compared to 9.0 % of revenue for fiscal 2018. for fiscal 2019 , our cac was $ 309.46 per customer compared to a cac of $ 283.22 for fiscal 2018. this increase was a result of our increased marketing spend that targeted sactional customers . we expect our cac to continue to increase over the next few years as a result of our continued focus on increasing marketing efforts . we expect this increase in cac to correspond with a continued increase in clv . we monitor repeat customer transactions in aggregate and in groups based upon the year in which customers first made a purchase from us , which we refer to as cohorts , as a way to measure our customer 's engagement with our products over their lifetime . our fiscal 2019 cohorts clv is $ 1,540. in addition , our fiscal 2015 cohort has increased its clv from $ 1,071 in fiscal 2015 to $ 1,277 in fiscal 2019 , a 19 % increase in customer value since the fiscal 2015 cohorts ' first purchases with lovesac . retail sales per selling square foot retail sales per selling square foot is calculated by dividing total net sales for all showrooms , comparable and non-comparable , by the average selling square footage for the period . selling square footage is retail space at our showrooms used to sell our products . selling square footage excludes backrooms at showrooms used for storage , office space or similar matters . cost of merchandise sold cost of merchandise sold includes the direct cost of sold merchandise ; inventory shrinkage ; inventory adjustments due to obsolescence , including excess and slow-moving inventory and lower of cost or net realizable value reserves ; inbound freight ; all freight costs to ship merchandise to our showrooms ; design , buying and allocation costs ; and all logistics costs associated with shipping product to our customers . certain of our competitors and other retailers may report gross profit differently than we do , by excluding from gross profit some or all of the costs related to their distribution network and instead including them in selling , general and administrative expenses . as a result , the reporting of our gross profit and profit margin may not be comparable to other companies . the primary drivers of our cost of merchandise sold are raw materials costs , labor costs in the countries where we source our merchandise , and logistics costs . we expect gross profit to increase to the extent that we successfully grow our net sales and continue to realize scale economics with our manufacturing partners . we review our inventory levels on an ongoing basis in order to identify slow-moving merchandise and use product markdowns to efficiently sell these products . the timing and level of markdowns are driven primarily by customer acceptance of our merchandise . in addition , we offer financing for our products through a leading third party consumer financing company . although we do not assume credit risk on these purchases , we do pay fees to these third party lenders , resulting in lower operating margins on these sales than non-financed sales . gross profit gross profit is equal to our net sales less cost of merchandise sold . gross profit as a percentage of our net sales is referred to as gross margin . in september 2018 , the office of the u.s. trade representative began imposing a 10 percent ad valorem duty on a subset of products imported from china , inclusive of various furniture product categories . in september 2018 , the office of the u.s. trade representative began imposing a 10 percent ad valorem duty on a subset of products imported from china , inclusive of various furniture product categories . looking ahead , we expect fiscal 2020 gross profit margin to be 3 % lower than fiscal 2019 gross profit margin as a result of the continued expected impact of product and margin shift , tariffs and investments into warehousing and distribution infrastructure to support growth . we are seeking to mitigate the 10 % tariff in total dollars but it is expected to have impact on margin percent . given the ramp up of our tariff mitigation strategies we expect the first quarter of fiscal 2020 to face the most pressure with a gross margin decline of over 3.5 % . 30 selling , general and administrative expenses selling , general and administrative expenses include all operating costs , other than marketing expense , not included in cost of merchandise sold . these expenses include all payroll and payroll-related expenses ; showroom expenses , including occupancy costs related to showroom operations , such as rent and common area maintenance ; occupancy and expenses related to many of our operations at our headquarters , including utilities ; selling , general and administrative expenses as a percentage of net sales is usually higher in lower volume quarters and lower in higher volume quarters because a significant portion of the costs are relatively fixed .
| basis of presentation and results of operations the following discussion contains references to fiscal years 2019 and 2018 which represent our fiscal years ended february 3 , 2019 , and february 4 , 2018 , respectively . our fiscal year ends on the sunday closest to february 1. fiscal year 2019 was 52 week period and fiscal 2018 was a 53 week period . the following table sets forth , for the periods for fiscal 2019 and fiscal 2018 , our consolidated statement of operations as a percentage of total revenues : replace_table_token_6_th 31 fiscal 2019 compared to fiscal 2018 net sales net sales increased $ 64.1 million , or 62.9 % , to $ 165.9 million in fiscal 2019 compared to $ 101.8 million in fiscal 2018. the increase in net sales is primarily due to an increase in new customers , which grew by 24.7 % in fiscal 2019 as compared to 24.1 % in fiscal 2018 and was accompanied by an increase in the total number of units sold by approximately 26.3 % . the fiscal 2019 average net sales per showroom is $ 1,568,581 , which reflects a higher average order volume per customer . we had 75 and 66 showrooms open as of february 3 , 2019 , and february 4 , 2018 , respectively .
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covid-19 in march 2020 , the outbreak of covid-19 , caused by a novel strain of the coronavirus , was recognized as a pandemic by the world health organization , and the outbreak is widespread globally , including in the markets in which we operate . the covid-19 outbreak had , and continues to have , a notable impact on general economic conditions , including but not limited to higher unemployment ; volatility in the capital markets ; closure or severe curtailment of the operations and , hence , revenues , of many businesses and public and private enterprises to which we are directly or indirectly exposed , such as hotels , restaurants , sports and entertainment facilities , airports and other transportation facilities , and retail establishments , mostly due to social distancing guidelines , travel bans and restrictions , and business restrictions and shutdowns . in the u.s. , significant monetary policy actions , fiscal stimulus measures and other relief measures have helped to moderate the economic impact of covid-19 . these measures include monetary policy decisions , such as quantitative easing , providing liquidity to financial institutions , providing liquidity to credit markets , the paycheck protection program lending facility and the main street business lending program ; congressional actions , such as the $ 2.4 trillion coronavirus aid , relief and economic security ( `` cares '' ) act , the $ 483 billion paycheck protection program and health care enactment act , the $ 190 billion families first coronavirus response act , and , most recently , the $ 920 billion 2021 consolidated appropriations act , which , among other things , provides direct payments to households , support for small businesses , renter assistance and funding for transport , airlines , education and state and local governments . in addition , housing measures , such as forbearance on mortgages and suspension of foreclosures and evictions , and various executive orders have helped to provide relief . outside of the us , and in the united kingdom and italy in particular , where ambac has insured portfolio exposure , various monetary policy , fiscal stimulus measures and other actions have helped to moderate the economic impact . nonetheless , the u.s. and many large global economies contracted on a full year basis in 2020. in the u.s. , the trajectory and sustainability of the economic recovery experienced in the second half of 2020 is uncertain due to , among other things , the magnitude of job losses , uncertainty regarding further government support measures , the acceleration of new covid-19 cases and the uncertainty related to the timing of a critical mass of covid-19 vaccines being provided to the broader population . for the ambac insured portfolio , credit risk remains elevated due to the historical and future economic and financial impact related to the covid-19 crisis . covid-19 has also impacted ambac 's operating environment . ambac has implemented a covid-19 response plan designed to ensure the safety of our staff and business continuity . our employees transitioned to working remotely in march 2020 while maintaining full operational capabilities . since july 2020 , ambac opened certain of its offices to allow a portion of the workforce to safely return on a voluntary basis . we have not experienced and do not anticipate incurring material net incremental operating expenditures to maintain the current operating environment . although many of ambac 's critical third-party service providers are operating with employees working remotely , we have not presently identified or experienced any limitations or operational constraints with respect to services provided . ambac does not believe that our current operating environment has resulted in a significant change to our disclosure controls or internal controls over financial reporting . covid-19 has adversely impacted ambac 's financial position and results of operations as credit risk in the insured and investment portfolios has increased . in the insured portfolio , municipal , mortgage-backed , student loan and other asset securitization exposures could be materially adversely impacted , and as a result , with the exception of the mortgage-backed sector , we increased loss reserves across each of these and other sectors during the year ended december 31 , 2020. in the mortgage-backed sector , significantly lower interest rates have increased excess spread levels and largely offset the impact of higher mortgage delinquencies and projected losses resulting from the covid-19 pandemic . we are continuously evaluating and updating our view of the macro economic environment as well as our specific credit view of each of our insured exposures considering the significant uncertainties brought upon us by the covid-19 pandemic . the overall financial impact from covid-19 has been and will be a function of ( i ) the willingness and ability of issuers of insured debt and other counterparties to pay their obligations when due ; ( ii ) the impact of changes to interest rates on policy and derivative payments ; and ( iii ) the performance of the investment portfolio . ambac 's insurance policies will be drawn in the event that the issuers of insured obligations do not make payments on their obligations when due . as a result of the covid-19 related economic impact on issuers and markets where ambac provides financial guarantees ; including lower tax , project , and business revenues and increases in forbearances or delinquencies on mortgage and student loan payments , we have increased our loss reserves and | ambac financial group , inc. 29 2020 form 10-k | table of co ntents may further increase them in the future depending on the duration and severity of the crisis . the crisis may also impair certain issuers ' ability to pay premiums owed to ambac ; however , we believe such issuers currently have the ability to continue to pay such premiums timely , but this is subject to change . ambac has exposure to reinsurance counterparties for their portions of future claim payments . ambac has reinsured approximately 13.3 % of its gross par outstanding to four reinsurance counterparties . story_separator_special_tag the review focused on insured issues that are scheduled or projected to have an outstanding principal | ambac financial group , inc. 30 2020 form 10-k | table of co ntents balance as of december 31 , 2021. the company reviewed the governing documents ' provisions for the setting of interest rates in the event of unavailability of libor ( `` fallback language '' ) . the company has initiated a dialogue with relevant trustees , calculation agents , auction agents , servicers and other parties responsible for implementing the rate change in these transactions . most have not yet committed to a course of action . also , whatever interest rate is set by the party responsible may be challenged in the court by other parties . the ambac note is referenced to 3-month libor and has a final maturity of february 12 , 2023. recent developments as summarized above indicate that major libor tenors may continue to be published through the maturity date of the ambac note . ambac 's investment and derivative portfolios have been evaluated to assess the risk of libor unavailability based on the respective instruments ' fallback language and parties responsible for implementing the alternative rates . investments that are ambac-insured securities , are being addressed through efforts on the financial guarantee portfolio described above . for other investments , we are working with our investment managers to ensure libor indexed positions in our portfolio contain unambiguous fallback language . ambac 's centrally cleared interest rate swaps are expected to follow libor transition steps outlined by the international swaps and derivatives association , inc. ( `` isda '' ) . our non-cleared interest rate swaps either have offsetting libor exposure with a single counterparty that serves as calculation agent responsible for rate changes or have ambac as the calculation agent . given the uncertainty of the ultimate timing of the libor sunset , as well as the lack of clarity on decisions that parties responsible for calculating interest rates will make and the reaction of impacted parties as well as the unknown level of interest rates when the change occurs , the company can not at this time predict the impact of the discontinuance of libor , if it occurs , on every obligation the company guarantees or on its other libor indexed financial instruments . for more information , see the the risk factor `` uncertainties regarding the expected discontinuance of the london inter-bank offered rate or any other interest rate benchmark could have adverse consequences `` found in part i , item 1a of this form 10-k. critical accounting policies and estimates ambac 's consolidated financial statements have been prepared in accordance with gaap . this section highlights accounting estimates management views as critical because they are most important to the portrayal of the company 's financial condition ; and require management to make difficult and subjective judgments regarding matters that are inherently uncertain and subject to change . these estimates are evaluated on an on-going basis based on historical developments , political events , market conditions , industry trends and other information . there can be no assurance that actual results will conform to estimates and that reported results of operations will not be materially adversely affected by the need to make future accounting adjustments to reflect changes in these estimates from time to time . management has identified the following critical accounting policies and estimates : ( i ) valuation of loss and loss expense reserves , ( ii ) valuation of certain financial instruments and ( iii ) valuation of deferred tax assets . management has discussed each of these critical accounting policies and estimates with the audit committee , including the reasons why they are considered critical and how current and anticipated future events impact those determinations . additional information about these policies can be found in note 2. basis of presentation and significant accounting policies to the consolidated financial statements included in part ii , item 8 in this form 10-k. valuation of losses and loss expense reserves ( including subrogation recoverables ) the loss and loss expense reserves and subrogation recoverable assets ( collectively defined as `` loss reserves '' ) discussed in this section relate only to ambac 's non-derivative insurance policies issued to beneficiaries , including unconsolidated vies . a loss reserve is recorded on the balance sheet on a policy-by-policy basis based upon the present value ( `` pv '' ) of expected net claim cash outflows or expected net recovery cash inflows , discounted at risk-free rates . the estimate for future net cash flows consider the likelihood of all possible outcomes that may occur from missed principal and or interest payments on the insured obligation . this estimate also considers future recoveries related to breaches of contractual representations and warranties by rmbs transaction sponsors , remediation strategies , excess spread and other contractual or subrogation-related cash flows . ambac 's approach to resolving disputes involving contractual breaches by transaction sponsors or other third parties has included negotiations and or pursuing litigation . ambac does not estimate recoveries for litigations where its sole claim is for fraudulent inducement , since any remedies under such claims would be non-contractual . the evaluation process for expected future net cash flows is subject to certain estimates and judgments regarding the probability of default by the issuer of the insured security , probability of remediation and settlement outcomes ( which may include commutation , litigation settlements , refinancings and or other settlement outcomes ) , probability of a restructuring outcome ( which may include payment moratoriums , debt haircuts and or subsequent recoveries ) and the expected loss severity of credits for each insurance contract . as the probability of default for an individual credit increases and or the severity of loss given a default increases , our loss reserve for that insured obligation will also increase . political , economic , credit or other unforeseen events could have an adverse impact on default probabilities and loss severities .
| summary ambac has considered these developments and other factors in evaluating its puerto rico loss reserves . during the year ended december 31 , 2020 , ambac had incurred losses associated with its domestic public finance insured portfolio of $ 256 million , which was impacted by lower discount rates , the continued uncertainty and volatility of the situation in puerto rico , including the potential impact of the covid-19 crisis on the commonwealth and the developing potential impact of the covid-19 crisis on other sectors in the domestic public finance insured portfolio ; and loss adjustment expenses related to the cost of defending our rights and pursuing recoveries . | ambac financial group , inc. 39 2020 form 10-k | table of co ntents while management believes its reserves are adequate to cover losses in its public finance insured portfolio , there can be no assurance that ambac may not incur additional losses in the future , particularly given the developing economic , political , and legal circumstances in puerto rico and the overall uncertain impact of the covid-19 crisis on the commonwealth and the domestic public finance insured portfolio in general . such additional losses may have a material adverse effect on ambac 's results of operations and financial condition . the following table shows ambac 's insured exposure to each issuer segregated by whether such debt obligation is subject to the priority debt provision or `` clawback . '' ambac has initiated litigation challenging the application of the `` clawback '' announced by governor padilla , puerto rico 's former governor , on december 1 , 2015. a description of ambac 's legal challenge is provided in note 17. commitments and contingencies in the consolidated financial statements , included in part ii , item 8 in this form 10-k. replace_table_token_11_th ( 1 ) internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of ambac .
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in addition , the company capitalized interest of $ 0.7 million during the year ended december 31 , 2019 and to date during the construction period . as of december 31 , 2019 , the manufacturing facility was not ready for its intended use and continued to be included in construction in progress . in january 2020 , after achieving the qualifications required to bring it to its intended use , the company placed the manufacturing facility into service . depreciation and amortization expense was $ 3.0 million , $ 1.3 million and $ 0.4 million for the years ended december 31 , 2019 , 2018 and 2017 , respectively . 155 5. accrued expenses and other current liabilities accrued expenses and other current liabilities consisted of the following ( in thousands ) : replace_table_token_21_th 6. debt long‑term debt consisted of the following ( in thousands ) : replace_table_token_22_th story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing at the end of this annual report on form 10-k. some of the information contained in this discussion and analysis or set forth elsewhere in this annual report on form 10-k , including information with respect to our plans and strategy for our business , includes forward-looking statements that involve risks and uncertainties . as a result of many factors , including those factors set forth in the “ risk factors ” section of this annual report on form 10-k , our actual results could differ materially from the results described in , or implied by , the forward-looking statements contained in the following discussion and analysis . overview we are developing a new class of cellular medicines , red cell therapeutics , or rcts . based on our vision that human red blood cells are the foundation of the next significant innovation in medicine , we have designed a proprietary platform to genetically engineer and culture rcts that are selective , potent and ready-to-use cellular therapies . we believe that our rcts will provide life-changing or life-saving benefits for patients with severe diseases across multiple therapeutic areas . we have generated hundreds of rcts using our red platform ® , a highly versatile and proprietary cellular therapy platform . we are utilizing our universal engineering and manufacturing processes to advance a broad pipeline of rct product candidates into clinical trials in cancer and autoimmune diseases . common design and manufacturing elements of our rcts should enable us to achieve significant advantages in product development . we are establishing end to end manufacturing capabilities and plan to develop commercial infrastructure to further establish rubius therapeutics as a leading , fully integrated cellular therapy company . during 2019 , the ind for a phase 1b clinical trial evaluating rtx-134 for the treatment of phenylketonuria , or pku , was allowed to proceed by the fda and in january 2020 , we dosed the first patient in the trial . in march 2020 , we announced that we are discontinuing the phase 1b clinical trial for rtx-134 and deprioritizing our rare disease programs in order to primarily focus on our oncology and autoimmunity pipeline . future capital investments and improvements in manufacturing efficiency , together with enhancements to the red platform® , may enable us to revisit chronic , high-dose rare diseases in the future . the ind for our second product candidate , rtx-240 has been allowed to proceed by the fda and we plan to submit an ind for rtx-321 by the end of 2020 . since our inception , we have focused substantially all of our resources on building our proprietary red platform , establishing and protecting our intellectual property portfolio , conducting research and development activities , developing our manufacturing process and manufacturing drug product material , organizing and staffing our company , business planning , raising capital and providing general and administrative support for these operations . we do not have any products approved for sale and have not generated any revenue from product sales . to date , we have funded our operations with proceeds from the sale of preferred stock and issuance of debt and with proceeds from our initial public offering , or ipo . on july 20 , 2018 , we completed our ipo pursuant to which we issued and sold 12,055,450 shares of common stock , inclusive of 1,572,450 shares pursuant to the full exercise of the underwriters ' option to purchase additional shares . we received proceeds of $ 254.3 million after deducting underwriting discounts and commissions and other offering costs . in august 2019 , we entered into a distribution agreement with j.p. morgan securities llc , jefferies llc and svb leerink llc with respect to an at-the-market , or atm , offering program under which we may offer and sell , from time to time at our sole discretion , shares of our common stock , having aggregate gross proceeds of up to $ 100.0 million . we have not yet sold any shares of our common stock under the atm offering program . since our inception , we have incurred significant operating losses . our ability to generate any product revenue or product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more of our product candidates . we reported net losses of $ 163.5 million for the year ended december 31 , 2019 , $ 89.2 million for the year ended december 31 , 2018 and $ 43.8 million for the year ended december 31 , 2017. as of december 31 , 2019 , we had an accumulated deficit of $ 312.7 million . we expect to continue 123 to incur significant expenses and increasing operating losses for at least the next several years . story_separator_special_tag product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development , due to the increased size and duration of later‑stage clinical trials . we expect that our research and development expenses will increase substantially in connection with our planned preclinical and clinical development activities in the future . at this time , we can not accurately estimate or know the nature , timing and costs of 125 the efforts that will be necessary to complete the preclinical and clinical development of any of our product candidates . the successful development and commercialization of our product candidates is highly uncertain . this is due to the numerous risks and uncertainties associated with product development and commercialization , including the following : · the timing and progress of preclinical and clinical development activities ; · the number and scope of preclinical and clinical programs we decide to pursue ; · raising additional funds necessary to complete preclinical and clinical development of and commercialize our drug candidates ; · the progress of the development efforts of parties with whom we may enter into collaboration arrangements ; · our ability to maintain our current research and development programs and to establish new ones ; · our ability to establish new licensing or collaboration arrangements ; · the successful initiation and completion of clinical trials with safety , tolerability and efficacy profiles that are satisfactory to the u.s. food and drug administration , or fda , or any comparable foreign regulatory authority ; · the receipt and related terms of regulatory approvals from applicable regulatory authorities ; · the availability of specialty raw materials for use in production of our product candidates ; · our ability to consistently manufacture our product candidates for use in clinical trials ; · our ability to operate a manufacturing facility , or secure manufacturing supply through relationships with third parties ; · our ability to obtain and maintain patents , trade secret protection and regulatory exclusivity , both in the united states and internationally ; · our ability to protect our rights in our intellectual property portfolio ; · the commercialization of our product candidates , if and when approved ; · obtaining and maintaining third‑party insurance coverage and adequate reimbursement ; · the acceptance of our product candidates , if approved , by patients , the medical community and third‑party payors ; · competition with other products ; and · a continued acceptable safety profile of our therapies following approval . a change in the outcome of any of these variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate . we may never succeed in obtaining regulatory approval for any of our product candidates . general and administrative expenses general and administrative expenses include salaries and related costs , including stock‑based compensation , for personnel in executive , finance and administrative functions . general and administrative expenses also include direct and allocated facility‑related costs as well as professional fees for legal , patent , consulting , investor and public relations , 126 accounting and audit services . we anticipate that our general and administrative expenses may increase in the future as we continue to build infrastructure to support the expansion of our research activities , development of our product candidates and any expanded compliance requirements . other income ( expense ) interest income interest income consists of interest earned on our invested cash balances . interest expense interest expense consists of interest expense on outstanding borrowings under our loan and security agreements , as well as amortization of debt discount and debt issuance costs . change in fair value of preferred stock warrant liability in connection with our 2015 loan and security agreement with pacific western bank , we issued warrants to purchase series a and series b preferred stock . we classified these warrants as a liability on our consolidated balance sheet that we remeasured to fair value at each reporting date , and we recognized changes in the fair value of the warrant liability as a component of other income ( expense ) in our consolidated statements of operations and comprehensive loss . upon the closing of our ipo in july 2018 , the preferred stock warrants became exercisable for common stock instead of preferred stock and were concurrently exercised by the holders . as a result , the fair value of the warrants was reclassified to additional paid-in capital and we no longer have a warrant liability to remeasure . other income ( expense ) , net other income ( expense ) , net consists of income earned under a sublease agreement and miscellaneous income and expense unrelated to our core operations . income taxes since our inception , we have not recorded any income tax benefits for the net losses we have incurred in each year or for our research and development tax credits generated , as we believe , based upon the weight of available evidence , that it is more likely than not that all of our net operating loss , or nol , carryforwards and tax credits will not be realized . as of december 31 , 2019 , we had u.s. federal and state net operating loss carryforwards of $ 222.9 million and $ 227.0 million , respectively , which may be available to offset future taxable income . the federal nols include $ 37.2 million , which expire at various dates through 2037 , and $ 185.7 million , which carryforward indefinitely . the state nols expire at various dates through 2039. as of december 31 , 2019 , we also had u.s. federal and state research and development tax credit carryforwards of $ 9.5 million and $ 5.1 million , respectively , which may be available to offset future tax liabilities and begin to expire in 2034 and 2026 , respectively .
| results of operations comparison of the years ended december 31 , 2019 and 2018 the following table summarizes our results of operations for the years ended december 31 , 2019 and 2018 : replace_table_token_2_th research and development expenses replace_table_token_3_th research and development expenses were $ 112.4 million for the year ended december 31 , 2019 , compared to $ 51.8 million for the year ended december 31 , 2018. the increase in direct costs related to our rare disease program of $ 15.2 million was primarily due to costs incurred in connection with our phase 1b clinical trial of rtx‑134 in patients with phenylketonuria . following the decision in march 2020 to deprioritize development of our rare disease programs , we expect these costs to decrease throughout the remainder of 2020 as the rtx-134 phase 1b trial has been discontinued . the increase in direct costs of $ 8.4 million in our lead cancer programs , including rtx-240 and rtx-321 , was related principally to preclinical and ind-enabling activities . the increases in personnel-related costs and stock-based compensation expense of $ 13.6 million and $ 5.2 million , respectively , were due to increased headcount in our research and development function . the increase in laboratory supplies and research materials of $ 5.9 million was due to increases in platform development , manufacturing process and scale-up and drug discovery activities . the increase in facility-related and other expenses of $ 9.3 million was mostly due to an increase in facilities costs resulting from the commencement of our lease of office and laboratory space in january and august 2019 , as well as additional laboratory services to support increased headcount .
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the intangible assets or liabilities related to in-place leases are comprised of : ( a ) the value of the above- and below-market leases in-place , measured over the period , including probable lease renewals for below-market leases , that the leases are expected to remain in effect ; ( b story_separator_special_tag executive overview we are focused on the ownership , management , redevelopment and limited development of quality apartment communities diversified by geography in the largest coastal and job growth markets in the united states and also diversified across price points . our principal financial objective is to provide predictable and attractive returns to our equity holders , as measured by growth in economic income and adjusted funds from operations . economic income is our measure of total return and adjusted funds from operations is our measure of current return . in 2016 , economic income totaled approximately $ 7 per share , representing a 15 % return on our estimated net asset value at the beginning of that measurement period . adjusted funds from operations was $ 1.97 per share , an increase of 5 % as compared to 2015. our calculation of economic income relies upon net asset value , or nav . nav and adjusted funds from operations are non-gaap measures and are defined under the non-gaap measures heading below . our business and strategic areas of focus are described in more detail within the business overview in item 1. execution of our goals within our strategic areas of focus drove solid results for aimco in 2016 , as further described in the sections that follow . property operations we own and operate a portfolio of conventional apartment communities , diversified by both geography and price point . at december 31 , 2016 , our conventional portfolio included 134 apartment communities with 37,922 apartment homes in which we held an average ownership of approximately 97 % . we also operate a portfolio of affordable apartment communities , which primarily consists of communities owned through low-income housing tax credit partnerships , and with rents generally paid , in whole or part , by a government agency . consolidated apartment communities that we manage within our conventional and affordable portfolios comprise our reportable segments and generated 90 % and 10 % , respectively , of our proportionate property net operating income , or noi , ( defined below under the results of operations – property operations heading ) during the year ended december 31 , 2016 . 19 in our conventional same store portfolio , revenue and expense grew 4.7 % and 1.4 % , respectively , leading to 6.2 % growth in property net operating income . revenue growth was due to a weighted average rent increase of 4.0 % and an average daily occupancy of 95.9 % , which was consistent with 2015 . we focus on customer satisfaction and resident retention , which results in lower resident turnover and reduces vacancy related costs . we receive approximately 90,000 customer satisfaction surveys annually and achieved an average rating of 4.18 ( on a 1 to 5 scale ) for the year ended december 31 , 2016 . our focus on efficient operations through centralization of administrative tasks , optimization of economies of scale at the corporate level and investment in more durable , longer-lived materials has helped us control operating expenses . as a result of these efforts , our conventional same store controllable operating expenses , which we define as property level operating expenses before real estate taxes , insurance and utilities , had a compound annual growth rate of 2.1 % over the last three years . for the year ended december 31 , 2016 , our conventional portfolio provided 68 % operating margins and 62 % free cash flow , or fcf , margins . fcf is defined under the non-gaap measures heading below . redevelopment and development during the year ended december 31 , 2016 , we invested $ 155.4 million in redevelopment , $ 85.2 million of which related to the ongoing redevelopment of park towne place and the sterling , mixed-use communities located in center city philadelphia . we are redeveloping the three of the four towers at park towne place , one at a time , and at december 31 , 2016 , we had completed lease-up of the south tower and had leased 70 % of the apartment homes in the east tower . rental rates are consistent with underwriting . based on the success of the first two towers , we commenced redevelopment of the north tower during 2016 , completing de-leasing in the third quarter and starting construction in the fourth quarter . we will continue to evaluate the success of the redevelopment and may redevelop the fourth tower in the community . we are redeveloping the sterling , a 30-story building , two or three floors at a time , and at december 31 , 2016 , we had completed 88 % of the apartment homes , of which 92 % had been leased . rental rates are in line with underwriting . three floors , representing 12 % of the homes , and 37,000 square feet of commercial space remain under construction with anticipated completion in second quarter 2017. during 2016 , we commenced four additional redevelopments with an estimated net investment of $ 81.4 million . these redevelopments include : bay parc plaza in miami , florida ; saybrook pointe in san jose , california ; yorktown in suburban chicago ; and the second phase of redevelopment at the palazzo at park la brea in los angeles , california . for additional information regarding these redevelopments , please refer to the discussion under the liquidity and capital resources heading below . during 2016 , we achieved noi stabilization at three redeveloped apartment communities in california , lincoln place in venice , ocean house on prospect in la jolla and preserve at marin in corte madera . story_separator_special_tag million . after payment of transaction costs , working capital adjustments and distributions to noncontrolling interests , our share of the net proceeds totaled $ 509.1 million . we sold one apartment community from our low-income housing tax credit portfolio for gross proceeds of $ 27.5 million . after repayment of property debt , payment of transaction costs and distributions to noncontrolling interests , our share of the net proceeds totaled $ 10.3 million . we invested these proceeds in redevelopment and development discussed below , as well as the acquisition for $ 320 million of indigo , a 463-home apartment community in redwood city , california that was in the final stages of construction at the time of acquisition . as of december 31 , 2016 , leasing was well ahead of schedule , with 77 % of apartment homes occupied at rental rates consistent with underwriting . balance sheet and liquidity our leverage strategy seeks to increase financial returns while using leverage with appropriate caution . we target the ratio of proportionate debt and preferred equity to adjusted ebitda to be below 7.0x and we target the ratio of adjusted ebitda to adjusted interest expense and preferred dividends to be greater than 2.5x . we also focus on the ratios of proportionate debt to adjusted ebitda and adjusted ebitda to adjusted interest expense . proportionate debt , adjusted ebitda and adjusted interest expense , as used in these ratios , are non-gaap financial measures , which are defined and reconciled under the non-gaap measures - leverage ratios heading below . preferred equity represents aimco 's preferred stock and the aimco operating 21 partnership 's preferred op units . our leverage ratios for the trailing twelve month periods ended december 31 , 2016 and 2015 , are presented below : replace_table_token_6_th we expect future leverage reduction from earnings growth , especially as apartment communities now being redeveloped are completed and the lease-up of indigo is completed , and from regularly scheduled property debt amortization funded from retained earnings . as of december 31 , 2016 , we held unencumbered apartment communities with an estimated fair value of approximately $ 1.6 billion . two credit rating agencies rate our creditworthiness , using different methodologies and ratios for assessing our credit . in 2015 , both of these agencies upgraded our credit rating and outlook to bbb- ( stable ) , an investment grade rating . although some of the ratios they use are similar to those we use to measure our leverage , there are differences in our methods of calculation and therefore our leverage ratios disclosed above are not indicative of the ratios that may be calculated by these agencies . during 2016 , we closed fixed-rate , non-recourse , amortizing , property loans totaling $ 393.5 million with a weighted average term of 9.4 years and weighted average interest rate of 3.2 % , which were on average 145 basis points over the corresponding treasury rates at the time of pricing . during 2016 , we also amended our $ 600.0 million revolving credit facility , extending its maturity to january 2022. for additional information regarding our leverage , please see the discussion under the liquidity and capital resources heading . culture our culture is the key to our success . our emphasis on a collaborative , respectful , and performance-oriented culture is what enables the continuing transformation of the aimco business . in 2016 , aimco was recognized by the denver post as a top work place for the fourth consecutive year . we were one of only three mid-size companies to be named a top work place in colorado for the past four consecutive years . key financial indicators the key financial indicators that we use in managing our business and in evaluating our operating performance are economic income , our measure of total return , and adjusted funds from operations , our measure of current return . in addition to these indicators , we evaluate our operating performance and financial condition using : pro forma funds from operations ; fcf capitalization rate ; noi capitalization rate ; same store property operating results ; proportionate property noi ; average revenue per effective apartment home ; financial coverage ratios ; and net leverage . certain of these financial indicators are non-gaap financial measures , which are defined , further described and , for certain of the measures , reconciled to comparable gaap-based measures , under the non-gaap measures heading below . story_separator_special_tag communities , which are those we have acquired since the beginning of a two year comparable period . conventional non-same store also includes apartment communities subject to agreements that limit the amount by which we may increase rents ; apartment communities that had not reached or maintained a stabilized level of occupancy as of the beginning of a two year comparable period , often due to a casualty event ; and apartment communities expected to be sold within 12 months but do not yet meet the criteria to be classified as held for sale . as of december 31 , 2016 , as defined by our segment performance metrics , our conventional portfolio consisted of the following : 101 conventional same store apartment communities with 30,893 apartment homes ; and 29 conventional non-same store apartment communities with 6,887 apartment homes . 23 from december 31 , 2015 , to december 31 , 2016 , on a net basis , our conventional same store portfolio decreased by six apartment communities and 2,256 apartment homes . this change consisted of : five conventional redevelopment apartment communities with 1,544 apartment homes that were reclassified into conventional non-same store ; one apartment community with 246 apartment homes reclassified into conventional non-same store as a result of a casualty event ; and five apartment communities with 1,727 apartment homes sold during the period .
| results of operations because our operating results depend primarily on income from our apartment communities , the supply of and demand for apartments influences our operating results . additionally , the level of expenses required to operate and maintain our apartment communities and the pace and price at which we redevelop , acquire and dispose of our apartment communities affect our operating results . the following discussion and analysis of the results of our operations and financial condition should be read in conjunction with the accompanying consolidated financial statements in item 8 . 22 overview 2016 compared to 2015 net income attributable to aimco and net income attributable to the aimco operating partnership increased by $ 181.7 million and $ 190.8 million , respectively , for the year ended december 31 , 2016 , as compared to the year ended december 31 , 2015 . the increase in income was principally due to an increase in gains on dispositions of real estate , partially offset by an increase in depreciation and amortization resulting from redeveloped and developed apartment communities placed into service during 2016 and from recent acquisitions . 2015 compared to 2014 net income attributable to aimco and net income attributable to the aimco operating partnership decreased by $ 60.5 million and $ 64.3 million , respectively , for the year ended december 31 , 2015 , as compared to the year ended december 31 , 2014 . the decrease in income was principally due to a decrease in gains on dispositions of real estate , partially offset by the effect of various other items discussed below . the following paragraphs discuss these and other items affecting the results of operations of aimco and the aimco operating partnership in more detail . property operations as described under the preceding executive overview heading , our owned real estate portfolio consists primarily of conventional apartment communities .
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our actual results may differ materially from those contained in these forward-looking statements as a result of various factors , including those set forth under “ risk factors ” or in other parts of this annual report . overview we are a medical device company dedicated to improving the quality of life of people with hearing loss . we developed the eargo solution to create a hearing aid that consumers actually want to use . our innovative product and go-to-market approach address the major challenges of traditional hearing aid adoption , including social stigma , accessibility and cost . we believe our eargo hearing aids are the first and only virtually invisible , rechargeable , completely-in-canal , fda regulated , exempt class i or class ii devices for the treatment of hearing loss . our rapid pace of innovation is enabled by our deep industry and technical expertise across mechanical engineering , product design , audio processing , clinical and hearing science , consumer electronics and embedded software design , and is supported by our strategic intellectual property portfolio . we market and sell our hearing aids direct to consumers with a personalized , consumer-centric approach . our commercial organization consists of a talented marketing team with deep experience in consumer-focused brand and performance marketing , a team of inside sales consultants , and a dedicated customer support team of licensed hearing professionals . we generate revenue from orders processed primarily through our website and over the phone by our sales consultants . we believe that our differentiated hearing aids , consumer-oriented approach and strong brand have fueled the rapid adoption of our hearing aids and high customer satisfaction , as evidenced by over 60 thousand eargo hearing aid systems sold , net of returns , as of december 31 , 2020. on october 20 , 2020 , we completed our initial public offering , or ipo , pursuant to which we sold an aggregate of 9,029,629 shares of our common stock at a price of $ 18.00 per share , resulting in net proceeds of $ 148.5 million after deducting underwriting discounts , commissions and offering expenses . upon the closing of our ipo , all outstanding shares of our convertible preferred stock automatically converted into 28,196,388 shares of our common stock . for the year ended december 31 , 2020 , we generated net revenue of $ 69.2 million , an increase of $ 36.4 million from the year ended december 31 , 2019. to date , all our revenue has been generated from customers in the united states . our net losses were $ 39.9 million , $ 44.5 million and $ 33.8 million for the years ended december 31 , 2020 , 2019 and 2018 , respectively . as of december 31 , 2020 and 2019 , we had an accumulated deficit of $ 199.1 million and $ 159.2 million , respectively . we expect to continue to incur losses for the foreseeable future . factors affecting our business we believe that our future performance will depend on many factors , including those described below and in the section titled “ risk factors ” included elsewhere in this annual report on form 10-k. efficient acquisition of new customers we have spent and expect to continue to spend significant amounts on sales and marketing designed to build a strong brand , achieve broad awareness of our eargo solution , acquire new customers and convert sales leads . we 77 have also invested and expect to continue invest ing in growing our teams of sales consultants and licensed hearing professionals to keep pace with increas ed demand , convert ing leads into satisfied customers and potentially grow ing our revenue . sales return rate our return policy allows our customers to return hearing aids for any reason within the first 45 days of delivery for a full refund , subject to a handling fee in certain states . the most commonly cited reason for returning our hearing aids is unsatisfactory fit , which we believe is a byproduct of our direct-to-consumer model and online distribution that results in nearly all of our customers ordering our product without trying it first . in addition to unsatisfactory fit , the next most cited reason for returns is that our hearing aids do not provide sufficient audio amplification . customer return accrual rates were approximately 26 % and 35 % for the years ended december 31 , 2020 and 2019 , respectively . the decline in our sales return rate in 2020 and 2019 was a result of the growth in customers with health insurance coverage for hearing aids and repeat customers which have generally lower return rates than other customers , and our initiatives to improve customer service and enhance the quality of our pre-screening assessments . we report revenue net of expected returns , which is an estimate informed in part by historical return rates . as such , our return rate impacts our reported net revenue and profitability . if actual sales returns differ significantly from our estimates , an adjustment to revenue in the current or subsequent period is recorded . new product introductions our technical capabilities and commitment to innovation have allowed us to deliver product enhancements on a rapid development timeline and support a compelling new product roadmap that we believe will continue to differentiate our competitive position over the next several years . with the launch of the eargo neo hifi in january 2020 , we have launched four generations of our hearing aids since 2017 , with each iteration having improved audio performance , physical fit and or comfort . we are focused on continuing to launch new versions of the eargo hearing solution that further improve audio quality , fit , comfort and or ease-of-use . we believe that the continued introduction of new products is critical to maintaining existing customers and increasing adoption of our solution , and as such , we expect to continue to invest in research and development to support new product introductions . story_separator_special_tag research and development expenses research and development , or r & d , expenses , consist primarily of engineering and product development costs to develop and support our products , regulatory expenses , non-recurring engineering and other costs associated with products and technologies that are in development , as well as related overhead costs . these expenses include personnel-related costs including salaries and stock-based compensation , supplies , consulting fees , prototyping , testing , materials , travel expenses , depreciation and allocated facility overhead costs . additionally , r & d expenses include internal and external costs associated with our regulatory compliance and quality assurance functions , and related overhead costs . we expect r & d expenses , net of capitalized internal use software development costs , to increase in absolute dollars as we continue to develop new products and enhance existing products and technologies . sales and marketing expenses our sales and marketing expenses are the largest component of our operating expenses and consist primarily of personnel-related costs including salaries and stock-based compensation , direct marketing , advertising and promotional expenses , consulting fees , public relations costs and allocated facility overhead costs . sales and marketing personnel include our inside sales consultants , licensed hearing professionals , marketing professionals and related support personnel . we expect our sales and marketing expenses to increase in absolute dollars , but decrease over time as a percentage of revenue , as we hire additional sales and marketing personnel , expand our sales support infrastructure and invest in our brand and product awareness to further penetrate the u.s. market and potentially expand into international markets . general and administrative expenses our general and administrative expenses consist primarily of compensation for executive , finance , legal , information technology and administrative personnel , including stock-based compensation . other significant expenses include professional fees for legal and accounting services , consulting fees , recruiting fees , information technology costs , corporate insurance , bad debt expense , general corporate expenses and allocated facility overhead costs . we expect to continue to incur additional general and administrative expenses as a result of operating as a public company , including expenses related to compliance with the rules and regulations of the sec , and those of the nasdaq stock market , additional insurance costs , investor relations activities and other administrative and professional services . as a result , we expect general and administrative expenses to increase in absolute dollars in future periods . interest income interest income consists of interest earned on cash and cash equivalents . interest expense interest expense consists of interest related to borrowings under our debt obligations and convertible promissory notes . 80 other income ( expense ) , net other income ( expense ) , net consists primarily of adjustments to the fair value of embedded derivatives associated with certain redemption features of our convertible promissory notes and adjustments to the fair value of our convertible preferred stock warrant liabilities . loss on extinguishment of debt the loss on extinguishment of debt arose on the redemption of our 2020 notes into shares of our series e convertible preferred stock in july 2020. income tax provision we use the asset and liability method to account for income taxes . under this method , deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases . deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled . a valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized . due to our historical operating performance and our recorded cumulative net losses in prior fiscal periods , our net deferred tax assets have been fully offset by a valuation allowance . financial statement effects of uncertain tax positions are recognized when it is more-likely-than-not , based on the technical merits of the position , that it will be sustained upon examination . interest and penalties related to unrecognized tax benefits are included within the provision for income tax . story_separator_special_tag style= '' text-align : right ; margin-bottom:0pt ; margin-top:0pt ; margin-left:0pt ; ; text-indent:0pt ; ; color : # 000000 ; font-family : times new roman ; font-size:10pt ; font-weight : normal ; font-style : normal ; text-transform : none ; font-variant : normal ; '' > 12,045 $ 12,841 $ ( 796 ) ( 6.2 ) % r & d expenses decreased by $ 0.8 million , or 6.2 % , from $ 12.8 million in 2019 to $ 12.0 million in 2020. the change was primarily due to a net decrease of $ 0.8 million in personnel and personnel-related costs resulting from increased capitalized costs associated with the development of internal use software and a decrease in travel costs due to the covid-19 pandemic . we capitalized $ 2.1 million of personnel and personnel-related internal use software costs in 2020 compared to $ 1.1 million in 2019. sales and marketing year ended december 31 , change ( dollars in thousands ) 2020 2019 amount % sales and marketing $ 49,525 $ 35,725 $ 13,800 38.6 % 82 sales and marketing expenses increased by $ 13.8 million , or 38.6 % , from $ 35.7 million in 2019 to $ 49.5 million in 2020. the change was primarily due to increases in personnel and personnel-related costs of $ 7.2 million and increases in direct marketing , advertising and promotional expenses of $ 6.6 million . the change in personnel and personnel-related costs was primarily due to increased commissions from increased sales and a net increase in salary-related costs , including an increase of $ 1.4 million in stock-based compensation .
| results of operations comparison of the years ended december 31 , 2020 and 2019 replace_table_token_4_th * not meaningful 81 revenue , net year ended december 31 , change ( dollars in thousands ) 2020 2019 amount % revenue , net $ 69,154 $ 32,790 $ 36,364 110.9 % revenue increased by $ 36.4 million , or 110.9 % , from $ 32.8 million in 2019 to $ 69.2 million in 2020 , primarily due to an increase in the volume of eargo hearing aid systems shipped , the majority of which were eargo neo hifi systems , which began shipping in january 2020. the increase in revenue was also attributable to a higher average selling price due to introduction of the neo hifi systems and a decrease in sales returns as a percentage of systems shipped , the latter of which was partially due to growth in sales to customers with health insurance coverage as such customers generally have lower return rates . gross systems shipped during 2020 were 38,243 , a 68 % increase compared to the 22,787 gross systems shipped during 2019. the increase in volume was largely driven by expanded national marketing efforts in conjunction with the launch of eargo neo hifi , growth incustomers with health insurance coverage for hearing aids and increased customer adoption of our telecare model due to the covid-19 pandemic .
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001-32833 ) 10.5 employment story_separator_special_tag the following discussion of our financial condition and results of operations should be read together with selected financial data and td group 's consolidated financial statements and the related notes included elsewhere in this report . the following discussion may contain predictions , estimates and other forward-looking statements that involve a number of risks and uncertainties , including those discussed under the heading entitled risk factors included elsewhere in this report . these risks could cause our actual results to differ materially from any future performance suggested below . overview we believe we are a leading global designer , producer and supplier of highly engineered aircraft components for use on nearly all commercial and military aircraft in service today . our business is well diversified due to the broad range of products we offer to our customers . some of our more significant product offerings , substantially all of which are ultimately provided to end-users in the aerospace industry , include mechanical/electro-mechanical actuators and controls , ignition systems and engine technology , specialized pumps and valves , power conditioning devices , specialized ac/dc electric motors and generators , nicad batteries and chargers , engineered latching and locking devices , rods and locking devices , engineered connectors and elastomers , cockpit security components and systems , specialized cockpit displays , aircraft audio systems , specialized lavatory components , seatbelts and safety restraints , engineered interior surfaces and lighting and control technology . each of these product offerings is composed of many individual products that are typically customized to meet the needs of a particular aircraft platform or customer . long-term sustainable growth for fiscal year 2012 , we generated net sales of $ 1,700.2 million , gross profit of $ 945.7 million or 55.6 % of sales , and net income of $ 325.0 million . we believe we have achieved steady , long-term growth in sales and improvements in operating performance since our formation in 1993 due to our competitive strengths and through execution of our value-driven operating strategy . more specifically , focusing our businesses on our value-driven operating strategy of obtaining profitable new business , carefully controlling the cost structure and pricing our highly engineered value-added products to fairly reflect the value we provide and the resources required to do so has historically resulted in improvements in gross profit and income from operations over the long term . our selective acquisition strategy has also contributed to the growth of our business . the integration of certain acquisitions into our existing businesses combined with implementing our proven operating strategy has historically resulted in improvements of the financial performance of the acquired business . our key competitive strengths and the elements of our business strategy are set forth in more detail below . we believe our key competitive strengths include : large and growing installed product base with aftermarket revenue stream . we provide components to a large and growing installed base of aircraft to which we supply aftermarket products . we estimate that our products are installed on approximately 70,000 commercial transport , regional transport , military and general aviation fixed wing turbine aircraft and rotary wing aircraft . diversified revenue base . we believe that our diversified revenue base reduces our dependence on any particular product , platform or market channel and has been a significant factor in maintaining our financial performance . our products are installed on almost all of the major commercial aircraft platforms now in production . we expect to continue to develop new products for military and commercial applications . 28 significant barriers to entry . we believe that the niche nature of our markets , the industry 's stringent regulatory and certification requirements , the large number of products that we sell and the investments necessary to develop and certify products create barriers to entry for potential competitors . our business strategy is made up of two key elements : ( 1 ) a value-driven operating strategy focused around our three core value drivers and ( 2 ) a selective acquisition strategy . value-driven operating strategy . our three core value drivers are : obtaining profitable new business . we attempt to obtain profitable new business by using our technical expertise , application skill and our detailed knowledge of our customer base and the individual niche markets in which we operate . we have regularly been successful in identifying and developing both aftermarket and oem products to drive our growth . improving our cost structure . we are committed to maintaining and continuously improving our lean cost structure through detailed attention to the cost of each of the products that we offer and our organizational structure , with a focus on reducing the cost of each . providing highly engineered value-added products to customers . we focus on the engineering , manufacturing and marketing of a broad range of highly engineered niche products that we believe provide value to our customers . we believe we have been consistently successful in communicating to our customers the value of our products . this has generally enabled us to price our products to fairly reflect the value we provide and the resources required to do so . selective acquisition strategy . we selectively pursue the acquisition of proprietary aerospace component businesses when we see an opportunity to create value through the application of our three core value-driven operating strategies . the aerospace industry , in particular , remains highly fragmented , with many of the companies in the industry being small private businesses or small non-core operations of larger businesses . we have significant experience among our management team in executing acquisitions and integrating acquired businesses into our company and culture . story_separator_special_tag 30 dukes aerospace acquisition on december 2 , 2009 , dukes aerospace , inc. , a wholly owned subsidiary of transdigm inc. , acquired substantially all of the aerospace-related assets of dukes , inc. and gst industries , inc. ( collectively dukes aerospace ) for approximately $ 95.5 million in cash , which includes a purchase price adjustment of $ 0.2 million received in the third quarter of fiscal 2011. dukes aerospace is a supplier of proprietary , highly engineered components primarily to the business jet , regional jet , and military aerospace markets , along with commercial and military helicopter markets . the products are comprised primarily of highly engineered valves and certain pumps , solenoids and related components . these products fit well with transdigm 's overall business direction . aero quality sales divestiture on april 7 , 2011 , the company completed the divestiture of aero quality sales ( aqs ) to satair a/s for approximately $ 31.8 million in cash , which includes a $ 1.8 million working capital adjustment received in the third quarter of fiscal 2011. aqs , which was acquired as part of the mckechnie aerospace acquisition , is a distributor and service center of aircraft batteries and battery support equipment . the company 's chairman and chief executive officer , w. nicholas howley was a director of satair a/s from 2006 through october 2011. mr. howley disclosed his relationship to satair a/s to the company 's board of directors and abstained from the related vote . fastener business divestiture on march 9 , 2011 , the company completed the divestiture of its fastener business for approximately $ 239.6 million in cash . this business , which was acquired as part of the mckechnie aerospace acquisition , is made up of valley-todeco , inc. and linread ltd. the business designs and manufactures fasteners , fastening systems and bearings for commercial , military and general aviation aircraft . recent development agreement to acquire goodrich pump & engine control systems on october 25 , 2012 , the company entered into a definitive agreement to acquire the assets of the goodrich pump & engine control systems business ( gpecs ) for approximately $ 236 million in cash . the acquisition , which is subject to approval by the u.s. department of justice and the european commission , is expected to close late in the current calendar year or early in 2013. gpecs manufactures proprietary , highly engineered aerospace fuel systems for the business jet , helicopter , military and commercial marketplace . 31 ebitda and ebitda as defined the following table sets forth a reconciliation of net income to ebitda and ebitda as defined : replace_table_token_11_th ( 1 ) ebitda represents earnings from continuing operations before interest , taxes , depreciation and amortization . ebitda as defined represents ebitda plus , as applicable for each relevant period , certain adjustments as set forth in the reconciliation of net income to ebitda and ebitda as defined . see non-gaap financial measures for additional information and limitations regarding these non-gaap financial measures . ( 2 ) represents accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when the inventory was sold . ( 3 ) represents costs incurred to integrate acquired businesses and product lines into td group 's operations , facility relocation costs and other acquisition-related costs . ( 4 ) represents transaction-related costs comprising deal fees ; legal , financial and tax due diligence expenses ; and valuation costs that are required to be expensed as incurred . ( 5 ) represents the compensation expense recognized by td group under our stock option plans . ( 6 ) represents the reversal of the earn-out liability related to the dukes aerospace acquisition based on lower growth projections relative to the required growth targets of the four-year earn-out arrangement . ( 7 ) represents costs incurred in connection with the refinancing in december 2010 , including the premium paid to redeem our 7 3 / 4 % senior subordinated notes due 2014 , the write off of debt issue costs and unamortized note premium and discount and settlement of the interest rate swap agreement and other expenses . 32 the following table sets forth a reconciliation of net cash provided by operating activities to ebitda and ebitda as defined : replace_table_token_12_th ( 1 ) represents interest expense excluding the amortization of debt issue costs and note premium and discount . ( 2 ) represents the compensation expense recognized by td group under its stock plans . ( 3 ) represents costs incurred in connection with the refinancing in december 2010 , including the premium paid to redeem our 7 3 / 4 % senior subordinated notes due 2014 , the write off of debt issue costs and unamortized note premium and discount and settlement of the interest rate swap agreement and other expenses . d amortization . ebitda as defined represents ebitda plus , as applicable for each relevant period , certain adjustments as set forth in the reconciliation of net cash provided by operating activities to ebitda and ebitda as defined . see non-gaap financial measures for additional information and limitations regarding these non-gaap financial measures . ( 5 ) represents accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when the inventory was sold . ( 6 ) represents costs incurred to integrate acquired businesses and product lines into td group 's operations , facility relocation costs and other acquisition-related costs . ( 7 ) represents transaction-related costs comprising deal fees ; legal , financial and tax due diligence expenses ; and valuation costs that are required to be expensed as incurred . ( 8 ) represents the compensation expense recognized by td group under our stock option plans . ( 9 ) represents the reversal of the earn-out liability related to the dukes aerospace acquisition based on lower growth projections relative to the required growth targets of the four-year earn-out arrangement .
| results of operations the following table sets forth , for the periods indicated , certain operating data of the company , including presentation of the amounts as a percentage of net sales ( amounts in thousands ) : replace_table_token_13_th fiscal year ended september 30 , 2012 compared with fiscal year ended september 30 , 2011 net sales . net organic and acquisition sales and the related dollar and percentage changes for the fiscal years ended september 30 , 2012 and 2011 were as follows ( amounts in millions ) : replace_table_token_14_th acquisition sales represent sales of acquired businesses for the period up to one year subsequent to their acquisition dates . the amount of acquisition sales shown in the table above resulted from the acquisitions of mckechnie aerospace , talley actuation and schneller in fiscal 2011 and harco , amsafe and aero-instruments in fiscal 2012. the organic sales growth was primarily due to an increase of $ 79.1 million , or a 23.6 % increase in commercial oem sales , an increase of $ 29.9 million , or an 6.2 % increase in commercial aftermarket sales , and an increase of $ 30.5 million , or a 8.9 % increase in defense sales , for the fiscal year ended september 30 , 2012 compared to the fiscal year ended september 30 , 2011. commercial oem sales for the fiscal year ended september 30 , 2012 were favorably impacted by the robust commercial transport oem production cycle and retroactive contract pricing adjustments ( approximately $ 13 million ) . 38 cost of sales and gross profit .
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losses and loss expenses payable the following table sets forth the activity in the liability for losses and story_separator_special_tag capitalized terms used in this item 7 and not otherwise defined have the meanings ascribed to such terms under the caption “ important defined terms used in this form 10-k ” which immediately precedes part i of this form 10-k. this discussion should be read in conjunction with the consolidated financial statements and notes thereto included in item 8 of this form 10-k and the narrative description of our business contained in item 1 of this form 10-k. for information regarding our financial results for the fiscal year ended december 31 , 2018 , please see the discussion included in our annual report on form 10-k for the fiscal year ended december 31 , 2019. overview state auto financial is a property and casualty insurance holding company . our insurance subsidiaries are part of the state auto group and pooling arrangement described below . the state auto group markets its insurance products throughout the united states primarily through independent agencies , which include retail agencies and brokers . the state auto group is rated a- ( excellent ) by a.m. best . state auto financial 's principal subsidiaries are state auto p & c , milbank and sa ohio , each of which is a property and casualty insurance company , and stateco , which provides investment management services to affiliated insurance companies . our reportable insurance segments are personal insurance and commercial insurance . these insurance segments are managed separately from each other due to the differences in the types of customers they serve , products they provide or services they offer . investment operations is also a reportable segment . as previously reported , we have exited our specialty business , which has resulted in the elimination of our specialty insurance segment . as a result , effective january 1 , 2019 , the specialty insurance business is no longer a reportable segment as it no longer is material to our results and is disclosed as 32 `` specialty run-off . '' see “ personal and commercial insurance ” in item 1 of this form 10-k for more information about our insurance segments . we evaluate the performance of our insurance segments using industry financial measurements determined under sap and certain measures determined under gaap . we evaluate our investment operations segment based on investment returns of assets managed . financial information about our segments for 2020 is set forth in this item 7 and in note 18 to our consolidated financial statements included in item 8 of this form 10-k. covid-19 the impact of covid-19 on our future results of operations and financial condition are highly uncertain at this time and outside of our control . the scope , duration and magnitude of the effects of the on-going covid-19 pandemic continue to evolve rapidly and in ways that are difficult or impossible to anticipate . for discussions on how covid-19 affected our operations , see the `` results of operations '' included in this item 7. for a discussion of the most significant risks and uncertainties that could impact our results of operations , financial position , liquidity or cash flows as a result of the covid-19 pandemic , see “ part i - item 1a . risk factors ” included in this form 10-k. executive summary 2020 was a year in which our results were negatively impacted by catastrophe losses with improved non-cat loss and lae and expense ratios . our 2020 personal and commercial insurance segments statutory combined ratio of 103.6 % included 14.0 points of catastrophe losses , which was 6.4 points higher than our five-year average . our net premium growth of 10.7 % was above the industry average . insurance operations our focus in 2020 was on personal auto profitability and , although our results fell far short of our expectations , we are pleased with the progress we made . we introduced a new private passenger auto pricing model in 2020 , addressed additional underwriting issues with the product and fixed the stability of our digital-only platform , state auto connect . we believe that these efforts will return personal auto to profitable growth in 2021. our homeowners business , now our largest line of business , saw improvements in both the non-catastrophe ratio and expense ratio while producing strong premium growth of 23.6 % . commercial lines achieved both profit and growth while completing the rollout of products on state auto connect , with the launch of farm and ranch , middle market commercial and workers ' compensation . the impact of covid-19 on our results included a decline in auto accidents due to fewer miles driven by insureds . we experienced an increase in workers ' compensation claims , primarily from nursing homes and other medical facilities . and we , along with the rest of the insurance industry , are facing legal challenges with respect to business interruption claims related to covid-19 . our claims and risk engineering ( care ) organization works to deliver exceptional service not only to customers affected by catastrophes throughout the year , but to those who , every day , reach out to us for help . in 2020 , the care team began to introduce customer service enhancements via our digital platform that will continue throughout 2021. continuing to improve the customer experience is central to care 's strategy going forward . improvements in customer and agent experience are being delivered through state auto connect . since its launch in 2016 , we have rebuilt all nine of our product lines , concluding with the launch of workers ' compensation in the fourth quarter of 2020. in 2019 , we focused on providing a more stable technology experience for agents and policyholders , which we delivered in 2020. in addition , our investments in improving the technology experience for our associates enabled us to quickly move to a remote work environment at the beginning of the covid-19 pandemic . story_separator_special_tag the 2019 prior accident year favorable development was across multiple coverages including bodily injury and uninsured and under-insured motorist coverages , primarily from the 2018 and 2017 accident years . the homeowners sap non-catastrophe loss and alae ratio for the year ended december 31 , 2020 improved 1.9 points when compared to the same 2019 period ( tables 1 - 2 ) . the 2020 improvement was primarily driven by lower claim frequency in the current accident year . partially offsetting this improvement was adverse development of prior accident year losses , primarily driven by higher than expected severity for 2019 property and third-party liability claims . commercial insurance segment the following tables set forth certain key performance indicators by major product line of business for our commercial insurance segment for the years ended december 31 , 2020 and 2019 : table 3 replace_table_token_9_th 41 table 4 replace_table_token_10_th commercial auto has been written on state auto connect since 2018 , and in january 2019 , we finished the rollout of state auto connect for small commercial package . our farm and ranch product launched on state auto connect during the first quarter of 2020 and is now live in 27 states . eight of the 27 states are states that we previously were not writing policies for farm & ranch products . the rollout of the state auto connect platform in farm & ranch 's remaining states will continue throughout 2021. our middle market commercial product launched on state auto connect in march 2020 and is currently live in 16 states , with subsequent state rollouts scheduled throughout 2021. finally , our workers ' compensation product launched on state auto connect in the fourth quarter of 2020 and is currently live in eight states with subsequent state rollouts scheduled throughout 2021. the commercial insurance segment 's net written premiums for the year ended december 31 , 2020 increased 12.7 % compared to 2019 ( tables 3 - 4 ) , primarily driven by ( i ) new business growth and rate increases in commercial auto , ( ii ) new business growth in farm & ranch , and ( iii ) rate increases in middle market commercial . the 2020 increase was partially offset by a decrease in net written premiums in workers ' compensation due to ( i ) a decline in new business as a result of covid-19 , ( ii ) a strategic decision to not renew and no longer write nursing home policies , and ( iii ) continued intense competition in this market . the commercial insurance segment 's sap catastrophe loss and alae ratio for the year ended december 31 , 2020 increased 9.5 points compared to 2019 ( tables 3 - 4 ) , with most of the catastrophe losses impacting middle market commercial , small commercial package , and farm & ranch . the 2020 cat loss and alae ratio was impacted ( i ) an increase in the severity of weather events when compared to 2019 , ( ii ) a severe wind and hail storm , including tornadoes , in tennessee , which contributed 4.4 points to the cat loss and alae ratio , of which 2.7 points were from three large losses in nashville , ( iii ) the midwest 42 derecho in august which contributed 1.4 points to the cat loss and alae ratio , and ( iv ) property losses resulting from the civil unrest which added 1.1 points to the cat loss and lae ratio . the commercial insurance segment 's sap non-catastrophe loss and alae ratio for the year ended december 31 , 2020 improved 5.3 points compared to 2019 . ( tables 3 - 4 ) . the commercial auto sap non-catastrophe loss and alae ratio for the year ended december 31 , 2020 improved 2.9 points when compared to 2019 ( tables 3 - 4 ) , driven by improvement in the current accident year . the 2020 current accident year was impacted by lower claims frequency , attributable to ( i ) fewer miles driven due to people working remotely and staying at home more because of covid-19 concerns , and ( ii ) reduced business activity due to the impact of covid-19 concerns . partially offsetting the 2020 improvement was less favorable development of prior accident year losses when compared to 2019. the 2019 prior accident year favorable development was primarily attributable to lower than anticipated severity from the 2017 accident year . the small commercial package sap non-catastrophe loss and alae ratio for the year ended december 31 , 2020 improved 7.0 points compared to 2019 ( tables 3 - 4 ) , primarily due to greater favorable development of prior accident year losses , driven by lower than expected bodily injury severity from multiple accident years when compared to 2019. the 2020 current accident year ratio was impacted by ( i ) a decline in claim frequency as a result of reduced business activity caused by covid-19 , and ( ii ) increased severity of property losses , primarily related to fire . the 2020 current accident year was also impacted by increased legal defense costs from claims related to covid-19 , which added 2.0 points to the non-cat loss ratio . 2019 favorable development of prior accident year losses was attributable to lower than expected bodily injury severity from multiple accident years . the middle market commercial sap non-catastrophe loss and alae ratio for the year ended december 31 , 2020 improved 7.3 points when compared to 2019 ( tables 3 - 4 ) , primarily due to improvement in the current accident year , driven by a decline in claim frequency as a result of reduced business activity caused by the impact of covid-19 , partially offset by increased legal defense costs from claims related to covid-19 , which added 0.6 points to the non-cat loss and alae ratio . greater favorable development of prior accident year losses , driven by lower than expected bodily injury severity from multiple accident years , also contributed to the improvement when compared to 2019.
| summary the following table sets forth certain key performance indicators we use to monitor our operations for the years ended december 31 , 2020 and 2019 : replace_table_token_4_th 2020 overview : covid-19 beginning in march 2020 , the global covid-19 pandemic has impacted our results of operations . for the year ended december 31 , 2020 , the impact on the non-cat loss and alae current accident year included : a decline in claim frequency in personal auto and commercial auto due to a reduction in miles driven as a result of people working remotely and staying at home more because of covid-19 concerns , a decline in claim frequency in commercial auto , small commercial package , middle market commercial and workers ' compensation due to reduced business and employment activity , increased workers ' compensation claims for businesses in the medical field , such as nursing homes and hospitals , due to employees being exposed to covid-19 in the course of their employment , and increased legal defense costs in small commercial package and middle market commercial due to litigation involving business interruption insurance claims . other factors net investment gain was $ 27.3 million which included $ 31.8 million of recognized net losses on equity securities sold during the year . during the third quarter , we completed the exit of our investments in the master limited partnership exchange traded funds ( `` mlp etf 's '' ) equity security asset class and recognized net investment losses of $ 35.1 million . the decline in the fair value of the investments in the mlp etfs during 2020 was in part 35 due to the market volatility caused by the covid-19 pandemic . net investment gain for 2020 included $ 59.3 million of unrealized gains from equity securities and other invested assets still held at the end of 2020. earned premiums were $ 1,380.9 million and reflected new business growth and rate increases in our personal and commercial segments .
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leases in story_separator_special_tag overview general we operate in two business segments : funeral home operations , which account for approximately 76 % of our revenues , and cemetery operations , which account for approximately 24 % of our revenues . funeral homes are principally service businesses that provide funeral services ( traditional burial and cremation ) and sell related merchandise , such as caskets and urns . cemeteries are primarily sales businesses that sell interment rights ( grave sites and mausoleum spaces ) and related merchandise , such as markers and outer burial containers . we provide funeral and cemetery services and products on both an “ at-need ” ( time of death ) and “ preneed ” ( planned prior to death ) basis . at december 31 , 2016 , we operated 170 funeral homes in 28 states and 32 cemeteries in 11 states within the united states . for additional discussion about our overall business strategy , see part i , item 1 , business , business strategy . funeral and cemetery operations factors affecting our funeral operating results include : demographic trends relating to population growth and average age , which impact death rates and number of deaths ; establishing and maintaining leading market share positions supported by strong local heritage and relationships ; effectively responding to increasing cremation trends by selling complementary services and merchandise ; controlling salary and merchandise costs ; and exercising pricing leverage related to our at-need business to increase average revenue per contract . in simple terms , volume and price are the two variables that affect funeral revenues . the average revenue per contract is influenced by the mix of traditional and cremation services because our average cremation service revenue is approximately one-third of the average revenue earned from a traditional burial service . funeral homes have a relatively fixed cost structure . thus , small changes in revenues , up or down , normally cause significant changes to our profitability . our funeral contract volumes , including contracts from acquisitions , have increased from 27,864 in 2012 to 33,160 in 2016 ( compound annual increase of 4.4 % ) . our funeral operating revenue , excluding financial revenue , has increased from $ 143.2 million in 2012 to $ 180.6 million in 2016 ( compound annual increase of 6.0 % ) . the increases are primarily a result of businesses we have acquired in the last five years and our ability to increase the average revenue per funeral through expanded service offerings and packages . additional funeral revenue from preneed commissions and preneed funeral trust earnings has increased from $ 7.6 million in 2012 to $ 8.8 million in 2016 . we experienced a 1.9 % decrease in volumes in comparing the year ended december 31 , 2016 to the year ended december 31 , 2015 on a same store basis and the same store average revenue per contract for the year ended december 31 , 2016 decreased 0.1 % compared to the year ended december 31 , 2015 . the percentage of funeral services involving cremations has increased from 46.2 % for the year ended december 31 , 2012 to 50.7 % for the year ended december 31 , 2016 . on a same store basis , the cremation rate has risen from 46.3 % in 2012 to 51.8 % for the year ended december 31 , 2016 , while the cremation rate for our acquired funeral home businesses has risen from 43.5 % for the year ended december 31 , 2012 compared to 46.0 % for the year ended december 31 , 2016 . cemetery operating results are affected by the size and success of our sales organization . approximately 48.0 % and 50.0 % of our cemetery revenues related to preneed sales of interment rights and related merchandise and services for the years ended december 31 , 2015 and 2016 , respectively . we believe that changes in the economy and consumer confidence affect the amount of preneed cemetery operating revenues . our cemetery financial performance from 2012 through 2016 was characterized by increasing levels of operating revenues and field-level cemetery profit margins . cemetery operating revenue , excluding financial revenue , increased from $ 38.3 million in 2012 to $ 48.9 million in 2016 ( compound annual increase of 6.3 % ) and increased 4.9 % over 2015 . additional cemetery revenue from preneed finance charges and trust earnings has increased from $ 9.1 million in 2012 to $ 9.9 million in 2016 ( compound annual increase of 2.0 % ) . changes in the capital markets and interest rates affect this component of our cemetery revenues . our goal is to build broader and deeper teams of sales leaders and counselors in our larger and more strategically located cemeteries in order to focus on growth of our preneed property sales . additionally , a portion of our capital expenditures is designed to continually expand our cemetery product offerings . financial revenue income recognized from the investments in the preneed funeral trust funds , the cemetery merchandise and services trust funds and the perpetual care trust funds decreased $ 1.1 million , or 6.7 % for the year ended december 31 , 2016 , as compared to 2015 , as a result of fewer preneed contract maturities and lower average revenue per preneed contract . for the five year period ended december 31 , 2016 , the performance of the funds , which includes realized income and unrealized appreciation , resulted in a 66.3 % return . investment income realized in the perpetual care trust funds ( except for capital gains ) is recognized as income when earned in the portfolio . investment income realized in the preneed funeral trust funds and the cemetery merchandise and services trust funds is allocated to the individual preneed contracts and deferred from revenue until the time that the services and merchandise are delivered to the customer . story_separator_special_tag the investments of such trust funds are classified as available-for-sale and are reported at fair market value ; therefore , the unrealized gains and losses , as well as accumulated and undistributed income and realized gains and losses are recorded to deferred preneed funeral and cemetery receipts held in trust and care trusts ' corpus on our consolidated balance sheets . our future obligations to deliver merchandise and services are reported at estimated settlement amounts . preneed funeral and cemetery trust investments are reduced by the trust investment earnings that we have been allowed to withdraw in certain states prior to maturity . these earnings , along with preneed contract collections not required to be placed in trust , are recorded in deferred preneed funeral revenue and deferred preneed cemetery revenue until the service is performed or the merchandise is delivered . in accordance with respective state laws , we are required to deposit a specified amount into perpetual and memorial care trust funds for each interment/entombment right and certain memorials sold . income from the trust funds is distributed to us and used to provide for the care and maintenance of the cemeteries and mausoleums . such trust fund income is recognized as revenue when realized by the trust and distributable to us . we are restricted from withdrawing any of the principal balances of these funds . an enterprise is required to perform an analysis to determine whether the enterprise 's variable interest ( s ) give it a controlling financial interest in a vie . this analysis identifies the primary beneficiary of a vie as the enterprise that has both the power to direct the activities of the vie that most significantly impact the entity 's economic performance and the obligation to absorb losses of the entity that could potentially be significant to the vie or the right to receive benefits from the entity that could potentially be significant to the vie . our analysis continues to support our position as the primary beneficiary in the majority of our funeral and cemetery trust funds . trust management fees are earned by us for investment management and advisory services that are provided by our wholly-owned registered investment advisor ( “ csv ria ” ) . as of december 31 , 2016 , csv ria provided these services to two institutions , which have custody of 79 % of our trust assets , for a fee based on the market value of trust assets . under state trust laws , we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided . we determine whether or not the assets in the preneed trusts have an other-than-temporary impairment on a security-by-security basis . this assessment is made based upon a number of criteria including the length of time a security has been in a loss position , changes in market conditions and concerns related to the specific issuer . if a loss is considered to be other-than-temporary , the cost basis of the security is adjusted downward to its fair market value . any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction to deferred preneed funeral and cemetery receipts held in trust and care trusts ' corpus on our consolidated balance sheets . there will be no impact on earnings unless and until such time that the investment is withdrawn from the trust in accordance with state regulations at an amount that is less than its original basis . see part ii , item 8 , financial statements and supplementary data , notes 6 and 10 for additional related disclosures . long-lived assets long-lived assets , such as property , plant and equipment subject to depreciation and amortization , are reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with the property , plant and equipment topic of the accounting standards codification ( “ asc ” ) 360. this guidance requires that long-lived assets to be held and used are reported at the lower of their carrying amount or fair value . we assess long-lived assets for impairment whenever events or circumstances indicate that the carrying value may be greater than the fair value . we evaluate our long-lived assets for impairment when a funeral home business has negative ebitda for four consecutive years and if there has been a decline in ebitda in that same period . for our cemetery business , we analyze the long-lived assets for impairment if the business has a negative operating margin and a decline in operating margin over a four year period . we review our long-lived assets deemed held-for-sale to the point of recoverability . assets to be disposed of and assets not expected to provide any future service potential are recorded at the lower of their carrying amount or fair value less estimated cost to sell . if we determine that the carrying value is not recoverable from the proceeds of the sale , we record an impairment at that time . for the year ended december 31 , 2016 , no impairments were identified on our long-lived assets . see part ii , item 8 , financial statements and supplementary data , note 1 for additional information . 25 business combinations tangible and intangible assets acquired and liabilities assumed are recorded at fair value and goodwill is recognized for any difference between the price of the acquisition and fair value . we recognize the assets acquired , the liabilities assumed and any non-controlling interest in the acquiree at the acquisition date , measured at the fair value as of that date . acquisition related costs are recognized separately from the acquisition and are expensed as incurred . we customarily estimate related transaction costs known at closing .
| results of operations funeral home segment . the following table sets forth certain information regarding our revenues and operating profit from funeral home continuing operations for the year ended december 31 , 2015 compared to the year ended december 31 , 2016 . replace_table_token_10_th funeral home same store operating revenues for the year ended december 31 , 2016 decreased $ 2.2 million , or 1.6 % , when compared to the year ended december 31 , 2015 . this decrease was primarily due to a 1.9 % decrease in same store contract volume to 26,636 , while the average revenue per contract remained flat at $ 5,273 . the average revenue per contract excludes the impact of preneed funeral trust earnings ( separately reflected in revenue above ) recognized at the time that we provide the services pursuant to the preneed contract . including preneed funeral trust earnings , the average revenue per contract remained flat at $ 5,471 for the year ended december 31 , 2016 . the average revenue per burial contract increased 1.8 % to $ 8,819 , while the number of traditional burial contracts decreased 5.6 % to 10,875 . the number of cremation contracts increased 1.3 % to 13,801 , and the average revenue per cremation contract increased 1.0 % to $ 3,274 . the burial rate decreased 170 basis points to 40.8 % and the cremation rate increased 160 basis points to 51.8 % for the year ended december 31 , 2016 when compared to the year ended december 31 , 2015 . the average revenue for “ other ” contracts , which are charges for merchandise and services for which we do not perform a funeral service and which make up approximately 7.4 % of the total number of contracts for the year ended december 31 , 2016 , increased 3.1 % to $ 2,371 .
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events that would indicate impairment and trigger an interim impairment assessment include , but are not limited to , current economic and market conditions , including a decline in market capitalization , a significant adverse change in legal factors , business climate or operational performance of the business and an adverse action or assessment by a story_separator_special_tag this document , including the following management 's discussion and analysis of financial condition and results of operations , contains forward-looking statements that are not purely historical regarding dexcom 's or its management 's intentions , beliefs , expectations and strategies for the future . these forward-looking statements fall within the meaning of the federal securities laws that relate to future events or our future financial performance . in some cases , you can identify forward-looking statements by terminology such as “ may , ” “ will , ” “ expect , ” “ plan , ” “ anticipate , ” “ believe , ” “ estimate , ” “ intend , ” “ potential ” or “ continue ” or the negative of these terms or other comparable terminology . forward-looking statements are made as of the date of this report , deal with future events , are subject to various risks and uncertainties , and actual results could differ materially from those anticipated in those forward looking statements . the risks and uncertainties that could cause actual results to differ materially are more fully described under “ risk factors ” and elsewhere in this report and in our other reports filed with the sec . we assume no obligation to update any of the forward-looking statements after the date of this report or to conform these forward-looking statements to actual results . you should read the following discussion and analysis together with “ selected financial data ” in part ii , item 6 and our financial statements and related notes in part ii , item 8. overview we are a medical device company primarily focused on the design , development and commercialization of continuous glucose monitoring ( “ cgm ” ) systems for use by people with diabetes and by healthcare providers for the treatment of people with diabetes . unless the context requires otherwise , the terms “ we , ” “ us , ” “ our , ” the “ company , ” or “ dexcom ” refer to dexcom , inc. and its subsidiaries . from inception to 2006 , we devoted substantially all of our resources to start-up activities , raising capital and research and development , including product design , testing , manufacturing and clinical trials . since 2006 , we have devoted considerable resources to the commercialization of our continuous glucose monitoring systems , including the g4 platinum and g5 mobile , as well as the continued research and clinical development of our technology platform . from inception through december 31 , 2017 , we have generated $ 2.4 billion of product and development grant and other ( non-product ) revenue , and we have incurred net losses in each year since our inception in may 1999. as of december 31 , 2017 , we had an accumulated deficit of $ 671.8 million . we expect our losses to continue as we proceed with our commercialization and research and development activities . we have financed our operations primarily through offerings of equity securities and debt , and the sales of our products . financial operations revenue we sell our durable systems and disposable units through a direct sales force in the united states , canada and portions of europe , and through distribution arrangements in the united states , canada , australia , new zealand , and in portions of europe , asia , latin america , the middle east and africa . we have contracts with certain distributors , the majority of whom stock our products , and we refer to these distributors as stocking distributors , whereby the stocking distributors fulfill orders for our product from their inventory . we also have contracts with certain distributors that do not stock our products , but rather products are shipped directly to the customer by us on behalf of our distributor , and we refer to these distributors as drop-ship distributors . we expect that revenues we generate from the sales of our products will fluctuate from quarter to quarter . we typically experience seasonality with lower sales in the first quarter of each year , compared to the previous fourth quarter , related to annual insurance deductible resets and unfunded flexible spending accounts . cost of sales cost of sales includes direct labor and materials costs related to each product sold or produced , including assembly , test labor and scrap , as well as factory overhead supporting our manufacturing operations . factory overhead includes facilities , material procurement and control , manufacturing engineering , quality assurance , supervision and management . these costs are primarily salary , fringe benefits , share-based compensation , facility expense , supplies and purchased services . all of our manufacturing costs are included in cost of sales . 55 research and development our research and development expenses primarily consist of engineering and research expenses related to our continuous glucose monitoring technology , clinical trials , regulatory expenses , quality assurance programs , materials and products for clinical trials . research and development expenses are primarily related to employee compensation , including salary , fringe benefits , share-based compensation , and temporary employee expenses . we also incur significant expenses to operate our clinical trials including clinical site reimbursement , clinical trial product and associated travel expenses . our research and development expenses also include fees for design services , contractors and development materials . selling , general and administrative our selling , general and administrative expenses primarily consist of salary , fringe benefits and share-based compensation for our executive , financial , sales , marketing , information technology and administrative functions . story_separator_special_tag cash flow summary the following table sets forth a summary of our cash flows for the periods indicated ( in millions ) replace_table_token_3_th as of december 31 , 2017 , we had $ 441.5 million of cash and cash equivalents compared to $ 94.5 million as of december 31 , 2016 , an increase of $ 347.0 million . the cash flows during the twelve months ended december 31 , 2017 were related primarily to the following items : cash inflows : net cash provided by operating activities of $ 92.0 million comprised of net loss of $ 50.2 million , offset by $ 139.6 million of net non-cash expenses and $ 2.6 million of changes in working capital balances . net non-cash expenses of $ 139.6 million were primarily related to share-based compensation , depreciation and amortization , and non-cash interest expense related to our senior convertible notes . proceeds from issuance of common stock of $ 10.1 million pursuant to the exercise of then-outstanding stock options and purchases of stock under our employee stock purchase plan . proceeds from short-term borrowings of $ 75.0 million . proceeds from issuance of senior convertible notes , net of issuance costs , of $ 389.0 million . cash outflows : capital expenditures of $ 66.0 million primarily related to purchase of facility related build-outs , office equipment and machinery and equipment . net cash outflow of $ 78.4 million as a result of marketable securities transactions . repayment of short-term borrowings of $ 75.0 million . 58 net cash provided by operating activities . the increase in cash provided by operating activities was primarily due to a reduction of $ 15.4 million in net loss , an increase of $ 11.5 million in non-cash expenses and a change of $ 8.9 million in working capital balances . the increase in non-cash expenses for the twelve months ended december 31 , 2017 was primarily related to our senior convertible notes . net cash used in investing activities . the change in cash used in investing activities was primarily due to an additional $ 77.9 million net cash used as a result of net purchasing of marketable securities , and an additional $ 10.3 million to purchase equipment to support facility related build-outs , manufacturing equipment and information technology infrastructure . net cash provided by financing activities . the increase in cash provided by financing activities was primarily due to $ 389.0 million net proceeds from the issuance of senior convertible notes , net of issuance costs . operating capital and capital expenditure requirements we anticipate that we will continue to incur operating losses as we incur expenses and expand the commercialization of our approved products domestically and internationally , develop additional continuous glucose monitoring products , and expand our marketing , manufacturing and corporate infrastructure . we believe that our cash , cash equivalents , marketable securities balances , projected cash contributions from our commercial operations and $ 200.0 million available under our credit agreement , of which $ 200.0 million remains available , will be sufficient to meet our anticipated cash requirements with respect to the continued scale-up of our commercialization activities , research and development activities , including clinical trials , the expansion of our marketing , manufacturing and corporate infrastructure , and to meet our other anticipated cash needs through at least february 27 , 2019 . if our available cash , cash equivalents and marketable securities are insufficient to satisfy our liquidity requirements , or if we develop additional products or new markets for our existing products , we may seek to sell additional equity or debt securities or obtain an additional credit facility . the sale of additional equity and debt securities may result in additional dilution to our stockholders . if we raise additional funds through the issuance of debt securities or preferred stock , these securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations . we may require additional capital beyond our currently forecasted amounts . any such required additional capital may not be available on reasonable terms , if at all . additionally , we can not guarantee that we will be successful in obtaining additional cash contributions from future partnership arrangements . our ability to transition to , and maintain profitable operations is dependent upon achieving a level of revenues adequate to support our cost structure . if events or circumstances occur such that we do not meet our operating plan as expected , or if we are unable to obtain additional financing , we may be required to reduce planned increases in compensation related expenses or other operating expenses related to research , development , and commercialization activities , which could have an adverse impact on our ability to achieve our intended business objectives . because of the numerous risks and uncertainties associated with the development of continuous glucose monitoring technologies , we are unable to estimate the exact amounts of capital outlays and operating expenditures associated with our current and anticipated clinical trials . our future funding requirements will depend on many factors , including , but not limited to : the revenue generated by sales of our approved products and other future products ; the expenses we incur in manufacturing , developing , selling and marketing our products ; the quality levels of our products and services ; the third-party reimbursement of our products for our customers ; our ability to efficiently scale our manufacturing operations to meet demand for our current and any future products ; the costs , timing and risks of delays of additional regulatory approvals ; the costs of filing , prosecuting , defending and enforcing any patent claims and other intellectual property rights ; the rate of progress and cost of our clinical trials and other development activities ; the success of our research and development efforts ; the emergence of competing or complementary technological developments ; the terms and timing of any collaborative , licensing and other arrangements that we may establish ; and the acquisition of
| results of operations fiscal year ended december 31 , 2017 compared to december 31 , 2016 revenue , cost of sales and gross profit revenues increased $ 145.2 million to $ 718.5 million for the twelve months ended december 31 , 2017 compared to $ 573.3 million for the twelve months ended december 31 , 2016 based primarily on increased sales volume of our disposable sensors due to the continued growth of our installed base of customers using our g4 platinum and g5 mobile systems and durable systems to both new and existing customers . revenue attributable to our disposable sensors and durable systems was approximately 70 % and 30 % , respectively , of total revenue , for each of the twelve months ended december 31 , 2017 and 2016 . revenue from products shipped to our distributors , which are primarily stocking distributors , for the twelve months ended december 31 , 2017 was approximately $ 538.0 million or 75 % of our revenue compared to $ 411.8 million or 72 % of our total revenue for the twelve months ended december 31 , 2016 . cost of sales increased $ 31.5 million to $ 226.4 million for the twelve months ended december 31 , 2017 compared to $ 194.9 million for the twelve months ended december 31 , 2016 , primarily due to increased sales volume . the gross profit of $ 492.1 million , or 68 % for the twelve months ended december 31 , 2017 increased $ 113.7 million compared to $ 378.4 million , or 66 % for the same period in 2016 , primarily due to increased revenue and a decrease in warranty costs primarily related to the february 23 , 2016 customer notification regarding the audible alarms and alerts associated with our receivers which was classified as a voluntary class 1 recall by the fda and was closed by the fda as of august 11 , 2017. research and development .
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the total cash consideration paid for the business , including net working capital , was approximately $ 52.3 million , with additional consideration of $ 6.9 million assumed in liabilities , for a total consideration story_separator_special_tag you should read this discussion together with our consolidated financial statements and the accompanying notes to consolidated financial statements and selected financial data included elsewhere in this form 10-k. executive overview we are one of the largest publicly-traded operators of hospitals in the united states in terms of number of facilities and net operating revenues . we provide healthcare services through the hospitals that we own and operate in non-urban and selected urban markets . we generate revenues by providing a broad range of general and specialized hospital and other outpatient healthcare services to patients in the communities in which we are located . as of december 31 , 2012 , we owned or leased 135 hospitals comprised of 131 general acute care hospitals and four stand-alone rehabilitation or psychiatric hospitals . in addition , we own and operate home care agencies , located primarily in markets where we also operate a hospital , and through our wholly-owned subsidiary , quorum health resources , llc , or qhr , we provide management and consulting services to non-affiliated general acute care hospitals located throughout the united states . for the hospitals and home care agencies that we own and operate , we are paid for our services by governmental agencies , private insurers and directly by the patients we serve . for our management and consulting services , we are paid by the non-affiliated hospitals utilizing our services . as further discussed in recent accounting pronouncements , during the first quarter of 2012 we adopted the provisions of accounting standards update , or asu , no . 2011-07 of the financial accounting standards board , or fasb , which requires us to present revenues net of the provision for bad debts . prior to the adoption of this asu , our provision for bad debts was presented as a component of operating expenses . for all periods presented in this annual report , revenues and any related financial ratios or metrics have been updated to reflect the change in the presentation of net operating revenues . the adoption of this standard did not impact our financial position , results of operations or cash flows . during the year ended december 31 , 2012 , we continued the execution of our acquisition strategy by acquiring four hospitals located in scranton , pennsylvania ; peckville , pennsylvania ; york , pennsylvania ; and blue island , illinois and a large physician practice located in longview , texas . during the year ended december 31 , 2012 , we also closed several financing arrangements that extend the maturity date of a significant portion of our outstanding indebtedness . as further discussed in the liquidity and capital resources section , we entered into additional amendments and a modification of our credit facility that extend by two and a half years , until january 25 , 2017 , the maturity date of approximately $ 1.9 billion of our term loans due 2014. we obtained a new $ 750 million senior secured revolving credit facility and a new $ 750 million incremental term loan a facility , both with a maturity date of october 25 , 2016 , subject to certain acceleration clauses , the net proceeds of which were used to repay the same amount of existing borrowings under the previous revolving credit facility and term loans under the credit facility . we also completed through various offerings the issuance of $ 2.2 billion of senior notes and $ 1.6 billion of senior secured notes , the net proceeds of which were used to finance the purchase and redemption of all our outstanding 8 7 / 8 % senior notes due 2015 , to prepay $ 1.6 billion of the outstanding term loans due 2014 under the credit facility , to pay related fees and expenses and for general corporate purposes . compared to our debt maturities at december 31 , 2011 , the net effect of these financing transactions extended the maturity of approximately $ 6.0 billion of our outstanding long-term debt previously due in 2014 and 2015 to various maturities ranging from 2016 to 2020. our net operating revenues for the year ended december 31 , 2012 increased to approximately $ 13.0 billion , as compared to approximately $ 11.9 billion for the year ended december 31 , 2011. income from continuing operations , before noncontrolling interests , for the year ended december 31 , 2012 increased 3.1 % over the year ended december 31 , 2011 to $ 346.3 million compared to $ 335.9 million . included in income from continuing operations for the year ended december 31 , 2012 , is a $ 47.9 million after-tax benefit from the resolution of an industry-wide governmental settlement and a payment update related to prior periods , a $ 20.2 million after-tax charge for certain legal and regulatory matters , a $ 71.8 million after-tax loss from the early extinguishment of debt and a $ 6.2 million after-tax impairment charge for long-lived assets . for the year ended december 31 , 2011 , income from continuing operations included a $ 42.0 million after-tax loss from the early extinguishment of debt . excluding the effect of these one-time items , the increase in income from continuing operations during the year ended december 31 , 2012 , as compared to the year ended december 31 , 2011 , is due primarily to increased revenues at our same-store hospitals , income from electronic health records incentive reimbursements and reductions in interest expense . story_separator_special_tag the reform legislation permits existing physician investments in a whole hospital to continue under a grandfather clause if the arrangement satisfies certain requirements and restrictions , but physicians are now prohibited , from the time the reform legislation became effective , from increasing the aggregate percentage of their ownership in the hospital . the reform legislation also restricts the ability of existing physician-owned hospitals to expand the capacity of their facilities . in addition to the reform legislation , the american recovery and reinvestment act of 2009 included provisions for implementing health information technology under the health information technology for economic and clinical health act , or hitech . these provisions were designed to increase the use of electronic health records , or ehr , technology and establish the requirements for a medicare and medicaid incentive payments program beginning in 2011 for eligible hospitals and providers that adopt and meaningfully use certified ehr technology . these incentive payments are intended to offset a portion of the costs incurred to implement and qualify as a meaningful user of ehr . rules adopted in july 2010 by the department of health and human services established an initial set of standards and certification criteria . our hospital facilities have begun to implement ehr technology on a facility-by-facility basis 46 beginning in 2011. we anticipate recognizing incentive reimbursement related to the medicare or medicaid incentives as we are able to implement the certified ehr technology , meet the defined meaningful use criteria , and information from completed cost report periods is available from which to calculate the incentive reimbursement . the timing of recognizing incentive reimbursement will not correlate with the timing of recognizing operating expenses and incurring capital costs in connection with the implementation of ehr technology which may result in material period-to-period changes in our future results of operations . hospitals that do not qualify as a meaningful user of ehr technology by 2015 are subject to a reduced market basket update to the inpatient prospective payment system standardized amount in 2015 and each subsequent fiscal year . although we believe that our hospital facilities will be in compliance with the ehr standards by 2015 , there can be no assurance that all of our facilities will be in compliance and therefore not subject to the penalty provisions of hitech . we recognized approximately $ 126.7 million and $ 63.4 million during the years ended december 31 , 2012 and 2011 , respectively , of incentive reimbursement for hitech incentive reimbursements from medicare and medicaid related to certain of our hospitals and for certain of our employed physicians , which are presented as a reduction of operating expenses . as a result of our current levels of cash , available borrowing capacity , long-term outlook on our debt repayments , the refinancing of our term loans and our continued projection of our ability to generate cash flows , we do not anticipate a significant impact on our ability to invest the necessary capital in our business over the next twelve months and into the foreseeable future . we believe there continues to be ample opportunity for growth in substantially all of our markets by decreasing the need for patients to travel outside their communities for healthcare services . furthermore , we continue to benefit from synergies from our acquisitions and will continue to strive to improve operating efficiencies and procedures in order to improve our profitability at all of our hospitals . acquisitions and divestitures effective july 1 , 2012 , we completed the acquisition of memorial health systems in york , pennsylvania . this healthcare system includes memorial hospital ( 100 licensed beds ) , the surgical center of york , and other outpatient and ancillary services . as part of this purchase agreement , we agreed to spend at least $ 75.0 million to build a replacement hospital within five years of the closing date . the total cash consideration paid for fixed assets and working capital was approximately $ 45.0 million and $ 2.6 million , respectively , with additional consideration of $ 12.5 million assumed in liabilities , for a total consideration of $ 60.1 million . based upon our preliminary purchase price allocation relating to this acquisition as of december 31 , 2012 , approximately $ 9.9 million of goodwill has been recorded . the preliminary allocation of the purchase price has been determined by us based on available information and is subject to settling amounts related to purchased working capital and final appraisals of tangible and intangible assets . adjustments to the purchase price allocation are not expected to be material . effective march 5 , 2012 , we completed a merger with diagnostic clinic of longview , p.a. , which is a multi-specialty clinic serving residents of longview , texas and surrounding east texas communities . this merger was accounted for as a purchase business combination . the total cash consideration paid for the business , including net working capital , was approximately $ 52.3 million , with additional consideration of $ 6.9 million assumed in liabilities , for a total consideration of $ 59.2 million . based upon our preliminary purchase price allocation relating to this acquisition as of december 31 , 2012 , approximately $ 41.8 million of goodwill has been recorded . the preliminary allocation of the purchase price has been determined by us based on available information and is subject to settling amounts related to purchased working capital . adjustments to the purchase price allocation are not expected to be material . effective march 1 , 2012 , we completed the acquisition of metrosouth medical center ( 330 licensed beds ) located in blue island , illinois . the total cash consideration paid for fixed assets was approximately $ 39.3 million with additional consideration of $ 5.8 million assumed in liabilities as well as a credit applied at closing of $ 0.9 million for negative acquired working capital , for a total consideration of $ 44.2 million .
| results of operations our hospitals offer a variety of services involving a broad range of inpatient and outpatient medical and surgical services . these include general acute care , emergency room , general and specialty surgery , critical care , internal medicine , obstetrics , diagnostic services , psychiatric and rehabilitation services . the strongest demand for hospital services generally occurs during january through april and the weakest demand for these services occurs during the summer months . accordingly , eliminating the effect of new acquisitions , our net operating revenues and earnings are historically highest during the first quarter and lowest during the third quarter . the following tables summarize , for the periods indicated , selected operating data . replace_table_token_17_th 49 replace_table_token_18_th ( a ) operating expenses include salaries and benefits , supplies , other operating expenses , electronic health records incentive reimbursement and rent . ( b ) adjusted admissions is a general measure of combined inpatient and outpatient volume . we computed adjusted admissions by multiplying admissions by gross patient revenues and then dividing that number by gross inpatient revenues . ( c ) includes loss from discontinued operations . ( d ) includes acquired hospitals to the extent we operated them in both years . year ended december 31 , 2012 compared to year ended december 31 , 2011 net operating revenues increased by 9.4 % to approximately $ 13.0 billion in 2012 , from approximately $ 11.9 billion in 2011. growth from hospitals owned throughout both periods contributed $ 545.5 million of that increase and $ 493.0 million was contributed by hospitals acquired in 2012 and 2011. on a same-store basis , net operating revenues increased 4.6 % . the increased net operating revenues contributed by hospitals that we owned throughout both periods were primarily attributable to general rate and reimbursement increases including revenues from states with provider assessment programs .
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the new accounting standard required lessees to recognize rou assets and corresponding lease liabilities for all leases with story_separator_special_tag the following discussion contains management 's discussion and analysis of our financial condition and results of operations and should be read together with the historical financial statements , the notes thereto included in item 8 “ financial statements and supplementary data ” and included elsewhere in this annual report on form 10-k. this discussion contains forward-looking statements that reflect our plans , estimates and beliefs and involve numerous risks and uncertainties , including but not limited to those described in the item 1a “ risk factors ” section of this annual report on form 10-k. actual results may differ materially from those contained in any forward-looking statements . you should carefully read “ special note regarding forward-looking statements ” and item 1a “ risk factors. ” overview we are a performance beauty company with a customer-centric approach focused on delivering breakthrough products in the self-pay aesthetic market . in february 2019 , we received the approval of our first product jeuveau ® ( prabotulinumtoxina-xvfs ) from the u.s. food and drug administration , or fda . in may 2019 , we commercially launched jeuveau ® in the united states and through a distribution partner in canada in october 2019. jeuveau ® is a proprietary 900 kda purified botulinum toxin type a formulation indicated for the temporary improvement in the appearance of moderate to severe glabellar lines , also known as “ frown lines , ” in adults . our primary market is the self-pay aesthetic market , which includes medical products purchased by physician and other customers that are then sold to consumers or used in procedures for aesthetic indications that are not reimbursed by any third-party payor , such as medicaid , medicare or commercial insurance . we believe we offer customers and consumers a compelling value proposition with jeuveau ® . currently , onabotulinumtoxina ( botox ) is the neurotoxin market leader , and prior to the approval of jeuveau ® , was the only known 900 kda botulinum toxin type a complex approved in the united states . we believe aesthetic physicians generally prefer the performance characteristics of the complete 900 kda neurotoxin complex and are accustomed to injecting this formulation . in may 2019 , as part of our commercial launch , we introduced the jeuveau ® experience treatment , or j.e.t. , an exclusive program for aesthetic providers and consumers to be the first to experience jeuveau ® . j.e.t . offered aesthetic providers the opportunity to receive multiple shipments of jeuveau ® and ended in august 2019. the program was made available through our technology platform , “ evolus practice , ” which allows providers to open a new account , order jeuveau ® , pay invoices and engage with our customer experience team and medical affairs representatives . we did not recognize net revenues from shipments made through the j.e.t . program . we have generated revenue from aesthetic practices that purchased products directly from us after completion or outside of the j.e.t . program . as a result of our j.e.t . program and customer and consumer marketing initiatives throughout 2019 , we have established a broad base of over 3,500 customer accounts ordering jeuveau ® through december 31 , 2019 . customer accounts that participated in j.e.t . drove greater than 80 % of our u.s. jeuveau ® net revenue for the year ended december 31 , 2019 . in august 2018 , we received approval from health canada for the temporary improvement in the appearance of moderate to severe glabellar lines in adult patients under 65 years of age . we began marketing jeuveau ® in canada in october 2019 through our distribution partner clarion medical technologies , inc. , or clarion . in september 2019 , we also received approval from the european commission , to market the product in all 28 eu member states , iceland , norway and liechtenstein . we plan to launch jeuveau ® in europe in 2020. we have a limited history of generating revenue from jeuveau ® and have never been profitable . as of december 31 , 2019 , we had an accumulated deficit of $ 213.1 million . we incurred net losses of $ 90.0 million and $ 46.9 million in the years ended december 31 , 2019 and 2018 , respectively . we expect to continue to incur significant expenses for the foreseeable future as we increase marketing efforts for jeuveau ® and maintain our regulatory approvals . daewoong license and supply agreement in 2013 , we and daewoong pharmaceuticals co. ltd. , or daewoong , entered into the daewoong agreement pursuant to which we have an exclusive distribution license to jeuveau ® from daewoong for aesthetic indications in the united states , eu , great britain , canada , australia , russia , c.i.s. , and south africa , as well as co-exclusive distribution rights with daewoong in japan . under the daewoong agreement , we are required to make certain minimum annual purchases in order to maintain the exclusivity of the license . these minimum purchase obligations are contingent upon the occurrence of future events , including receipt of governmental approvals and our future market share in various jurisdictions . in connection with 56 our entry into the daewoong agreement , we made an upfront payment to daewoong of $ 2.5 million . we further agreed to make milestone payments upon achievement of certain confidential development and commercial milestones , including a confidential payment to daewoong upon each of the u.s. food and drug administration , or fda , and the european medicines agency , or the ema , approval of jeuveau ® . under the daewoong agreement , the maximum aggregate amount of milestone payments that could be owed to daewoong upon the satisfaction of all milestones is $ 13.5 million . story_separator_special_tag in november 2019 , we closed a follow-on public offering and sold 5,999,550 shares of our common stock at a price of $ 13.00 per share , inclusive of 782,550 shares of common stock issued upon the exercise by the underwriters of their option to purchase additional shares . the net proceeds were approximately $ 73.3 million after deducting underwriting discounts and commissions , excluding other offering expenses . loan and security agreement on march 15 , 2019 , or the closing date , we entered into a loan and security agreement , or the credit facility , with oxford finance , llc , as collateral agent , or oxford , pursuant to which the lender made term loans available to us of up to $ 100.0 million , or the credit facility . the credit facility provides that the term loans will be funded in two advances . the first tranche of $ 75.0 million was funded on the closing date , and the second tranche of $ 25.0 million may be drawn , at our request , no later than september 30 , 2020 , upon achieving specified minimum net sales milestones and no event of default is occurring . as of december 31 , 2019 , the company had not yet met the net sales milestone to draw the second tranche . the credit facility bears an annual interest rate equal to the greater of 9.5 % , or the 30-day u.s. dollar libor rate plus 7.0 % . we have agreed to pay interest only on each tranche funded pursuant to the credit facility for the first 36 months until may 2022 , which will be followed by a 23-month amortization period . notwithstanding the foregoing , if we maintain compliance with the specified minimum net sales covenant and meet other conditions during the initial interest-only period , upon our request , the interest only period may be extended by an additional 12 months to a total of 48 months followed by an 11-month amortization period . upon the earliest to occur of the maturity date , the acceleration of the term loans , or the prepayment of the term loans , we will be required to pay to oxford a final payment of 5.5 % of the full principal amount of the term loans funded , or the final payment . we may elect to prepay all amounts owed prior to the maturity date , provided that a prepayment fee is also paid , which shall be equal to 3.0 % of the amount prepaid if the prepayment occurs on or prior to march 15 , 2020 , 2.0 % of the amount prepaid if the prepayment occurs after march 15 , 2020 and on or prior to march 15 , 2021 , or 1.0 % of the amount prepaid if the prepayment occurs thereafter , or the prepayment fee . if the term loans are accelerated following the occurrence of an event of default , we will be required to immediately pay to oxford an amount equal to the sum of all outstanding principal of the term loans plus accrued and unpaid interest thereon through the prepayment date , the final payment , the prepayment fee , and all other obligations that are due and payable , including payment of oxford 's expenses and interest at the default rate with respect to any past due amounts . the credit facility is secured by substantially all of our assets . the credit facility includes affirmative and negative covenants applicable to us , our current subsidiary and any subsidiaries we may create in the future . the affirmative covenants include , among others , covenants requiring us to maintain our legal corporate existence and governmental approvals , deliver certain financial reports , maintain insurance coverage and satisfy certain requirements regarding deposit accounts . the negative covenants include , among others , restrictions on us transferring collateral , incurring additional indebtedness , engaging in mergers or acquisitions , paying dividends or making other distributions , making investments , creating liens , selling assets and suffering a change in control , in each case subject to certain exceptions . the credit facility also includes events of default , the occurrence and continuation of which could cause interest to be charged at a default interest rate equal to the applicable rate plus 5.0 % and oxford , as collateral agent , with the right to exercise remedies against us and the collateral securing the credit facility , including foreclosure against the property securing the credit facility , including our cash . these events of default include , among other things , any failure by us to pay principal or interest due under the credit facility , a breach of certain covenants under the credit facility , our insolvency , a material adverse change , the occurrence of any default under certain other indebtedness and one or more judgments against us , the institution of certain temporary or permanent relief in connection with pending litigation , or the breach , termination or other adverse events under the daewoong agreement . 60 the credit facility also provides us with the ability , under certain conditions , to obtain up to a $ 25.0 million revolving line of credit secured by our inventory , accounts receivable and cash proceeds of both . oxford has the right of first refusal , but not the obligation , to provide such a revolving line of credit . there is no guarantee that such a line would be available to us on terms favorable to us or at all . as of december 31 , 2019 , the company had met the conditions to enter into a $ 25.0 million revolving line of credit . operating leases we lease office facilities under various operating lease agreements . our corporate headquarters is located in newport beach , california , in a facility that we subleased until january 2020 under a non-cancelable operating lease for a fixed amount each month .
| results of operations comparison of the years ended december 31 , 2019 and 2018 the following table summarizes our results of operations for the periods indicated : replace_table_token_1_th net revenues we currently operate in one reportable segment and all of our net revenues are derived from sales of jeuveau ® . net revenues consist of revenues , net of customer rebates and coupons . revenues are recognized when the control of the promised goods is transferred to the customer in an amount that reflects the consideration to which we expect to be entitled in exchange for those products or services . during the year ended december 31 , 2019 , we recorded net revenues of $ 34.9 million consisting of product revenue of $ 34.2 million from the sale of jeuveau ® in the united states and service revenue of $ 0.7 million from sale of jeuveau ® through a distribution partner in canada . we commercially launched jeuveau ® and began shipping to customers in the united states in may 2019 and launched through a distribution partner in canada in october 2019. we recorded the sale of jeuveau ® in canada as service revenue on a net basis . we did not record any net revenue during the year ended december 31 , 2018 . cost of sales our cost of sales was $ 8.0 million for the year ended december 31 , 2019 , which primarily consisted of the cost of inventory that was purchased from daewoong for product sales in the united states . we did not record any cost of sales during the year ended december 31 , 2018 . our gross profit as a percentage of net revenues was 77.1 % for the year ended december 31 , 2019 and benefited from one-time reduced , launch pricing from our manufacturing partner .
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randal j. kirk , the father of julian p. kirk , a member of our board of directors , directly and through certain affiliates , has voting and dispositive power over a majority of story_separator_special_tag you should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes contained elsewhere in this annual report . some of the information contained in this discussion and analysis are set forth 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 risks and uncertainties . see “ special note regarding forward-looking statements. ” our actual results may differ substantially from those referred to herein due to a number of factors , including but not limited to risks described in the section entitled “ risk factors ” and elsewhere in this annual report . overview ampliphi biosciences is a biotechnology company focused on the discovery , development and commercialization of novel phage therapeutics . our proprietary pipeline is based on the use of bacteriophages , a family of viruses that infect only bacteria . phages have powerful and highly selective mechanisms of action that permit them to target and kill specific bacterial pathogens , including the so-called multi-drug-resistant or “ superbug ” strains . we are combining our proprietary approach and expertise in identifying , characterizing and developing naturally occurring bacteriophages with that of our collaboration partners in bacteriophage biology , drug engineering , development and manufacturing , to develop second-generation bacteriophage products . we believe that phages represent a promising means to treat bacterial infections , especially those that have developed resistance to current medicines . 50 our lead programs consist of three product candidates : ampliphage-001 for the treatment of p. aeruginosa lung infections in cystic fibrosis ( cf ) patients ; ampliphage-002 , for the treatment of methicillin-resistant s. aureus ( mrsa ) infections ; and ampliphage-004 for the treatment of c. difficile infections . we have incurred net losses since our inception . our operations to date have been limited to research and development and raising capital . since november 2010 , we have raised approximately $ 5.6 million through the sale and issuance of convertible notes and warrants to purchase common stock . in june and july of 2013 , we completed a private placement of shares of our series b redeemable convertible preferred stock and warrants to purchase common stock , which raised approximately $ 7.0 million in addition to converting approximately $ 6.3 million in outstanding convertible notes . in december 2013 , we completed a private placement of shares of our common stock , which raised approximately $ 18 million , prior to commissions . in march 2015 , we completed a private placement of shares of our common stock , which raised approximately $ 13 million , prior to commissions . to date , we have not generated any revenue and have primarily financed our operations through the sale and issuance of convertible notes and the private placement of our equity securities . as of december 31 , 2014 , we had a cumulative deficit of $ 362.0 million . we recorded net income of $ 23.1 million in 2014 and a net loss of $ 64.6 million in 2013. we anticipate that a substantial portion of our capital resources and efforts in the foreseeable future will be focused on completing the development and obtaining regulatory approval of our product candidates . we expect our research and development expenses to increase as we pursue regulatory approval for our product candidates . we also expect to incur additional expenses associated with operating as a public company . as a result , we expect to continue to incur significant and increasing operating losses at least for the next several years . we do not expect to generate product revenue unless and until we successfully complete development and obtain marketing approval for at least one of our product candidates . we currently expect to use our existing cash and cash equivalents for the continued research and development of our product candidates and for working capital and other general corporate purposes . we may also use a portion for the potential acquisition of , or investment in , product candidates , technologies , formulations or companies that complement our business , although we have no current understandings , commitments or agreements to do so . we expect that these funds will not be sufficient to enable us to complete all necessary development of any potential product candidates . accordingly , we will be required to obtain further funding through other public offerings , debt financing , collaboration and licensing arrangements or other sources . 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 attractive terms , we would be forced to delay , reduce or eliminate our research and development programs . critical accounting policies and use of estimates our management 's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements , which have been prepared in accordance with u.s. generally accepted accounting principles . the preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements . on an ongoing basis , we evaluate our estimates and judgments , including those related to accrued expenses and stock-based compensation . we base our estimates on historical experience , known trends and events , and various other factors that are believed to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . story_separator_special_tag in addition , we are in the process of evaluating the benefits of relying on the other exemptions and reduced reporting requirements provided by the jobs act . subject to certain conditions set forth in the jobs act , if as an “ emerging growth company ” we choose to rely on such exemptions , we may not be required to , among other things , ( i ) provide an auditor 's attestation report on our system of internal controls over financial reporting pursuant to section 404 , ( ii ) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the dodd-frank wall street reform and consumer protection act , ( iii ) comply with any requirement that may be adopted by the public company accounting oversight board regarding a supplement to the auditor 's report providing additional information about the audit and the financial statements ( auditor discussion and analysis ) and ( iv ) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer 's compensation to median employee compensation . these exemptions will apply for a period of five years following the completion of our initial public offering or until we no longer meet the requirements of being an “ emerging growth company , ” whichever is earlier . 53 financial overview revenue to date , our revenues have come primarily from sub-licensing agreements . we have not generated any revenues from the sale of our product candidates and do not expect to generate any revenue from the sale of our product candidates in the near term . research and development expenses research and development costs consist of the costs associated with our research and discovery activities , conducting clinical trials , manufacturing development efforts and activities related to regulatory filings . our research and development expenses consist of salaries , non-cash stock-based compensation , costs of outside collaborators and outside services , royalty and license costs and facility , occupancy and utility expenses . we expense research and development costs as incurred . we expect annual research and development expenses will increase significantly in the future as we progress with development . general and administrative expenses general and administrative expenses consist primarily of salaries and related costs for our personnel in the executive , finance , patent , accounting and other administrative functions , including non-cash stock-based compensation , as well as consulting costs for functions for which we either do not or only partially staff internally , including public relations , market research and recruiting . other costs include professional fees for legal and accounting services , insurance and facility costs . severance charge we incurred a severance charge in 2014 related to the departure of our chief executive officer in september 2014. the charge consists of cash compensation and benefits and non-cash stock-based compensation expense pursuant to his employment agreement with the company . oher income ( expense ) gain ( loss ) on warrant and derivative liabilities represents the change in fair value on revaluation of our warrant and preferred stock conversion liabilities , driven primarily by changes in our common stock price , interest rates and remaining estimated life of these liabilities . amortization of note discount is related to the amortization of discounts related to the value of warrants issued in conjunction with the notes and which have been amortized over the stated life of the notes . interest expense consists of interest on our convertible loan notes , which were converted to preferred shares in 2013. any interest earned on our cash and cash equivalents is not considered significant to our financial statements . story_separator_special_tag liabilities of $ 37.2 million . other items included in net cash used in operating activities included non-cash charges related to stock-based compensation expenses , depreciation expenses , and patent amortization expense , which collectively approximated $ 2.1 million . decreases in accounts payable and accrued expenses and deferred revenue represented an aggregate $ 1.0 million use of funds , and partially offset by an increase in accrued severance of $ 0.6 million . we invested $ 1.2 million in property and equipment in 2014 , primarily related to our new cgmp manufacturing facility in slovenia . net cash used in operating activities for the year ended december 31 , 2013 was $ 6.3 million . we recorded a net loss for the period of $ 64.6 million , including a non-cash loss on warrant and derivative liabilities of $ 49.3 million and a non-cash charge of $ 3.0 million related to common shares issued for a technology access fee . other items in uses of funds from operations included non-cash charges related to stock-based compensation expenses ( $ 1.4 million ) , amortization of note discount ( $ 2.6 million ) , depreciation expense , and amortization of patents , which collectively totaled $ 4.9 million . tax refunds , an increase in accounts payable and accrued expenses , and an increase in accrued interest on notes payable represented an aggregate source of funds totaling $ 1.3 million . in march 2015 , we raised approximately $ 13 million in a private placement for our common stock and warrants to purchase common stock . we expect to raise additional capital or incur indebtedness to continue to fund our future operations . we may seek to raise capital through a variety of sources , including : · the public equity market ; · private equity financing ; · collaborative arrangements ; · licensing arrangements ; and or · public or private debt . our ability to raise additional funds will depend on our clinical and regulatory events , our ability to identify promising in-licensing opportunities and factors related to financial , economic and market conditions , many of which are beyond our control . we can not be certain that sufficient funds will be available to us when required or on satisfactory terms .
| results of operations comparison of the years ended december 31 , 2014 and 2013 revenue for the years ended december 31 , 2014 and 2013 , we recognized revenues from sub-licensing agreements of $ 0.4 million and $ 0.1 million , respectively . research and development research and development expenses were $ 5.8 million for the year ended december 31 , 2014 , a decrease of $ 0.7 million , or 10.9 % , compared to $ 6.5 million for the year ended december 31 , 2013. this decrease was attributable to a $ 3.0 million one-time technology access fee incurred in 2013 to intrexon . adjusted for this fee , other research and development expenses rose by $ 2.3 million , or 65.4 % . this increase was due to higher discovery , laboratory , nonclinical testing , research and development collaborations , consulting and clinical development planning expenses for our product candidates , as well as the establishment of our pilot manufacturing operation in slovenia in 2014 . 54 research and development expenses are expected to increase in 2015 compared to 2014 as we plan to continue devoting substantial resources to research and development in future periods as we start clinical trials and continue our discovery efforts . general and administrative general and administrative expenses were $ 6.9 million for the year ended december 31 , 2014 , up $ 0.9 million , or 14.2 % , compared to $ 6.0 million for 2013. this increase was due to higher legal , accounting , and staffing expenses incurred to satisfy our obligations as a public company and expenses of $ 0.6 million to certain shareholders as required by the terms of our registration rights agreement from the december 2013 private placement . severance charge the company recorded a severance charge of $ 1.9 million in the third quarter ended september 30 , 2014 related to the departure of its chief executive officer .
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the number of shares of common stock and treasury stock and the share activity were as follows : replace_table_token_51_th the cash dividends paid on the common stock for the years ended december 31 , 2013 , 2012 , and 2011 aggregated $ 66.1 million , $ 58.4 million and $ 53.3 million , respectively . note 15 stock-based compensation the company issues stock options and restricted stock units to employees under stock awards plans approved by shareholders . stock options are issued to non-employee directors for their services as directors under director stock option plans approved by shareholders . options are awarded with the exercise price equal to the market price on the date of grant and generally become exercisable over three years and expire 10 years after grant . restricted stock units generally vest over three years . compensation expense recorded attributable to stock options for the year story_separator_special_tag ( in thousands , expect per share amounts or otherwise indicated ) the objective of the following management 's discussion and analysis of consolidated results of operations and financial condition ( `` md & a '' ) is to help the reader understand the financial performance of aptargroup , inc. md & a is presented in eight sections : overview , results of operations , liquidity and capital resources , off-balance sheet arrangements , overview of contractual obligations , recently issued accounting pronouncements , critical accounting estimates , operations outlook and forward-looking statements . md & a should be read in conjunction with our consolidated financial statements and accompanying notes to consolidated financial statements contained elsewhere in this annual report on form 10-k. in md & a , `` we , '' `` our , '' `` us , '' `` aptargroup , '' `` aptargroup , inc. '' and `` the company '' refer to aptargroup , inc. and its subsidiaries . overview general we are a leading global solution provider of a broad range of innovative packaging delivery solutions primarily for the beauty , personal care , home care , prescription drug , consumer health care , injectables , food and beverage markets . our creative packaging solutions enhance the convenience , safety and security of consumers around the globe and allow our customers to differentiate their products in the market . our diverse product offering and broad global reach drove core sales growth in 2013. in spite of difficult conditions in certain markets , we were able to grow core sales by 4 % over the prior year . even though we began the year slowly , we saw improvement in year over year sales growth in the middle part of the year and ended with a strong fourth quarter . our pharma segment 's strong results were driven by increased sales across each market served by this segment . also , our food + beverage segment reported increased earnings while continued softness in the u.s. , currency effects , and latin american facility start-up costs had a negative impact on the results of our beauty + home segment . on a geographic basis excluding currency effects and the aptar stelmi acquisition , strong european sales growth was able to more than offset the softness in the u.s. we also continued to grow at a strong rate in latin america and asia . we define core sales as net sales excluding acquisitions and changes in foreign currency rates . core sales is a non-gaap financial measure . we present this measure as supplemental information to help our investors better understand the trends in our business results over time . our management uses core sales to evaluate our business on a consistent basis . a reconciliation of core sales growth to net sales growth , the most comparable gaap measure , can be found on page 14. story_separator_special_tag 2012 to 68.2 % compared to 67.1 % in 2011. excluding stelmi , 2012 cost of sales represented 68.1 % of net sales : the following factors negatively impacted our cost of sales percentage in 2012 : increased raw material costs . raw material costs , primarily the cost of plastic resin , increased in 2012 compared to 2011. while the majority of resin cost increases are passed along to our customers in our selling prices , we typically experience a lag in the timing of passing on these cost increases . other material costs also increased such as the cost of aluminum , steel and rubber . mix of products sold . excluding acquisitions and foreign currency , our pharma segment sales represented a slightly lower percentage of our overall sales . this negatively impacts our cost of sales percentage as margins on our pharmaceutical products typically are higher than the overall company average . lincolnton start-up costs . start-up activities associated with our new facility in lincolnton , north carolina have led to under-absorption of costs . for 2012 , we recognized $ 3.5 million of under-absorption in our results . the following factor positively impacted our cost of sales percentage in 2012 : strengthening of the u.s. dollar . we are a net importer from europe into the u.s. of products produced in europe with costs denominated in euros . as a result , when the u.s. dollar or other currencies strengthen against the euro , products produced in europe ( with costs denominated in euros ) and sold in currencies that are stronger compared to the euro , have a positive impact on cost of sales as a percentage of net sales . selling , research & development and administrative our selling , research & development and administrative expenses ( `` sg & a '' ) increased approximately 7 % or $ 23.1 million in 2013 compared to the same period a year ago . excluding changes in foreign currency rates , sg & a increased by approximately $ 20.3 million compared to the same period a year ago . part of the increase is related to the stelmi acquisition . story_separator_special_tag in 2012 , net other expenses increased to $ 17.5 million compared to $ 12.2 million in 2011. this increase is mainly due to $ 2.7 million of lower interest income and $ 1.7 million higher interest expense related to converting part of our short-term borrowing to long-term in order to lock in the historically low interest rates . effective tax rate the reported effective tax rate on net income for 2013 and 2012 was 35.0 % and 32.7 % , respectively . the higher tax rate for 2013 is primarily the result of tax regulation changes enacted in france , offset partially by the tax benefits resulting from an italian tax law change as well as the expected use of a brazilian net operating loss . the reported effective tax rate on net income for 2012 and 2011 was 32.7 % and 33.2 % , respectively . the lower tax rate for 2012 is primarily the mix of earnings and lower tax expense associated with earnings repatriated to the u.s. during 2012. these benefits were partially offset by tax increases resulting from law changes enacted in 2012 in france . net income attributable to aptargroup , inc. we reported net income of $ 172.0 million in 2013 compared to $ 162.6 million reported in 2012 and $ 183.7 million reported in 2011. beauty + home segment replace_table_token_6_th ( 1 ) segment income is defined as earnings before net interest expense , certain corporate expenses , restructuring initiatives and income taxes . the company evaluates performance of its business units and allocates resources based upon segment income . for a reconciliation of segment income to income before income taxes , see note 17 to the consolidated financial statements in item 8 . 16 /atr 2013 form 10-k net sales increased approximately 2 % in 2013 to $ 1.49 billion compared to $ 1.45 billion in 2012. changes in foreign currency rates did not have a material impact on reported sales for 2013. sales of our products , excluding foreign currency changes , to the beauty market increased approximately 2 % while sales to the personal care market increased approximately 4 % in 2013 compared to 2012. softer sun care sales due to cooler weather conditions were offset by strong sales growth in asia and latin america . sales of our home care products , excluding foreign currency changes , decreased approximately 4 % mainly due to exiting certain unprofitable businesses in europe . geographically , increases in europe , asia and latin america offset the softness in north america . customer tooling sales , excluding foreign currency changes , decreased in 2013 to $ 38.6 million compared to $ 42.8 million in the prior year . in 2012 , net sales decreased approximately 4 % to $ 1.45 billion compared to $ 1.52 billion in 2011. the strengthening u.s. dollar compared to the euro negatively impacted sales by 6 % . excluding changes in exchange rates , sales increased 2 % from the prior year . sales of our products , excluding foreign currency changes , to the beauty market increased approximately 1 % while sales to the personal care market increased approximately 3 % in 2012 compared to 2011 mainly due to sales growth in asia and latin america . sales of our home care products , excluding foreign currency changes , decreased approximately 5 % due to lower tooling sales compared to the prior year . segment income for 2013 decreased approximately 12 % to $ 109.3 million from $ 123.5 million reported in 2012. increased earnings from the strong sales in europe , asia and latin america were not able to offset the higher labor costs and operational inefficiencies brought on by softness in the north american region and facility start-up costs in brazil and columbia . additional personnel costs and professional fees related to our north american enterprise system rollouts also negatively impacted segment income in 2013. in 2012 , segment income decreased approximately 6 % to $ 123.5 million from $ 130.8 million reported in 2011. the decrease in segment income in 2012 compared to 2011 was primarily due to foreign currency changes and lower sales volumes in europe . increased earnings related to the strong sales growth in asia and latin america helped to offset some of this decrease . pharma segment replace_table_token_7_th net sales of our products to the pharma segment increased 20 % in 2013 to $ 708.8 million compared to $ 588.7 million in 2012. stelmi sales were $ 74.0 million during the first half of 2013 and represented 12 % of the increase . foreign currency changes had a positive impact of 2 % on total segment sales . excluding acquisitions and changes in exchange rates , sales increased 6 % in 2013 compared to the prior year . excluding acquisitions and foreign currency rate changes , sales of our products to the prescription drug and consumer health care markets increased 2 % and 11 % , respectively , in 2013 compared to the same period in the prior year . decreases in the first quarter related to destocking of inventory by our customers serving the generic allergy market , especially in north america , and softness in the consumer health care market in europe were more than offset by the increase in sales during the last nine months of the year . we also increased second half injectables sales during 2013 compared to 2012 due to strong volumes and selective pricing increases . customer tooling sales , excluding foreign currency changes , also increased in 2013 to $ 22.0 million compared to $ 18.6 million in the prior year . in 2012 , sales of our products to the pharma segment increased 6 % to $ 588.7 million compared to $ 553.9 million in 2011. stelmi sales were $ 56.8 million and represented 10 % of the increase . the strengthening u.s. dollar compared to the euro negatively impacted sales by 5 % .
| 2013 highlights core sales increased 4 % and net sales increased 8 % . sales growth across all three business segments drove results . we acquired a 20 % non-controlling interest in bapco closures holding limited for approximately $ 5.2 million . in addition to this equity stake , we secured an exclusive global license related to innovative closures sealing technology that provides package integrity and tamper evidence . we have substantially completed the european restructuring plan at the end of 2013 with total costs of approximately $ 19.5 million . savings from this plan are expected to be in the range of $ 10 million to $ 12 million on an annualized basis . french tax regulations enacted at the end of december negatively impacted earnings by $ 0.10 per share . we spent approximately $ 119 million to repurchase 2.0 million shares of our common stock . we made dividend payments to our shareholders totaling approximately $ 66 million . 13 /atr 2013 form 10-k results of operations the following table sets forth the consolidated statements of income and the related percentages of net sales for the periods indicated : replace_table_token_3_th net sales we reported net sales of $ 2.5 billion for 2013 , 8 % above 2012 reported net sales of $ 2.3 billion . stelmi , which was acquired in july of 2012 , reported sales for the first six months of 2013 of $ 74.0 million which contributed 3 % to the reported increase in 2013 net sales . the negative translation effect from weakening latin american and asian currencies was offset by the stronger euro compared to prior year . this resulted in a 1 % positive impact from changes in exchange rates on our reported sales growth . although all three operating segments saw increases in 2013 , the 4 % core sales growth was mainly driven by the strong results of our food + beverage and pharma segments .
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'' all references to numbered notes are to specific footnotes to our consolidated financial statements included in this annual report . you should read this discussion in conjunction with our consolidated financial statements , the notes thereto and other financial information included elsewhere in this annual report . our financial statements are prepared in accordance with gaap . capitalized terms used , but not defined , in this management 's discussion and analysis of financial condition and results of operations ( `` md & a '' ) have the same meanings as in such notes . overview we are principally engaged in the acquisition , ownership , development , redevelopment , management , and leasing of diversified retail real estate throughout the united states . as of december 31 , 2018 , our portfolio included approximately 36.3 million square feet of gross leasable area ( “ gla ” ) , consisting of 206 wholly owned properties totaling 31.6 million square feet of gla across 48 states and puerto rico , and interests in 26 jv properties totaling approximately 4.7 million square feet of gla across 13 states . we have historically generated revenues primarily by leasing our properties to tenants , including both sears holdings ( prior to its rejection of the master lease ) and diversified , non-sears tenants , who operate retail stores ( and potentially other uses ) in the leased premises , a business model common to many publicly traded reits . in addition to revenues generated under the master lease through rent payments from sears holdings and revenues expected to be generated under the holdco master lease , assuming effectiveness , in future periods , we generate revenue through leases to diversified , non-sears tenants under existing and future leases for space at our properties . our primary objective is to create value for our shareholders through the re-leasing and redevelopment of the majority of our wholly owned properties and jv properties . in doing so , we expect to meaningfully grow noi and diversify our tenant base while transforming our portfolio from one with a single-tenant orientation to one comprised predominately of first-class , multi-tenant shopping centers and larger-scale , mixed-use properties . in order to achieve our objective , we intend to execute the following strategies : convert single-tenant buildings into multi-tenant properties at meaningfully higher rents ; maximize value of vast land holdings through retail and mixed-use densification ; leverage existing and future joint venture relationships with leading landlords and financial partners ; and maintain a flexible capital structure to support value creation activities . as of december 31 , 2018 , we leased space at 86 wholly owned properties to sears holdings pursuant to a master lease agreement ( the “ master lease ” ) that provided the company with the right to recapture certain space from sears holdings at each property for retenanting or redevelopment purposes . of these properties , 49 properties were leased only to sears holdings and 37 properties were leased to both sears holdings and one or more diversified , non-sears tenants as of december 31 , 2018. the remaining 120 wholly owned properties included 89 properties that were leased solely to diversified , non-sears tenants and 31 unleased properties . as of december 31 , 2018 , space at 19 jv properties was also leased to sears holdings pursuant to lease agreements similar to the master lease ( the “ jv master leases ” ) . sears holdings was the sole tenant at seven jv properties and 12 jv properties were leased to both sears holdings and one or more diversified , non-sears tenants . five jv properties were leased solely to diversified , non-sears tenants and two jv properties were unleased as of december 31 , 2018. as of december 31 , 2018 , four wholly owned properties were subject to previously exercised 100 % recapture notices and five wholly owned properties were under contract for sale . taking into account this recapture and transaction activity , we leased space at 77 wholly owned properties and 19 jv properties to sears holdings under the master lease and jv master leases , respectively , as of december 31 , 2018. the master lease provides us with the right to recapture up to approximately 50 % of the space occupied by sears holdings at each of the 224 wholly owned properties initially included in the master lease ( subject to certain exceptions and limitations ) . in addition , seritage has the right to recapture any automotive care centers which are free-standing or attached as “ appendages ” to the properties , and all outparcels or outlots and certain portions of parking areas and common areas . upon exercise of this recapture right , we generally incur certain costs and expenses for the separation of the recaptured space from the remaining sears holdings space and can reconfigure and rent the recaptured space to diversified , non-sears tenants on potentially superior terms determined by us and for our own account . we also have the right to recapture 100 % of the space occupied by sears holdings at each of 21 identified wholly owned properties by making a specified lease termination payment to sears holdings , after which we expect to be able to reposition and re-lease those stores on potentially superior terms determined by us and for our own account . - 47 - as of december 31 , 2018 , we had exercised recapture rights at 70 properties , including 17 properties at which we had exercised partial recapture rights , 40 properties at which we had exercised 100 % recapture rights ( 24 of which were converted from partial recapture properties ) , and 13 properties at which we had exercised our rights to recapture only automotive care centers or outparcels . with respect to the jv properties , each jv master lease provides for similar recapture rights as the master lease governing the company 's wholly owned properties . story_separator_special_tag the company did not experience interruptions in rental payments nor has it incurred material capital expenditures to repair any property damage . story_separator_special_tag roman ; font-size:10pt ; font-weight : normal ; font-style : normal ; text-transform : none ; font-variant : normal ; '' > depreciation and amortization expenses depreciation and amortization expenses consist of depreciation of real property , depreciation of furniture , fixtures and equipment , and amortization of certain lease intangible assets . for the year ended december 31 , 2018 , the company incurred depreciation and amortization expenses of $ 226.7 million as compared to depreciation and amortization expenses of $ 262.2 million in the prior year period . the decrease of $ 35.5 million was due primarily to ( i ) $ 57.7 million less depreciation attributable to demolished buildings and ( ii ) $ 34.2 million of lower scheduled amortization and depreciation resulting from an increase in fully-amortized lease intangibles and fully-depreciated buildings , as well as from dispositions and the contribution of properties to new joint ventures , offset by ( i ) $ 56.4 million of accelerated amortization attributable to in-place lease intangible assets as a result of recapture and termination activity under the master lease , as well as a reassessment of the useful life of in-place lease intangible assets related to the master lease as a result of sears holdings ' bankruptcy filing . accelerated amortization results from the recapture of space from , or the termination of space by , sears holdings . such recaptures and terminations are deemed lease modifications and require related lease intangibles to be amortized over the shorter of the shortened lease term or the remaining useful life of the asset . general and administrative expenses general and administrative expenses consist of personnel costs , including share-based compensation , professional fees , office expenses and overhead expenses . for the year ended december 31 , 2018 , the company incurred general and administrative expenses of $ 34.8 million , including $ 7.5 million of equity-based compensation , compared to general and administrative expenses of $ 27.9 million , including $ 7.0 million of equity-based compensation , for the prior year period . the $ 0.5 million increase in equity-based compensation was driven primarily by the outperformance of targets related to equity awards with performance-based vesting . the remaining $ 6.4 million increase was driven primarily by ( i ) approximately $ 2.6 million of increased compensation and related costs resulting from an increase in personnel , ( ii ) approximately $ 1.9 million of legal and advisory costs related to sears holdings bankruptcy and ( iii ) approximately $ 1.5 million of expenses related to financing and other transactions that were not consummated . gain on sale of real estate during the year ended december 31 , 2018 : − the company contributed its property located in san diego , ca to the utc jv and sold a 50.0 % interest to a separate account advised by invesco real estate based on a contribution value of $ 68.0 million and pre-transaction development and other costs of approximately $ 19.2 million . as a result of the transaction , the company recorded a gain of $ 28.3 million which is included in gain on sale of real estate within the consolidated statements of operations . − the company contributed its property located in west hartford , ct to the west hartford jv and sold a 50.0 % interest to first washington realty based on the initial west hartford jv contribution value of $ 25.0 million and pre-transaction development and other costs of approximately $ 20.2 million . as a result of the transaction , the company recorded the initial west hartford jv gain of $ 1.2 million which is included in gain on sale of real estate within the consolidated statements of operations . during the fourth quarter of 2018 , the company determined that certain pre-transaction development costs would not be reimbursed by the west hartford jv and , therefore decreased the gain on sale of real estate within the consolidated statement of operations by $ 4.4 million . - 50 - the west hartford jv is subject to ( i ) a revaluation upon the earlier of the first anniversary of project stabilization ( as defined in the operating agreement of the west hartford jv ) or december 31 , 2019 , and ( ii ) an adjustment based on the timing , method and magnitude of the reassessment of the property for real estate tax purposes between 2018 and 2022. upon revaluation , the primary inputs in determining the initial west hartford jv contribution value , which consist of property operating income and total project costs , will be updated for actual results and the final west hartford jv contribution value will be calculated to yield a pre-determined rate of return to first washington realty . upon adjustment for real estate tax purposes , an amount based on the difference betwee n actual real estate taxes and tenant recoveries for such real estate taxes will be determined and the capitalized value of such amount will be applied as the real estate tax adjustment amount . the final west hartford jv gain will not be more than $ 5.8 mil lion or less than ( $ 3.4 ) million each reporting period the company re-analyzes the primary inputs that determine the initial west hartford jv contribution value and initial west hartford jv gain . for the year ended december 31 , 2018 , there were no adjustments to the initial west hartford jv contribution value or the initial west hartford jv gain resulting from such analysis . − the company contributed its property located in santa monica , ca to the mark 302 jv and sold a 49.9 % interest to an investment fund managed by invesco real estate based on the initial mark 302 jv contribution value of $ 90.0 million .
| results of operations we derive substantially all of our revenue from rents received from tenants under existing leases at each of our properties . this revenue generally includes fixed base rents and recoveries of expenses that we have incurred and that we pass through to the individual tenants , in each case as provided in the respective leases . our primary cash expenses consist of our property operating expenses , general and administrative expenses , interest expense and construction and development related costs . property operating expenses include real estate taxes , repairs and maintenance , management expenses , insurance , ground lease costs and utilities ; general and administrative expenses include payroll , office expenses , professional fees , and other administrative expenses ; and interest expense is on our term loan facility . in addition , we incur substantial non-cash charges for depreciation and amortization on our properties and related intangible assets and liabilities resulting from the transaction . we did not have any revenues or expenses until we completed the transaction on july 7 , 2015. the results of operations presented for previous periods do not give effect to the bankruptcy of sears holdings , any subsequent termination of the master lease or entering into the holdco master lease . our results for future periods may therefore not be comparable for the results presented herein .
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cash and investments segregated and on deposit for regulatory purposes cash and investments segregated and on deposit for regulatory purposes consists of the following ( dollars in millions ) : replace_table_token_34_th 67 td ameritrade holding corporation notes to consolidated financial statements — ( continued ) 5. investments available-for-sale the following tables present the amortized cost and fair value of available-for-sale securities ( dollars in millions ) : september 30 , story_separator_special_tag this discussion contains forward-looking statements within the meaning of the u.s. private securities litigation reform act of 1995. statements that are not historical facts , including statements about our beliefs and expectations , are forward-looking statements . forward-looking statements include statements preceded by , followed by or that include the words `` may , '' `` could , '' `` would , '' `` should , '' `` believe , '' `` expect , '' `` anticipate , '' `` plan , '' `` estimate , '' `` target , '' `` project , '' `` intend '' and similar words or expressions . in particular , forward-looking statements contained in this discussion include our expectations regarding : the effect of client trading activity on our results of operations ; the effect of changes in interest rates on our net interest spread ; the amount of net revenues ; the impact of reducing commissions on our online exchange-listed stock , exchange traded funds ( `` etf '' ) ( domestic and canadian ) and option trades ; the amounts of total operating expenses , amortization of acquired intangible assets and advertising expense ; our effective income tax rate ; our capital and liquidity needs and our plans to finance such needs ; and our plans to return capital to stockholders through cash dividends and share repurchases . the company 's actual results could differ materially from those anticipated in such forward-looking statements . important factors that may cause such differences include , but are not limited to : economic , social and political conditions and other securities industry risks ; interest rate risks ; liquidity risks ; client and counterparty credit risks ; clearing function risks ; systemic risk ; aggressive competition ; information system risks , network security risks ; investment advisory services risks ; merger and acquisition risks ; external service provider risks ; employee misconduct risks ; libor phase-out risks ; new laws , rules , regulations and regulatory guidance affecting our business ; net capital requirements ; extensive regulation and regulatory uncertainties ; and litigation , investigations and proceedings involving our business . we also are subject to other risks , uncertainties and assumptions set forth under item 1a — risk factors of this form 10-k , as well as the risk that our risk management practices may leave us exposed to unidentified or unanticipated risks . the forward-looking statements contained in this report speak only as of the date on which they were made . we undertake no obligation to publicly update or revise such statements , whether as a result of new information , future events or otherwise , except to the extent required by the federal securities laws . glossary of terms in discussing and analyzing our business , we utilize several metrics and other terms that are defined in the following glossary of terms . italics indicate other defined terms that appear elsewhere in the glossary . the term `` gaap '' refers to u.s. generally accepted accounting principles . asset-based revenues — revenues consisting of ( 1 ) bank deposit account fees , ( 2 ) net interest revenue and ( 3 ) investment product fees . the primary factors driving our asset-based revenues are average balances and average rates . average balances consist primarily of average client bank deposit account balances , average client margin balances , average segregated cash balances , average client credit balances , average fee-based investment balances and average securities borrowing and securities lending balances . average rates consist of the average interest rates and fees earned and paid on such balances . average client trades per day — total trades divided by the number of trading days in the period . this metric is also known as daily average revenue trades ( `` darts `` ) . average commissions per trade — total commissions and transaction fee revenues as reported on our consolidated financial statements , less order routing revenue , divided by total trades for the period . commissions and transaction fee revenues primarily consist of trading commissions , order routing revenue and markups on riskless principal transactions in fixed-income securities . basis point — when referring to interest rates , one basis point represents one one-hundredth of one percent . bank deposit account fees — revenues generated from a sweep program that is offered to eligible clients of the company whereby clients ' uninvested cash is swept to fdic-insured ( up to specified limits ) money market deposit accounts at affiliated and non-affiliated third-party financial institutions participating in the program . beneficiary accounts — brokerage accounts managed by a custodian , guardian , conservator or trustee on behalf of one or more beneficiaries . examples include accounts maintained under the uniform gift to minors act ( ugma ) or uniform transfer to minors act ( utma ) , guardianship , conservatorship and trust arrangements and pension or profit plan for small business accounts . 28 brokerage accounts — accounts maintained by us on behalf of clients for securities brokerage activities . the primary types of brokerage accounts are cash accounts , margin accounts , ira accounts and beneficiary accounts . futures accounts are sub-accounts associated with a brokerage account for clients who want to trade futures and or options on futures . forex accounts are sub-accounts associated with a brokerage account for clients who want to engage in foreign exchange trading . cash accounts — brokerage accounts that do not have margin account approval . client assets — the total value of cash and securities in brokerage accounts . story_separator_special_tag liquid assets may be utilized for general corporate purposes and is defined as the sum of ( 1 ) corporate cash and cash equivalents , ( 2 ) corporate investments , less securities sold under agreements to repurchase , and ( 3 ) our regulated subsidiaries ' net capital in excess of minimum operational targets established by management . corporate cash and cash equivalents includes cash and cash equivalents from our investment advisory subsidiaries . liquid assets represents available capital , including any capital from our regulated subsidiaries in excess of established management operational targets . we include the excess capital of our regulated subsidiaries in the calculation of liquid assets , rather than simply including regulated subsidiaries ' cash and cash equivalents , because capital requirements may limit the amount of cash available for dividend from the regulated subsidiaries to the parent company . net capital in excess of minimum operational targets established by management is generally available for dividend from the regulated subsidiaries to the parent company . liquid assets is based on more conservative measures of net capital than regulatory requirements because we generally manage to higher levels of net capital at our regulated subsidiaries than the regulatory thresholds require . liquid assets should be considered as a supplemental measure of liquidity , rather than as a substitute for gaap cash and cash equivalents . liquidation value — the net value of a client 's account holdings as of the close of a regular trading session . liquidation value includes client cash and the value of long security positions , less margin balances and the cost to buy back short security positions . it also includes the value of open futures , foreign exchange and options positions . margin accounts — brokerage accounts in which clients may borrow from us to buy securities or for any other purpose , subject to regulatory and company-imposed limitations . net interest margin ( `` nim `` ) — a measure of the net yield on our average spread-based assets . net interest margin is calculated for a given period by dividing the annualized sum of bank deposit account fees and net interest revenue by average spread-based assets . net interest revenue — net interest revenue is interest revenues less brokerage interest expense . interest revenues are generated by charges to clients on margin balances maintained in margin accounts , the investment of cash from operations and segregated cash and interest earned on securities borrowing/securities lending . brokerage interest expense consists of amounts paid or payable to clients based on credit balances maintained in brokerage accounts and interest incurred on securities borrowing/securities lending . brokerage interest expense does not include interest on our non-brokerage borrowings . net new assets — consists of total client asset inflows , less total client asset outflows , excluding activity from business combinations . client asset inflows include interest and dividend payments and exclude changes in client 30 assets due to market fluctuations . net new assets are measured based on the market value of the assets as of the date of the inflows and outflows . net new asset growth rate ( annualized ) — annualized net new assets as a percentage of client assets as of the beginning of the period . non-gaap net income and non-gaap diluted eps — non-gaap net income and non-gaap diluted earnings per share ( `` eps '' ) are non-gaap financial measures . we define non-gaap net income as net income adjusted to remove the after-tax effect of amortization of acquired intangible assets and acquisition-related expenses . we consider non-gaap net income and non-gaap diluted eps as important measures of our financial performance because they exclude certain items that may not be indicative of our core operating results and business outlook and may be useful in evaluating the operating performance of the business and facilitating a meaningful comparison of our results in the current period to those in prior and future periods . amortization of acquired intangible assets is excluded because management does not believe it is indicative of our underlying business performance . acquisition-related expenses are excluded as these costs are not representative of the costs of running our on-going business . non-gaap net income and non-gaap diluted eps should be considered in addition to , rather than as a substitute for , gaap net income and gaap diluted eps . order routing revenue — revenues generated from payments and or rebates received from market centers . order routing revenue is a component of transaction-based revenues . securities borrowing — we borrow securities temporarily from other broker-dealers in connection with our broker-dealer business . we deposit cash as collateral for the securities borrowed , and generally earn interest revenue on the cash deposited with the counterparty . we also incur interest expense for borrowing certain securities . securities lending — we loan securities temporarily to other broker-dealers in connection with our broker-dealer business . we receive cash as collateral for the securities loaned , and generally incur interest expense on the cash deposited with us . we also earn revenue for lending certain securities . securities sold under agreements to repurchase ( repurchase agreements ) — we sell securities to counterparties with an agreement to repurchase the same or substantially the same securities at a stated price plus interest on a specified date . we utilize repurchase agreements to finance our short-term liquidity and capital needs . under these financing transactions , we receive cash from counterparties and provide u.s. treasury securities as collateral . segregated cash — client cash and investments segregated in compliance with rule 15c3-3 of the securities exchange act of 1934 ( the customer protection rule ) and other regulations . interest earned on segregated cash is a component of net interest revenue . spread-based assets — client and brokerage-related asset balances , consisting of bank deposit account balances and interest-earning assets . spread-based assets is used in the calculation of our net interest margin and our consolidated duration .
| results of operations conditions in the u.s. equity markets significantly impact the volume of our clients ' trading activity . there is a relationship between the volume of our clients ' trading activity and our results of operations . we can not predict future trading volumes in the u.s. equity markets . if client trading activity increases , we generally expect that it would have a positive impact on our results of operations . if client trading activity declines , we generally expect that it would have a negative impact on our results of operations . changes in average client balances , especially bank deposit account , margin , credit and fee-based investment balances , may significantly impact our results of operations . changes in interest rates also significantly impact our results of operations . we seek to mitigate interest rate risk by aligning the average duration of our interest-earning assets with that of our interest-bearing liabilities . we can not predict the direction of interest rates or the levels of client balances . if interest rates rise , we generally expect to earn a larger net interest spread . conversely , a falling interest rate environment generally would result in us earning a smaller net interest spread . effective october 3 , 2019 , we reduced our online exchange-listed stock , etfs ( domestic and canadian ) and option trade commissions from $ 6.95 to $ 0 per trade ( plus $ 0.65 per contract and no exercise or assignment fees on option trades ) . the expected impact of these price reductions on our net revenues for fiscal year 2020 is discussed later in this section . financial performance metrics net income , diluted earnings per share and ebitda ( earnings before interest , taxes , depreciation and amortization ) are key metrics we use in evaluating our financial performance . net income and diluted earnings per share are gaap financial measures and ebitda is a non-gaap financial measure .
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the following table summarizes the company 's maximum exposure to loss associated with rs cogen as of december 31 , 2011 : ( millions ) investment in and advances to rs cogen $ 11 take-or-pay obligation under power tolling arrangement 257 maximum exposure to loss $ 268 2011 ppg annual report and form 10-k 41 notes to the consolidated financial statements summarized financial information of ppg 's equity affiliates on a 100 percent basis , in the aggregate , is as follows : ( millions ) 2011 2010 working capital $ 339 $ 130 property , net 952 927 short-term debt ( 202 ) ( 137 ) long-term debt ( 626 ) ( 423 ) other , net 61 184 net story_separator_special_tag performance in 2011 compared with 2010 performance overview net sales in 2011 totaled $ 14,885 million compared to $ 13,423 million in 2010 , an increase of 11 percent . higher volumes contributed just over 2 percent and higher selling prices increased sales by 5 percent . the remainder of the sales increase was due to the impact of foreign currency translation and acquisitions . the higher sales volumes were achieved in all major geographic regions , while four reportable segments had increased volume levels and the other two had level year-over-year volumes . increased demand was driven by stronger global industrial production activity , which aided many of our businesses . the global industrial recovery continued in 2011 with solid growth in emerging regions and north america and with modest improvement in europe despite a slight decline in volume in the second half of 2011 due to reduced end-use market demand for fiber glass and automotive refinish based on softness in the region . growth rates in asia in 2011 were reduced by the shrinking level of marine original-equipment new ship builds . growth was impacted early in the year due to the effects of the japanese earthquake and tsunami and was also tempered late in the year by the negative sales impact stemming from the thailand floods , particularly in optical products . north american growth was impacted by unscheduled production outages in the commodity chemicals segment earlier in 2011 as well as decreased chlorine industry demand in the fourth quarter . activity in construction markets in the developed regions of the world remained at low levels and has not demonstrated any consistent improvement . our volume growth for 2011 versus the prior year growth which benefitted from increasing demand as the global industrial economy began to recover from the recession . also , volumes were flat in the fourth quarter of 2011 as customers curtailed their inventory and were cautious with their order patterns , reflecting economic uncertainty . the improved selling prices in 2011 were achieved in every reporting segment , led by commodity chemicals and each of the three coatings segments . the commodity chemicals segment achieved pricing gains due to continued strong demand and tightening supply of caustic soda . in our coatings segments , prices were raised in response to persistent raw material cost inflation . the higher coatings selling prices significantly , but did not fully , offset the impact of raw material inflation rates that began to flatten in the fourth quarter . the favorable currency impact was primarily driven by strengthening european , asian and latin american currencies against the u.s. dollar compared to 2010 , despite a decline in the value of the euro in the second half of 2011. cost of sales , exclusive of depreciation and amortization , increased by $ 867 million in 2011 to $ 9,081 million compared to $ 8,214 million in 2010. about fifty-five percent of the increase was driven by inflation , particularly increases in raw material costs , primarily in our coatings businesses . manufacturing costs were again positive in 2011. additionally , about 20 percent of the increase in cost of sales was due to sales growth from volume and acquisitions . the effect of foreign currency accounts for about 25 percent of the increase in cost of sales for the year . cost of sales as a percentage of sales was 61.0 percent in 2011 compared to 61.2 percent in 2010. this improvement reflects a combination of slightly higher margins on the sales volume growth in 2011 due to improved product mix and the benefit of selling price increases , particularly in commodity chemicals , net of the impact of inflation on cost of sales . for the coatings businesses , higher pricing significantly offset inflation , as raw material costs escalated throughout 2011. however , the coatings businesses did not fully offset raw material cost inflation with higher pricing in 2011 , and additional pricing actions are underway in 2012 in several businesses to further counter inflation absorbed in 2011. for the company in total , inflation was more than offset by higher pricing aided by commodity chemicals . selling , general and administrative expenses increased by $ 255 million to $ 3,234 million in 2011 compared to $ 2,979 million in 2010. the effects of foreign currency , inflation , and growth in costs to support the increased sales volumes and acquisitions were approximately equal . selling , general and administrative costs as a percentage of sales were 21.7 percent in 2011 , down from 22.2 percent in 2010 reflecting the benefit of our continuing effort to aggressively manage our cost growth as our sales volume increases . story_separator_special_tag the automotive oem business delivered strong single-digit percentage growth reflecting high growth rates due to the automotive industry recovery with continued growth in north america , asia pacific and latin america , and low growth in europe where volumes were positive for the full year but weakened in the second half of the year . global volumes in the industrial and packaging businesses were also favorable with asia pacific the strongest region delivering the majority of the growth , with somewhat lower or even declining volumes in europe and north america due , in part , to late year customer destocking . 18 2011 ppg annual report and form 10-k looking ahead , we anticipate continued volume growth , including higher global auto production and strong general industrial activity . we also anticipate further price increases to restore margin lost to raw material inflation in 2011. currency is expected to be negative to sales and earnings in the first quarter . architectural coatings - emea sales increased $ 230 million , or 12 percent , to $ 2,104 million in 2011. the sales increase was comprised of 5 percent due to the positive impact of foreign currency translation , a 1 percent increase from acquired business and the remainder from an increase in selling prices and volume gains . segment earnings were up $ 10 million compared to the prior year . positive year-over-year earnings resulted from the earnings impact of volume growth and currency translation . earnings in 2011 were reduced by a $ 9 million charge related to a u.k.-based retail do-it-yourself customer who filed for bankruptcy during the second quarter of 2011 and the adverse impact of inflation net of price increases . looking ahead , we anticipate soft demand to continue in europe as we begin 2012. first quarter 2012 results will also include the results of the dyrup acquisition , which closed in january 2012. we anticipate negative currency translation impacts given the segment 's large euro base of sales and earnings and the decline in the value of the euro compared with the first quarter of 2011. optical and specialty materials sales for 2011 increased $ 63 million , or 6 percent , compared to 2010 , to $ 1,204 million due to a 2 percent increase in volumes , pricing and the favorable impact of currency . earnings grew by 6 percent to $ 326 million . both optical products and silicas achieved sales growth coming from higher volumes , pricing and the impact of currency . the silicas business ' volumes benefitted from the higher automotive oem production resulting in increased demand for our products sold into the tire and battery markets . segment results were tempered by the negative impact from the serious flooding in thailand that disrupted optical customers and supply chains . the flooding also impacted production of ppg 's optical materials , resulting in a declaration of force majeure during the fourth quarter . segment earnings increased due to the factors increasing sales , which exceeded the impact of inflation , higher manufacturing costs and volume driven growth in overhead cost . looking ahead , we do not anticipate any notable 2012 residual impact from the thailand flooding , as we approached normal operations at the end of december . we expect a normal seasonal uptick for optical in the first quarter and transitions ® growth to resume driven by market growth and share gain versus clear lenses in emerging regions . in addition , we are commercializing vantage ® our new transitions ® clear-to-polarized product in the first half of 2012 , and we expect increased marketing costs associated with the launch of this new product . we also anticipate recent silica market trends to continue , aided by higher auto production and the tire industry focus on improving fuel efficiency through higher silica content in tires . similar to other global ppg businesses , currency is expected to have a negative year-over-year impact in the first quarter . commodity chemicals sales in 2011 versus the prior year increased $ 298 million , or 21 percent , to $ 1,732 million . higher pricing and the impact of the equachlor acquisition were the key factors producing the improved sales and earnings . segment earnings increased $ 181 million to $ 370 million in 2011. capacity utilization was lower in the second , third and fourth quarters due to planned and unplanned production outages , as well as lower chlorine industry demand in the fourth quarter due to customer inventory management and lower chlorine derivative exports , resulting in higher manufacturing and maintenance expenses . natural gas unit costs were lower year-over-year , but ethylene costs were higher . an increase in overhead costs was substantially offset by gains from asset sales , primarily related to the lease of marcellus shale natural gas drilling rights on ppg owned property , and lower environmental expense . looking forward , we anticipate higher chlorine demand in the first quarter of 2012 sequentially versus the fourth quarter of 2011 due to both seasonal factors and modest customer inventory restocking . this would result in improved capacity utilization compared to the fourth quarter , but still lower versus an exceptionally strong operating rate in the first quarter 2011. caustic inventory is extremely low , and we intend to implement announced caustic price increases in the first quarter . also , the current natural gas market price has declined below $ 3.00 per unit . glass sales increased $ 76 million , or 8 percent , compared to 2010 to $ 1,061 million in 2011. sales increased 4 percent due to pricing , 2 percent due to volume growth with the remainder attributable to favorable foreign currency impacts . solid fiber glass pricing gains drove the sales growth , together with improved flat glass volumes . fiber glass volumes were also up over 2010 , but were lower in the fourth quarter of 2011 due to lower european demand .
| results of reportable business segments replace_table_token_5_th performance coatings sales increased $ 186 million or 5 percent , to $ 4,281 million in 2010. the sales increase was comprised of 3 percent due to price and 2 percent due to currency . volumes for the segment were slightly positive as volume increases in automotive refinish , aerospace and protective and marine coatings were offset by a mid-single digit percentage volume decline in the architectural-americas and asia pacific coatings business . the growth in the automotive refinish business was a result of market share gains and recovery from the customer destocking in 2009. aerospace and protective and marine coatings also achieved solid volume growth due to strong growth in both emerging and developed regions . these businesses both have a sizeable after-market component , serve late-economic cycle industries and did not experience the same degree of volume decline during the recession as most of our other businesses . segment income in 2010 increased $ 110 million to $ 661 million . the increase in earnings resulted from the impact of higher sales volume , improved sales margin mix , lower overhead costs and favorable currency . the negative earnings impact of inflation was offset by favorable pricing and lower manufacturing costs . the increase in income was led by automotive refinish , protective and marine coatings and aerospace businesses as all benefited from partial volume recovery and lower costs as a result of our cost savings initiatives . industrial coatings sales increased $ 640 million or 21 percent compared to 2009 , to $ 3,708 million . the sales increase was comprised of 19 percent due to volume , 1 percent due to price and 1 percent due to currency translation . volume growth was led by the automotive oem and industrial businesses ' emerging regions , both reflecting the continuing , gradual recovery from the global recession .
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if a derivative instrument is designated as a fair value hedge , changes in the fair value of the instrument are reported in current earnings and offset the change in fair value of the hedged assets , liabilities or firm commitments . historically , the company has not entered into transactions to hedge its net investment in foreign operations but may in future periods . at december 26 , 2015 the fair value of derivative instruments were not considered material and the company had no material hedge transactions in 2015 , 2014 or 2013. new accounting standards : in may 2014 , the financial accounting standards board ( fasb ) issued an accounting standards update that supersedes most current revenue recognition guidance and modifies the accounting for certain costs associated with revenue generation . the core story_separator_special_tag results of operations overview our business is comprised of three segments . the north american retail division includes our retail stores in the united states , including puerto rico and the u.s. virgin islands , which offer office supplies , technology products and solutions , business machines and related supplies , facilities products , and office furniture . most stores also have a copy and print center offering printing , reproduction , mailing and shipping . the north american business solutions division sells office supply products and services in canada and the united states , including puerto rico and the u.s. virgin islands . north american business solutions division customers are served through dedicated sales forces , through catalogs , telesales , and electronically through our internet sites . our international division sells office products and services through direct mail catalogs , contract sales forces , internet sites , and retail stores in europe and asia/pacific . grupo officemax , the former officemax business in mexico , was sold in 2014 and is presented as an other segment to align with management reporting . staples acquisition in february 2015 , staples and the company entered into the staples merger agreement , under which staples will acquire all of the outstanding shares of office depot and the company will become a wholly owned subsidiary of staples . the transaction has been approved by both companies ' boards of directors and office depot shareholders . the completion of the staples acquisition is subject to customary closing conditions including , among others , regulatory approvals under the hart-scott-rodino antitrust improvements act of 1976 , as amended , and under the antitrust and competition laws of the european union and canada . on february 2 , 2016 , the company and staples entered into a letter agreement to waive , until may 16 , 2016 , certain of their respective rights to terminate the staples merger agreement . on february 10 , 2016 , staples announced that it has received conditional approval from european union regulatory authorities to acquire office depot and the parties plan to divest office depot 's european businesses in connection with the consummation of the pending acquisition of office depot by staples . refer to part i item 1 . business of this annual report for further details . merger on november 5 , 2013 , the company completed its merger with officemax . officemax 's financial results are included in our consolidated statements of operations since the merger date , affecting comparability of the 2015 and 2014 financial results to the 2013 amounts . sales reported for 2015 compared to the prior year were significantly affected by store closures in north america , changes in currency exchange rates abroad , and the sale in august 2014 of grupo officemax . replace_table_token_7_th 29 since the merger date , we have made significant progress on our integration activities and implementing our real estate strategy . in the united states , we closed 168 and 181 retail stores in 2014 and 2015 , respectively , converted all stores to common point of sale systems , completed certain warehouse cross-banner consolidations , closures , and platform modifications , successfully launched the co-branded website ( www.officedepot.com ) , combined operating support functions , transitioned certain customers from the officemax to the office depot platform , and made significant progress on identifying customer preferences and developing methods to service their needs . integration activities will continue in 2016 and certain supply chain activities are currently anticipated to be substantially completed by the end of 2017. other significant factors impacting total company results and liquidity gross margin increased 75 basis points in 2015 compared to 2014 , following a 10 basis point increase in the prior year to year comparison . gross margin in the north american retail division increased , while the north american business solution division 's remained flat and the international division 's slightly decreased . grupo officemax has been omitted from basis point calculations . total company selling , general and administrative expenses decreased in 2015 compared to 2014 , reflecting the closure of stores in north america , lower payroll and advertising expenses , operational efficiencies and synergies , the 2014 sale of the business in mexico , and foreign currency translation effects . as a percentage of sales , total company selling , general and administrative expenses decreased in 2015 compared to 2014 by over 60 basis points . non-cash asset impairment charges of $ 13 million and $ 88 million were recorded in 2015 and 2014 , respectively , and are comprised as follows . replace_table_token_8_th we incurred $ 332 million and $ 403 million of merger , restructuring , and other operating expenses , net in 2015 and 2014 , respectively . in 2015 , this line item includes $ 140 million of expenses related to the merger activities , including store closure costs incurred to date , $ 81 million of international restructuring and certain other expenses , and $ 111 million of staples acquisition expenses . story_separator_special_tag the 2014 sales increase results primarily from the addition of officemax sales of $ 551 million in 2014 compared 33 to $ 93 million in 2013. offsetting the impact of the officemax sales in 2014 were negative sales impacts resulting from competitive market pressures , soft economic conditions in europe , the loss of certain contracts , discontinuation of low margin business , and reduced spend in the public sector across regions . division operating income totaled $ 23 million in 2015 , $ 53 million in 2014 , and $ 36 million in 2013. division operating income as a percentage of sales was 1 % in 2015 , 2 % in 2014 , and 1 % in 2013. division operating income in 2015 and 2014 reflect benefits from lower payroll and advertising , as well as benefits associated to prior restructuring activities . in 2015 , supply chain expenses decreased due to efficiencies and lower occupancy expenses associated with the consolidation of certain supply chain facilities . these benefits in the 2015 division operating income were more than offset by the negative flow-through impact of lower sales , slightly lower gross profit margins resulting from competitive pressures , and foreign currency transaction impacts related to certain merchandise purchases denominated in u.s. dollars . the division has substantially completed the european restructuring plan , which aligns the organization from a geographic-focus to a channel-focus and is intended to provide operational efficiency and allow enhanced customer service . costs associated with restructuring activities are reported at the corporate level and discussed in the international restructuring and certain other operating expenses section below . for u.s. reporting , the international division 's sales are translated into u.s. dollars at average exchange rates experienced during the year . changes in constant currencies are computed by excluding the impact of foreign currency exchange rates fluctuations . the division 's reported sales were negatively impacted from changes in foreign currency exchange rates by $ 424 million in 2015 and positively impacted by $ 35 million in 2014 , respectively . however , the translation effects from changes in foreign currency exchange rates did not have a significant impact on division operating income . we analyze our international operations in terms of local currency performance to allow focus on operating trends and results . international division store count and activity is summarized below : replace_table_token_13_th ( 1 ) includes 249 stores operated by office depot de mexico , which the company sold its interest in during 2013 . ( 2 ) 22 companyowned stores and 93 stores operated by grupo officemax . ( 3 ) stores operated by grupo officemax , which the company sold its interest during the third quarter of 2014 . 34 corporate the line items in our consolidated statements of operations impacted by these corporate activities are presented in the table below , followed by a narrative discussion of the significant matters . these activities are managed at the corporate level and , accordingly , are not included in the determination of division income for management reporting or external disclosures . replace_table_token_14_th in addition to these charges and credits , certain selling , general and administrative expenses are not allocated to the divisions and are managed at the corporate level . those expenses are addressed in the section unallocated costs below . asset impairments , merger , restructuring , other charges and credits in recent years , we have taken actions to adapt to changing and competitive conditions . these actions include closing stores and distribution centers , consolidating functional activities , eliminating redundant positions , disposing of businesses and assets , and taking actions to improve process efficiencies . these actions have resulted in significant charges associated with the merger , real estate strategy , restructuring certain international operations and the staples acquisition . these activities are expected to continue in future periods and result in additional charges . asset impairments we recognized asset impairment charges of $ 13 million , $ 88 million , and $ 70 million in 2015 , 2014 , and 2013 , respectively . asset impairment charges are comprised as follows : replace_table_token_15_th store impairments as a result of declining sales in recent periods and adoption of our real estate strategy in 2014 , the company has conducted a detailed quarterly store impairment analysis . the analysis includes estimates of store-level sales , gross margins , direct expenses , exercise of future lease renewal options where applicable , and resulting cash flows and , by their nature , include judgments about how current initiatives will impact future performance . if the anticipated cash flows of a store can not support the carrying value of its assets , the assets are impaired and written down to estimated fair value . 35 the projections prepared for the 2015 analysis assumed declining sales over the forecast period , consistent with recent experience . gross margin and operating cost assumptions have been held at levels consistent with recent actual results and planned activities . estimated cash flows were discounted at 12 % in 2015 and 13 % for the two preceding years . the impairment charges include amounts to bring the location 's assets to estimated fair value based on projected operating cash flows or residual value , as appropriate . the company continues to capitalize additions to previously-impaired operating stores and tests for subsequent impairment . the 2014 store impairment charge also includes $ 1 million related to the closure of stores in canada . the company will continue to evaluate initiatives to improve performance and lower operating costs . to the extent that forward-looking sales and operating assumptions are not achieved and are subsequently reduced , or in certain circumstances , even if store performance is as anticipated , additional impairment charges may result . however , at the end of 2015 , the impairment analysis reflects the company 's best estimate of future performance . as implementation of the real estate strategy continues , we are likely to experience volatility in results .
| operating results discussion of additional income and expense items , including material charges and credits and changes in interest and income taxes follows our review of segment results . north american retail division replace_table_token_9_th sales in our north american retail division decreased 8 % in 2015 and increased 41 % in 2014. sales in each of the three years were negatively impacted by store closures . store closure activity is shown below . the 2014 sales increase resulted from the addition of a full year of officemax sales of $ 2,526 million compared to sales of $ 384 million in the period from the merger date to year-end 2013. our comparable store sales relate to stores that have been open for at least one year . stores are removed from the comparable sales calculation one month prior to closing , as sales during that period are largely non-comparable clearance activity , and during periods of store remodeling and if significantly downsized . our measure of comparable store sales has been applied consistently across periods , but may differ from measures used by other companies . comparable store sales in 2015 from the 1,552 stores that were open for more than one year were flat . comparable store sales in 2014 decreased 2 % . as the company continues to implement the real estate strategy , current period comparable store sales calculations are positively affected from customers transferring from closed to nearby stores which remain open , though the impact declines after the one year anniversary of the store closure . the average sales transfer rate achieved to date under the real estate strategy is estimated to be at least 30 % and we anticipate a continued favorable impact from sales transfer as we implement the remaining portion of the real estate strategy .
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f-13 huron consulting group inc. notes to consolidated financial statements ( continued ) ( tabular amounts in thousands , except per share amounts ) 3. discontinued operations in recent years , we have undertaken several separate initiatives to divest certain practices within the huron financial segment in order to enable us to devote more of our energy and financial resources to the remaining businesses of the company where we have a more substantial market presence . most recently , on december 30 , 2011 , we sold the accounting advisory ( aa ) practice to a group of investors including the managing director of the practice at the time and recognized a loss of $ 1.9 million in connection with the sale . story_separator_special_tag you should read the following discussion and analysis of our financial condition and results of operations together with the information under part iiitem 6. selected financial data , and our historical audited consolidated financial statements and related notes appearing under part ii item 8. financial statements and supplementary data. the following discussion and analysis of our financial condition and results of operations contains forward-looking statements and involves numerous risks and uncertainties , including , without limitation , those described under part iitem 1a . risk factors and forward-looking statements of this annual report on form 10-k. actual results may differ materially from those contained in any forward-looking statements . overview we are a leading provider of operational and financial consulting services . we help clients in diverse industries improve performance , transform the enterprise , reduce costs , leverage technology , process and review large amounts of complex data , address regulatory changes , recover from distress , and stimulate growth . our professionals employ their expertise in finance , operations , strategy , and technology to provide our clients with specialized analyses and customized advice and 23 solutions that are tailored to address each client 's particular challenges and opportunities to deliver sustainable and measurable results . we provide consulting services to a wide variety of both financially sound and distressed organizations , including healthcare organizations , leading academic institutions , fortune 500 companies , governmental entities , and law firms . we provide our services and manage our business under five operating segments : huron healthcare , huron legal , huron education and life sciences , huron financial , and all other . see part iitem 1. businessoverviewour services and note 17 segment information under part iiitem 8. financial statements and supplementary data included elsewhere in this form 10-k for a detailed discussion of our five segments . see note 3 discontinued operations under part iiitem 8. financial statements and supplementary data for information about our discontinued operations . how we generate revenues a large portion of our revenues is generated by our full-time consultants who provide consulting services to our clients and are billable to our clients based on the number of hours worked . a smaller portion of our revenues is generated by our other professionals , also referred to as full-time equivalents , all of whom work variable schedules as needed by our clients . other professionals include specialized finance and operational consultants and our document review and electronic data discovery groups , as well as full-time employees who provide software support and maintenance services to our clients . our document review and electronic data discovery groups generate revenues primarily based on number of hours worked and units produced , such as pages reviewed or amount of data processed . we translate the hours that these other professionals work on client engagements into a full-time equivalent measure that we use to manage our business . we refer to our full-time consultants and other professionals collectively as revenue-generating professionals . revenues generated by our full-time consultants are primarily driven by the number of consultants we employ and their utilization rates , as well as the billing rates we charge our clients . revenues generated by our other professionals , or full-time equivalents , are largely dependent on the number of consultants we employ , their hours worked , and billing rates charged , as well as the number of pages reviewed and amount of data processed in the case of our document review and electronic data discovery groups , respectively . we generate the majority of our revenues from providing professional services under four types of billing arrangements : time-and-expense , fixed-fee ( including software license revenue ) , performance-based , and support and maintenance for the software we deploy . time-and-expense billing arrangements require the client to pay based on either the number of hours worked , the number of pages reviewed , or the amount of data processed by our revenue-generating professionals at agreed upon rates . we recognize revenues under time-and-expense billing arrangements as the related services are rendered . time-and-expense engagements represented 44.9 % , 47.7 % , and 44.2 % of our revenues in 2013 , 2012 , and 2011 , respectively . in fixed-fee billing arrangements , we agree to a pre-established fee in exchange for a predetermined set of professional services . we set the fees based on our estimates of the costs and timing for completing the engagements . it is the client 's expectation in these engagements that the pre-established fee will not be exceeded except in mutually agreed upon circumstances . we generally recognize revenues under fixed-fee billing arrangements using a proportionate performance approach , which is based on work completed to-date versus our estimates of the total services to be provided under the engagement . we generate revenues from licensing two types of proprietary software to clients : revenue cycle management software and research administration and compliance software . license revenue from our revenue cycle management software is sold only as a component of our consulting projects , and the services we provide are essential to the functionality of the software . therefore , revenues from these software licenses are recognized over the term of the related consulting services contract . story_separator_special_tag segment results segment operating income consists of the revenues generated by a segment , less the direct costs of revenue and selling , general and administrative costs that are incurred directly by the segment . unallocated corporate costs include costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment . these administrative function costs include corporate office support costs , certain office facility costs , costs relating to accounting and finance , human resources , legal , marketing , information technology , and company-wide business development functions , as well as costs related to overall corporate management . critical accounting policies management 's discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states of america ( gaap ) . the notes to our consolidated financial statements include disclosure of our significant accounting policies . we review our financial reporting and disclosure practices and accounting policies to ensure that our financial reporting and disclosures provide accurate information relative to the current economic and business environment . the preparation of financial statements in conformity with gaap requires management to make assessments , estimates , and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements , as well as the reported amounts of revenues and expenses during the reporting period . critical accounting policies are those policies that we believe present the most complex or subjective measurements and have the most potential to impact our financial position and operating results . while all decisions regarding accounting policies are important , we believe that there are four accounting policies that could be considered critical . these critical accounting policies relate to revenue recognition , allowances for doubtful accounts and unbilled services , carrying values of goodwill and other intangible assets , and valuation of net deferred tax assets . revenue recognition we recognize revenues in accordance with fasb asc topic 605 , revenue recognition. under asc 605 , revenue is recognized when persuasive evidence of an arrangement exists , the related services are provided , the price is fixed or determinable , and collectability is reasonably assured . we generate the majority of our revenues from providing professional services under four types of billing arrangements : time-and-expense , fixed-fee ( including software license revenue ) , performance-based , and support and maintenance for the software we deploy . 26 time-and-expense billing arrangements require the client to pay based on the number of hours worked , the number of pages reviewed , or the amount of data processed by our revenue-generating professionals at agreed upon rates . we recognize revenues under time-and-expense arrangements as the related services are rendered . in fixed-fee billing arrangements , we agree to a pre-established fee in exchange for a predetermined set of professional services . we set the fees based on our estimates of the costs and timing for completing the engagements . we recognize revenues under fixed-fee billing arrangements using a proportionate performance approach , which is based on work completed to-date versus our estimates of the total services to be provided under the engagement . estimates of total engagement revenues and cost of services are monitored regularly during the term of the engagement . if our estimates indicate a potential loss , such loss is recognized in the period in which the loss first becomes probable and reasonably estimable . in performance-based billing arrangements , fees are tied to the attainment of contractually defined objectives . we do not recognize revenues under performance-based billing arrangements until all related performance criteria are met . we also generate revenues from licensing two types of proprietary software to clients . license revenue from our research administration and compliance software is recognized in accordance with asc 985-605 , generally in the month in which the software is delivered . license revenue from our revenue cycle management software is sold only as a component of our consulting projects , and the services we provide are essential to the functionality of the software . therefore , revenues from these software licenses are recognized over the term of the related consulting services contract in accordance with asc 605. clients that have purchased one of our software licenses can pay an annual fee for software support and maintenance . annual support and maintenance fee revenue is recognized ratably over the support period , which is generally one year . these fees are billed in advance and included in deferred revenues until recognized . we have arrangements with clients in which we provide multiple elements of services under one engagement contract . revenues under these types of arrangements are allocated to each element based on the element 's fair value in accordance with asc topic 605 and recognized pursuant to the criteria described above . provisions are recorded for the estimated realization adjustments on all engagements , including engagements for which fees are subject to review by the bankruptcy courts . expense reimbursements that are billable to clients are included in total revenues and reimbursable expenses , and typically an equivalent amount of reimbursable expenses are included in total direct costs and reimbursable expenses . reimbursable expenses are primarily recognized as revenue in the period in which the expense is incurred . subcontractors that are billed to clients at cost are also included in reimbursable expenses . differences between the timing of billings and the recognition of revenue are recognized as either unbilled services or deferred revenues in the accompanying consolidated balance sheets . revenues recognized for services performed but not yet billed to clients are recorded as unbilled services . client prepayments and retainers are classified as deferred revenues and recognized over future periods as earned in accordance with the applicable engagement agreement .
| segment results huron healthcare revenues huron healthcare segment revenues increased $ 70.0 million , or 24.2 % , to $ 358.8 million for the year ended december 31 , 2013 , from $ 288.8 million for the year ended december 31 , 2012. revenues from time-and-expense engagements , fixed-fee engagements , performance-based arrangements , and software support and maintenance arrangements represented 1.6 % , 64.6 % , 29.1 % , and 4.7 % of this segment 's revenues in 2013 , respectively , compared to 1.3 % , 62.4 % , 30.7 % , and 5.6 % in 2012 , respectively . of the overall $ 70.0 million increase in revenues , $ 68.5 million was attributable to our full-time billable consultants and $ 1.5 million was attributable to our full-time equivalents . the increase in demand for our services in the huron healthcare segment reflects the increased pressures our clients face as the result of evolving business models , rising costs , and declining reimbursements from government and commercial payers . the increase in full-time billable consultant revenues reflected increases in the average number of full-time billable consultants , consultant utilization rate , and average billing rate . performance-based fee revenue was $ 104.5 million during 2013 compared to $ 88.6 million during 2012. this increase in performance-based fee revenue reflected our execution of favorable results at certain healthcare clients during the fourth quarter of 2013. the level of performance-based fees earned may vary based on our clients ' preferences and the mix of services we provide . performance-based fee arrangements may cause significant variations in revenues , operating results , and average billing rates due to our level of execution and the timing of achievement of the performance-based criteria .
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2016-16 , `` income taxes ( topic story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read in conjunction with item 6 , `` selected financial data '' and our consolidated financial statements and related notes included in this annual report on form 10-k. this discussion contains forward-looking statements that involve risks and uncertainties . our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including , but not limited to , those discussed under item 1a , `` risk factors . '' overview we develop and manufacture a broad line of high-performance fiber lasers , fiber amplifiers and diode lasers that are used in numerous applications , primarily in materials processing . we sell our products globally to oems , system integrators and end users . we market our products internationally primarily through our direct sales force . we are vertically integrated such that we design and manufacture most of our key components used in our finished products , from semiconductor diodes to optical fiber preforms , finished fiber lasers and amplifiers . we also manufacture certain complementary products used with our lasers , including optical delivery cables , fiber couplers , beam switches , optical processing heads and chillers . in addition , we offer laser-based systems for certain markets and applications . description of our net sales , costs and expenses net sales . we derive net sales primarily from the sale of fiber lasers and amplifiers . we also sell diode lasers , communications systems , laser systems and complementary products . we sell our products through our direct sales organization and our network of distributors and sales representatives , as well as system integrators . we sell our products to oems that supply materials processing laser systems , communications systems , medical laser systems and other laser systems for advanced applications to end users . we also sell our products to end users that build their own systems which incorporate our products or use our products as an energy or light source . our scientists and engineers work closely with oems , systems integrators and end users to analyze their system requirements and match appropriate fiber laser or amplifier specifications . our sales cycle varies substantially , ranging from a period of a few weeks to as long as one year or more , but is typically several months . sales of our products generally are recognized upon shipment , provided that no obligations remain and collection of the receivable is reasonably assured . our sales typically are made on a purchase order basis rather than through long-term purchase commitments . we develop our products to standard specifications and use a common set of components within our product architectures . our major products are based upon a common technology platform . we continually enhance these and other products by improving their components and developing new components and new product designs . the average selling prices of our products generally decrease as the products mature . these decreases result from factors such as decreased manufacturing costs and increases in unit volumes , increased competition , the introduction of new products and market share considerations . in the past , we have lowered our selling prices in order to penetrate new 35 markets and applications . furthermore , we may negotiate discounted selling prices from time to time with certain customers that purchase multiple units . cost of sales . our cost of sales consists primarily of the cost of raw materials and components , direct labor expenses and manufacturing overhead . we are vertically integrated and currently manufacture all critical components for our products as well as assemble finished products . we believe our vertical integration allows us to increase efficiencies , leverage our scale and lower our cost of sales . cost of sales also includes personnel costs and overhead related to our manufacturing , engineering and service operations , related occupancy and equipment costs , shipping costs and reserves for inventory obsolescence and for warranty obligations . inventories are written off and charged to cost of sales when identified as excess or obsolete . due to our vertical integration strategy and ongoing investment in plant and machinery , we maintain a relatively high fixed manufacturing overhead . we may not be able to or choose not to adjust these fixed costs to adapt to rapidly changing market conditions . our gross margin is therefore significantly affected by our sales volume and the corresponding utilization of capacity and absorption of fixed manufacturing overhead expenses . sales and marketing . our sales and marketing expense consists primarily of costs related to compensation , trade shows , professional and technical conferences , travel , facilities , depreciation of equipment used for demonstration purposes and other marketing costs . research and development . our research and development expense consists primarily of compensation , development expenses related to the design of our products and certain components , the cost of materials and components to build prototype devices for testing and facilities costs . costs related to product development are recorded as research and development expenses in the period in which they are incurred . general and administrative . our general and administrative expense consists primarily of compensation and associated costs for executive management , finance , legal , information technology and other administrative personnel , outside legal and professional fees , insurance premiums and fees , allocated facilities costs and other corporate expenses such as charges and benefits related to the change in allowance for doubtful debt . factors and trends that affect our operations and financial results in reading our financial statements , you should be aware of the following factors and trends that our management believes are important in understanding our financial performance . net sales . our net sales grew from $ 769.8 million in 2014 to $ 1,408.9 million in 2017 , representing a three year compound annual growth rate of approximately 22 % . story_separator_special_tag we invested $ 126.5 million , $ 127.0 million and $ 70.1 million in capital expenditures in 2017 , 2016 and 2015 , respectively . most of this investment relates to expansion of our manufacturing capacity and , to a lesser extent , research and development and sales-related facilities . a high proportion of our costs is fixed so costs are generally difficult or may take time to adjust in response to changes in demand . in addition , our fixed costs increase as we expand our capacity . if we expand capacity faster than is required by sales growth , gross margins could be negatively affected . gross margins generally decline if production volumes are lower as a result of a decrease in sales or a reduction in inventory because the absorption of fixed manufacturing costs will be reduced . gross margins generally improve when the opposite occurs . if both sales and inventory decrease in the same period , the decline in gross margin may be greater if we can not reduce fixed costs or choose not to reduce fixed costs to match the decrease in the level of production . if we experience a decline in sales that reduces absorption of our fixed costs , or if we have production issues , our gross margins will be negatively affected . we also regularly review our inventory for items that are slow-moving , have been rendered obsolete or are determined to be excess . any provision for such slow-moving , obsolete or excess inventory affects our gross margins . for example , we recorded provisions for slow-moving , obsolete or excess inventory totaling $ 16.9 million , $ 22.8 million and $ 15.4 million in 2017 , 2016 and 2015 , respectively . sales and marketing expense . we expect to continue to expand our worldwide direct sales organization , build and expand applications centers , hire additional sales and marketing personnel at our existing and new geographic locations as well as to support sales of new product lines , increase the number of units for demonstration purposes and otherwise increase expenditures on sales and marketing activities in order to support the growth in our net sales . as such , we expect that our sales and marketing expenses will increase in the aggregate . research and development expense . we plan to continue to invest in research and development to improve our existing components and products and develop new components , products , systems and applications technology . the amount of research and development expense we incur may vary from period to period . in general , if net sales continue to increase we expect research and development expense to increase in the aggregate . 37 general and administrative expense . we expect our general and administrative expenses to increase as we continue to invest in systems and resources in management , finance , legal , information technology , human resources and administration to support our worldwide operations . legal expenses vary from quarter to quarter based primarily upon the level of litigation and transaction activities . major customers . while we have historically depended on a few customers for a large percentage of our annual net sales , the composition of this group can change from year to year . net sales derived from our five largest customers as a percentage of our annual net sales were 28 % , 22 % and 25 % in 2017 , 2016 and 2015 . our largest customer accounted for 13 % , 9 % and 13 % of our net sales in 2017 , 2016 and 2015 , respectively . we seek to add new customers and to expand our relationships with existing customers . we anticipate that the composition of our significant customers will continue to change . we generally do not enter into agreements with our customers obligating them to purchase our fiber lasers or amplifiers . if any of our significant customers were to substantially reduce their purchases from us , our results would be adversely affected . critical accounting policies and estimates the preparation of financial statements in conformity with accounting principles generally accepted in the united states ( `` 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 net sales and expenses . by their nature , these estimates and judgments are subject to an inherent degree of uncertainty . on an ongoing basis we re-evaluate our judgments and estimates including those related to inventories , warranty obligations , contingent liabilities , income taxes and the fair value of certain debt and equity instruments including stock-based compensation . we base our estimates and judgments on our historical experience and on other assumptions that we believe are reasonable under the circumstances , the results of which form the basis for making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . actual results could differ from those estimates , which may materially affect our operating results and financial position . the accounting policies described below are those which , in our opinion , involve the most significant application of judgment , or involve complex estimation , and which could , if different judgments or estimates were made , materially affect our reported results of operations and financial position . revenue recognition . we recognize revenue in accordance with financial accounting standards board ( `` fasb '' ) accounting standards codification ( `` asc '' ) 605. revenue from orders with multiple deliverables is divided into separate units of accounting when certain criteria are met . these separate units generally consist of equipment and installation . the consideration for the arrangement is then allocated to the separate units of accounting based on their relative selling prices .
| results of operations the following table sets forth selected statement of operations data for the periods indicated in dollar amounts and expressed as a percentage of net sales . replace_table_token_10_th comparison of year ended december 31 , 2017 to year ended december 31 , 2016 net sales . net sales increased by $ 402.7 million , or 40.0 % , to $ 1,408.9 million in 2017 from $ 1,006.2 million in 2016 . the table below sets forth sales by application ( in thousands , except for percentages ) : replace_table_token_11_th 41 the table below sets forth sales by type of product and other revenue ( in thousands , except for percentages ) : replace_table_token_12_th sales for materials processing applications increased due to higher sales of high power lasers , medium power lasers , pulsed lasers , qcw lasers and laser systems . the increase in high power laser sales related to growth in cutting and welding . high power lasers continue to displace co2 lasers . we believe our revenue growth has benefited from an accelerated replacement cycle for older co2 based cutting systems and also from displacement of non-laser technologies , which has resulted in higher demand for the fiber based cutting and welding systems sold by our oem customers . within cutting applications , we continue to see a migration to lasers with higher output powers which improve processing speeds and enable processing of thicker materials . the shift towards lasers with higher output powers has also benefited sales due to their higher average selling prices . medium power sales increased due to growth in laser sintering and fine welding applications , which was partially offset by decreases in sales for fine cutting applications because fine cutting systems using medium power lasers migrated to using high power 1 to 2 kilowatt lasers . average selling prices for medium power lasers also declined .
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executive overview net income for 2012 totaled $ 9.2 million , an increase of 79.5 % from the $ 5.1 million earned in 2011. diluted earnings per share for 2012 were $ 1.28 , an increase of 80.3 % from the $ 0.71 earned in 2011. the increase in net income and diluted earnings per share was driven primarily by the full year impact of the acquisition of gs financial corp. ( gsfc ) in july 2011. key components of the company 's performance in 2012 are summarized below . loans , including those covered under loss sharing agreements with the fdic ( covered loans ) , as of december 31 , 2012 were $ 673.1 million , an increase of $ 6.8 million , or 1.0 % , from december 31 , 2011. loan growth during the year was primarily related to commercial real estate loans ( up $ 25.8 million ) , which was virtually offset by decreases in most other loan categories . as of december 31 , 2012 , covered loans totaled $ 45.8 million , a decrease of $ 15.3 million , or 25.1 % , from december 31 , 2011. total customer deposits as of december 31 , 2012 were $ 771.4 million , an increase of $ 40.7 million , or 5.6 % , from december 31 , 2011. the increase in deposits was driven primarily by strong growth in now ( up $ 29.6 million ) and demand deposit ( up $ 24.6 million ) accounts , which was partially offset by certificates of deposit ( down $ 31.8 million ) . interest income increased $ 7.7 million , or 20.0 % , in 2012 compared to 2011. the increase was primarily due to a higher average volume of loans receivable during 2012 resulting primarily to the gsfc acquisition , which more than offset decreases in the average yield on interest-earning assets . interest expense decreased $ 303,000 , or 5.8 % , in 2012 compared to 2011. 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 purchased 337,887 shares of its common stock during 2012 at an average price per share of $ 17.25. as of december 31 , 2012 , an additional 145,436 shares remain eligible for purchase under the share repurchase plan announced in july 2012. the provision for loan losses totaled $ 2.4 million in 2012 , 65.1 % higher than the $ 1.5 million recorded in 2011. the elevated level of provision resulted primarily from a $ 1.7 million charge-off on a $ 5.4 million commercial real estate loan and other credit quality declines in the commercial real estate , construction and land and commercial and industrial loan portfolios . at december 31 , 2012 , the company 's ratio of allowance for loan losses to total loans was 0.79 % , compared to 0.77 % at december 31 , 2011. excluding loans acquired from gsfc and statewide ( acquired loans ) , the ratio of the allowance for loan losses to total organic loans was 1.01 % at december 31 , 2012 compared to 1.14 % at december 31 , 2011. net charge-offs for 2012 were $ 2.2 million , or 0.33 % of total loans , compared to $ 276,000 , or 0.04 % , in 2011. the increase in net charge-offs for 2012 resulted primarily from the charge-off on the commercial real estate loan mentioned above . noninterest income increased $ 671,000 , or 9.9 % , in 2012 compared to 2011. the increase was primarily the result of an increase of $ 1.1 million in gains on the sale of mortgage loans and a $ 393,000 difference in 21 gains/losses on sale of securities , which were partially offset by the absence of a $ 525,000 payment received in settlement of a lawsuit during 2011 and $ 270,000 less accretion on the fdic loss sharing receivable in 2012 compared to 2011. noninterest expense increased $ 1.7 million , or 5.4 % , in 2012 compared to 2011. noninterest expense for 2011 includes merger-related expenses of $ 2.1 million . excluding merger-related expenses , the increase in noninterest expense was primarily the result of the full year impact of the addition of gsfc employees , its operations and facilities and higher costs associated with foreclosed assets . acquisition activity on july 15 , 2011 , the company acquired gsfc , the former holding company of guaranty savings bank ( guaranty ) of metairie , louisiana . on the acquisition date , home bancorp acquisition corp. , a newly created wholly owned subsidiary of the company , was merged with and into gsfc , and immediately thereafter , gsfc was merged with and into the company , with the company as the surviving corporation , and guaranty , the former subsidiary of gsfc , was merged with and into home bank , with home bank as the surviving institution . shareholders of gsfc received $ 21.00 per share in cash , yielding an aggregate purchase price of $ 26,417,000. as a result of the acquisition , the four former guaranty branches in the greater new orleans area were added to the bank 's branch office network . assets acquired from gsfc totaled $ 256.7 million , which included loans of $ 182.4 million , investment securities of $ 46.5 million and cash of $ 9.3 million . the bank also recorded a core deposit intangible asset of $ 859,000 and goodwill of $ 354,000 relating to the acquisition of gsfc , and assumed liabilities of $ 230.6 million , which included $ 193.5 million in deposits and $ 34.7 million in federal home loan bank ( fhlb ) advances . on march 12 , 2010 , the bank acquired certain assets and liabilities of the former statewide bank ( statewide ) , a full-service community bank formerly headquartered in covington , louisiana , from the federal deposit insurance corporation ( fdic ) . story_separator_special_tag in accordance with asc 310-30 and in estimating the fair value of the acquired loans as of the acquisition date , we ( a ) calculate the contractual amount and timing of undiscounted principal and interest payments ( the undiscounted contractual cash flows ) and ( b ) estimate the amount and timing of undiscounted expected principal and interest payments ( the undiscounted expected cash flows ) . the difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference . in accordance with asc 805 , acquired loans without deteriorated credit are recorded at fair value and accounted for under asc topic 310-20 , nonrefundable fees and other costs . acquired loans without deteriorated credit quality , which relate solely to the gsfc acquisition , totaled $ 178.2 million at the date of acquisition . on the acquisition date , the amount by which the undiscounted expected cash flows exceeded the estimated fair value of the acquired loans is the accretable yield . the accretable yield is taken into interest income over the life of the loans using the effective yield method . the accretable yield changes over time due to both accretion and as actual and expected cash flows vary from the acquisition date estimated cash flows . the accretable yield is then measured as of each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans . the remaining undiscounted expected cash flows are calculated as of each financial reporting date based on information then currently available . increases in expected cash flows over those originally estimated increase the accretable yield and are 23 recognized as interest income prospectively . increases in expected cash flows also lead to the reduction of any allowance for loan losses recorded after the acquisition . decreases in expected cash flows , compared to those originally estimated , decrease the accretable yield and are recognized by recording a provision for loan losses . as the accretable yield increases or decreases from changes in cash flow expectations , the offset is a decrease or increase to the nonaccretable difference . as of december 31 , 2012 , $ 205,000 of our allowance for loan losses was allocated to acquired loans in the gsfc portfolio with deteriorated credit quality . income taxes . we make estimates and judgments to calculate some of our tax liabilities and determine the recoverability of some of our deferred tax assets , which arise from temporary differences between the tax and financial statement recognition of revenues and expenses . we also estimate a valuation allowance for deferred tax assets if , based on the available evidence , it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods . these estimates and judgments are inherently subjective . historically , our estimates and judgments to calculate our deferred tax accounts have not required significant revision to our initial estimates . in evaluating our ability to recover deferred tax assets , we consider all available positive and negative evidence , including our past operating results , recent cumulative losses and our forecast of future taxable income . in determining future taxable income , we make assumptions for the amount of taxable income , the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies . these assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business . any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets . an increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings . other-than-temporary impairment of investment securities . securities are evaluated periodically to determine whether a decline in their fair value is other-than-temporary . the term other-than-temporary is not intended to indicate a permanent decline in value . rather , it means that the prospects for near term recovery of value are not necessarily favorable , or that there is a lack of evidence to support fair values equal to , or greater than , the carrying value of the investment . management reviews criteria such as the magnitude and duration of the decline , the reasons for the decline and the performance and valuation of the underlying collateral , when applicable , to predict whether the loss in value is other-than-temporary and the intent and ability of the company to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value . once a decline in value is determined to be other-than-temporary , the carrying value of the security is reduced to its fair value and a corresponding charge to earnings is recognized for the decline in value determined to be credit related . the decline in value attributable to noncredit factors is recognized in other comprehensive income . stock-based compensation . the company accounts for its stock options in accordance with asc topic 718 , compensation stock compensation . asc 718 requires companies to expense the fair value of employee stock options and other forms of stock-based compensation . management utilizes the black-scholes option valuation model to estimate the fair value of stock options . the option valuation model requires the input of highly subjective assumptions , including expected stock price volatility and option life . these subjective input assumptions materially affect the fair value estimate . financial condition loans , loan quality and allowance for loan losses loans the types of loans originated by the company are subject to federal and state laws and regulations . interest rates charged on loans are affected principally by the demand for such loans and the supply of money available for lending purposes and the rates offered by our competitors .
| results of operations the company earned net income of $ 9.2 million in 2012 , an increase of $ 4.1 million compared to the $ 5.1 million earned in 2011 and an increase of $ 4.5 million compared to the $ 4.7 million reported in 2010. diluted earnings per share were $ 1.28 , $ 0.71 and $ 0.62 in 2012 , 2011 and 2010 , respectively . net interest income net interest income is the difference between the interest income earned on interest-earning assets , such as loans and investment securities , and the interest expense paid on interest-bearing liabilities , such as deposits and borrowings . our net interest income is largely determined by our net interest spread , which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest bearing liabilities , and the relative amounts of interest-earning assets and interest-bearing liabilities . net interest income totaled $ 41.2 million in 2012 , an increase of $ 8.0 million , or 24.1 % , compared to the $ 33.2 million earned in 2011. this growth was due to a $ 7.7 million , or 20.0 % , increase in interest income resulting primarily from the full year impact of gsfc 's earning assets ( the company acquired gsfc in july 2011 ) and an increase in the yield earned on covered loans . in accordance with asc 310 , receivables , the company evaluates the expected cash flows of acquired loans throughout the year . as a result of improved cash flow expectations related to covered loans , the company adjusted the accretable yield recognized on covered loans during the third quarter of 2012. 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 improved mix of interest-bearing liabilities .
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under the terms of the amended agreement , the company is required to meet a certain diligence obligation to initiate either a phase iia or phase iib story_separator_special_tag you should read the following discussion and analysis of our financial condition and results of operations together with the financial statements and related notes appearing elsewhere in this annual report on form 10-k. some of the information in this discussion and analysis contains forward-looking statements reflecting our current expectations and involves risk and uncertainties . for example , statements regarding our expectations as to our plans and strategy for our business , future financial performance , expense levels and liquidity sources are forward-looking statements . our actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors , including those set forth under the “ risk factors ” section and elsewhere in this annual report on form 10-k. please also see the section entitled “ special note regarding forward-looking statements. ” overview we are a clinical-stage biopharmaceutical company focused on the development and commercialization of a portfolio of product candidates to treat patients suffering from central nervous system , or cns , diseases . leveraging our deep domain expertise , we have acquired or in-licensed four development-stage proprietary compounds that we believe have innovative mechanisms of action with potentially positive therapeutic profiles . our lead product candidate is min-101 , a compound for the potential treatment of patients with schizophrenia . in addition , our portfolio includes min-202 , a compound we are co-developing with janssen pharmaceuticals , or janssen , for the treatment of patients suffering from primary and comorbid insomnia , min-117 , a compound we are developing for the treatment of patients suffering from major depressive disorder , or mdd , and min-301 , a compound we are developing for the treatment of patients suffering from parkinson 's disease . we believe our innovative product candidates have significant potential to transform the lives of a large number of affected patients and their families who are currently not well-served by available therapies in each of their respective indications . we exclusively licensed min-101 from mitsubishi tanabe pharma corporation , or mtpc , in 2007 with the rights to develop , sell and import min-101 globally , excluding most of asia . in november 2013 , we merged with sonkei pharmaceuticals inc. , or sonkei , a clinical-stage biopharmaceutical company and , in february 2014 , we acquired mind-nrg , a pre-clinical-stage biopharmaceutical company . we refer to these transactions as the sonkei merger and mind-nrg acquisition , respectively . sonkei licensed min-117 from mtpc in 2008 with the rights to develop , sell and import min-117 globally , excluding most of asia . with the acquisition of mind-nrg , we obtained exclusive rights to develop and commercialize min-301 . we have also entered into a co-development and license agreement with janssen pharmaceutica nv , or janssen , for the exclusive rights to develop and commercialize min-202 in the european union , subject to royalty payments to janssen , and royalty rights for any sales outside the european union . we have not received regulatory approvals to sell any of our product candidates , and we have not generated any revenue from the sales or license of our product candidates . we have incurred significant operating losses since inception . we expect to incur net losses and negative cash flow from operating activities for the foreseeable future in connection with the clinical development and the potential regulatory approval , infrastructure development and commercialization of our product candidates . on july 7 , 2014 , we closed our initial public offering , in which we issued and sold 5,454,545 shares of common stock at a public offering price of $ 6.00 per share , for aggregate gross proceeds to us of $ 32.7 million . all of the shares issued and sold in our initial public offering were registered under the securities act pursuant to a registration statement on form s-1 ( file no . 333-195169 ) , which was declared effective by the sec on june 30 , 2014. net proceeds to us from the offering were approximately $ 28.2 million , after deducting the underwriting discount and transaction expenses of approximately $ 3.1 million . the company had issued $ 1.3 million 8 % convertible promissory notes due june 30 , 2014 to certain stockholders that were payable on demand at maturity . in addition , in conjunction with the merger of sonkei on november 12 , 2013 , the company assumed convertible promissory notes held by certain stockholders with a principal amount of 518,519. the convertible promissory notes were converted on july 7 , 2014 at the ipo price of $ 6.00 per share into 352,000 shares of the company 's common stock . financial overview presentation on november 12 , 2013 , we merged with sonkei , in order to acquire sonkei 's lead product candidate , min-117 . the results of sonkei are included in our accompanying financial statements commencing as of november 12 , 2013. on february 11 , 2014 , we acquired mind-nrg in order to acquire mind-nrg 's lead product candidate , min-301 . the results of mind-nrg are included in our accompanying financial statements beginning february 11 , 2014 . 69 revenue none of our product candidates have been approved for commercialization and we have not received any revenue in connection with the sale or license of our product candidates . story_separator_special_tag other general and administrative expenses include allocated facility‑related costs not otherwise included in research and development expenses , travel expenses and professional fees for auditing , tax and legal services . we expect that general and administrative expenses will increase as a result of the acquisition of mind‑nrg and licensing min‑202 from janssen . we also expect to incur greater expenses relating to our operations as a public reporting company , including increased payroll and increased consulting , legal and compliance , accounting , insurance and investor relations costs . foreign exchange ( gains ) ( losses ) and other , net foreign exchange gains ( losses ) and other , net has been primarily comprised of interest income and foreign currency exchange gains or losses resulting from clinical trial expenses denominated in euros and swiss francs . we also incurred interest expense on the convertible promissory notes issued by us in november 2013 and assumed by us in the sonkei merger as well as the debt assumed in connection with the mind‑nrg acquisition . these notes and the accrued interest converted into common stock upon the closing of our initial public offering . other than general and administrative expenses and interest expense , we have incurred certain expenses in euros and swiss francs , including research and development expenses . since planned clinical trials are expected to be in europe , we expect to continue to incur future expenses in euros . we record expenses in u.s. dollars at the time the liability is incurred . changes in the applicable foreign currency rate between the date an expense is recorded and the payment date is recorded as a foreign currency gain or loss . net operating losses and tax carryforwards as of december 31 , 2014 , we had approximately $ 26.4 million of federal net operating loss carryforwards . these federal net operating loss carryforwards will begin to expire at various dates beginning in 2027 , if not utilized . as of december 31 , 2014 , we had approximately $ 21.4 million of state net operating loss carryforwards . these state net operating loss carryforwards will begin to expire at various dates beginning in 2015 , if not utilized . the internal revenue code , or irc , limits the amounts of net operating loss carryforwards that a company may use in any one year in the event of certain cumulative changes in ownership over a three‑year period as described in section 382 of the irc . we have not performed a detailed analysis to determine whether an ownership change occurred upon consummation of the merger between us and sonkei or the acquisition of mind‑nrg . however , as a result of these transactions , our initial public offering and the shares issued to jjdc and shareholders of mind‑nrg as part of the private placements consummated concurrently with our initial public offering , it is likely that an ownership change would occur or has occurred . such an ownership change could also be triggered by subsequent sales of securities by us or our stockholders . such a change in ownership would limit the utilization of our net operating losses . as a result , we may not be able to take full advantage of these tax carryforwards for federal tax purposes . 71 costs associated with the acquisitions and financings we incurred legal and other professional fees associated with the acquisition of sonkei and mind‑nrg , which costs are expensed as incurred . we also incurred professional fees associated with entering into the co‑development and licensing agreement with janssen and engaging valuation specialists . on november 12 , 2013 , cyrenaic pharmaceuticals , inc. , or cyrenaic , merged with sonkei , with cyrenaic being the surviving company , which was renamed minerva . in the merger , each share of sonkei common stock was converted into 0.383 shares of cyrenaic common stock , resulting in the issuance of 2,423,368 shares of cyrenaic common stock to the former sonkei stockholders . although there were certain venture funds that were common stockholders of each of sonkei and cyrenaic , since the underlying investors in the venture funds were not “ substantially similar ” , the merger was accounted for a business combination with cyrenaic being treated as the acquirer . the results of sonkei are included in our accompanying financial statements commencing november 12 , 2013. we merged with sonkei in order to acquire sonkei 's lead product candidate , min‑117 . at the date of the merger , a sonkei consultant held 1,112,500 shares of sonkei common stock with a nonrecourse note due to sonkei , which was being treated as a stock option for accounting purposes . in connection with the merger , we issued 426,176 shares of common stock to this consultant ( discussed further in note 9 — stockholders ' equity to our december 31 , 2014 financial statements appearing elsewhere in this form 10-k ) in order to replace the holder 's common stock in sonkei . due to the nonrecourse note , these shares were treated as stock options for accounting purposes and the holder of the option could only vest in the stock options if the holder continues to provide services to us through the time of a change in control . as a change in control was not deemed probable as of the merger date , the value of the options was not included as part of the consideration transferred in the merger for accounting purposes . rather , we recognized all of the compensation expense for these stock options in our statement of operations upon the closing of our initial public offering . the merger accounting purchase price was therefore determined based upon the remaining 1,997,192 shares of common stock issued in the merger at a valuation of $ 9.49 per share for a total purchase price of approximately $ 18.9 million .
| results of operations comparison of the years ended december 31 , 2014 and december 31 , 2013 ( in thousands ) replace_table_token_3_th research and development expenses research and development expenses were $ 42.9 million for the year ended december 31 , 2014 compared to $ 0.7 million for the same period in 2013 , an increase of $ 42.2 million . the increase was primarily due to a $ 22.0 million license fee paid to janssen pursuant to our co-development agreement for min-202 which has no alternative future use , $ 13.1 million in stock-based compensation expense , $ 3.0 million in higher development costs related to min-101 and $ 2.4 million in program costs related to min-202 . stock-based compensation expense for 2014 includes $ 10.5 million of expense associated with previously issued shares of restricted common stock , the vesting of which became probable upon our initial public offering . general and administrative expenses general and administrative expenses were $ 12.0 million for the year ended december 31 , 2014 compared to $ 2.5 million for the same period in 2013 , representing an increase of approximately $ 9.5 million . the increase was primarily due to $ 4.5 million in stock-based compensation expense , $ 0.7 million in higher legal and professional fees , and $ 4.3 million related to staffing , office leases and information systems necessary to support our operations as a public company .
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the loan is collateralized by a first deed of trust on the partnership 's hotel property , including all improvements and personal property thereon and an assignment of all present and future leases and rents . the prudential loan is without recourse to the limited and general partners of justice . in march 2007 , justice entered into a second mortgage loan with the prudential insurance company of america ( the “ second prudential loan ” ) in a principal amount of $ 19,000,000 . the term of the second prudential loan is for approximately 100 months and matures on august 5 , 2015 , the same date as the partnership 's first mortgage loan with prudential . the second prudential loan is at a fixed interest rate of 6.42 % per annum and calls for monthly installments of principal and interest in the amount of approximately $ 119,000 , calculated on a 30-year amortization schedule . the loan is collateralized by a second deed of trust on the partnership 's hotel property , including all improvements and personal property thereon and an assignment of all present and future leases and rents . the loan story_separator_special_tag story_separator_special_tag 2011 . 20 during the past couple of years , we have seen our management team guide our hotel through a difficult economic period by taking bold steps to reduce expenses and implement innovative strategies in order to improve operations and enhance our competitiveness in the market . as a result , we were well positioned to take advantage of the gradual recovery that took place in the san francisco market . we saw a significant improvement in room rates as the hotel was able to expand its share of the higher rated business and leisure travel which increased our operating revenues and profitability . those results made it possible for justice investors to declare its first limited partnership distribution since september 2008 as the partnership made a total distribution in the amount of $ 1,000,000 in december 2011 , of which portsmouth received $ 500,000. the general partners of justice will continue to monitor and review the operations and financial results of the hotel and to set the amount of any future distributions that may be appropriate based on operating results , cash flows and other factors , including establishment of reasonable reserves for debt payments and operating contingencies . we will continue in our efforts to upgrade our guest rooms and facilities and explore new and innovative ways to differentiate the hotel from its competition . during fiscal 2012 , we completed several projects to enhance the guest experience , including our new executive lounge on the 26 th floor of the hotel and the upgrading of the lobby and common areas of the hotel . we have also made improvements to our restaurant facilities and food and beverage services and have upgraded internet connectivity throughout the hotel and are providing more technological amenities for our guests . we continue to make the hotel more energy efficient and have enhanced our recycling program to support the concept of a greener world while reducing our operating costs . the hotel also became a groundbreaker in implementing hilton 's huanying ( “ welcome ” ) program which features a tailored experience for chinese travelers . we have also taken important steps to further develop our ties to the local chinese community and the city as part of being a good corporate citizen and to promote new business . moving forward , we will continue to focus on cultivating more international business , especially from china , and capturing a greater percentage of the higher rated business , leisure and group travel . during the last twelve months , we have seen improvement in business and leisure travel . if that trend in the san francisco market and the hotel industry continues , it should translate into an increase in room revenues and profitability . however , like all hotels , it will remain subject to the uncertain domestic and global economic environment . while operating in a competitive rental market , real estate operations improved modestly . the company had real estate revenues of $ 14,537,000 for the year ended june 30 , 2012 compared with revenues of $ 13,571,000 for the year ended june 30 , 2011. the increase in rental revenues occurred primarily in the properties located outside of california , particularly in texas , while the california properties remained relatively consistent with the exception of the new california property purchased in april 2011 , where the company had rental revenues for full year during fiscal 2012 versus only two months in fiscal 2011. real estate operating expenses increased to $ 7,885,000 from $ 7,349,000 as the result of the increase in occupancy and rental revenue and partially as result of having a full year of expenses related to the new property purchased in april 2011. depreciation expense related to the company 's real estate operations decreased by approximately $ 552,000 from the prior comparable year primarily as the result of a one-time depreciation expense catch-up adjustment of $ 737,000 recorded in fiscal 2011 due to the reclass of the company 's held for sale property from discontinued operations to continuing operations . management continues to review and analyze the company 's real estate operations to improve occupancy and rental rates and to reduce expenses and improve efficiencies . in january 2012 , the company sold its 24-unit apartment complex located in los angeles , california for $ 4,370,000. the company realized a gain on the sale of real estate of approximately $ 1,710,000 and received net proceeds of $ 4,111,000 from the sale after selling costs . story_separator_special_tag as a result , justice was able to pay some limited partnership distributions in fiscal years 2008 and 2009. however , due to the significant downturn in the san francisco hotel market beginning in september 2008 and the continued weakness in domestic and international economies , no partnership distributions were paid in fiscal 2011 and 2010. during such periods , the company had to depend more on the revenues generated from the investment of its cash and marketable securities and from its general partner management fees . since we have seen significant improvement in the operations of the hotel , and the san francisco market in general , justice was in a position to pay a limited partnership distribution in december 2011 in an aggregate amount of $ 1,000,000 , of which portsmouth received $ 500,000. the general partners of justice will continue to monitor and review the operations and financial results of the hotel and to set the amount of any future distributions that may be appropriate based on operating results , cash flows and other factors , including establishment of reasonable reserves for debt payments and operating contingencies . the new justice compensation agreement that became effective on december 1 , 2008 , when portsmouth assumed the role of managing general partner of justice , has provided additional cash flows to the company . under the new compensation agreement , portsmouth is now entitled to 80 % of the minimum base fee to be paid to the general partners of $ 285,000 , while under the prior agreement portsmouth was entitled to receive only 20 % of the minimum base fee . as a result of increases in hotel gross revenues in fiscal 2012 , total general partner fees paid to portsmouth for the year ended june 30 , 2012 increased to $ 366,000 , compared to $ 323,000 for the year ended june 30 , 2011. to meet its substantial financial commitments for the renovation and transition of the hotel to a hilton , justice had to rely on borrowings to meet its obligations . on july 27 , 2005 , justice entered into a first mortgage loan with the prudential insurance company of america in a principal amount of $ 30,000,000 ( the “ prudential loan ” ) . the term of the prudential loan is for 120 months at a fixed interest rate of 5.22 % per annum . the prudential loan calls for monthly installments of principal and interest in the amount of approximately $ 165,000 , calculated on a 30-year amortization schedule . the loan is collateralized by a first deed of trust on the partnership 's hotel property , including all improvements and personal property thereon and an assignment of all present and future leases and rents . the prudential loan is without recourse to the limited and general partners of justice . the principal balance of the prudential loan was $ 26,599,000 as of june 30 , 2012. on march 27 , 2007 , justice entered into a second mortgage loan with prudential ( the “ second prudential loan ” ) in a principal amount of $ 19,000,000. the term of the second prudential loan is for 100 months and matures on august 5 , 2015 , the same date as the first prudential loan . the second prudential loan is at a fixed interest rate of 6.42 % per annum and calls for monthly installments of principal and interest in the amount of $ 119,000 , calculated on a 30-year amortization schedule . the second prudential loan is collateralized by a second deed of trust on the partnership 's hotel property , including all improvements and personal property thereon and an assignment of all present and future leases and rents . the second prudential loan is also without recourse to the limited and general partners of justice . the principal balance of the second prudential loan was $ 17,722,000 as of june 30 , 2012. effective april 29 , 2010 , the partnership obtained a modification of its $ 2,500,000 unsecured revolving line of credit facility with east west bank that was to mature on april 30 , 2010 , and converted that line of credit facility to an unsecured term loan . the modification provides that justice will pay the $ 2,500,000 balance on its line of credit facility over a period of four years , to mature on april 30 , 2014. this term loan calls for monthly principal and interest payments of $ 41,000 , calculated on a nine-year amortization schedule , with interest only from may 1 , 2010 to august 31 , 2010. pursuant to the modification , the annual floating interest rate was reduced by 0.5 % to the wall street journal prime rate plus 2.5 % ( with a minimum floor rate of 5.0 % per annum ) . the modification provides for new financial covenants that include specific financial ratios and a return to minimum profitability after june 30 , 2011. management believes that the partnership has the ability to meet the specific covenants and the partnership was in compliance with the covenants as of june 30 , 2012. as of june 30 , 2012 , the interest rate was 5.75 % and the outstanding balance was $ 1,702,000 . 24 despite an uncertain economy , the hotel has continued to generate positive cash flows . while the debt service requirements related to the two prudential loans , as well as the term loan to pay off the line of credit , may create some additional risk for the company and its ability to generate cash flows in the future , management believes that cash flows from the operations of the hotel and the garage will continue to be sufficient to meet all of the partnership 's current and future obligations and financial requirements .
| results of operations as of june 30 , 2012 , the company owned approximately 79.9 % of the common shares of its subsidiary , santa fe and santa fe 68.8 % owned approximately 68.8 % of the common shares of portsmouth square , inc. intergroup also directly owns approximately 12.5 % of the common shares of portsmouth . the company 's principal sources of revenue continue to be derived from the general and limited partnership interests of its subsidiary , portsmouth , in the justice investors limited partnership ( “ justice ” or the “ partnership ” ) , rental income from its investments in multi-family real estate properties and income received from investment of its cash and securities assets . portsmouth has a 50.0 % limited partnership interest in justice and serves as the managing general partner of justice . evon corporation ( “ evon ” ) serves as the other general partner . justice owns a 543 room hotel property located at 750 kearny street , san francisco , california 94108 , known as the “ hilton san francisco financial district ” ( the “ hotel ” ) and related facilities , including a five-level underground parking garage . the financial statements of justice have been consolidated with those of the company . see note 2 to the consolidated financial statements . the hotel is operated by the partnership as a full service hilton brand hotel pursuant to a franchise license agreement with hilton hotels corporation . the term of the agreement is for a period of 15 years commencing on january 12 , 2006 , with an option to extend the license term for another five years , subject to certain conditions . justice also has a management agreement with prism hospitality l.p. ( “ prism ” ) to perform the day-to-day management functions of the hotel . the parking garage that is part of the hotel property is managed by ace parking pursuant to a contract with the partnership .
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( 10 ) adjusted income ( loss ) derived from operating activities is computed by subtracting direct costs , general and administrative expenses , depreciation and amortization , and depletion expense from operating revenues and then adding earnings ( losses ) from unconsolidated affiliates. these amounts should not be used as a substitute for those amounts reported under gaap . however , management evaluates the performance of our business units and the consolidated company based on several criteria , including adjusted income ( loss ) derived from operating activities , because it believes that these financial measures are an accurate reflection of our ongoing profitability . a reconciliation of this non-gaap measure to income ( loss ) from continuing operations before income taxes , which is a gaap measure , is provided within the above table . ( 11 ) represents the elimination of inter-segment transactions and unallocated corporate expenses . 34 ( 12 ) represents impairments and other charges recorded during the years ended december 31 , 2010 , 2009 and 2008 , respectively . ( 13 ) excludes well-servicing rigs , which are measured in rig hours . includes our equivalent percentage ownership of rigs owned by unconsolidated affiliates . rig years represent a measure of the number of equivalent rigs operating during a given period . for example , one rig operating 182.5 days during a 365-day period represents 0.5 rig years . ( 14 ) international rig years include our equivalent percentage ownership of rigs owned by unconsolidated affiliates which totaled 2.2 years , 2.5 years and 3.5 years during the years ended december 31 , 2010 , 2009 and 2008 , respectively . ( 15 ) rig hours represents the number of hours that our well-servicing rig fleet operated during the year . story_separator_special_tag recorded on the sale of leasehold interests . additional information is provided in notes 21 discontinued operations and 24 supplemental information on oil and gas exploration and production activities in part ii , item 8 . financial statements and supplementary data . other operating segments these operations include our drilling technology and top-drive manufacturing , directional drilling , rig instrumentation and software , and construction and logistics operations . the results of operations for these operating segments are as follows : replace_table_token_25_th the increase in operating results from 2009 to 2010 primarily resulted from higher demand in the united states and canada drilling markets for rig instrumentation and data collection services from oil and gas exploration companies and higher third-party rental and rigwatch units , which generate higher margins , partially offset by a continued decline in customer demand for our construction and logistics services in alaska . the decreases in operating results from 2008 to 2009 primarily resulted from ( i ) lower demand in the u.s. and canada drilling markets for rig instrumentation and data collection services from oil and gas exploration companies , ( ii ) decreases in customer demand for our construction and logistics services in alaska and ( iii ) decreased capital equipment unit volumes and lower service and rental activity as a result of the slowdown in the oil and gas industry . 38 discontinued operations during 2010 , we began actively marketing our oil and gas assets in the horn river basin in canada and in the llanos basin in colombia . these assets also include our 49.7 % and 50.0 % ownership interests in our investments of remora and smvp , respectively , which we account for using the equity method of accounting . all of these assets are included in our oil and gas operating segment . we determined that the plan of sale criteria in the asc topic relating to the presentation of financial statements for assets sold or held for sale had been met during the third quarter of 2010. accordingly , we reclassified these wholly owned oil and gas assets from our property , plant and equipment , net , as well as our investment balances for remora and smvp from investments in unconsolidated affiliates to assets held for sale in our consolidated balance sheet at september 30 , 2010. the operating results from these assets for all periods presented are retroactively presented and accounted for as discontinued operations in the accompanying audited consolidated statements of income ( loss ) . our condensed statements of income ( loss ) from discontinued operations for the years ended december 31 , 2010 , 2009 and 2008 were as follows : replace_table_token_26_th ( 1 ) includes our proportionate share of full-cost ceiling test writedowns of $ 47.8 million and $ 21.0 million , for the years ended december 31 , 2009 and 2008 , respectively . other financial information general and administrative expenses replace_table_token_27_th general and administrative expenses decreased from 2009 to 2010 and from 2008 to 2009 primarily as a result of significant decreases in wage-related expenses and other cost-reduction efforts across all business units . the decrease during 2009 was partially offset by share-based compensation expense , which included $ 72.1 million of compensation expense related to previously granted restricted stock and option awards held by messrs. isenberg and petrello that was unrecognized as of april 1 , 2009. the recognition of this expense resulted from provisions of their respective new employment agreements that effectively eliminated the risk of forfeiture of such awards . there is no remaining unrecognized expense related to their outstanding restricted stock and option awards . excluding the share-based compensation expense related to the previous awards held by messrs. isenberg and petrello , general and administrative expenses for 2009 and 2010 are substantially below 2008 levels , indicating that the cost-reduction efforts and actions across all business units beginning in late 2008 have had a favorable impact on our operating results . story_separator_special_tag 39 depreciation and amortization , and depletion expense replace_table_token_28_th depreciation and amortization expense . depreciation and amortization expense increased from 2009 to 2010 and from 2008 to 2009 primarily as a result of projects completed in recent years under our expanded capital expenditure program that commenced in early 2005. depletion expense . depletion expense increased from 2009 to 2010 as a result of increased units-of-production depletion . depletion expense decreased from 2008 to 2009 primarily as a result of decreased natural gas production volumes during each year . interest expense replace_table_token_29_th interest expense increased from 2009 to 2010 as a result of the interest expense related to our september 2010 issuance of 5.0 % senior notes due september 2020. the increase was partially offset by a reduction to interest expense resulting from our repurchases of approximately $ 1.2 billion par value of 0.94 % senior exchangeable notes during 2009 and 2010. interest expense increased from 2008 to 2009 as a result of the interest expense related to our january 2009 issuance of 9.25 % senior notes due january 2019. the increase was partially offset by a reduction to interest expense due to our repurchases of approximately $ 1.1 billion par value of 0.94 % senior exchangeable notes during 2008 and 2009. investment income ( loss ) replace_table_token_30_th investment income during 2010 was $ 7.6 million compared to $ 25.6 million during the prior year . investment income in 2010 included interest and dividend income of $ 7.2 million from our cash , other short-term and long-term investments and $ 4.9 million from gains on sales of short-term and long-term investments , partially offset by net unrealized losses of $ 4.4 million from our trading securities . investment income during 2009 was $ 25.6 million compared to $ 21.4 million during 2008. investment income in 2009 included net unrealized gains of $ 9.8 million from our trading securities and interest and dividend income of $ 15.9 million from our cash , other short-term and long-term investments . investment income during 2008 was $ 21.4 million and included net unrealized gains of $ 8.5 million from our trading securities and interest and dividend income of $ 40.5 million from our short-term and long-term investments , partially offset by losses of $ 27.4 million from our actively managed funds classified as long-term investments . 40 gains ( losses ) on sales and retirements of long-lived assets and other income ( expense ) , net replace_table_token_31_th the amount of gains ( losses ) on sales and retirements of long-lived assets and other income ( expense ) , net for 2010 represents a net loss of $ 47.1 million and includes : ( i ) foreign currency exchange losses of approximately $ 17.9 million , ( ii ) litigation expenses of $ 6.4 million , ( iii ) net losses on sales and retirements of long-lived assets of approximately $ 6.6 million , ( iv ) acquisition-related costs of $ 7.0 million and ( v ) losses of $ 7.0 million recognized on purchases of our 0.94 % senior exchangeable notes due 2011. the amount of gains ( losses ) on sales and retirements of long-lived assets and other income ( expense ) , net for 2009 represents a net loss of $ 12.6 million and includes : ( i ) foreign currency exchange losses of approximately $ 8.4 million , ( ii ) litigation expenses of $ 11.5 million and ( iii ) net losses on sales and retirements of long-lived assets of approximately $ 5.9 million . these losses were partially offset by pre-tax gains of $ 11.5 million recognized on purchases of $ 964.8 million par value of our 0.94 % senior exchangeable notes due 2011. the amount of gains ( losses ) on sales and retirements of long-lived assets and other income ( expense ) , net for 2008 represents a net loss of $ 15.8 million and includes : ( i ) losses on derivative instruments of approximately $ 14.6 million , including a $ 9.9 million loss on a three-month written put option and a $ 4.7 million loss on the fair value of our range-cap-and-floor derivative , ( ii ) losses on retirements on long-lived assets of approximately $ 13.2 million , inclusive of involuntary conversion losses on long-lived assets of approximately $ 12.0 million , net of insurance recoveries , related to damage sustained from hurricanes gustav and ike during 2008 and ( iii ) litigation expenses of $ 3.5 million . these losses were partially offset by a $ 12.2 million pre-tax gain recognized on our purchase of $ 100 million par value of 0.94 % senior exchangeable notes due 2011. impairments and other charges replace_table_token_32_th impairments of oil and gas assets in 2010 , we recognized impairments of $ 192.2 million related to our oil and gas assets . of this total , $ 137.8 million represents writedowns to the carrying value of some acreage in the united states , which we do not have future plans to develop due to the sustained low natural gas prices , and certain exploratory wells in colombia , which we have determined will be uneconomical to develop in the foreseeable future . 41 the remaining $ 54.3 million relates to an impairment of a financing receivable as a result of the continued commodity price deterioration in the barnett shale area of north central texas . we determined that this impairment was necessary using estimates and assumptions based on estimated cash flows for proved and probable reserves and current natural gas prices . we believe the estimates used provide a reasonable estimate of current fair value . we determined that this represented a level 3 fair value measurement . as of december 31 , 2010 , the carrying value of this oil and gas financing receivable , which is included in long-term investments , has been reduced to $ 20.1 million . a further protraction or continued period of
| segment results of operations contract drilling our contract drilling operating segments contain one or more of the following operations : drilling , workover and well-servicing and pressure pumping , on land and offshore . u.s. lower 48 land drilling . the results of operations for this reportable segment are as follows : replace_table_token_17_th operating revenues increased from 2009 to 2010 primarily due to higher average dayrates and utilization . the increase was partially offset by the decrease in early contract termination revenue . operating revenues related to early contract termination during 2010 included $ 23.2 million as compared to $ 108.5 million in 2009. adjusted income derived from operating activities decreased from 2009 to 2010 due to an increase in operating costs associated with the increased drilling activity . operating results continued to be negatively impacted by higher depreciation expense related to capital expansion projects completed in recent years . operating results decreased from 2008 to 2009 primarily due to a decline in drilling activity , driven by lower natural gas prices beginning in the fourth quarter of 2008 and diminished demand as customers released rigs and delayed drilling projects in response to the significant drop in natural gas prices and the tightening of the credit markets . u.s. land well-servicing . the results of operations for this reportable segment are as follows : replace_table_token_18_th operating results increased from 2009 to 2010 primarily due to an increase in rig utilization driven by higher oil prices . the increase in operating results also reflects lower general and administrative costs and depreciation expense . operating results decreased from 2008 to 2009 primarily due to lower rig utilization and price erosion , driven by lower customer demand for our services due to relatively lower oil prices caused by the 35 u.s. economic recession and reduced end product demand .
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as such , the company is no longer entitled to receive any potential future milestone-based payments or royalties under its development and license agreements with boston scientific . pursuant to one of the pre-existing agreements , the company received a non-refundable licensing fee of $ 13,000,000 from boston scientific in 2008. the company recorded the $ 13,000,000 payment as deferred revenue and recognized the revenue on a straight-line basis over the five year period estimated by the company for its continuing involvement in the development effort ( see note 2 , revenue recognition ) , which period ended on march 31 , 2013. the company reevaluated its estimated remaining period of continuing involvement at each reporting period until all of the revenue that had been deferred was recognized . the transactions contemplated by the bsc purchase agreement do not impact the company 's ability to continue to commercialize its clearpoint system or to continue the development of its cleartrace system . f-14 mri interventions , inc . notes to consolidated financial statements 6. n otes payable senior note payable the company had a $ 2,000,000 secured convertible note ( “ april 2011 note ” ) payable to brainlab ag ( “ brainlab ” ) . upon issuance , the april 2011 note story_separator_special_tag . the following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes thereto included elsewhere in this annual report . this discussion and analysis contains forward-looking statements that are based upon current expectations and involve risks , assumptions and uncertainties . you should review the “ risk factors ” section of this annual report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements described in the following discussion and analysis . overview we are a medical device company that develops and commercializes innovative platforms for performing minimally invasive surgical procedures in the brain and heart under direct , intra-procedural mri guidance . we have two product platforms . our clearpoint system , which is in commercial use , is used to perform minimally invasive surgical procedures in the brain . we anticipate that our cleartrace system , which is still in development , will be used to perform minimally invasive surgical procedures in the heart . both systems utilize intra-procedural mri to guide the procedures . both systems are designed to work in a hospital 's existing mri suite . we believe that our two product platforms , subject to appropriate regulatory clearance and approval , will deliver better patient outcomes , enhance revenue potential for both physicians and hospitals , and reduce costs to the healthcare system . in 2010 , we received regulatory clearance from the fda to market our clearpoint system in the united states for general neurological procedures . in 2011 , we also obtained ce marking approval for our clearpoint system , which enables us to sell our clearpoint system in the european union . the vast majority of our product revenues for the years ended december 31 , 2014 and 2013 relate to sales of our clearpoint system products . we do not have regulatory clearance or approval to sell our cleartrace system for commercial use ; however , we have had an isolated sale of certain cleartrace system components to a research site for non-commercial use . we have financed our operations and internal growth primarily through the sale of equity securities , the issuance of convertible and other secured notes , and license arrangements . we have incurred significant losses since our inception in 1998 as we devoted substantial efforts to research and development . as of december 31 , 2014 , we had an accumulated deficit of $ 77.3 million . we may continue to incur operating losses as we commercialize our clearpoint system products , continue to develop our cleartrace system , and expand our business . factors which may influence future results of operations the following is a description of factors which may influence our future results of operations , and which we believe are important to an understanding of our business and results of operations . revenues in june 2010 , we received 510 ( k ) clearance from the fda to market our clearpoint system in the united states for general neurological procedures . future revenues from sales of our clearpoint system products are difficult to predict and may not be sufficient to offset our continuing research and development expenses and our increasing selling , general , and administrative expenses . we can not sell our cleartrace system for commercial use until we receive regulatory clearance or approval . generating recurring revenues from the sale of disposable products is an important part of our business model for our clearpoint system . we anticipate that , over time , recurring revenues will constitute an increasing percentage of our total revenues as we leverage each new installation of our clearpoint system to generate recurring sales of our clearpoint disposable products . our product revenues were $ 3.4 million and $ 2.9 million for the years ended december 31 , 2014 and 2013 , respectively , and were almost exclusively related to our clearpoint system . since inception , the most significant source of our revenues has been related to our collaborative agreements with boston scientific , principally from recognition of the $ 13.0 million of licensing fees , which we received in 2008. revenues associated with these licensing fees were recognized on a straight-line basis over a five year period , which was the period we estimated for our continuing involvement in the development activities , and which period ended in the first quarter of 2013 . 47 our revenue recognition policies are more fully described in the “ critical accounting policies and significant judgments and estimates ” section below . story_separator_special_tag sales of disposable products : revenues from the sale of disposable products , including clearpoint system disposable products , are recognized at the time risk of loss passes to the customer , which is generally at shipping point or upon delivery to the customer 's location , depending on the agreed upon terms with the customer . sales of cleartrace components : sales of cleartrace system components to research sites for non-commercial use are recognized at the time risk of loss passes to the customer , which is generally at shipping point or upon delivery to the customer 's location , depending on the agreed upon terms with the customer . the company does not have regulatory clearance or approval to sell cleartrace system components for commercial use . ( 2 ) license and development arrangements — we defer recognition of non-refundable upfront license fees if there are continuing performance obligations without which the technology , know-how , rights , products or services conveyed in conjunction with the non-refundable fees have no utility to the licensee that could be considered separate and independent of our performance under other elements of the arrangement . ( 3 ) development service revenues — we entered into an agreement to provide development services to a third party . under the agreement , we earned revenue equal to costs incurred for outside expenses related to the development services provided , plus actual direct internal labor costs ( including the cost of employee benefits ) , plus an overhead markup of the direct internal labor costs incurred . revenue was recognized in the period in which we incurred the related costs . ( 4 ) other service revenues — other service revenues are comprised of installation fees , training fees , shipping fees and service fees charged in connection with clearpoint system installations and clearpoint system service agreements . typically , we will bill upfront for service agreements , which have terms ranging from one to three years . these amounts are recognized as revenues ratably over the term of the related service agreement . inventory . inventory is carried at the lower of cost ( first-in , first-out method ) or net realizable value . all items included in inventory relate to our clearpoint system . software license inventory that is not expected to be utilized within the next twelve months is classified as a non-current asset . we periodically review our inventory for obsolete items and provide a reserve upon identification of potential obsolete items . 49 derivative liability for warrants to purchase common stock . our derivative liabilities for warrants represent the fair value of warrants issued in connection with certain private placements of shares our common stock . the fair values of these warrants are presented as liabilities based on certain net cash settlement and exercise price reset , or “ down round , ” provisions . these derivative liabilities , which are recorded on our consolidated balance sheets , are calculated utilizing the monte carlo simulation valuation method . changes in the fair values of these warrants are recognized as other income or expense in the related statement of operations . share-based compensation . we account for compensation for all arrangements under which employees and others receive shares of stock or other equity instruments ( including options and warrants ) based on fair value . the fair value of each award is estimated as of the grant date and amortized as compensation expense over the requisite vesting period . the fair values of our share-based awards are estimated on the grant dates using the black-scholes valuation model . this valuation model requires the input of highly subjective assumptions , including the expected stock volatility , estimated award terms and risk-free interest rates for the expected terms . to estimate the expected terms , we utilize the “ simplified ” method for “ plain vanilla ” options discussed in the sec 's staff accounting bulletin 107 , or sab 107. we believe that all factors listed within sab 107 as pre-requisites for utilizing the simplified method apply to us and to our share-based compensation arrangements . we intend to utilize the simplified method for the foreseeable future until more detailed information about exercise behavior becomes available . we based our estimate of expected volatility on the average of historical volatilities of publicly traded companies we deemed similar to us because we lack our own relevant historical volatility data . we will consistently apply this methodology until we have sufficient historical information regarding the volatility of our own share prices to use as the input for all of our share-based fair value calculations . we utilize risk-free interest rates based on a zero-coupon u.s. treasury instrument , the term of which is consistent with the expected term of the share-based award . we have not paid , and do not anticipate paying , cash dividends on shares of our common stock ; therefore , the expected dividend yield is assumed to be zero . research and development costs . costs related to research , design and development of products are charged to research and development expense as incurred . these costs include direct salary and employee benefit-related costs for research and development personnel , costs for materials used in research and development activities , sponsored research and costs for outside services . since most of the expenses associated with our development service revenues relate to existing internal resources , these amounts are included in research and development costs . 50 story_separator_special_tag 1.25 ; text-indent : 39.6pt '' > during the year ended december 31 , 2013 , we recorded a loss of $ 1.4 million related to the march 2013 brainlab loan modification , which modification included a $ 1.9 million increase to the principal balance of the note , a decrease in the interest rate from 10 % to 5.5 % , and the elimination of the note 's equity conversion feature .
| results of operations comparison of the year ended december 31 , 2014 to the year ended december 31 , 2013 replace_table_token_2_th nm= not meaningful product and other service revenues . product and other service revenues were $ 3.5 million for the year ended december 31 , 2014 , and $ 3.0 million for the prior year , an increase of $ 504,000 , or 17 % . product and other service revenues included disposable product sales for the year ended december 31 , 2014 of $ 2.6 million , compared with $ 1.8 million for the same period in 2013 , an increase of $ 831,000 , or 47 % . the increase reflected customer purchases of disposable products during the year ended december 31 , 2014 for a higher number of performed and anticipated procedures compared with the prior year , as well as the sale of drug delivery catheters we manufactured on a contract basis for a third party . approximately $ 710,000 of the product and other service revenues for the year ended december 31 , 2014 related to the sale of clearpoint system reusable products , compared with $ 1.1 million for the prior year , a decrease of $ 421,000. product and other service revenues for the year ended december 31 , 2014 also included $ 56,000 in cleartrace system components sold to a research site for non-commercial use . other service revenues , mostly related to clearpoint system service agreements and installation services , were $ 122,000 for the nine months ended december 31 , 2014 , and $ 82,000 for the prior year . development service revenues . during the years ended december 31 , 2014 and 2013 , we recorded development service revenues of $ 104,000 and $ 284,000 , respectively , representing a decrease of $ 180,000. the decrease reflects the completion of a development project we performed on a contract basis .
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this reporting change did not impact segment reporting for 2012 or 2013 or the company 's consolidated results for any year . for the years ended december 31 , 2013 and 2014 , the company realigned its reportable segments for financial reporting purposes as a result of the significant growth in the company . the change primarily represented reporting asphalt produced at the shreveport , superior and montana refineries in the fuel products segment . prior to this change , asphalt was reported as part of the specialty products segment . while this reporting change did not impact the company 's consolidated results , segment data for previous years has been restated and is consistent with the current year presentation throughout the financial statements and the accompanying notes . unitholders should read the following discussion and analysis of the financial condition and results of operations of the company in conjunction with the historical consolidated financial statements and notes of the company included elsewhere in this annual report . overview we are a leading independent producer of high-quality , specialty hydrocarbon products in north america . we are headquartered in indianapolis , indiana and own specialty and fuel products facilities primarily located in northwest louisiana , northwest wisconsin , northern montana , western pennsylvania , texas , new jersey , eastern missouri and north dakota . we own and lease oilfield services locations in texas , oklahoma , louisiana , arkansas , colorado , utah , wyoming , montana , new mexico , new york , north dakota , pennsylvania and ohio . we own and lease additional facilities , primarily related to production and distribution of specialty , fuel and oilfield services products , throughout the united states ( “ u.s. ” ) . our business is organized into three segments : specialty products , fuel products and oilfield services . in our specialty products segment , we process crude oil and other feedstocks into a wide variety of customized lubricating oils , white mineral oils , solvents , petrolatums and waxes . our specialty products are sold to domestic and international customers who purchase them primarily as raw material components for basic industrial , consumer and automotive goods . we also blend and market specialty products through our royal purple , bel-ray , trufuel and quantum brands . in our fuel products segment , we process crude oil into a variety of fuel and fuel-related products , including gasoline , diesel , jet fuel , asphalt and heavy fuel oils , as well as reselling purchased crude oil to third party customers . our oilfield services segment manufactures and markets products and provides oilfield services including drilling fluids , completion fluids , production chemicals and solids control services to the oil and gas exploration industry throughout the u.s. 2014 update story_separator_special_tag since the acquisitions of anchor and sos in 2014 , the oilfield services segment generated adjusted ebitda of $ 35.1 million . operational reliability we seek to operate each of our assets safely , reliably and in compliance with all regulatory guidelines . while planned facility maintenance is a requisite part of being in the business of specialty and fuel products refining , some years involve more maintenance than others . generally speaking , our fuel products refineries conduct significant planned maintenance “ turnarounds ” once every four to five years ; our last turnaround cycle lasted between 2013 and the first half of 2014. having concluded maintenance at each of our fuel facilities until the next staggered turnaround cycle which we expect to begin in 2018 , we anticipate that our fuel refineries should operate at optimal levels until the next round of planned maintenance . importantly , we expect the next turnaround cycle will involve staggered maintenance at each fuel products refinery over a multi-year period in order to minimize the financial impact of the planned maintenance in a shorter period of time . exiting our most recent turnaround cycle , our fuel products refineries have performed well . in 2014 , production of fuel products increased by 11.1 % when compared to 2013. our superior , montana and san antonio refineries each reported record total feedstock runs in 2014 versus prior years while under our ownership . capital markets activity on march 26 , 2014 , calumet priced $ 900.0 million of 6.50 % notes due 2021. the offering was upsized to $ 900.0 million from the original offering size of $ 850 million . we used a portion of the net proceeds from the private placement to fund the approximately $ 223.6 million purchase price of anchor and the redemption of all $ 500.0 million aggregate principal amount of our outstanding 9.375 % senior unsecured notes due 2019. the remaining funds were used for general partnership purposes , including planned capital expenditures at our facilities . on march 10 , 2014 , we entered into an equity placement agreement with various sales agents . the equity placement agreement provides a cost-effective means for us to conduct at-the-market equity offerings from time to time using our shelf registration statement . our board of directors has authorized a $ 300.0 million at the market ( “ atm ” ) equity distribution program . under this authorization , we have the option to sell units into the open market on a ratable basis at the current available market price . during 2014 , we sold approximately $ 3.6 million in limited partner common units under the atm authorization . 55 quarterly cash distribution on january 23 , 2015 , we declared a regular quarterly cash distribution that was paid on february 13 , 2015 to unitholders of record as of the close of business on february 3 , 2015 . for the full year 2014 , we paid total cash distributions of $ 210.2 million , versus $ 201.6 million in 2013 , representing an annualized cash distribution of $ 2.74 per unit . story_separator_special_tag we expect to fund our portion of this project through estimated cash contributions of $ 137.5 million to $ 142.5 million , together with $ 75.0 million from an unsecured syndicated term loan facility with the joint venture as the borrower , which is expected be repaid by us through our allocation of profits from the joint venture . the total estimated annual ebitda contribution from this project is estimated to be $ 60 million to $ 70 million , subject to market conditions . both the project cost and ebitda contribution are to be split 50/50 between the joint venture partners . san antonio , texas refinery solvents project we have commenced a project that will take a portion of our san antonio refinery 's ultra-low sulfur diesel and jet fuel production and convert it into up to 3,000 bpd of higher margin solvents that will meet customer requirements for low aromatic content . solvents production will supplement the refinery 's current fuels production slate and will be targeted toward the drilling fluid , paints and coating markets . this project is currently expected to reach completion during the fourth quarter 2015. the current estimated total construction cost of the solvents project is approximately $ 65.0 million to $ 75.0 million , while the total estimated annual ebitda contribution from this project is estimated to be approximately $ 20.0 million , subject to market conditions . missouri esters plant expansion project we continue to progress on a project designed to more than double the production capacity of our louisiana , missouri esters plant from 35 million to 75 million pounds per year . we currently anticipate this project should reach completion during the second quarter of 2015. esters are a key base stock used in the aviation , refrigerant and automotive lubricants markets . the current estimated total construction cost of the esters plant expansion is approximately $ 40.0 million to $ 45.0 million , while the total estimated annual ebitda contribution from this project is estimated to be $ 8.0 million to $ 12.0 million , subject to market conditions . 57 acquisitions acquisition acquisition date description aggregate purchase price ( 1 ) specialty oilfield solutions , ltd. assets ( “ sos acquisition ” ) august 1 , 2014 a full-service drilling fluids and solids control company with primary operations in the eagle ford , marcellus and utica shale formations . $ 29.6 adf holdings , inc. ( “ anchor acquisition ” ) march 31 , 2014 an independent provider and marketer of drilling fluids , completion fluids and production chemicals to the oil and gas exploration industry . $ 223.6 ( 2 ) united petroleum , llc assets ( “ united petroleum acquisition ” ) february 28 , 2014 a marketer and distributor of high performance lubricants . $ 10.4 bel-ray company , llc ( “ bel-ray acquisition ” ) december 10 , 2013 a manufacturer and global distributor of high-performance lubricants and greases . $ 53.6 ( 3 ) murphy oil usa , inc. logistics assets ( “ crude oil logistics acquisition ” ) august 9 , 2013 crude oil loading facilities and related assets in north dakota . $ 6.2 nustar energy l.p. 's san antonio , texas refinery ( “ san antonio acquisition ” ) january 2 , 2013 a refinery in san antonio , texas with total crude oil throughput capacity of 17,500 bpd and produces jet fuel , diesel , gasoline and other fuel products . $ 117.9 montana refining company , inc. ( “ montana acquisition ” ) october 1 , 2012 a refinery in great falls , montana with total crude throughput capacity of 10,000 bpd and produces gasoline , diesel , jet fuel and asphalt which are marketed primarily into local markets in washington , montana , idaho and alberta , canada . $ 191.6 ( 4 ) royal purple , inc. ( “ royal purple acquisition ” ) july 3 , 2012 a leading independent formulator and marketer of premium industrial and consumer lubricants to a diverse customer base across several large markets including oil and gas , chemicals and refining , power generation , manufacturing and transportation , food and drug manufacturing and automotive aftermarket . $ 331.2 trusouth oil , llc , renamed calumet packaging , llc ( “ calumet packaging acquisition ” ) january 6 , 2012 a specialty petroleum packaging and distribution company located in shreveport , louisiana . $ 26.9 hercules incorporated ( “ missouri acquisition ” ) january 3 , 2012 an aviation and refrigerant lubricants business ( a polyolester based synthetic lubricants business ) and a manufacturing facility located in louisiana , missouri . $ 19.6 ( 1 ) aggregate purchase price is net of cash acquired and includes working capital . ( 2 ) aggregate purchase price is net of cash acquired and excludes debt assumed . ( 3 ) aggregate purchase price is net of cash acquired and net of cash acquired and subject to certain other adjustments , including tax adjustments . ( 4 ) aggregate purchase price is net of cash acquired and an estimated $ 27.6 million of income taxes due to the conversion to a delaware limited liability company . key performance measures our sales and net income are principally affected by the price of crude oil , demand for specialty products , fuel products and oilfield products and services , prevailing crack spreads for fuel products , the price of natural gas used as fuel in our operations and our results from derivative instrument activities . our primary raw materials are crude oil and other specialty feedstocks and our primary outputs are specialty petroleum products , fuel products and oilfield services products . the prices of crude oil , specialty products , fuel products and oilfield services are subject to fluctuations in response to changes in supply , demand , market uncertainties and a variety of additional factors beyond our control . we monitor these risks and enter into physical contracts and derivative instruments designed to mitigate the impact of commodity price fluctuations on our business .
| financial results during 2014 , each of our key performance metrics , including adjusted ebitda ( as defined in “ non-gaap financial measures ” ) and distributable cash flow ( “ dcf ” ) ( as defined in “ non-gaap financial measures ” ) , increased significantly when compared to 2013 , driven mainly by improved plant reliability , attractive fuels refining economics and stable to growing margins within our specialty products segment . adjusted ebitda was $ 305.9 million in 2014 , an increase of 26.7 % from 2013. distributable cash flow increased from $ 18.5 million in 2013 to $ 142.9 million in 2014 , due to a combination of increased adjusted ebitda and a marked decline in turnaround capital spending . during 2014 , our specialty products segment represented 72.2 % of total adjusted ebitda , our fuel products segment represented 16.3 % of adjusted ebitda and our oilfield services segment represented 11.5 % of adjusted ebitda . we seek to weight our company-wide adjusted ebitda toward high margin , stable volume specialty products , given our goal of stable quarterly distributions . in 2014 , adjusted ebitda generated from our specialty products and fuel products segments increased by 13.5 % and 6.4 % , respectively , when compared to the prior year .
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refer to note ( 14 ) for a detailed discussion of share-based payments . ( m ) voluntary separation benefits - we account for voluntary separation benefits in accordance with the provisions of asc 712 , compensation-nonretirement postemployment benefits . voluntary separation benefits are recorded to expense when the associates irrevocably accept the offer and the amount of the termination liability is reasonably estimable . 59 ( n ) foreign currency - in accordance with asc 830 , foreign currency matters , assets and liabilities of non-u.s. subsidiaries whose functional currency is the local currency are translated into u.s. dollars at exchange rates prevailing at the balance sheet date . revenues and expenses are translated at average exchange rates during the year . the net exchange differences resulting from these translations are reported in accumulated other comprehensive loss . gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations . ( o ) collaborative arrangements - in accordance with asc 808 , collaborative arrangements , third party costs incurred and revenues generated by arrangements involving joint operating activities of two or more parties that are each story_separator_special_tag the following management discussion and analysis ( `` md & a '' ) is intended to help the reader understand our results of operations and financial condition . this md & a is provided as a supplement to , and should be read in conjunction with , our financial statements and the accompanying notes to the financial statements ( `` notes '' ) . our fiscal year ends on the saturday closest to december 31. fiscal years 2017 , 2016 and 2015 each consisted of 52 weeks and ended on december 30 , 2017 , december 31 , 2016 , and january 2 , 2016 , respectively . all references to years in this md & a represent fiscal years unless otherwise noted . management overview our revenues are primarily derived by selling , implementing and supporting software solutions , clinical content , hardware , devices and services that give health care providers and other stakeholders secure access to clinical , administrative and financial data in real or near-real time , helping them to improve quality , safety and efficiency in the delivery of health care . our fundamental strategic focus is the creation of organic growth by investing in research and development ( `` r & d '' ) to create solutions and services for the health care industry . this strategy has driven strong growth over the long-term , as reflected in five- and ten-year compound annual revenue growth rates of 14 % and 13 % , respectively . this growth has also created an important strategic footprint in health care , with cerner solutions in more than 27,000 facilities worldwide , including hospitals , physician practices , laboratories , ambulatory centers , behavioral health centers , cardiac facilities , radiology clinics , surgery centers , extended care facilities , retail pharmacies , and employer sites . selling additional solutions and services back into this client base is an important element of our future revenue growth . we are also focused on driving growth through market share expansion by strategically aligning with health care providers that have not yet selected a supplier and by displacing competitors in health care settings that are looking to replace their current supplier . we may also supplement organic growth with acquisitions or strategic investments . we expect to drive growth through solutions and services that reflect our ongoing ability to innovate and expand our reach into health care . examples of these include our careaware health care device architecture and devices , cerner itworks services , revenue cycle solutions and services , and healtheintent population health solutions and services . finally , we believe there is significant opportunity for growth outside of the united states , with many non-u.s. markets focused on health care information technology as part of their strategy to improve the quality and lower the cost of health care . beyond our strategy for driving revenue growth , we are also focused on earnings growth . similar to our history of growing revenue , our net earnings have increased at compound annual rates of 17 % and 21 % , respectively , over the most recent five- and ten-year periods . we expect to drive earnings growth as we continue to grow our revenue . we also have opportunities to expand our operating margins over time . in the near term , we expect growth in non-cash expenses , such as amortization and depreciation , and a mix of lower margin revenue associated with some of our rapidly growing services businesses will limit our margin expansion . longer-term , we expect to generate margin expansion as the growth rate of non-cash expenses slows , we achieve scale and efficiencies in our services businesses , control general and administrative expenses , and get more contributions to our growth from solutions on our healtheintent platform , which we expect to be accretive to our overall margins . we are also focused on continuing to deliver strong levels of cash flow , which we expect to accomplish by continuing to grow earnings and prudently managing capital expenditures . siemens health services on february 2 , 2015 , we acquired the cerner health services business , as further described in note ( 2 ) of the notes to consolidated financial statements . the addition of this business impacts the comparability of our 2015 consolidated financial statements in relation to the comparative periods presented herein . story_separator_special_tag personnel , depreciation and other expenses associated with our managed services business , communications expenses , unreimbursed travel expenses , expense for share-based payments , and trade show and advertising costs . the growth in sales and client service expenses reflects hiring of services personnel to support the growth in services revenue . software development expenses as a percent of total revenues were 12 % in 2017 , compared to 11 % in 2016 . story_separator_special_tag support and maintenance revenues increased 4 % to $ 1.0 billion in 2016 , compared to $ 976 million in 2015 . this increase was primarily attributable to continued success selling cerner millennium applications and implementing them at client sites . services revenue increased 16 % to $ 2.4 billion in 2016 , from $ 2.1 billion in 2015 . this increase was driven by a $ 207 million increase in professional services due to growth in implementation and consulting activities and growth in managed services of $ 124 million as a result of continued demand for our hosting services . revenue backlog increased 12 % to $ 15.9 billion in 2016 compared to $ 14.2 billion in 2015 . this increase was driven by solid levels of new business bookings revenue during the past four quarters , including strong levels of managed services bookings that typically have longer contract terms . costs of revenue costs of revenue as a percent of total revenues were 16 % in 2016 , compared to 17 % in 2015 . the lower costs of revenue as a percent of total revenues was primarily driven by a lower mix of technology resale , which carries a higher cost of revenue . operating expenses total operating expenses increased 7 % to $ 3.1 billion in 2016 , compared with $ 2.9 billion in 2015 . sales and client service expenses as a percent of total revenues were 43 % in 2016 , compared to 42 % in 2015 . these expenses increased 13 % to $ 2.1 billion in 2016 , from $ 1.8 billion in 2015 . the growth in services expense and increase as a percent of total revenues reflects hiring of services personnel to support the strong growth in services revenue . software development expenses as a percent of total revenues were 11 % in 2016 , compared to 12 % in 2015 . expenditures for software development include ongoing development and enhancement of the cerner millennium and healtheintent platforms , with a focus on supporting key initiatives to enhance physician experience , revenue cycle and population health solutions . a summary of our total software development expense in 2016 and 2015 is as follows : replace_table_token_7_th general and administrative expenses as a percent of total revenues were 8 % in 2016 , compared to 10 % in 2015 . these expenses decreased 7 % to $ 392 million in 2016 , from $ 423 million in 2015 . the decrease as a percent of total revenues was primarily the result of decreased expenses in 2016 related to acquisition costs and related adjustments associated with our acquisition of the cerner health services business and our voluntary separation plans . general and administrative expenses in 2016 and 2015 include acquisition costs and related adjustments associated with our cerner health services business of $ 4 million and $ 46 million , respectively . general and administrative expenses in 2016 and 2015 include costs associated with our voluntary separation plans of $ 36 million and $ 46 million , respectively . at the end of 2016 , our voluntary separation plans were complete . refer to note ( 1 ) of the notes to consolidated financial statements for further detail regarding the voluntary separation plans . 31 amortization of acquisition-related intangibles as a percent of total revenues was 2 % in both 2016 and 2015 . these expenses decreased 1 % to $ 91 million in 2016 , from $ 92 million in 2015 . the decrease in amortization of acquisition-related intangibles includes the impact of certain intangible assets becoming fully amortized . non-operating items other income , net was $ 7 million in 2016 , compared to less than $ 1 million in 2015 . this increase is primarily due to increased capitalization of interest on construction in process , primarily related to our innovations campus ( office space development located in kansas city , missouri ) . our effective tax rate was 31 % in both 2016 and 2015 . refer to note ( 12 ) of the notes to consolidated financial statements for further information regarding our effective tax rate . operations by segment the following table presents a summary of our operating segment information for the years ended 2016 and 2015 : replace_table_token_8_th domestic segment revenues increased 9 % to $ 4.2 billion in 2016 , from $ 3.9 billion in 2015 . this increase was primarily driven by growth in services revenue . costs of revenue as a percent of revenues were 16 % in 2016 , compared to 17 % in 2015 . the lower costs of revenue as a percent of revenues was primarily driven by a lower mix of technology resale , which carries a higher cost of revenue . operating expenses as a percent of revenues were 42 % in 2016 , compared to 40 % in 2015 . the increase as a percent of revenues reflects a higher mix of services during 2016 that was driven by services revenue growth . global segment revenues increased 6 % to $ 551 million in 2016 , from $ 521 million in 2015 . this increase was driven by growth across most of our business . costs of revenue as a percent of revenues were 19 % in both 2016 and 2015 . operating expenses as a percent of revenues were 45 % in both 2016 and 2015 . other , net these expenses were flat at $ 1.1 billion in both 2016 and 2015 . 32 liquidity and capital resources our liquidity is influenced by many factors , including the amount and timing of our revenues , our cash collections from our clients and the amount we invest in software development , acquisitions , capital expenditures , and in recent years , our share repurchase programs . our principal sources of liquidity are our cash , cash equivalents , which primarily consist of money market funds and time deposits with original maturities of less than 90 days , and short-term investments .
| results overview the company delivered strong levels of bookings , revenues , earnings and operating cash flows in 2017 . bookings , which reflects the value of executed contracts for software , hardware , professional services and managed services , was $ 6.3 billion in 2017 , which is an increase of 16 % compared to $ 5.4 billion in 2016 . 26 revenues for 2017 increased 7 % to $ 5.1 billion , compared to $ 4.8 billion in 2016 . the increase in revenue reflects ongoing demand from new and existing clients for cerner 's solutions and services driven by their needs to keep up with regulatory requirements , adapt to changing reimbursement models , and deliver safer and more efficient care . net earnings for 2017 increased 36 % to $ 867 million , compared to $ 636 million in 2016 . diluted earnings per share increased 39 % to $ 2.57 in 2017 , compared to $ 1.85 in 2016 . the overall increase in net earnings and diluted earnings per share was primarily a result of increased revenues and a lower effective tax rate , which was favorably impacted by certain u.s. income tax reform enacted in december 2017. we had cash collections of receivables of $ 5.4 billion in 2017 compared to $ 5.2 billion in 2016 . days sales outstanding was 72 days for the 2017 fourth quarter compared to 73 days for the 2017 third quarter and 69 days for the 2016 fourth quarter . operating cash flows for 2017 were $ 1.3 billion compared to $ 1.2 billion in 2016 . health care information technology market outlook we have provided an assessment of the health care information technology market under `` health care and health care it industry '' in part i , item 1 `` business , '' which is incorporated herein by reference .
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dixie international sells all of our brands outside of the north american market . during 2016 , our net sales decreased 5.9 % , or 7.2 % on a “ net sales as adjusted ” basis , compared with 2015. sales of residential products decreased 1.8 % , or 3.0 % on a “ net sales as adjusted ” basis , in 2016 versus 2015 , while , we estimate , the industry was down in low single digits . we anticipate the residential housing market will have steady but moderate growth over next several years . commercial product sales decreased 10.0 % , or 11.5 % on a “ net sales as adjusted ” basis , during 2016 , while , we believe , the industry was down slightly . we anticipate the commercial market to have moderate growth for next year . ( see reconciliation of net sales to net sales as adjusted below . ) in 2016 , we incurred an operating loss of $ 3.4 million compared with operating income of $ 2.0 million in 2015. despite improvements in quality-related costs due to more strict and consistent quality standards and reduced associate medical expenses from a new plan design , the unabsorbed fixed cost due to the lower sales volume substantially offset those cost savings in 2016. in addition , operations were impacted by the reduction of inventories as we under produced our sales volume , thus negatively affecting our cost structure during the year . during 2016 , we completed our capacity expansion and facility consolidation plans which began in 2014. under these plans , we aligned our warehousing , distribution and manufacturing with our growth and manufacturing strategy . they were designed to create a better cost structure as well as improve distribution capabilities and provide for more efficient manufacturing processes . in addition , we consolidated three of our leased divisional and corporate offices to a single leased facility . total expenses of the plans since inception were $ 9.9 million including $ 1.5 million during 2016. despite a difficult year from a profitability perspective , we have made several changes to improve our results in the future . by completing our restructuring plans earlier in the year , we have set the stage for a more productive manufacturing environment . we reduced our claims expense significantly as our workforce training has taken affect and improved our quality . we have reduced inventory to levels commensurate with our sales and our service is in line with our customers expectations . in addition , the industry announced a price increase based on increases in cost of both labor and raw material . this price increase includes both residential and commercial products . in response to the high rate of growth for hard surface products in the last several years , we decided to initiate a series of product launches in luxury vinyl tile and engineered wood hard surface flooring products . during the fourth quarter of 2016 , we began offering luxury vinyl tile ( “ lvt ” ) products under the calibre brand which was our first hard surface offering in the commercial markets . these new lvt products are being sold by our existing masland contract sales force . residentially , our dixie home and masland residential brands will be supplying stainmaster petprotect® luxury vinyl tile in 2017. finally , we are preparing to launch a high-end engineered wood line through our fabrica brand . the growth rate , measured as market sales volume in square feet , has been substantially higher for hard surface products than soft surface products over the past 4 years . 16 story_separator_special_tag style= '' line-height:120 % ; text-align : justify ; font-size:9pt ; '' > income tax provision ( benefit ) . our effective income tax rate was a benefit of 41.0 % in 2016. in 2016 , we increased our valuation allowances by $ 106 thousand related to state income tax loss carryforwards and state income tax credit carryforwards . additionally , 2016 included approximately $ 395 thousand of federal tax credits . our effective income tax rate was a benefit of 23.9 % in 2015. in 2015 , we increased our valuation allowances by $ 977 thousand related to state income tax loss carryforwards and state income tax credit carryforwards . additionally , 2015 included approximately $ 441 thousand of federal tax credits . net income ( loss ) . continuing operations reflected a loss of $ 5.2 million , or $ 0.33 per diluted share in 2016 , compared with a loss from continuing operations of $ 2.3 million , or $ 0.15 per diluted share in 2015. our discontinued operations reflected a loss of $ 131 thousand , or $ 0.01 per diluted share and income on disposal of discontinued operations of $ 60 thousand , or $ 0.00 per diluted share in 2016 compared with a loss of $ 148 thousand , or $ 0.01 per diluted share in 2015. including discontinued operations , we had a net loss of $ 5.3 million , or $ 0.34 per diluted share , in 2016 compared with a net loss of $ 2.4 million , or $ 0.16 per diluted share , in 2015 . 18 fiscal year ended december 26 , 2015 compared with fiscal year ended december 27 , 2014 replace_table_token_7_th net sales . net sales for the year ended december 26 , 2015 were $ 422.5 million compared with $ 406.6 million in the year-earlier period , an increase of 3.9 % for the year-over-year comparison . sales for the carpet industry were down slightly for annual 2015 compared with the prior year . our 2015 year-over-year carpet sales comparison reflected an increase of 4.5 % in net sales . sales of residential carpet were down 0.4 % and sales of commercial carpet increased 14.4 % . story_separator_special_tag we expect capital expenditures to be approximately $ 8.0 million in 2017 while depreciation and amortization is expected to be approximately $ 13.3 million . planned capital expenditures in 2017 are primarily for new equipment . during the year ended december 31 , 2016 , cash used in financing activities was $ 19.2 million . we had payments of $ 10.0 million on the revolving credit facility and payments of $ 10.5 million on notes payable and lease obligations . we believe our operating cash flows , credit availability under our revolving credit facility and other sources of financing are adequate to finance our anticipated liquidity requirements under our current operating conditions . as of december 31 , 2016 , the unused borrowing availability under our revolving credit facility was $ 45.6 million . our revolving credit facility requires us to maintain a fixed charge coverage ratio of 1.1 to 1.0 during any period that borrowing availability is less than $ 16.5 million . as of the date hereof , our fixed coverage ratio was less than 1.1 to 1.0 , accordingly the unused availability accessible by us was $ 29.1 million ( the amount above $ 16.5 million ) at december 31 , 2016. significant additional cash expenditures above our normal liquidity requirements or significant deterioration in economic conditions could affect our business and require supplemental financing or other funding sources . there can be no assurance that such supplemental financing or other sources of funding can be obtained or will be obtained on terms favorable to us . debt facilities revolving credit facility . on september 23 , 2016 , we amended our revolving credit facility to revise certain definitions and extend the maturity date from march 2019 to september 2021. the revolving credit facility provides for a maximum of $ 150.0 million of revolving credit , subject to borrowing base availability . the borrowing base is currently equal to specified percentages of our eligible accounts receivable , inventories , fixed assets and real property less reserves established , from time to time , by the administrative agent under the facility . the revolving credit facility is secured by a first priority lien on substantially all of our assets . at our election , advances of the revolving credit facility bear interest at annual rates equal to either ( a ) libor for 1 , 2 or 3 month periods , as selected by us , plus an applicable margin ranging between 1.50 % and 2.00 % , or ( b ) the higher of the prime rate , the federal funds rate plus 0.5 % , or a daily libor rate plus 1.00 % , plus an applicable margin ranging between 0.50 % and 1.00 % . the applicable margin is determined based on availability under the revolving credit facility with margins increasing as availability decreases , with the exception that the applicable margin can not go below 1.75 % until after march 31 , 2017. as of december 31 , 2016 , the applicable margin on our revolving credit facility was 1.75 % . we pay an unused line fee on the average amount by which 20 the aggregate commitments exceed utilization of the revolving credit facility equal to 0.375 % per annum . the weighted-average interest rate on borrowings outstanding under the revolving credit facility was 4.40 % at december 31 , 2016 and 3.12 % at december 26 , 2015. the revolving credit facility includes certain affirmative and negative covenants that impose restrictions on our financial and business operations . the revolving credit facility requires us to maintain a fixed charge coverage ratio of 1.1 to 1.0 during any period that borrowing availability was less than $ 16.5 million . as of december 31 , 2016 , the unused borrowing availability under the revolving credit facility was $ 45.6 million ; however , since our fixed charge coverage ratio was less than 1.1 to 1.0 , the unused availability accessible by us was $ 29.1 million ( the amount above $ 16.5 million ) at december 31 , 2016. notes payable - buildings . on november 7 , 2014 , we entered into a ten-year $ 8.3 million note payable to purchase a previously leased distribution center in adairsville , georgia . the note payable is scheduled to mature on november 7 , 2024 and is secured by the distribution center . the note payable bears interest at a variable rate equal to one month libor plus 2.0 % and is payable in equal monthly installments of principal of $ 35 thousand , plus interest calculated on the declining balance of the note , with a final payment of $ 4.2 million due on maturity . in addition , we entered into an interest swap with an amortizing notional amount effective november 7 , 2014 which effectively fixes the interest rate at 4.50 % . on january 23 , 2015 , we entered into a ten-year $ 6.3 million note payable to finance an owned facility in saraland , alabama . the note payable is scheduled to mature on january 7 , 2025 and is secured by the facility . the note payable bears interest at a variable rate equal to one month libor plus 2.0 % and is payable in equal monthly installments of principal of $ 26 thousand , plus interest calculated on the declining balance of the note , with a final payment of $ 3.1 million due on maturity . in addition , we entered into a forward interest rate swap with an amortizing $ 5.7 million notional amount effective january 7 , 2017 which will effectively fix the interest rate at 4.30 % . acquisition note payable - development authority of gordon county . on november 2 , 2012 , we signed a 6 % seller-financed note of $ 5.5 million with lineage pcr , inc. ( “ lineage ” ) related to the acquisition of the continuous carpet dyeing facility in calhoun , georgia .
| results of operations fiscal year ended december 31 , 2016 compared with fiscal year ended december 26 , 2015 replace_table_token_5_th our fiscal year ended december 31 , 2016 had 53 weeks and fiscal year ended december 26 , 2015 had 52 weeks . discussions below related to percentage changes in net sales for the annual periods have been adjusted to reflect the comparable number of weeks and are qualified with the term “ net sales as adjusted ” . for comparative purposes , we define `` net sales as adjusted '' as net sales less the last week of sales in a 53 week fiscal year . we believe “ net sales as adjusted ” will assist our financial statement users in obtaining comparable data between the reporting periods . ( see reconciliation of net sales to net sales as adjusted in the table below . ) reconciliation of net sales to net sales as adjusted replace_table_token_6_th net sales . net sales for the year ended december 31 , 2016 were $ 397.5 million compared with $ 422.5 million in the year-earlier period , a decrease of 5.9 % , or 7.2 % on a “ net sales as adjusted ” basis , for the year-over-year comparison . sales for the carpet industry were down slightly for 2016 compared with the prior year . our 2016 year-over-year carpet sales comparison reflected a decrease of 4.7 % , or 6.0 % on a “ net sales as adjusted ” basis , in net sales . sales of residential carpet were down 1.8 % , or 3.0 % on a “ net sales as adjusted ” basis , and sales of commercial carpet decreased 10.0 % , or 11.5 % on a “ net sales as adjusted ” basis .
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the airpatrol merger consideration also included an earn-out , half of the value of which was to be in stock and the other half in cash ( unless otherwise agreed or required pursuant to the airpatrol merger agreement ) payable to the former stockholders of airpatrol in 2015 in accordance with the following formula : if for the five quarter period ending march 31 , 2015 , airpatrol net income meets or exceeds $ 3.5 million , the company agreed to pay to the former airpatrol stockholders an earn-out payment equal to two times airpatrol net income , provided that the total earn-out payment shall not exceed $ 10.0 million . on april 18 , 2014 , the parties to the airpatrol agreement entered into an amendment no . 2 , pursuant which the company agreed to ( i ) modify the working capital adjustment provision of the airpatrol agreement , ( ii ) modify the story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited financial statements and related notes included elsewhere in this annual report on form 10-k. in addition to historical information , this discussion and analysis here and throughout this form 10-k contains forward-looking statements that involve risks , uncertainties and assumptions . our actual results may differ materially from those anticipated in these forward-looking statements , due to a number of factors , including but not limited to , risks described in the section entitled “ risk factors. ” except where indicated , all share and per share data in this section , as well as the consolidated financial statements , reflect the reverse stock split effected on april 8 , 2014. overview of our business sysorex global ( “ sysorex ” or the “ company ” ) provides data analytics and indoor-location based solutions and services to commercial and government customers worldwide . we have developed a new kind of discovery platform that blends data from traditional software and network systems with the growing universe of mobile and internet of things ( iot ) . in doing so we have created a high velocity , secure and scalable platform that we believe allows our customers to evaluate their most complex business issues , and compete successfully in their respective markets . our products are designed to help customers derive real time value by combining both the physical and digital worlds . these products and services operate and report among the following segments : mobile , iot & big data products , storage and computing , saas revenues , and professional services . sysorex 's data analytics products integrate with our airpatrol product line , which focuses on collecting data from any wireless device in close proximity ( cellular , wifi , ble , rfid , etc. ) . we believe we can provide the right information at the right time based on our integrated solutions allowing us to uniquely blend the real world and the digital world . we believe that our airpatrol product line is also well positioned in the cyber security market as mobile device management and detection technology . we believe that our location accuracy of sub 10-feet and our ability to capture all rf frequencies is unmatched . detecting rogue devices that could be a security threat to an enterprise or government agency and then providing accurate location of that device is an important security application for our customers . our airpatrol product line has three patents and ten others pending worldwide . sysorex also provides supporting products and services including enterprise computing and storage , virtualization , business continuity , data migration ; custom application development , networking and information technology business consulting services . these allow sysorex to offer turnkey solutions when requested by customers . our storage and computing segment revenues are typically driven by purchase orders that are received on a monthly basis . approximately 21 % of the revenues from these purchase orders are recurring contracts that range from one to five years for warranty and maintenance support . for these contracts the customer is invoiced one time and pays sysorex upfront for the full term of the warranty and maintenance contract . revenue from these contracts is determinable ratably over the contract period with the unearned revenue recorded as deferred revenue and amortized over the contract period . we have a 30-year history and a high repeat customer rate of approximately 50-60 % annually . our revenues are diversified over hundreds of customers and typically no one customer exceeds 15 % of revenues however from time to time a large order from a customer could put it temporarily above 15 % . we have one customer that was approximately 25 % for the year ending december 31 , 2015 but we do n't anticipate that this customer will continue to maintain that percentage as our revenues expand across other customers in 2016. management believes this diversification provides stability to our revenue streams . our software-as-a-service ( saas ) contracts are typically performed for periods of one or more years and we have a high customer retention rate . sysorex saas product include : etearsheets , invoicing , crm , and other products and services to approximately 675 newspapers in the cloud . cloud or saas based analytics is a growing market that sysorex intends to pursue beyond the media vertical that we are in today . 46 our mobile , iot and big data sales are expected to grow significantly in 2016 ; however sales cycles proved to be longer than we expected in 2015. the long sales cycles result from customer related issues such as budget and procurement processes but also because of the early stages of indoor-locationing technology and the learning curve required for customers to implement such solutions . this is improving with the increased presence and awareness of beacon and wi-fi locationing technologies in the market . our professional services group provides consulting services ranging from enterprise architecture design to custom application development to data modeling . story_separator_special_tag our significant accounting policies are discussed in note 2 of the audited financial statements for the years ended december 31 , 2015 and 2014. we believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results , and they require our most difficult , subjective or complex judgments , resulting from the need to make estimates about the effect of matters that are inherently uncertain . there have been no changes to estimates during the periods presented in the filing . historically changes in management estimates have not been material . revenue recognition we provide it solutions and services to customers with revenues currently derived primarily from the sale of third-party hardware and software products , software , assurance , licenses and other consulting services , including maintenance services . the products and services we sell , and the manner in which they are bundled , are technologically complex and the characterization of these products and services require judgment in order to apply revenue recognition policies . for all of these revenue sources , we determine whether we are the principal or agent in accordance with accounting standards codification topic , 605-45 principal agent considerations . we allocate the total arrangement consideration to the deliverables based on an estimated selling price of our products and services and report revenues containing multiple deliverable arrangements under asc 605-25 “ revenue arrangements with multiple deliverables ” ( “ asc-605-25 ” ) . these multiple deliverable arrangements primarily consist of the following deliverables : third-party computer hardware , third-party software , hardware and software maintenance ( a.k.a . support ) , and third-party services . we determine the estimated selling price using cost plus a reasonable margin for each deliverable , which was based on our established policies and procedures for providing customers with quotes , as well as historical gross margins for our products and services . from time to time our personnel are contracted to perform installation and services for the customer . in situations where we bundle all or a portion of the separate elements , vendor specific objective evidence ( “ vsoe ” ) is determined based on prices when sold separately . our revenue recognition policies vary based upon these revenue sources and the mischaracterization of these products and services could result in misapplication of revenue recognition polices . 48 we recognize revenue when the following criteria are met ( 1 ) persuasive evidence of an arrangement exists ; ( 2 ) shipment ( software or hardware ) or fulfillment ( maintenance ) has occurred and applicable services have been rendered , ( 3 ) the sales price is fixed or determinable , and ( 4 ) collectability is reasonably assured . generally , these criteria are met upon shipment to customers with respect to the sales of hardware and software products . with respect to our maintenance and other service agreements , this criteria is met once the service has been provided . revenue from the sales of our services on time and material contracts is recognized based on a fixed hourly rate as direct labor hours are expended . we recognize revenue for sales of all services on a fixed fee ratably over the term of the arrangement as such services are provided . the company evaluates whether the revenues it receives from the sale of hardware and software products , licenses , and services , including maintenance and professional consulting services , should be recognized on a gross or net basis on a transaction by transaction basis . we maintain primary responsibility for the materials and procedures utilized to service our customers , even in connection with the sale of third party-products and maintenance services as we are responsible for the fulfillment and acceptability of the products and services purchased by our customers . in addition , the nature of the products sold to our customers are such that they need configuration in order to be utilized properly for the purposes intended by the customer and therefore we assume certain responsibility for product staging , configuration , installation , modification , and integration with other client systems , or retain general inventory risk upon customer return or rejection . our customers rely on us to develop the appropriate solutions and specifications applicable to their specific systems and then integrate any such required products or services into their systems . as described above , we are responsible for the day to day maintenance and warranty services provided in connection with all of our existing customer relationships , whether such services are ultimately provided directly by the company and its employees or by the applicable third party service provider . as of the date of this filing , after an evaluation of all of our existing customer relationships , we have concluded that we are the primary obligor to all of our existing customers and therefore recognize all revenues on a gross basis . long-lived assets we account for our long-lived assets in accordance with accounting standards codification ( “ asc ” ) 360 , “ accounting for the impairment or disposal of long-lived assets ” ( “ asc 360 ” ) , which requires that long-lived assets be evaluated whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or the useful life has changed . some of the events or changes in circumstances that would trigger an impairment test include , but are not limited to : ● significant under-performance relative to expected and or historical results ( negative comparable sales growth or operating cash flows for two consecutive years ) ; ● significant negative industry or economic trends ; ● knowledge of transactions involving the sale of similar property at amounts below our carrying value ; or ● our expectation to dispose of long-lived assets before the end of their estimated useful lives , even though the assets do not meet the criteria to be classified as “ held for sale.
| results of operations year ended december 31 , 2015 compared to the year ended december 31 , 2014 the following table sets forth selected consolidated financial data as a percentage of our revenue and the percentage of period-over-period change : replace_table_token_2_th revenues revenues for the year ended december 31 , 2015 were $ 67.0 million compared to $ 62.9 million for the comparable period in the prior year . the increase of $ 4.1 million , or approximately 6.5 % is primarily associated with growth in the storage and computing and professional services segments . mobile , iot & big data products revenue for the year ended december 31 , 2015 was $ 1.7 million compared to $ 1.9 million for the prior year period . storage and computing revenue was $ 50 million for the year ended december 31 , 2015 , and $ 48.3 million for the prior year period . saas revenue was $ 3.7 million during the year ended december 31 , 2015 and $ 4 million during the prior year period . professional services revenue was $ 11.6 million during the year ended december 31 , 2015 and $ 8.7 million during the prior year period . 52 cost of revenues cost of revenues for the year ended december 31 , 2015 was $ 47.6 million compared to $ 44.2 million for the comparable period in the prior year . this increase of $ 3.4 million , or approximately 7.7 % , was primarily attributable to higher sales . sysorex mobile , iot & big data products cost of net revenues was $ 510,000 for the year ended december 31 , 2015 as compared to $ 406,000 for the prior year period . storage and computing cost of net revenues was $ 40.3 million for the year ended december 31 , 2015 , and $ 38.6 million for the prior year period .
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” overview of corporate developments on december 2 , 2014 , the company , through its bank subsidiary , metabank , completed an acquisition of substantially all of the commercial loan portfolio and related assets of afs/ibex financial services , inc. the acquisition included the afs/ibex operating platform , other related assets and approximately $ 74.1 million of outstanding insurance premium finance loan receivables . the purchase price for the acquisition included the payment of $ 99.3 million in cash . the afs/ibex business , now an operating division of the bank , continues to serve businesses and insurance agencies nationwide with commercial insurance premium financing . the afs/ibex division is located in dallas , texas , with a full-service office in southern california . the company reviewed its securities portfolio in connection with the afs/ibex acquisition and sold approximately $ 80 million of investment securities to fund the loan portfolio acquisition . securities were selected and sold during november and december 2014 on an opportunistic basis at a net loss of approximately $ 1.4 million with the intent to minimize the recoupment period . see note 2 to the “ notes to consolidated financial statements. ” in march 2015 , meta announced the sale of 740,654 common shares under its “ at-the-market ” equity offering announced on december 17 , 2014. the common shares sold at an average price of $ 35.03 per share . proceeds to the company , net of direct selling costs , were $ 25.4 million . on september 8 , 2015 , the company completed the acquisition of substantially all of the assets and liabilities of fort knox financial services corporation and its subsidiary , tax product services llc ( together “ refund advantage ” ) . the company will continue to provide its refund advantage professional tax refund‑transfer software services used by independent electronic refund originators and their customers . the purchase price for the acquisition included the payment of $ 26 million in cash as well as the issuance of 581,260 shares of the company 's common stock to the shareholders of fort knox . the cash portion of the purchase price was funded from the proceeds of a private placement of 535,000 shares of the company 's common stock to certain institutional investors . see note 2 to the “ notes to consolidated financial statements. ” the company recorded net income of $ 18.1 million in fiscal 2015 compared to $ 15.7 million in fiscal 2014. the primary reasons for the increase in net income were increases in both investment securities portfolio interest income and loan portfolio interest income , bolstered by a significant increase in non-interest income from $ 51.7 million in fiscal 2014 to $ 58.2 million in fiscal 2015. in fiscal 2015 , the company 's net interest income was $ 59.2 million , compared to $ 46.3 million in fiscal 2014 and $ 36.0 million in fiscal 2013. the increase was primarily driven by growth in loan volumes and rates achieved on loans receivable , particularly aided by the loans produced at the company 's afs/ibex division . additionally , the overall increase was driven by higher volume and yields attained from investments . offsetting higher net interest income and non-interest income in part was non-interest expense , which rose $ 18.3 million , from $ 78.2 million in fiscal 2014 , to $ 96.5 million in fiscal 2015 . 79 retail bank segment 2015 fiscal year net income was $ 9.1 million compared to $ 8.7 million in fiscal 2014. retail bank checking balances continued to grow from $ 80.8 million at september 30 , 2014 , to $ 88.7 million , or 9.8 % , at september 30 , 2015. retail bank total loans increased $ 106.1 million during the fiscal year , or 21.8 % , to $ 593.3 million , from strong growth in the residential real estate , commercial and multi-family real estate , and agricultural lending segments . mps segment 2015 fiscal year net income was $ 8.8 million compared to $ 7.7 million in fiscal 2014. this increase was primarily the result of an increase in tax-related prepaid card volume and the addition of new partners throughout the year . the average internal net interest yield mps received for its deposits was 1.45 % for the 2015 fiscal year and 1.48 % in the comparable 2014 period . overall cost of funds at metabank averaged 0.11 % during fiscal 2015 , compared to 0.14 % for 2014. tangible book value per common share decreased by $ 3.31 , or 12 % , to $ 24.60 per share at september 30 , 2015 , from $ 27.91 per share at september 30 , 2014. this decrease is primarily attributable to increases in goodwill , intangible assets and shares issued in connection with the refund advantage asset purchase . partially offsetting this reduction was an increase in retained earnings . the tangible book value per common share , excluding accumulated other comprehensive income ( “ aoci ” ) was $ 24.30 as of september 30 , 2015 , compared to $ 28.47 as of september 30 , 2014. book value per common share outstanding increased by $ 4.91 , or 17 % , to $ 33.24 per share at september 30 , 2015 , from $ 28.33 per share at september 30 , 2014. the company 's non- performing assets ( “ npas ” ) were 0.31 % of total assets at september 30 , 2015 , compared to 0.05 % at september 30 , 2014 , and 0.33 % at june 30 , 2015. the increase from september 2014 was mainly due to the previously reported downgrade of a large agriculture lending relationship . story_separator_special_tag see notes 8 , 9 and 10 to the “ notes to consolidated financial statements , ” which are included in part ii , item 8 “ financial statements and supplementary data ” of this annual report on form 10-k. 81 at september 30 , 2015 , the company 's stockholders ' equity totaled $ 271.3 million , an increase of $ 96.5 million from $ 174.8 million at september 30 , 2014. stockholders ' equity increased primarily as a result of issuances of common stock , an increase in retained earnings and unrealized income on investment securities due to market conditions . at september 30 , 2015 , the bank continued to meet regulatory requirements for classification as a well-capitalized institution . see note 15 to the “ notes to consolidated financial statements , ” which is included in part ii , item 8 “ financial statements and supplementary data ” of this annual report on form 10-k. story_separator_special_tag investment securities increased by 25 basis points on a tey basis . the yield on government-related mbs decreased 20 basis points as longer-term interest rates decreased materially throughout the fiscal year . average tey on the securities portfolio increased by 8 basis points in fiscal 2015 compared to fiscal 2014 . 84 the company 's average total deposits and interest-bearing liabilities increased $ 343.2 million , or 19.7 % , to $ 2.1 billion during fiscal 2015 from $ 1.7 billion during 2014. the increase resulted mainly from an increase in the company 's non-interest-bearing deposits and federal funds purchased . the average outstanding balance of non-interest-bearing deposits increased from $ 1.3 billion in fiscal 2014 to $ 1.6 billion in fiscal 2015. the company 's cost of total deposits and interest-bearing liabilities declined three basis points to 0.11 % during fiscal 2015 from 0.14 % during 2014 , primarily due to continued migration to low- and no-cost deposits provided by mps . provision for loan losses . in fiscal 2015 , the company recorded $ 1.5 million in provision for loan loss , compared to $ 1.2 million in 2014. the increased provision was primarily due to loan growth . management closely monitors economic developments , both regionally and nationwide , and considers these factors when assessing the appropriateness of its allowance for loan losses . w hile the current economic environment is still slightly strained , it has begun to show signs of improvement in the company 's markets . the company 's loss rates over the past three years have been very low . notwithstanding these signs of improvement , the company does not believe it is likely these low loss conditions will continue indefinitely . all of the company 's markets indirectly benefit from the current agricultural market . loss rates in the agricultural real estate and agricultural operating loan portfolios have been minimal in the past three years . low loss rates are primarily due to good weather , higher than average livestock prices and strong crop yields over the last few years , offset by lower grain prices in 2014 and 2015. overall , these factors have created positive economic conditions for most farmers in our markets during this time period . nonetheless , management expects that future losses in this portfolio could be higher than recent historical experience in that low commodity prices and high input costs have the potential to negatively impact potential yields . the allowance for loan losses for mps credits , which constitute a small portion of the company 's loans , results from an estimation process that evaluates relevant characteristics of its credit portfolio ( s ) . mps also considers other internal and external environmental factors such as changes in operations or personnel and economic events that may affect the adequacy of the allowance for credit losses . adjustments to the allowance for loan losses are recorded periodically based on the result of this estimation process . the exact methodology to determine the allowance for loan losses for each program will not be identical . each program may have differing attributes including such factors as levels of risk , definitions of delinquency and loss , inclusion/exclusion of credit bureau criteria , roll rate migration dynamics and other factors . similarly , the additional capital required to offset the increased risk in subprime lending activities may vary by credit program . each program is evaluated separately . management believes that , based on a detailed review of the loan portfolio , historic loan losses , current economic conditions , the size of the loan portfolio and other factors , the current level of the allowance for loan losses at september 30 , 2015 , reflects an appropriate allowance against probable losses from the loan portfolio . although the company maintains its allowance for loan losses at a level that it considers to be adequate , investors and others are cautioned that there can be no assurance that future losses will not exceed estimated amounts , or that additional provisions for loan losses will not be required in future periods . in addition , the company 's determination of the allowance for loan losses is subject to review by its regulatory agencies , the occ and the federal reserve , which can require the establishment of additional general or specific allowances . 85 non‑interest income . non-interest income increased by $ 6.4 million , or 12.4 % , to $ 58.2 million for fiscal 2015 from $ 51.7 million for 2014 primarily due to an increase in fees earned on prepaid debit cards , credit products and other payment systems products of $ 5.8 million due to the addition of multiple new partners and growth in existing mps programs . loan fees also increased by $ 1.4 million from retail loan growth and the addition of afs/ibex . these increases in non-interest income were partially offset by an increased loss on the securities available for sale of $ 1.7 million sold primarily to fund the afs/ibex transaction . non-interest expense . non-interest expense increased by $ 18.3 million , or 23.4 % , to $ 96.5
| results of operations the company 's results of operations are dependent on net interest income , provision for loan losses , non-interest income , non-interest expense , income tax expense and other comprehensive income or loss . net interest income is the difference , or spread , between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities . the interest rate spread is affected by regulatory , economic and competitive factors that influence interest rates , loan demand and deposit flows . notwithstanding that a significant amount of the company 's deposits , primarily those attributable to mps , pay low rates of interest or none at all , the company , like other financial institutions , is subject to interest rate risk to the extent that its interest-earning assets mature or reprice at different times , or on a different basis , than its interest-bearing liabilities . the company 's non-interest income is derived primarily from prepaid card , credit products , atm fees attributable to mps and fees charged on bank loans and transaction accounts . non-interest income is also derived from net gains on the sale of securities available for sale as well as the company 's holdings of bank-owned life insurance . this income is offset by expenses , such as compensation and occupancy expenses associated with additional personnel and office locations as well as card processing expenses attributable to mps . non-interest expense is also impacted by acquisition-related expenses , occupancy and equipment expenses , regulatory expenses , and legal and consulting expenses . 82 average balances , interest rates and yields the following table presents , for the periods indicated , the total dollar amount of interest income from average interest-earning assets and the resulting yields , as well as the interest expense on average interest-bearing liabilities , expressed both in dollars and rates . only the yield/rate have tax equivalent adjustments .
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our total number of lots controlled increased in the quarter ended october 31 , 2018 , as compared to the same period of the prior year , which is the fourth consecutive quarter for which we have experienced a year-over-year quarterly increase . we believe continued growth in lots controlled should ultimately lead to community count growth and our fiscal 2017 and 2018 financing transactions have provided us with the long term capital needed to implement our investment strategy to grow our business . however , there is typically a significant time lag from when we first control lots until the time that we open a community for sale . our cash position in fiscal 2018 allowed us to spend $ 566.8 million on land purchases and land development during fiscal 2018 , along with using $ 211.4 million of cash to pay down debt , and still have $ 187.9 million of homebuilding cash and cash equivalents as of october 31 , 2018. we continue to see opportunities to purchase land at prices that make economic sense in light of our current sales prices and sales pace and plan to continue actively pursuing such land acquisitions . new land purchases at pricing that we believe will generate appropriate investment returns and drive greater operating efficiencies are needed to return to sustained profitability . the factors discussed above for fiscal 2016 and 2017 led to a decrease in our community count from 130 at october 31 , 2017 to 123 at october 31 , 2018 , and as a result , for the year ended october 31 , 2018 we experienced mixed operating results compared to the prior year . more specifically : ● net contracts per average active selling community increased slightly to 35.9 for the year ended october 31 , 2018 compared to 35.1 in the prior year . ● active selling communities decreased 5.4 % over last year , and our average active selling communities decreased by 12.2 % over last year . net contracts decreased 10.1 % for the year ended october 31 , 2018 , compared to the prior year . ● for the year ended october 31 , 2018 , sale of homes revenues decreased 18.5 % as compared to the prior year , as a result of a 13.5 % decrease in deliveries , primarily due to our decreased community count . ● gross margin percentage increased from 13.2 % for the year ended october 31 , 2017 to 15.2 % for the year ended october 31 , 2018. gross margin percentage , before cost of sales interest expense and land charges , increased from 17.2 % for the year ended october 31 , 2017 to 18.4 % for the year ended october 31 , 2018. the improvements in both gross margin percentage and gross margin percentage , before cost of sales interest expense and land charges , are primarily the result of the mix of communities delivering , as well as the benefit of a one-time $ 6.3 million credit related to a land development reimbursement from a municipality in california . ● selling , general and administrative costs ( including corporate general and administrative expenses ) decreased $ 26.9 million for the year ended october 31 , 2018 as compared to the prior year . as a percentage of total revenue , such costs increased from 10.4 % for the year ended october 31 , 2017 to 11.5 % for the year ended october 31 , 2018. the dollar decrease for year ended october 31 , 2018 was primarily due to the reduction of our warranty reserves , as a result of our annual actuarial analysis , along with an adjustment to our insurance reserves in the third quarter of fiscal 2018 , resulting from a recent legal settlement . there was also an increase in management fees received from our joint ventures , due to increased unconsolidated joint venture deliveries during the period , and $ 12.5 million of additional reserves recorded in fiscal 2017 related to the grandview litigation discussed in note 18 to the consolidated financial statements . partially offsetting the decrease for the year ended october 31 , 2018 , were higher stock compensation costs and legal ( including litigation ) fees incurred related to our fiscal 2018 financing transactions . we received insurance coverage , less the deductible , for these litigation costs . also offsetting the decreased costs for the year ended october 31 , 2018 was rent expense related to ( i ) the sale and leaseback of our former corporate headquarters building for the period from november 2017 to february 2018 and ( ii ) rent on our new headquarters building . the increase in selling , general and administrative costs ( including corporate general and administrative expenses ) as a percentage of total revenue for the year ended october 31 , 2018 was mainly due to the decrease in total revenues for fiscal 2018 as compared to the prior year . 27 when comparing sequentially from the third quarter of fiscal 2018 to the fourth quarter of fiscal 2018 , our gross margin percentage increased from 15.4 % to 16.5 % and our gross margin percentage , before cost of sales interest expense and land charges , increased from 18.4 % to 19.2 % . our gross margin percentage , and gross margin percentage , before cost of sales interest expense and land charges , increased primarily as a result of product mix , as well as the benefit of a one-time $ 6.3 million credit related to a land development reimbursement from a municipality in california . story_separator_special_tag our inventories consist of the following three components : ( 1 ) sold and unsold homes and lots under development , which includes all construction , land , capitalized interest and land development costs related to started homes and land under development in our active communities ; ( 2 ) land and land options held for future development or sale , which includes all costs related to land in our communities in planning or mothballed communities ; and ( 3 ) consolidated inventory not owned , which includes all costs related to specific performance options , variable interest entities and other options , which consists primarily of model homes financed with an investor and inventory related to land banking arrangements accounted for as financings . 28 we decide to mothball ( or stop development on ) certain communities when we determine that the current performance does not justify further investment at the time . when we decide to mothball a community , the inventory is reclassified on our consolidated balance sheets from “ sold and unsold homes and lots under development ” to “ land and land options held for future development or sale. ” as of october 31 , 2018 , the net book value associated with our 18 mothballed communities was $ 24.5 million , net of impairment charges recorded in prior periods of $ 186.1 million . we regularly review communities to determine if mothballing is appropriate . during fiscal 2018 , we did not mothball any communities , but we sold two previously mothballed communities and re-activated two previously mothballed communities . from time to time we enter into option agreements that include specific performance requirements , whereby we are required to purchase a minimum number of lots . because of our obligation to purchase these lots , for accounting purposes in accordance with asc 360-20-40-38 , we are required to record this inventory on our consolidated balance sheets . as of october 31 , 2018 , we had no specific performance options recorded on our consolidated balance sheets . consolidated inventory not owned also consists of other options that were included on our consolidated balance sheets in accordance with accounting principles generally accepted in the united states of america ( “ us gaap ” ) . we sell and lease back certain of our model homes with the right to participate in the potential profit when each home is sold to a third party at the end of the respective lease . as a result of our continued involvement , for accounting purposes in accordance with asc 360-20-40-38 , these sale and leaseback transactions are considered a financing rather than a sale . therefore , for purposes of our consolidated balance sheets , at october 31 , 2018 , inventory of $ 50.5 million was recorded to “ consolidated inventory not owned , ” with a corresponding amount of $ 43.9 million recorded to “ liabilities from inventory not owned. ” we have land banking arrangements , whereby we sell our land parcels to the land banker and they provide us an option to purchase back finished lots on a quarterly basis . because of our options to repurchase these parcels , for accounting purposes , in accordance with asc 360-20-40-38 , these transactions are considered financings rather than sales . for purposes of our consolidated balance sheets , at october 31 , 2018 , inventory of $ 37.4 million was recorded as “ consolidated inventory not owned , ” with a corresponding amount of $ 19.5 million recorded to “ liabilities from inventory not owned ” for the amount of net cash received from the transactions . the recoverability of inventories and other long-lived assets is assessed in accordance with the provisions of asc 360-10 , “ property , plant and equipment − overall ” ( “ asc 360-10 ” ) . asc 360-10 requires long-lived assets , including inventories , held for development to be evaluated for impairment based on undiscounted future cash flows of the assets at the lowest level for which there are identifiable cash flows . as such , we evaluate inventories for impairment at the individual community level , the lowest level of discrete cash flows that we measure . we evaluate inventories of communities under development and held for future development for impairment when indicators of potential impairment are present . indicators of impairment include , but are not limited to , decreases in local housing market values , decreases in gross margins or sales absorption rates , decreases in net sales prices ( base sales price net of sales incentives ) , or actual or projected operating or cash flow losses . the assessment of communities for indication of impairment is performed quarterly . as part of this process , we prepare detailed budgets for all of our communities at least semi-annually and identify those communities with a projected operating loss . for those communities with projected losses , we estimate the remaining undiscounted future cash flows and compare those to the carrying value of the community , to determine if the carrying value of the asset is recoverable . the projected operating profits , losses , or cash flows of each community can be significantly impacted by our estimates of the following : ● future base selling prices ; ● future home sales incentives ; ● future home construction and land development costs ; and ● future sales absorption pace and cancellation rates . 29 these estimates are dependent upon specific market conditions for each community . while we consider available information to determine what we believe to be our best estimates as of the end of a quarterly reporting period , these estimates are subject to change in future reporting periods as facts and circumstances change .
| results of operations total revenues compared to the prior period , revenues increased ( decreased ) as follows : replace_table_token_11_th 39 homebuilding sale of homes revenues decreased $ 433.8 million , or 18.5 % , for the year ended october 31 , 2018 , decreased $ 260.8 million , or 10.0 % , for the year ended october 31 , 2017 , and increased $ 512.7 million , or 24.6 % , for the year ended october 31 , 2016 as compared to the same period of the prior year . the decreased revenues in fiscal 2018 were primarily due to the number of home deliveries decreasing 13.5 % , and the average price per home decreasing to $ 393,280 in fiscal 2018 from $ 417,714 in fiscal 2017. the decrease in deliveries in fiscal 2018 was primarily the result of a reduction in community count in fiscal 2018 by 5.4 % . the decreased revenues in fiscal 2017 were primarily due to the number of home deliveries decreasing 13.3 % , partially offset by the average price per home increasing to $ 417,714 in fiscal 2017 from $ 402,350 in fiscal 2016. the decrease in fiscal 2017 deliveries was primarily the result of a reduction in community count by 22.2 % . the increased revenues in fiscal 2016 were primarily due to the 17.4 % increase in deliveries , as well as the average price per home increasing to $ 402,350 in fiscal 2016 from $ 379,177 in fiscal 2015. for fiscal 2018 , the fluctuations in average prices were primarily the result of geographic and community mix of our deliveries and home price decreases ( which we increase or decrease in communities depending on the respective community 's performance ) , partially offset by price increases in some communities primarily in the west . for fiscal 2017 , the fluctuations in average prices were primarily the result of the geographic and community mix of our deliveries , along with our ability to raise home prices in certain communities .
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valley 's pci loan portfolio totaling $ 6.6 billion at december 31 , 2019 primarily consists of loans acquired in business combinations subsequent to 2011. the pci loans are initially recorded at fair value ( as determined by the present value of expected future cash flows ) with no valuation allowance ( i.e. , the allowance for loan losses ) , and aggregated and accounted for as pools of loans based on common risk characteristics . we estimate the undiscounted cash flows expected to be collected by incorporating several key assumptions , including probability of default , loss given default , and the amount of actual prepayments after the acquisition dates . the difference between the undiscounted cash flows expected at acquisition and the initial carrying amount ( fair value ) of the pci loans , or the “ accretable yield , ” is recognized as interest income utilizing the level-yield method over the life of each pool . contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition , or the “ non-accretable difference. ” the non-accretable difference , which is neither accreted into income nor recorded on our consolidated balance sheet , reflects estimated future credit losses and uncollectable contractual interest expected to be incurred over the life of the loans . prepayments affect the estimated life of pci loans and could change the amount of interest income , and possibly principal , expected to be collected . reclassifications of the non-accretable difference to the accretable yield may occur subsequent to the loan acquisition dates due to increases in our estimate of the expected cash flows of the loan pools . on a quarterly , or more frequent basis , the bank evaluates the remaining contractual required payments due and estimates of cash flows expected to be collected for the underlying loans of each pci loan pool . these evaluations require the continued use of key assumptions and estimates necessary in forecasting the estimated cash flows . we attempt to ensure the forecasted expectations are reasonable based on the information currently available ; however , due to the uncertainties inherent in the use of estimates , actual cash flow results may differ from our forecast and the differences may be significant . to mitigate such differences , we carefully prepare and review the assumptions utilized in forecasting estimated cash flows . pci loans that may have been classified as non-performing loans by an acquired bank are no longer classified as non-performing because these loans are accounted for on a pooled basis . management 's judgment is required in classifying loans in pools as performing loans , and is dependent on having a reasonable expectation about the timing and amount of the pool cash flows to be collected , even if certain loans within the pool are contractually past due . replace_table_token_38_th see notes 1 and 5 to the consolidated financial statements , and the `` loan portfolio '' section included in this md & a for further pci loan details , including net increases and decreases in expected cash flows subsequent to the applicable pci loan acquisition dates impacting the accretable yield in 2019 and 2018 . goodwill and other intangible assets . we record all assets , liabilities , and non-controlling interests in the acquiree in purchase acquisitions , including goodwill and other intangible assets , at fair value as of the acquisition date , and expense all acquisition related costs as incurred as required by asc topic 805 , “ business combinations. ” goodwill totaling $ 1.4 billion at december 31 , 2019 is not amortized but is subject to annual tests for impairment or more often , if events or circumstances indicate it may be impaired . other intangible assets totaling $ 86.8 million at december 31 , 2019 are amortized over their estimated useful lives and are subject to impairment tests if events or circumstances indicate a possible inability to realize the carrying amount . such evaluation of other intangible assets is based on undiscounted cash flow projections . the initial recording of goodwill and other intangible assets requires subjective judgments concerning estimates of the fair value of the acquired assets and assumed liabilities . prior to new accounting guidance effective january 1 , 2020 , the goodwill impairment analysis was generally a two-step test . during 2019 , valley elected to perform step one of the two-step goodwill impairment test for all of its reporting units but may choose to perform an optional qualitative assessment allowable for one or more units in future periods to determine whether it is necessary to perform a quantitative goodwill impairment test . step one compares the fair value of the reporting unit with its carrying amount , including goodwill . if the fair value of the reporting unit exceeds its carrying amount , goodwill of the reporting unit is considered not impaired ; however , if the carrying amount of the reporting unit exceeds its fair value , an additional step must be performed . that additional step compares the implied fair value of the reporting unit 's goodwill with the carrying amount of that goodwill . the implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination , i.e. , by measuring the excess of the estimated fair value of the reporting unit , as determined in the first step above , over the aggregate estimated fair values of the individual assets , liabilities , and identifiable intangibles , as if the reporting unit was being acquired in a business combination at the impairment test date . story_separator_special_tag an impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value . the loss establishes a new basis in the goodwill and subsequent reversal of goodwill impairment losses is not permitted . based upon valley 's 2019 goodwill impairment testing , the fair values of its four reporting units , wealth management , consumer lending , commercial lending , and investment management , were in excess of their carrying values . however , due to lower yields on our investment portfolio and reinvestment of normal repayments from investment securities into new loan originations , our investment management segment experienced downward pressure on its fair value . while not expected at this time , we may be required to record a charge to earnings should there be a deficiency in our estimated fair value of the investment management and other reporting units during our subsequent annual ( or more frequent ) impairment tests . see the `` business segments '' section below for more information regarding our business segments/reporting units . fair value may be determined using market prices , comparison to similar assets , market multiples , certain discounted cash flow analyses and other determinants . estimated cash flows may extend far into the future and , by their nature , are difficult to determine over an extended timeframe . factors that may materially affect the estimates include , among others , competitive forces , customer behaviors and attrition , changes in revenue growth trends , cost structures and technology , and changes in discount rates , terminal values , and specific industry or market sector conditions . to assist in assessing the impact of potential goodwill or other intangible assets impairment charges at december 31 , 2019 , the impact of a five percent impairment charge on these intangible assets would result in a reduction in pre-tax income of approximately $ 73.0 million . note 9 to the consolidated financial statements for additional information regarding goodwill and other intangible assets . income taxes . we are subject to the income tax laws of the u.s. , its states and municipalities . the income tax laws of the jurisdictions in which we operate are complex and subject to different interpretations by the taxpayer and the relevant government taxing authorities . in establishing a provision for income tax expense , we must make judgments and interpretations about the application of these inherently complex tax laws to our business activities , as well as the timing of when certain items may affect taxable income . our interpretations may be subject to review during examination by taxing authorities and disputes may arise over the respective tax positions . we attempt to resolve these disputes during the tax examination and audit process and ultimately through the court systems when applicable . we monitor relevant tax authorities and revise our estimate of accrued income taxes due to changes in income tax laws and their interpretation by the courts and regulatory authorities on a quarterly basis . revisions of our estimate of accrued income taxes also may result from our own income tax planning and from the resolution of income tax controversies . such revisions in our estimates may be material to our operating results for any given quarter . the provision for income taxes is composed of current and deferred taxes . deferred taxes arise from differences between assets and liabilities measured for financial reporting versus income tax return purposes . deferred tax assets are recognized if , in replace_table_token_39_th management 's judgment , their realizability is determined to be more likely than not . we perform regular reviews to ascertain the realizability of our deferred tax assets . these reviews include management 's estimates and assumptions regarding future taxable income , which also incorporate various tax planning strategies . in connection with these reviews , if we determine that a portion of the deferred tax asset is not realizable , a valuation allowance is established . management determined it is more likely than not that valley will realize its net deferred tax assets , except for immaterial valuation allowances , as of december 31 , 2019 and 2018 . during 2018 , we recognized a $ 2.3 million tax benefit related to the adjustment of the tax cuts and jobs act of 2017 ( tax act ) provisional amounts in our final 2017 tax returns completed in the fourth quarter 2018. in the fourth quarter 2017 , we re-measured and reduced our deferred tax assets by $ 15.4 million for the estimated impact of the tax act , which decreased our federal income tax rate from 35 percent to 21 percent effective january 1 , 2018. the adjustments of $ 2.3 million and $ 15.4 million to deferred tax assets were reflected as credits and charges , respectively , to our income tax expense for 2018 and 2017 , respectively . we also maintain a reserve related to certain tax positions that management believes contain an element of uncertainty . an uncertain tax position is measured based on the largest amount of benefit that management believes is more likely than not to be realized . during 2019 , our income tax expense reflected an $ 31.1 million increase to our tax provision related to reserve for uncertain tax liability positions at december 31 , 2019 as compared to a $ 3.3 million net tax benefit in 2018 related to the reduction of reserves caused by the expiration of the statute of limitations for certain tax positions . see notes 1 and 14 to the consolidated financial statements and the `` executive summary '' and “ income taxes ” sections in this md & a for an additional discussion on the accounting for income taxes . new authoritative accounting guidance . see note 1 of the consolidated financial statements for a description of recent accounting pronouncements including the dates of adoption and the anticipated effect on our
| annual results . operating environment . during 2019 , real gross domestic product expanded 2.3 percent as compared to 2.9 percent in 2018 due , in part , to weaker business fixed investment and a slower pace of services consumption by households . the federal funds target rate was increased five times by the federal open market committee ( fomc ) from mid-december 2017 to mid-december 2018. during 2019 , the fomc held the target range of 2.25 to 2.50 percent until the end of july 2019 , and then cut the target three times to a range of 1.50 to 1.75 percent during the second half of 2019. in early march 2020 , the fomc cut interest rates by 50 basis points to a target range of 1.00 to 1.25 percent in an effort to contain the coronavirus 's economic fallout . the interest rate cut was the first emergency rate move since the 2008 financial crisis . the 10-year u.s. treasury note yield ended 2019 at 1.92 percent , 77 basis points lower compared with december 31 , 2018. the spread between the 2- and 10-year u.s. treasury note yields ended the year at 0.34 percent , 13 basis points higher compared to the end of 2018. however , this spread has contracted during early march 2020 as compared to december 31 , 2019 and could remain that way for an extended period due to current economic concerns . for all commercial banks in the u.s. , loans and leases grew approximately 4.2 percent from december 31 , 2018 to december 31 , 2019. for the industry , banks reported that demand for most commercial loan products had declined compared to the end of 2018. the decline was driven by weakening demand among small firms for commercial and industrial loans and tightening of underwriting standards , particularly for commercial real estate loans .
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we also have audited , in accordance with the standards of the public company accounting oversight board ( united states ) , the statements of assets , liabilities , and trust corpus of enduro royalty trust as of december 31 , 2015 and 2014 , and the related statements of distributable income and changes in trust corpus for each of the three years in the period ended december 31 , 2015 of enduro royalty trust , and our report dated march 10 , 2016 expressed an unqualified opinion thereon . ernst & young llp fort worth , texas march 10 , 2016 51 item 9b . other information . none . part iii item 10. directors , executive officers and corporate governance . the trust has no directors or executive officers . the trustee is a corporate trustee that may be removed by the affirmative vote of the holders of not less than a majority of the outstanding trust units at a meeting at which a quorum is present . section 16 ( a ) beneficial ownership reporting compliance the trust story_separator_special_tag this discussion contains forward-looking statements . please refer to forward-looking statements for an explanation of these types of statements . overview enduro royalty trust is a statutory trust created in may 2011 and its initial public offering was completed in november 2011. the trust 's only asset and source of income is the net profits interest , which entitles the trust to receive 80 % of the net profits from oil and natural gas production from the underlying properties . the net profits interest is passive in nature and neither the trust nor the trustee has any management control over or responsibility for costs relating to the operation of the underlying properties . additionally , third parties operate substantially all of the wells on the underlying properties and , therefore , enduro is not in a position to control the timing of development efforts , associated costs , or the rate of production of the reserves . the trust is required to make monthly cash distributions of substantially all of its monthly cash receipts , after deducting the trust 's administrative expenses , to holders of record ( generally the last business day of each calendar month ) on or before the 10 th business day after the record date . the net profits interest is entitled to a share of the profits from and after july 1 , 2011 attributable to production occurring on or after june 1 , 2011. the amount of trust revenues and cash distributions to trust unitholders depends on , among other things : · oil and natural gas sales prices ; · volumes of oil and natural gas produced and sold attributable to the underlying properties ; · production and development costs ; · price differentials ; · potential reductions or suspensions of production ; · the amount and timing of trust administrative expenses ; and · the establishment , increase , or decrease of reserves for approved development expenses or future liabilities of the trust . generally , enduro receives cash payment for oil production 30 to 60 days after it is produced and for natural gas production 60 to 90 days after it is produced . 2015 recap and 2016 outlook oil and natural gas prices declined significantly in the second half of 2014 and have remained low , negatively impacting the fair value of the net profits interest , revenues and distributable income available to unitholders , and development activity in 2015. the average nymex oil price for the production months included in 2015 distributions decreased approximately 40 % from the prior year , significantly decreasing the revenues and distributable income available to unitholders in 2015. since the last distribution paid in 2015 , which primarily represented oil production during the month of august 2015 , average nymex oil prices have further deteriorated , declining by approximately 49 % from the 2015 average ( based on production months included in 2015 distributions ) . the continued decline in prices has and will continue to negatively affect the amount of cash flow available for distribution to the trust unitholders in 2016. during the third quarter of 2015 , the trust recorded an impairment charge of $ 367.3 million due to the continued declines in commodity prices and the resulting negative effects on estimated future cash flows from the net profits interest and on the reserves attributable to the trust 's interest in the underlying properties . the impairment resulted in a non-cash charge to trust corpus and did not affect the trust 's distributable income . it is reasonably possible that lower prices may change the estimates of future net cash flows attributable to the underlying properties resulting in the need to further impair the carrying value of the net profits interest in the future . despite the decline in oil prices , oil sales volumes included in 2015 distributions increased 4 % from the prior year primarily as a result of new production from the 2014 rocker b drilling program . during 2014 , enduro participated in 20 gross well proposals received from pioneer natural resources ( pioneer ) for the rocker b drilling program in the wolfcamp play in the midland basin . although the majority of development expenses associated with this drilling program were included in 2014 distributions , first production payments from 12 wells were not included until distributions made during the first and second quarters of 2015. the new production receipts from these 12 wells and a full year of cash receipts from the remaining eight wells significantly contributed to the trust 's increase in oil production in 2015. in the current commodity price environment , development activity has significantly decreased and , as a result , the trust 's oil production in 2016 is predicted to decrease as no new production is expected to offset natural declines . story_separator_special_tag the trust withheld $ 0.8 million and paid $ 0.6 million for general and administrative expenses during the year ended december 31 , 2014. expenses paid during the period primarily consisted of fees for the preparation of 2013 tax information for unitholders , preparation of the trust 's reserve report and annual report on form 10-k for 2013 , 2013 financial statement audit fees , preparation of the trust 's 2014 monthly press releases and quarterly reports on form 10-q , trustee fees , and new york stock exchange listing fees . for the year ended december 31 , 2013 , the trust withheld $ 0.6 million and paid $ 0.7 million for general and administrative expenses . 34 liquidity and capital resources the trust 's principal sources of liquidity are cash flow generated from the net profits interest and borrowing capacity under the letter of credit described below . other than trust administrative expenses , including any reserves established by the trustee for future liabilities , the trust 's only use of cash is for distributions to trust unitholders . available funds are the excess cash , if any , received by the trust from the net profits interest and other sources ( such as interest earned on any amounts reserved by the trustee ) in any given month , over the trust 's expenses paid for that month . available funds are reduced by any cash the trustee determines to hold as a reserve against future expenses . the trustee may create a cash reserve to pay for future liabilities of the trust . if the trustee determines that the cash on hand and the cash to be received are , or will be , insufficient to cover the trust 's liabilities , the trustee may authorize the trust to borrow money to pay administrative or incidental expenses of the trust that exceed cash held by the trust . the trustee may authorize the trust to borrow from any person , including the trustee or the delaware trustee or an affiliate thereof , although none of the trustee , the delaware trustee or any affiliate thereof intends to lend funds to the trust . the trustee may also cause the trust to mortgage its assets to secure payment of the indebtedness . the terms of such indebtedness and security interest , if funds were to be loaned by the entity serving as trustee or delaware trustee or an affiliate thereof , would be similar to the terms which such entity would grant to a similarly situated commercial customer with whom it did not have a fiduciary relationship . in addition , enduro has provided the trust with a $ 1 million letter of credit to be used by the trust if its cash on hand ( including available cash reserves ) is insufficient to pay ordinary course administrative expenses . further , if the trust requires more than the $ 1 million under the letter of credit to pay administrative expenses , enduro has agreed to loan funds to the trust necessary to pay such expenses . any loan made by enduro to the trust would be evidenced by a written promissory note , be on an unsecured basis , and have terms that are no less favorable to enduro than those that would be obtained in an arm 's length transaction between enduro and an unaffiliated third party . if the trust borrows funds or draws on the letter of credit , no further distributions will be made to trust unitholders until such amounts borrowed or drawn are repaid . except for the foregoing , the trust has no source of liquidity or capital resources . the trustee has no current plans to authorize the trust to borrow money . at december 31 , 2015 and 2014 , the trust held cash reserves of $ 107,851 and $ 249,068 , respectively , for future trust expenses . since its formation , the trust has not borrowed any funds and no amounts have been drawn on the letter of credit . in february 2016 , enduro established a $ 750,000 reserve from that month 's net profits interest calculation for approved 2016 development expenses . the trust , in its discretion , also withheld $ 250,000 for anticipated future liabilities of the trust . cash held by the trustee as a reserve against future liabilities or for distribution at the next distribution date may be held in a noninterest-bearing account or may be invested in : · interest-bearing obligations of the united states government ; · money market funds that invest only in united states government securities ; · repurchase agreements secured by interest-bearing obligations of the united states government ; or · bank certificates of deposit . in prior periods , the amounts received by enduro from hedge contract counterparties upon settlement of the hedge contracts reduced the operating expenses related to the underlying properties in calculating income from the net profits interest in the first and second quarters of 2014 and the year ended december 31 , 2013. enduro has not entered into any hedge contracts relating to oil and natural gas volumes expected to be produced after 2013 and the terms of the conveyance prohibit enduro from entering into new hedging arrangements burdening the trust . the trust pays the trustee an administrative fee of $ 200,000 per year . the trust pays the delaware trustee an annual fee of $ 2,000. the trust also incurs , either directly or as a reimbursement to the trustee , legal , accounting , tax and engineering fees , printing costs and other expenses that are deducted by the trust before distributions are made to trust unitholders . the trust also is responsible for paying other expenses incurred as a result of being a publicly traded entity , including costs associated with annual and quarterly reports to trust unitholders , tax return and form 1099 preparation and distribution , nyse listing fees , independent auditor fees and registrar and transfer agent fees .
| results of operations the following table displays oil and natural gas sales volumes and average prices ( excluding the effects of the hedging arrangements discussed in note 5 of the notes to financial statements in item 8 of this form 10-k ) from the underlying properties , representing the amounts included in the net profits calculation for the distributions paid during the years ended december 31 , 2015 , 2014 and 2013. replace_table_token_12_th 31 computation of net profits income received by the trust in connection with the closing of the initial public offering , on november 8 , 2011 , enduro contributed the net profits interest to the trust in exchange for 33,000,000 newly issued trust units . the net profits interest entitles the trust to receive 80 % of the net profits from the sale and production of oil and natural gas attributable to the underlying properties that are produced during the term of the conveyance , which commenced on july 1 , 2011. the trust 's net profits income consists of monthly net profits attributable to the net profits interest . net profits income for the years ended december 31 , 2015 , 2014 , and 2013 were determined as shown in the following table : replace_table_token_13_th the following table displays oil and natural gas sales volumes and average prices ( excluding the effects of the hedging arrangements discussed in note 5 of the notes to financial statements in item 8 of this form 10-k ) from the underlying properties , representing the amounts included in the net profits calculation for distributions paid during the years ended december 31 , 2015 , 2014 , and 2013 : replace_table_token_14_th 32 years ended december 31 , 2015 and 2014 income from net profits interest for the year ended december 31 , 2015 is calculated from the following : · oil sales primarily related to oil produced from the underlying properties from september 2014 through
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we operate and elected to be taxed as a reit , commencing with our taxable year ended december 31 , 2012. we generally will not be subject to u.s. federal income taxes on our taxable income to the extent that we annually , in accordance with the reit regulations , distribute all of our net taxable income to stockholders and maintain our intended qualification as a reit . we also intend to operate our business in a manner that will permit us to maintain our exemption from registration under the 1940 act . our consolidated financial statements include our accounts , those of our wholly owned taxable reit subsidiary or `` trs '' and a trust that meets the definition of a variable interest entity ( `` vie '' ) related to the acquisition of residential whole-loans in which we are the primary beneficiary . the trust has issued trust certificates to us which are collateralized by pools of residential mortgage loans held by the trust . we include the underlying residential whole-loans owned by the trust in residential whole-loans at fair value on our consolidated balance sheets and have eliminated the trust certificates in consolidation . we are externally managed and advised by our manager , an sec-registered investment advisor and a wholly-owned subsidiary of legg mason , inc. our manager is responsible for administering our business activities and our day-to-day operations , subject to the supervision of our board of directors . on april 3 , 2014 , we entered into a binding agreement with a group of underwriters to sell an incremental 13.0 million shares of our common stock , which closed on april 9 , 2014. the agreement provided the underwriters with the right to purchase an additional 1.95 million shares ( 15 % of 13.0 million ) during the succeeding thirty ( 30 ) days . the shares were offered to the market at a price of $ 14.85 per share and the underwriters exercised a portion of their option and purchased an incremental 1.0 million shares on may 2 , 2014 , which closed on may 7 , 2014. we received net proceeds of approximately $ 205.4 million after subtracting underwriting commissions and offering expenses of approximately $ 2.9 million . on april 3 , 2014 , we also entered into an agreement to sell 650,000 shares of our common stock , for $ 14.85 per share , to our manager in a private placement for an aggregate offering price of approximately $ 9.7 million , which closed on april 9 , 2014. we have invested the proceeds of our ipo , concurrent private placements and follow-on public offerings in agency rmbs , including mortgage pass-through certificates , agency derivatives , agency interest-only strips , and agency cmos , non-agency rmbs as well as agency and non-agency cmbs , non u.s. cmbs , abs and residential whole-loans . we have also used `` to-be-announced '' forward contracts , or tbas , in order to invest in agency rmbs . pursuant to these tbas , we agree to purchase ( or deliver ) , for future settlement , agency rmbs with certain principal and interest terms . at december 31 , 2014 , our portfolio was comprised of approximately $ 3.2 billion of agency rmbs ( including approximately $ 257.6 million of agency interest-only strips ) , approximately $ 671.0 million of non-agency rmbs ( including approximately $ 74.1 million of non-agency interest-only strips ) , approximately $ 44.2 million agency cmbs ( ( including approximately $ 18.8 million of agency cmbs interest-only strips ) , approximately $ 393.8 million non-agency cmbs , approximately $ 108.9 million of other securities and approximately $ 7.2 million of residential whole-loans , exclusive of linked transactions . in addition , at december 31 , 2014 , our linked transactions included approximately $ 8.2 million of non-agency rmbs , approximately $ 38.6 million of non-agency cmbs ( including non u.s. cmbs ) and approximately $ 5.7 million of other securities . 55 we use leverage , currently comprised of borrowings under repurchase agreements , as part of our business strategy in order to increase potential returns to stockholders . we accomplish this by borrowing against existing mbs and other securities through repurchase agreements . there are no limits on the maximum amount of leverage that we may use , and we are not required to maintain any particular debt-to-equity leverage ratio under our charter . we may also change our financing strategy and leverage without the consent of stockholders . as of december 31 , 2014 , we had entered into master repurchase agreements with 24 counterparties . as of december 31 , 2014 , we had approximately $ 3.9 billion of borrowings , including borrowings on linked transactions , outstanding under our repurchase agreements collateralized by approximately $ 4.4 billion of mbs and other securities . the balance outstanding at december 31 , 2014 includes approximately $ 31.9 million related to linked transactions collateralized by approximately $ 52.5 million of mbs and other securities and $ 4.9 million of borrowings related to residential whole-loans owned through trust certificates which are eliminated upon consolidation of approximately $ 7.2 million . we have entered into swaps to effectively fix the interest rate of our borrowings ( for the life of the swap ) ; net of variable-rate payment swaps , of approximately $ 1.4 billion , under our repurchase agreements , excluding forward starting swaps of $ 2.2 billion . in addition , as of year-end , we also owned swaptions on approximately an incremental $ 105.0 million of borrowings . as of december 31 , 2014 , our aggregate debt-to-equity ratio was approximately 6.3 to 1 , including repurchase agreements on linked transactions and 6.2 to 1 , excluding repurchase agreements on linked transactions . recent market conditions and strategy our business is affected by general u.s. residential real estate fundamentals , domestic and foreign commercial real estate fundamentals and the overall u.s. and international economic environment . story_separator_special_tag these loan modification and refinance programs , future u.s. federal , state and or local legislative or regulatory actions that result in the modification of outstanding mortgage loans , as well as changes in the requirements necessary to qualify for refinancing mortgage loans with fnma , fhlmc or gnma , may adversely affect the value of , and the returns on , residential mortgage loans , rmbs , real estate-related securities and various other asset classes in which we may invest . in addition to the foregoing , the u.s. congress and or various states and local legislators may enact additional legislation or regulatory action , such as the recently enacted qualifying mortgage requirements under the dodd-frank act , to address the current economic crisis or for other purposes that could have a material adverse effect on lending in general and our ability to execute our business strategies . in particular , we believe that while the recently enacted qualifying mortgage requirements under the dodd-frank act may present an opportunity to acquire and securitize certain `` non-qualifying '' or non-qm mortgages , it is likely to reduce the overall production of new mortgages , thereby negatively impacting the general supply of rmbs . 57 on january 4 , 2012 , the u.s. federal reserve board released a report titled `` the u.s. housing market : current conditions and policy considerations '' to congress providing a framework for thinking about certain issues and tradeoffs that policy makers might consider . in march 2014 , senate banking committee chairman tim johnson and ranking member mike crapo announced an agreement on their own version of gse reform which would eventually replace fnma and fhlmc with a new system . it is unclear how future legislation may impact the housing finance market and the investing environment for agency securities as the method of reform is undecided and has not yet been defined by the regulators . critical accounting policies the consolidated financial statements include our accounts , those of our consolidated subsidiary , our wholly owned taxable reit subsidiary or `` trs '' and a variable interest entity ( `` vie '' ) related to the acquisition of residential whole-loans 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 . we have identified what we believe will be our most critical accounting policies to be the following : investments we elected the fair value option for all of our mbs , other securities and whole-loans at the date of purchase , which permits us to measure these securities at fair value with the change in fair value included as a component of earnings . although we have elected the fair value option for our mbs , other securities and whole-loans , we separately compute interest income on our mbs , other securities and whole-loans under the prescribed method based on the nature of the investment . as such , premiums and discounts are amortized or accreted into interest income and are included in interest income in the consolidated statements of operations . 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 ) . in accordance with gaap , we are required to provide enhanced disclosures regarding instruments in the level iii category ( which require significant management judgment ) , including a separate reconciliation of the beginning and ending balances for each major category of assets and liabilities . gaap establishes a framework for measuring fair value in accordance with gaap and expands financial statement disclosure requirements for fair value measurements . gaap 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 iquoted prices in active markets for identical assets or liabilities . level iiquoted 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 iiiprices 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 . 58 the level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety . when available , we use quoted market prices to determine the fair value of an asset or liability . if quoted market prices are not available , we consult with independent pricing services or obtain third party broker quotes . if independent pricing service , or third party broker quotes are not available , we determine the fair value of the securities using valuation techniques that use , when possible , current market-based or independently-sourced market parameters , such as interest rates . while linked transactions are treated as derivatives for gaap , the securities underlying the company 's linked transactions are valued using similar techniques to those used for our securities portfolio .
| results of operations the following discussion of our results of operations highlights our performance for the years ended december 31 , 2014 and december 31 , 2013 and for the period from may 15 , 2012 ( commencement of operations ) through december 31 , 2012. for the year ended december 31 , 2014 , we had net income of $ 100.7 million or $ 2.67 per basic and diluted weighted average common share . for the year ended december 31 , 2013 , we had a net loss of $ 27.9 million or $ 1.19 per basic and diluted weighted average common share . from may 15 , 2012 ( commencement of operations ) through december 31 , 2012 , we had net income of $ 57.3 million or $ 3.64 per basic and $ 3.63 diluted weighted average common share . during the later portion of 2013 , and continuing through 2014 we expanded our investment in non-agency mbs and commenced investing in cmbs and other credit oriented structured securities and adjusted our overall leverage and hedging strategy pursuant to our current business plan . accordingly , operating results for the partial period from may 15 , 2012 through december 31 , 2012 may not to be fully comparable with the results of our operations for the full years ended december 31 , 2014 and december 31 , 2013 . 70 investments the following table presents certain information about our investment portfolio at december 31 , 2014 which is a non-gaap measure due to the inclusion of our linked transactions , in order to present a complete economic presentation of our portfolio , which is reconciled to gaap below , as follows ( dollars in thousands ) : replace_table_token_4_th ( 1 ) net weighted average coupon as of december 31 , 2014 is presented net of servicing and other fees .
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our company mission is to enable and empower our brand warriors to fight for our clients ' brands every day to bring value to our stakeholders . we accomplish this by aligning with our clients ' business objectives resulting in a trusted partnership . the startek advantage is the sum total of our culture , customized solutions and processes that enhance our clients ' customers experience . startek advantage is focused on improving customer experience and reducing total cost of ownership for our clients . startek has proven results for the multiple services we provide including sales , order management and provisioning , customer care , technical support , receivables management , and retention programs . we manage programs using a variety of multi-channel customer interaction capabilities including voice , chat , email , ivr and back-office support . startek has delivery centers in the u.s. , philippines , canada , costa rica , honduras and through its startek @ home workforce . we seek to become a market leader in providing meaningful impact bpo services to our clients . our approach is to develop relationships with our clients that are partnering and collaborative in nature where we are focused , flexible and responsive to their business needs . in addition we offer creative industry-based solutions to meet our clients ' ever changing business needs . the end result is the delivery of a quality customer experience to our client 's customers . to become a leader in the market , our strategy is to : · grow our existing client base by deepening and broadening our relationships , · add new clients and continue to diversify our client base , · improve the profitability of our business through operational improvements , increased utilization and right-sizing our north american operation , · expand our global delivery platform to meet our client needs , and · broaden our service offerings by providing more innovative and technology-enabled solutions . during 2011 , we further expanded our near-shore delivery platform by opening our first facility in honduras . management believes that the labor market in honduras is strong and our position as an early entrant into this country provides us a competitive advantage to win business with new and existing customers . during 2011 , we also continued to grow our headcount in the philippines , where we added over 1,100 new full-time equivalent agents . we believe that diversifying our geographic platform by expanding offshore and near-shore will result in improved margins and position us for future growth . in 2011 , we decreased our north american footprint by closing one facility in the u.s. early in the year and one canadian facility in the third quarter of 2011. the decision to close these facilities was due to lower client volumes and an effort to improve utilization at our centers , thus driving efficiencies and improved margins . we will continue to evaluate the profitability of our north american locations . in 2011 , we made progress on our strategic objective to add new clients by signing eight new contracts . we also built-out startek advantage which builds upon the development of the startek operating platform in order to drive efficiencies in our operation , execute on our core offerings and deliver customized processes and solutions to our clients . we operate within three business segments : u.s. , canada and offshore . the business segments align with the regions in which our services are rendered . as of december 31 , 2011 , our u.s. segment included the operations of eight facilities in the u.s. ; our canada segment included the operations of two facilities in canada ; and our offshore segment included the operations of two facilities in the philippines , one in costa rica and one in honduras . as of december 31 , 2010 , there were nine , three and three facilities in the u.s. , canada and offshore segments , respectively . as of december 31 , 2009 , there were thirteen , five and one facilities in the u.s. , canada and offshore segments , respectively . we use gross profit as our measure of profit and loss for each business segment and do not allocate selling , general and administrative expenses to our business segments . in 2010 and 2011 we received lower call volumes in our north american facilities , which adversely affected our results . partially offsetting lower call volumes in north america has been strong demand for our offshore call center services , primarily in the philippines . we have observed that our customers are decreasing the number of agents handling calls by leveraging call disposition technology and there continues to be a shift toward outsourced and offshore providers . while the increased use of call disposition technology has somewhat adversely impacted our 2011 financial results , the shift toward outsourced and offshore providers has positively impacted our business due to our expanded presence in the philippines , costa rica and honduras . part of our strategy ( as noted above ) is to further expand our geographic footprint offshore and near-shore to capitalize on this trend and to diversify geographic risk . we also believe our customers and potential customers are seeking front and back-office business processes to increase operating efficiencies in order to enhance their customer experience . we believe we are positioned to benefit from this trend as we have developed a comprehensive suite of services which includes front and back-office offerings for our customers . 20 significant developments during the year ended december 31 , 2011 new facilities one component of our strategy is to expand our global delivery platform by growing offshore and near-shore . management believes that expansion into targeted international locations will broaden our service delivery platform and build our competitive advantage . story_separator_special_tag in addition , under the credit agreement , we are subject to certain standard affirmative and negative covenants , including the following financial covenants : 1 ) maintaining a minimum adjusted ebitda , as defined in the credit agreement , of no less than the monthly minimum amounts set forth in the credit agreement and 2 ) limiting non-financed capital expenditures during 2012 to $ 6.5 million , provided that such expenditures would not cause the ratio of excess availability , as defined in the credit agreement , to aggregate non-financed capital expenditures to be less than 1:50 to 1:00. the requirement for non-financed capital expenditures may be increased quarterly by an amount equal to 50 % of any positive variance between budgeted and actual adjusted ebitda results measured at the end of each quarter . we and wells fargo are required to agree on financial covenants for the remaining term of the credit agreement beyond 2012 , and any failure to do so will constitute an event of default . in connection with the termination of our secured line of credit with umb bank , we liquidated all of our outstanding hedge positions with umb bank as of this date , and replaced them with new hedges with wells fargo bank , which resulted in a gain of approximately $ 0.2 million during the first quarter of 2012 . 21 results of operations years ended december 31 , 2011 and december 31 , 2010 the following table presents selected items from our consolidated statements of operations in thousands of dollars and as a percentage of revenue for the periods indicated : replace_table_token_5_th nm = not meaningful . the following table summarizes our revenues and gross profit for the periods indicated , by reporting segment : replace_table_token_6_th 22 revenue revenue decreased by $ 45.9 million , or 17.3 % , from $ 265.4 million in 2010 to $ 219.5 million in 2011. the decrease was driven by the u.s. and canadian segments . revenue in the u.s. segment decreased by 32.9 % , or $ 55.1 million , due in part to five site closures during 2010 and 2011 , which resulted in $ 31.2 million less revenue in 2011 as compared to 2010. in addition , our closure in collinsville , virginia in january 2012 resulted in $ 10.0 million less revenue in 2011 as compared to 2010 as these programs ramped down . other revenue decreased by $ 17.7 million driven by lower call volumes , partially offset by $ 3.8 million of incremental revenue from new business booked during 2011. revenue from canada decreased by $ 19.5 million , or 30.5 % . the decline was driven by the closure of three sites in canada in 2010 and 2011 which contributed $ 13.6 million less revenue during 2011 as compared to 2010. in addition , the downsizing of our facility in cornwall , ontario during 2011 resulted in approximately $ 9.8 million less revenue in 2011 , as compared to 2010. these declines were partially offset by greater call volumes at our other canadian facilities . offshore revenue increased $ 28.8 million from $ 33.7 million to $ 62.5 million due primarily to two new facilities in 2010 and one new facility in 2011. our costa rica facility was opened in march 2010 , our second site in the philippines in april 2010 and a first site in honduras in september 2011 , which combined contributed $ 17.9 million in incremental revenue in 2011 , compared to 2010. the remaining increase was driven primarily by new business resulting from an increase in full-time equivalent agents in our other philippine location . in the offshore segment , there was $ 5.2 million of incremental revenue from new business booked during 2011. cost of services and gross profit cost of services decreased by $ 41.2 million , or 17.3 % , from $ 237.7 million in 2010 to $ 196.5 million in 2011. gross profit as a percentage of revenue increased slightly from 10.4 % in 2010 to 10.5 % in 2011. cost of services in the u.s. decreased by approximately $ 42.7 million , or 30.0 % , of which $ 36.2 million related to the ramp-downs and site closures discussed above . gross profit as a percentage of revenue in the u.s decreased from 14.9 % in 2010 to 11.2 % in 2011 , or $ 12.4 million . the site closures and ramp downs accounted for $ 5.0 million of the decline in gross profit in 2011 compared to 2010. cost of services in canada decreased by approximately $ 18.6 million , or 31.1 % . the decrease was driven by a decline of $ 21.9 million in 2011 , compared to 2010 , for the four sites that closed and downsized in canada during 2010 and 2011 , described above . gross profit as a percentage of revenue in canada increased from 6.4 % in 2010 to 7.1 % in 2011 , but in dollars decreased by $ 1.0 million . the site closures and downsizing accounted for $ 1.6 million of the decline in gross profit , which was partially offset by improved gross profit at our other canadian facilities due to higher volumes and better utilization . the decrease in cost of services in the u.s and canada were partially offset by greater cost of services in the offshore segment , which increased by approximately $ 20.2 million , or 57.4 % . gross profit as a percentage of revenue offshore increased from ( 4.3 % ) in 2010 to 11.5 % in 2011 , or $ 8.6 million . the new facilities opened in costa rica , the philippines and honduras in 2010 and 2011 contributed $ 15.7 million in incremental cost of services and $ 2.2 million of incremental gross profit as new business was ramped and utilization improved .
| variability of operating results our business has been seasonal only to the extent that our clients ' marketing programs and product launches are geared toward the winter holiday buying season . we have experienced and expect to continue to experience some quarterly variations in revenue and operating results due to a variety of factors , many of which are outside our control , including : ( i ) timing and amount of costs incurred to expand capacity in order to provide for volume growth from existing and future clients ; ( ii ) changes in the volume of services provided to principal clients ; ( iii ) expiration or termination of client projects or contracts ; ( iv ) timing of existing and future client product launches or service offerings ; ( v ) seasonal nature of certain clients ' businesses ; and ( vi ) variability in demand for our services by our clients depending on demand for their products or services and or depending on our performance . critical accounting policies and estimates our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements , which have been prepared in accordance with u.s. generally accepted accounting principles . the preparation of our financial statements requires us to make estimates that affect the reported amounts of assets , liabilities , revenues and expenses , and related disclosures of contingent assets and liabilities . we base our accounting estimates on historical experience and other factors that we believe to be reasonable under the circumstances . however , actual results may vary from these estimates due to factors beyond our control or due to changes in these assumptions or conditions . we have discussed the development and selection of critical accounting policies and estimates with our audit committee . the following is a summary of our critical accounting policies and estimates we make in preparing our consolidated financial statements .
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