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amounts allocated to land , buildings , equipment and fixtures are based on cost segregation studies performed by independent third parties or on the company 's analysis of story_separator_special_tag the following discussion should be read in conjunction with the consolidated financial statements of lcfh and accompanying notes included in this annual report on form 10-k. in addition to historical 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 , but are not limited to , those discussed in our `` risk factors . '' overview we are a leading commercial real estate finance company with a proprietary loan origination platform and an established national footprint . as a non-bank operating company , we believe that we are well-positioned to benefit from the opportunities arising from the diminished supply of debt capital and the substantial demand for new financings in the commercial real estate sector . we believe our comprehensive , fully-integrated in-house infrastructure , access to a diverse array of committed financing sources and highly experienced management team of industry veterans will allow us to continue to prudently grow our business as we endeavor to capitalize on profitable opportunities in various market conditions . we conduct our business through three major business lines : commercial mortgage lending , investments in securities secured by first mortgage loans , and investments in selected net leased and other real estate assets . we apply a comprehensive best practices underwriting approach to every loan and investment that we make , rooted in management 's deep understanding of fundamental real estate values and proven expertise in these complementary business lines through multiple economic and credit cycles . our primary business strategy is originating conduit loans , which are first mortgage loans on stabilized , income-producing commercial real estate properties that are available for sale in cmbs securitizations . from our inception in october 2008 through december 30 , 2013 , we originated $ 5.9 billion of conduit loans , $ 5.2 billion of which were sold into 17 cmbs securitizations . according to market data provided by commercial mortgage alert , this makes us , by volume , the second largest non-bank contributor of loans to cmbs securitizations in the united states for in 2013. the securitization of conduit loans has been a consistently profitable business for us and enables us to reinvest our equity capital into new loan originations or allocate it to other investments . in addition to conduit loans , we originated $ 1.4 billion of balance sheet loans held for investment from inception through december 31 , 2013. during that timeframe , we also acquired $ 5.7 billion of investment grade-rated securities secured by first mortgage loans on commercial real estate and $ 785.5 million of selected net leased and other real estate assets . as of december 31 , 2013 , we had $ 3.5 billion in total assets and $ 1.2 billion in book equity capital . as of that date , our assets included $ 979.6 million of loans , $ 1.7 billion of securities , and $ 624.2 million of real estate . our primary sources of revenue include net interest income on our investments , which comprised 23.2 % and 38.6 % of our total net revenues and net income , respectively , for the year ended december 31 , 2013 , and income from sales of loans , net , which represents the income we earn from regular sales and securitizations of certain commercial mortgage loans , and which comprised 46.7 % and 77.7 % of our net revenues and net income , respectively , for the year ended december 31 , 2013. see `` —non-gaap financial measures '' for a definition of net revenues and a reconciliation to total net interest income after provision for loan losses and total other income . we also generate net rental revenues from certain of our real estate and fee income from our loan originations and the management of our institutional bridge loan partnership . 66 ladder was founded in october 2008 and we are currently capitalized by our management team and a group of leading global institutional investors , including affiliates of alberta investment management corp. , gi partners , ontario municipal employees retirement system and towerbrook capital partners . we have built our operating business to include 60 full-time industry professionals by hiring experienced personnel known to us in the commercial mortgage industry . doing so has allowed us to maintain consistency in our culture and operations and to focus on strong credit practices and disciplined growth . we have a diversified and flexible financing strategy supporting our business operations , including significant committed term financing from leading financial institutions . as of december 31 , 2013 , we had $ 2.2 billion of debt financing outstanding , including $ 989.0 million of financing from the fhlb ( with an additional $ 416.0 million of committed term financing available to us ) , $ 248.2 million committed secured term repurchase agreement financing outstanding ( with an additional $ 1.7 billion of committed secured term financing available to us ) , $ 291.1 million of third-party , non-recourse mortgage debt , $ 361.6 million of other securities financing , and $ 325.0 million of notes . as of december 31 , 2013 , our debt-to-equity ratio was 1.9:1.0 , as we employ leverage prudently to maximize financial flexibility . refer to note 16 to the consolidated financial statements for disclosure regarding events subsequent to december 31 , 2013. our businesses we invest primarily in loans , securities and other interests in u.s. commercial real estate , with a focus on senior secured assets . our mix of business segments is designed to provide us with the flexibility to opportunistically allocate capital in order to generate attractive risk-adjusted returns under varying market conditions . story_separator_special_tag these properties are leased on a net basis where the tenant is generally responsible for payment of real estate taxes , property , building and general liability insurance and property and building maintenance . sixteen of our properties are leased to a national pharmacy chain , and the remaining properties are leased to a national discount retailer , a regional sporting goods store , and a regional membership warehouse club . as of december 31 , 2013 , our net leased properties comprised a total of 1.4 million square feet , had a 100 % occupancy rate , had an average age since construction of 6.6 years and a weighted average remaining lease term of 18.7 years . in addition , as of december 31 , 2013 , we owned ( i ) a 13 story office building with a book value of $ 14.8 million through a joint venture with an operating partner , ( ii ) a portfolio of 14 office buildings with a book value of $ 129.5 million through a separate joint venture with an operating partner and , ( iii ) a 26-story office building in minnesota through a consolidated , majority owned joint venture with a book value of $ 50.1 million . further details regarding our portfolio of commercial real estate properties , including state of operation , can be found in the table on page 62. residential real estate . as of december 31 , 2013 , we owned 333 residential condominium units at veer towers in las vegas , nv with a book value of $ 93.0 million through a consolidated joint venture with an operating partner . the condominium units are included in our real estate business segment . the condominium units were 53 % leased and occupied as of december 31 , 2013. depending on market conditions for new leases and renewals in this residential inventory , we may provide tenants rent concessions or abatements . we intend to sell the entire inventory of units over time . we are only leasing the units currently under short-term leases ( less than 2-year terms ) to offset operating expenses during our sales process , and therefore , any rent concessions or abatements would have no material impact on our operations . in addition , during 2013 , we acquired a multifamily apartment building in miami , fl with a book value of $ 79.8 million . the apartment units were 92 % leased and occupied as of december 31 , 2013. other investments institutional bridge loan partnership . in 2011 , we established an institutional partnership with a canadian sovereign pension fund to invest in first mortgage bridge loans that met pre-defined criteria . our partner owns 90 % of the limited partnership interests and we own the remaining 10 % on a pari passu basis and act as general partner . we retain the discretion over which loans to propose to sell to the partnership , and our partner retains the discretion to accept or reject individual loans . as the general partner , we have engaged our advisory entity to manage the assets of the partnership and earn management fees and incentive fees from the partnership . in addition , we are entitled to retain origination fees of up to 1 % on loans that we sell to the partnership and on a case-by-case basis , as approved by our partner , may retain certain exit fees . as of december 31 , 2013 , the partnership owned $ 102.6 million of first mortgage bridge loan assets that were financed by $ 34.6 million of term debt . debt of the partnership is nonrecourse to the limited and general partners , except for customary nonrecourse carve-outs for certain actions and environmental liability . as of december 31 , 2013 , the book value of our investment in the institutional partnership was $ 7.1 million . unconsolidated joint venture . in connection with the origination of a loan in april 2012 , we received a 25 % equity kicker with the right to convert upon a capital event . on march 22 , 2013 , the loan was refinanced by us and we converted our equity kicker interest into a 25 % limited liability company membership interest in grace lake jv , llc . as of december 31 , 2013 , the llc owned an office building campus with a carrying value of $ 78.5 million that is financed by $ 77.7 million of long-term debt . debt of the llc is nonrecourse to the limited liability company members , except for 70 customary nonrecourse carve-outs for certain actions and environmental liability . as of december 31 , 2013 , the book value of our investment in the llc was $ 2.1 million . other asset management activities . as of december 31 , 2013 , we also managed two separate cmbs investment accounts for private investors with combined total assets of $ 3.8 million . as of october 2012 , we are no longer purchasing any new investments for these accounts , however , we will continue to manage the existing investments until their full prepayment or other disposition . business outlook we believe the commercial real estate finance market currently presents substantial opportunities for new origination , as it is characterized by stabilizing property values , a low interest rate environment , and a supply- demand imbalance for financing . over $ 1.6 trillion of commercial real estate debt is scheduled to mature over the next five years according to trepp , while at the same time traditional real estate lenders such as banks and insurance companies face significant new capital and regulatory requirements . april 2010 marked the first new-issue , multi-borrower cmbs securitization since june 2008. for 2010 as a whole , new cmbs issuances totaled $ 11.6 billion . in 2011 , new cmbs issuances totaled $ 32.7 billion , despite a slowdown in originations of commercial real estate mortgage loans during the second half of the year because of the uncertain economic climate created by the euro-area crisis .

factors impacting operating results there are a number of factors that influence our operating results in a meaningful way . the most significant factors include : ( 1 ) our competition ; ( 2 ) market and economic conditions ; ( 3 ) loan origination volume ; ( 4 ) profitability of securitizations ; ( 5 ) avoidance of credit losses ; ( 6 ) availability of debt and equity funding and the costs of that funding ; ( 7 ) the net interest margin on our investments ; and ( 8 ) effectiveness of our hedging and other risk management practices . jobs act on april 5 , 2012 , the jobs act was signed into law . the jobs act contains provisions that , among other things , reduce certain reporting requirements for qualifying public companies . section 107 of the jobs act also provides that an `` emerging growth company '' can take advantage of the extended transition period provided in section 7 ( a ) ( 2 ) ( b ) of the securities act for complying with new or revised 71 accounting standards . in other words , an `` emerging growth company '' can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies . however , we are choosing to `` opt out '' of such extended transition period , and as a result , we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies . section 107 of the jobs act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable . additionally , we are in the process of evaluating the benefits of relying on the other reduced reporting requirements provided by the jobs act . subject to certain conditions set forth in the jobs act , as an `` emerging growth company , '' we may choose to rely on certain exemptions .

the risk category story_separator_special_tag this discussion and analysis reflect 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 , which appear elsewhere in this annual report . you should read the information in this section in conjunction with the other business and financial information provided in this annual report . overview our business consists primarily of making loans to real estate investors , businesses and consumers . we also invest in securities , which consist of federal home loan bank of pittsburgh stock , mortgage-backed securities issued by u.s. government-sponsored entities , corporate bonds , tax-exempt municipal bonds , and u.s. treasury notes . we also have a mortgage banking operation that generates one to four family residential mortgage loans through three mortgage loan originators and three correspondent mortgage banks . such residential mortgage loans are originated both for sale in the secondary market and for retention in our portfolio . however , the origination of loans for sale became a larger focus for us at the beginning of 2017. we continue to rely less on correspondent banks for loan originations , focusing instead on self-generated originations . we offer a variety of deposit accounts , including checking accounts , savings and money market accounts , and time deposits . we also utilize advances from the federal home loan bank of pittsburgh for liquidity and for asset/liability management purposes . we also offer various merchant services to businesses , consisting of multiple credit card processing solutions and other ancillary services such as internet banking . these services are offered through a third-party partner . our results of operations rely heavily on net interest income , which is the difference between interest earned on interest-earning assets and interest expense on interest-bearing liabilities . the results of operations are also affected by non-interest income , non-interest expenses , and the provision for loan losses . primary sources of non-interest income are gains on the sale of loans , earnings on bank-owned life insurance , and loan servicing fees . primary non-interest expenses are personnel costs , occupancy , professional fees , federal deposit insurance premiums , and data processing . our financial condition and results of operations may also be affected by general and local economic and competitive conditions , changes in market interest rates , governmental policies , and actions of financial regulatory authorities . business strategy our business strategy is to use our capital to both serve our community and maintain a profitable community savings bank . our goals have been to grow our core deposit base , effectively manage our cost of funds , and develop strong business relationships with our customers . our mortgage banking operations continue to generate gains on loan sales and servicing fee income . we continue to expand our base for non-interest income and have begun marketing our commercial loans as well . our current business strategy consists of the following : ● continue to grow our core deposit base . deposits have been and continue to be our primary source of funds for lending . historically , we relied on time deposits as a source of funds , we remain focused on increasing core deposits . we consider savings , checking , money market , and commercial deposits to be core deposits . core deposits are the funding source that is least costly and least sensitive to interest rate fluctuations . core deposits also help us maintain loan-to-deposit ratios at levels consistent with regulatory expectations . continuing to focus on relationship growth will increase our deposit portfolio with new and existing customers . we also continue to improve and invest in technologies , such as remote check capture and mobile & on-line banking that will help to attract core deposits . additionally , we will be offering new consumer checking and savings products that we expect to boost core deposits . ● increase income streams by developing and offering innovative products to help our customers ' meet their financial goals . we continue to strive to make the financial independence of our customers and our communities one of the pillars of our core values . we opened a consumer credit card product and will be opening up a business credit card product in 2020. we continue to market special cd & money market rates , and we continue to offer atm fee reimbursement along with all checking account products . while some of these offerings create a tangible cost , the intangible value to the bank and appreciation from our customers is incalculable . relationship banking is our goal and by providing more products to our customers , we broaden the available avenues for income growth . 26 ● manage credit risk to maintain a low level of non-performing assets . strong asset quality is a key to the long-term financial success of any bank . our credit risk management strategy focuses on well-defined credit and investment policies and procedures that we believe promote conservative lending and investment practices , conservative loan underwriting criteria and active credit monitoring . in 2019 we 've instituted practices to strengthen collection efforts to address levels of non-performing assets as well . ● manage interest rate risk . interest rate risk management is central to our budgeting , liquidity , and asset management . our focus has shifted to managing our commercial and consumer credit portfolios , with conservative lending growth , competitive interest rates , and reasonable closing costs . the commercial lending department continues to market saleable loans to the market in an effort to free up space for more competitive opportunities in terms of interest rate and credit quality . the consumer lending department continues to sell all eligible fixed rate residential mortgage loans into the secondary market , which helps mitigate and manage interest rate risk . story_separator_special_tag the fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties , other than in a forced or liquidation sale . we estimate the fair value of a financial instrument and any related asset impairment using a variety of valuation methods . where financial instruments are actively traded and have quoted market prices , quoted market prices are used for fair value . when the financial instruments are not actively traded , other observable market inputs , such as quoted prices of securities with similar characteristics , may be used , if available , to determine fair value . when observable market prices do not exist , we estimate fair value . these estimates are subjective in nature and imprecision in estimating these factors can impact the amount of revenue or loss recorded . a more detailed description of the fair values measured at each level of the fair value hierarchy and the methodology we utilize can be found in note 17 of the financial statements . investment securities . available for sale and held to maturity securities are reviewed quarterly for possible other-than-temporary impairment . the review includes an analysis of the facts and circumstances of each individual investment such as the severity of loss , the length of time the fair value has been below cost , the expectation for that security 's performance , the creditworthiness of the issuer and our intent and ability to hold the security to recovery . a decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the statements of net income . at december 31 , 2019 , we believe the unrealized losses are primarily a result of increases in market yields from the time of purchase . in general , as market yields rise , the fair value of securities will decrease ; as market yields fall , the fair value of securities will increase . management generally views changes in fair value caused by changes in interest rates as temporary ; therefore , these securities have not been classified as other-than-temporarily impaired . management has also concluded that based on current information we expect to continue to receive scheduled interest payments as well as the entire principal balance . furthermore , management does not intend to sell these securities and does not believe it will be required to sell these securities before they recover in value . 28 loan portfolio story_separator_special_tag text-align : left '' > 34 the following table sets forth activity in our allowance for loan losses for the years indicated . replace_table_token_14_th 35 allocation of allowance for loan losses . the following tables set forth the allowance for loan losses allocated by loan category . the allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories . december 31 , 2019 2018 2017 amount percent of allowance to total allowance percent of loans in category to total loans amount percent of allowance to total allowance percent of loans in category to total loans amount percent of allowance to total allowance percent of loans in category to total loans ( dollars in thousands ) one-to-four family mortgage loans $ 543 46 % 45 % $ 422 38 % 47 % $ 514 49 % 54 % commercial mortgage loans 444 38 36 394 35 37 383 37 35 commercial and industrial loans 171 14 15 264 23 12 81 8 8 consumer loans 25 2 4 45 4 4 63 6 3 total $ 1,183 100 % 100 % $ 1,125 100 % 100 % $ 1,041 100 % 100 % replace_table_token_15_th see notes 2 and 7 to the financial statements for a complete discussion of the allowance for loan losses . although we believe that we use the best information available to establish the allowance for loan losses , future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations . furthermore , while we believe we have established our allowance for loan losses in conformity with u.s. gaap , there can be no assurance that regulators , in reviewing our loan portfolio , will not require us to increase our allowance for loan losses . in addition , because future events affecting borrowers and collateral can not be predicted with certainty , there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above . any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations . 36 securities portfolio the following table sets forth the amortized cost and estimated fair value of our securities portfolio at the dates indicated . replace_table_token_16_th at december 31 , 2019 , 2018 , and 2017 we had no investments in a single issuer ( other than securities issued by the u.s. government and government agency ) , which had an aggregate book value in excess of 10 % of our stockholders ' equity . securities portfolio maturities and yields . the following table sets forth the stated maturities and weighted average yields of investment securities at december 31 , 2019 , 2018 and 2017. weighted-average yields on tax-exempt securities are not presented on a tax equivalent basis . certain mortgage-backed securities have adjustable interest rates and will reprice annually within the various maturity ranges . these repricing schedules are not reflected in the table below . weighted average yield calculations on investment securities available for sale do not give effect to changes in fair value that are reflected as a component of equity .

general . loans are our primary interest-earning asset . at december 31 , 2019 , net loans represented 77.0 % of our total assets . loan portfolio analysis . the following table sets forth the composition of our loan portfolio by type of loan at the dates indicated . replace_table_token_4_th replace_table_token_5_th 29 loan maturity . the following tables set forth certain information at december 31 , 2019 and december 31 , 2018 regarding the dollar amount of loan principal repayments becoming due during the periods indicated . the tables do not include any estimate of prepayments that may significantly shorten the average loan life and may cause actual repayment experience to differ from that shown below . demand loans , which are loans having no stated repayment schedule or no stated maturity , are reported as due in one year or less . replace_table_token_6_th replace_table_token_7_th 30 the following tables sets forth the dollar amount of all loans at december 31 , 2019 that are due after december 31 , 2020 and have either fixed interest rates or floating or adjustable interest rates . the amounts shown below exclude third-party loan and other net origination costs and the discount on loans previously held for sale . replace_table_token_8_th loan originations , purchases and sales . the following table sets forth our loan origination , purchase and sale activity for the years indicated . replace_table_token_9_th 31 asset quality credit risk management . 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 and commercial business loans are assigned a risk rating based on pre-determined criteria and levels of risk .

allowances allocated to or acquired by the duke energy registrants are held primarily for consumption . carrying amounts for emission allowances are based on the cost to acquire the allowances or , in the case of a business combination , on the fair value assigned in the allocation of the purchase price of the acquired business . emission allowances are expensed to fuel used in electric generation and purchased power on the consolidated statements of operations . 124 part ii duke energy corporation – duke energy carolinas , llc – story_separator_special_tag management 's discussion and analysis includes financial information prepared in accordance with generally accepted accounting principles ( gaap ) in the united states ( u.s. ) , as well as certain non-gaap financial measures such as adjusted earnings and adjusted earnings per share discussed below . generally , a non-gaap financial measure is a numerical measure of financial performance , financial position or cash flows that excludes ( or includes ) amounts that are included in ( or excluded from ) the most directly comparable measure calculated and presented in accordance with gaap . the non-gaap financial measures should be viewed as a supplement to , and not a substitute for , financial measures presented in accordance with gaap . non-gaap measures as presented herein may not be comparable to similarly titled measures used by other companies . the following combined management 's discussion and analysis of financial condition and results of operations is separately filed by duke energy corporation ( collectively with its subsidiaries , duke energy ) and its subsidiaries duke energy carolinas , llc ( duke energy carolinas ) , progress energy , inc. ( progress energy ) , duke energy progress , llc ( duke energy progress ) , duke energy florida , llc ( duke energy florida ) , duke energy ohio , inc. ( duke energy ohio ) and duke energy indiana , llc ( duke energy indiana ) . however , none of the registrants make any representation as to information related solely to duke energy or the subsidiary registrants of duke energy other than itself . subsequent to duke energy 's acquisition of piedmont natural gas company , inc. ( piedmont ) on october 3 , 2016 , piedmont is a wholly owned subsidiary of duke energy . the financial information for duke energy includes results of piedmont subsequent to october 3 , 2016. see note 2 to the consolidated financial statements , `` acquisitions and dispositions , '' for additional information regarding the acquisition . duke energy duke energy is an energy company headquartered in charlotte , north carolina . duke energy operates in the u.s. primarily through its wholly owned subsidiaries , duke energy carolinas , duke energy progress , duke energy florida , duke energy ohio , duke energy indiana and piedmont . when discussing duke energy 's consolidated financial information , it necessarily includes the results of the subsidiary registrants , which , along with duke energy , are collectively referred to as the duke energy registrants . management 's discussion and analysis should be read in conjunction with the consolidated financial statements and notes for the years ended december 31 , 2016 , 2015 and 2014 . executive overview acquisition of piedmont natural gas on october 3 , 2016 , duke energy completed the acquisition of piedmont , a north carolina corporation primarily engaged in regulated natural gas distribution to residential , commercial , industrial and power generation customers in portions of north carolina , south carolina and tennessee . piedmont is also invested in joint-venture , energy-related businesses , including regulated interstate natural gas transportation and storage and regulated intrastate natural gas transportation . the acquisition provides a foundation for duke energy to establish a broader , long-term strategic natural gas infrastructure platform to complement its existing natural gas pipeline investments and regulated natural gas business in the midwest . cost savings , efficiencies and other benefits are expected from combined operations . duke energy acquired all of piedmont 's outstanding common stock for a total cash purchase price of $ 5.0 billion and assumed piedmont 's existing long-term debt , which had an estimated fair value of approximately $ 2.0 billion at the time of the acquisition . the excess of the purchase price over the estimated fair value of piedmont 's assets and liabilities on the acquisition date was recorded as goodwill . the transaction resulted in incremental goodwill of approximately $ 3.4 billion . duke energy financed the transaction with a combination of debt , equity issuances and other cash sources . financings to fund the transaction included $ 3.75 billion of long-term debt issued in august 2016 , $ 750 million borrowed under a short-term loan facility ( term loan ) in september 2016 , as well as the issuance of 10.6 million shares of common stock in october 2016. the share issuance resulted in net cash proceeds of approximately $ 723 million . see note 6 to the consolidated financial statements , `` debt and credit facilities , '' for additional information related to the debt issuance and note 18 , `` common stock , '' for additional information related to the equity issuance . duke energy recorded pretax non-recurring transaction and integration costs associated with the acquisition of $ 439 million in 2016 , including interest expense of $ 234 million related to the acquisition financing . the interest expense primarily relates to losses on forward-starting interest rate swaps . the remaining charges include commitments made in conjunction with the transaction , such as charitable contributions and a one-time bill credit to piedmont customers , as well as professional fees and severance . duke energy also expects to incur system integration and other acquisition-related transition costs , primarily through 2018 , that are necessary to achieve certain anticipated cost savings , efficiencies and other benefits . see note 2 to the consolidated financial statements , `` acquisitions and dispositions , '' for additional information regarding the transaction . story_separator_special_tag the legislation also required the completion of dam improvement projects and the installation of water lines for residents within a half mile of coal ash sites in the state . work was completed on all required deadlines under the new legislation . cost management and efficiencies . duke energy has a demonstrated track record of driving efficiencies and productivity , including merger integration . these efficiencies will help in duke energy 's objective to keep overall customer rates below the national average , while moderating customer bill increases over time . in june 2016 , duke energy achieved the $ 687 million of guaranteed savings for customers in the carolinas from the 2012 merger with progress energy , a full year ahead of its original commitment . growth in the dividend . in 2016 , duke energy continued to grow the dividend payment to shareholders by approximately 4 percent . 2016 represented the 90 th consecutive year duke energy paid a cash dividend on its common stock . duke energy objectives – 2017 and beyond duke energy will continue to deliver exceptional value to customers , be an integral part of the communities in which it does business , and provide attractive returns to investors . duke energy is committed to lead the way to cleaner , smarter energy solutions that customers value through a strategy focused on : transformation of the customer experience to meet changing customer expectations through enhanced convenience , control and choice in energy supply and usage . modernization of the electric grid , including storm hardening , to ensure the system is better prepared for severe weather and to improve the system 's reliability and flexibility , as well as to provide better information and services for customers . generation of cleaner energy through an increased amount of natural gas , renewables generation and the continued safe and reliable operation of nuclear plants . expansion of natural gas infrastructure , from midstream gas pipelines to local distribution systems . operational excellence through engagement with employees and being an industry leader in safety performance and efficient operations . stakeholder engagement to ensure the regulatory rules in the states in which duke energy operates benefit customers and allow duke energy to recover its significant investments in a timely manner . primary objectives toward the implementation of this strategy include : growth initiatives . growth in the electric utilities and infrastructure business is expected to be supported by the investment of significant capital in the electric transmission and distribution grid , and in cleaner , more efficient generation . duke energy expects to invest approximately $ 30 billion in electric utilities and infrastructure growth projects over the next five years , continuing its efforts to generate cleaner energy . duke energy intends to work constructively with regulators to evaluate the current construct and seek modernized recovery solutions , such as riders , rate decoupling and multiyear rate plans , that benefit both customers and shareholders . investment projects at electric utilities and infrastructure currently underway that will support growth initiatives include : duke energy indiana 's $ 1.4 billion grid modernization plan , which was approved by the iurc in 2016 , is aimed at improving reliability , including fewer outages and quicker restoration . the plan allows for recovery of duke energy 's investment through a rider . as part of the settlement , duke energy also received approval to install ami meters , deferring the costs for future recovery in a rate case . significant investments in natural gas-fired combined cycle plants , including completing the $ 1.5 billion citrus country plant in florida , the $ 600 million lee facility in south carolina and the $ 1 billion investment in the western carolinas modernization project . these investments will allow duke energy to replace older , less efficient coal units early . duke energy expects to continue to advance other cleaner energy sources within its regulated electric jurisdictions , including hydro , wind , solar and combined heat-and-power projects , increasing the flexibility of the system and allowing duke energy to continue lowering carbon emissions . electric utilities and infrastructure will also invest significantly in modernizing the electric grid to provide greater flexibility , better reliability and power quality , as well as more valuable products and services for its customers . these significant investments will result in the need to file rate cases with regulators to update customer rates . duke energy will also focus on modernizing the regulatory constructs in its jurisdictions to minimize rate impacts to customers and recover costs in a more timely manner . duke energy expects to invest around $ 6 billion in its gas utilities and infrastructure business over the next five years . growth in gas utilities and infrastructure will be focused on the following : with the acquisition of piedmont , duke energy now operates gas distribution businesses across five states . the continued integration of piedmont , as well as additional investments in the gas local distribution company ( ldc ) system , will help maintain system integrity and expand gas distribution to new customers . duke energy will continue to grow its midstream pipeline business , underpinned by investments in the atlantic coast pipeline , sabal trail and constitution pipeline projects . these highly-contracted pipelines will bring much needed , low-cost gas supplies to the eastern u.s. , spurring economic growth and helping duke energy to grow its customer base in the southeast . 40 part ii for commercial renewables , duke energy will continue to pursue long-term , highly-contracted wind and solar projects that meet its return criteria . cost management . duke energy has a demonstrated track record of driving efficiencies and productivity into the business and continues to identify sustainable cost savings as an essential element in response to a transforming industry . execute on coal ash management strategy . duke energy will continue the company 's compliance strategy with the north carolina coal ash management act of 2014 ( coal ash act ) and resource conservation and recovery act .

results of operations replace_table_token_21_th the following table shows the percent changes in gwh sales of electricity and average number of electric customers for duke energy ohio . the below percentages for retail customer classes represent billed sales only . total sales includes billed and unbilled retail sales and wholesale sales to incorporated municipalities and to public and private utilities and power marketers . amounts are not weather normalized . replace_table_token_22_th year ended december 31 , 2016 as compared to 2015 operating revenues . the variance was driven primarily by : a $ 61 million increase in rider revenues primarily due to increased rates and true-ups . partially offset by : a $ 25 million decrease in fuel revenues driven by lower electric fuel and natural gas prices and decreased natural gas sales volumes . operating expenses . the variance was driven by : a $ 38 million decrease in the cost of natural gas , primarily due to decreased volumes and lower natural gas prices . partially offset by : a $ 17 million increase in operations and maintenance expense primarily due to increased spending on energy efficiency programs , higher pjm transmission owner scheduling and reactive supply expenses , and increased costs related to distribution projects and inspection maintenance programs , partially offset by lower allocated corporate costs ; a $ 6 million increase in depreciation and amortization expense due to additional plant in service ; and a $ 4 million increase in property and other taxes due to higher property taxes . income tax expense . the variance was primarily due to a lower effective tax rate , partially offset by an increase in pretax income . the effective tax rate for the years ended december 31 , 2016 and 2015 were 28.9 percent and 35.2 percent , respectively . the decrease in the effective tax rate was primarily due to an immaterial out of period adjustment related to deferred tax balances associated with property , plant and equipment .

nomination process , director candidate selection and qualifications the nominating and corporate governance committee is responsible for identifying , screening and recommending candidates to the board for nomination to the board . the nominating and corporate governance committee may consider director candidates from numerous sources , including stockholders , directors and officers . all candidates are evaluated in the 119 same manner . the board is responsible for nominating directors for election by the stockholders and filling any vacancies on the board that may occur . qualifications and diversity . the board does not have a formal policy with respect to diversity on the board and does not narrowly define diversity to gender and race . we look at the breadth story_separator_special_tag company overview except as expressly stated , the financial condition and results of operations discussed throughout management 's discussion and analysis of financial condition and results of operations are those of metropcs communications , inc. and its consolidated subsidiaries , including metropcs wireless , inc. , or wireless , and unless the context indicates otherwise , references to “ metropcs , ” “ metropcs communications , ” “ our company , ” “ the company , ” “ we , ” “ our , ” “ ours ” and “ us ” refer to metropcs communications , inc. , a delaware corporation , and its wholly-owned subsidiaries . we are a wireless telecommunications carrier that currently offers wireless broadband mobile services primarily in selected major metropolitan areas in the united states , including the atlanta , boston , dallas/fort worth , detroit , las vegas , los angeles , miami , new york , orlando/jacksonville , philadelphia , sacramento , san francisco and tampa/sarasota metropolitan areas . as of december 31 , 2012 , we hold licenses for wireless spectrum suitable for wireless broadband mobile services covering a total population of 144 million people in and around many of the largest metropolitan areas in the united states . in addition , we have roaming agreements with other wireless broadband mobile carriers that allow us to offer our customers service in many areas when they are outside our service area . these roaming agreements , together with the area we serve with our own networks , allows our customers to receive service in an area covering over 280 million in total population under the metro usa ® brand . we provide our services using code division multiple access ( cdma ) networks using 1xrtt technology and evolution data optimized ( evdo ) and fourth generation long term evolution ( 4g lte ) . as a result of the significant growth we have experienced since we launched operations , our results of operations to date are not necessarily indicative of the results that can be expected in future periods . we expect that our number of customers will continue to increase over time , which will continue to contribute to increases in our revenues and operating expenses . we sell products and services to customers through our company-owned retail stores as well as indirectly through relationships with independent retailers and third party dealers . our service allows our customers to place unlimited local calls from within our local service area and to receive unlimited calls from any area while in our service area , for a flat-rate monthly service fee . since january 2010 , we have offered service under service plans which include all applicable taxes and regulatory fees and offering nationwide voice , text and web access services on an unlimited , no long-term contract , paid-in-advance , flat-rate basis beginning at $ 40 per month . for an additional $ 5 to $ 30 per month , our customers may select alternative service plans that offer additional features predominately on an unlimited basis . we also offer discounts to customers who purchase services for additional handsets on the same account . in january 2011 , we introduced new 4g lte service plans that allow customers to enjoy voice , text and web access services at fixed monthly rates starting as low as $ 40 per month . in 2012 , we introduced a nationwide 4g lte data , talk and text service plan for $ 25 per month , including all applicable taxes and regulatory fees . for additional usage fees , we also provide certain other value-added services . all of these plans require payment in advance for one month of service . if no payment is made in advance for the following month of service , service is suspended at the end of the month that was paid for by the customer and , if the customer does not pay within 30 days , the customer is terminated . we believe our service plans differentiate us from the more complex plans and long-term contract requirements of traditional wireless carriers . t-mobile transaction on october 3 , 2012 , we announced we had entered into a business combination agreement to combine our business with t-mobile , or the proposed transaction . upon completion of the proposed transaction , which we expect to occur in the first half of 2013 , metropcs and t-mobile will combine their respective businesses , will rename metropcs as t-mobile us , and will operate t-mobile and metropcs as separate customer units . the business combination agreement is structured as a recapitalization , in which metropcs will declare a reverse stock split , make a cash payment of $ 1.5 billion in the aggregate to our stockholders of record immediately following the reverse stock split and acquire all of t-mobile 's capital stock by issuing a subsidiary of deutsche telekom 74 % of metropcs ' common stock outstanding following the cash payment on a pro forma basis . upon completion of the combination , metropcs stockholders will own 26 % of the combined company . story_separator_special_tag write-downs for obsolescent and unmarketable inventory were not significant as of december 31 , 2011 and 2012. if actual market conditions are less favorable than those projected , additional inventory write-downs may be required . deferred income tax asset and other tax reserves we assess our deferred tax asset and record a valuation allowance , when necessary , to reduce our deferred tax asset to the amount that is more likely than not to be realized . we have considered future taxable income , reversal of existing taxable temporary differences , potential to carryback tax benefits and prudent and feasible tax planning strategies in assessing the need for the valuation allowance . should we determine that we would not be able to realize all or part of a deferred tax asset in the future , an adjustment to the deferred tax asset would be charged to earnings in the period we made that determination . we establish reserves when , despite our belief that our tax returns are fully supportable , we believe that certain positions may be challenged and ultimately modified . we adjust the reserves in light of changing facts and circumstances . our effective tax rate includes the impact of income tax related reserve positions and changes to income tax reserves that we consider appropriate . a number of years may elapse before a particular matter for which we have established a reserve is finally resolved . unfavorable settlement of any particular issue may require the use of cash or a reduction in our net operating loss carryforwards . favorable resolution would be recognized as a reduction to the effective rate in the year of resolution . tax reserves as of december 31 , 2012 were $ 8.0 million which are presented on the consolidated balance sheet in other long-term liabilities . property and equipment depreciation on property and equipment is applied using the straight-line method over the estimated useful lives of the assets once the assets are placed in service , which are five to ten years for network infrastructure assets , three to ten years for capitalized interest , up to fifteen years for capital leases , approximately one to eight years for office equipment , which includes software and computer equipment , approximately three to seven years for furniture and fixtures and five years for vehicles . leasehold improvements are amortized over the shorter of the remaining term of the lease and any renewal periods reasonably assured or the estimated useful life of the improvement . the estimated life of property and equipment is based on historical experience with similar assets , as well as taking into account anticipated technological or other changes . if technological changes were to occur more rapidly than anticipated or in a different form than anticipated , the useful lives assigned to these assets may need to be shortened , resulting in the recognition of increased depreciation expense in future periods . likewise , if the anticipated technological or other changes occur more slowly than anticipated , the life of the assets could be extended based on the life assigned to new assets added to property and equipment . this could result in a reduction of depreciation expense in future periods . we assess the impairment of long-lived assets whenever events or changes in circumstances indicate the carrying value may not be recoverable . factors we consider important that could trigger an impairment review include significant underperformance relative to historical or projected future operating results or significant changes in the manner of use of the assets or in the strategy for our overall business , or indications of a significant decrease in market price . the carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset . any required impairment loss would be measured as the amount by which the asset 's carrying value exceeds its fair value and would be recorded as a reduction in the carrying value of the related asset and charged to results of operations . in connection with the proposed transaction , an initial fair value assessment was performed by t-mobile on our property and equipment and we determined that an undiscounted cash flow recoverability analysis should be performed in accordance with asc 360 ( topic 360 , “ property , plant , and equipment ” ) . as a result of that analysis , we concluded that the carrying value of our property and equipment was recoverable and there was no impairment as of december 31 , 2012. the carrying value of property and equipment was approximately $ 4.3 billion as of december 31 , 2012. fair value measurements we follow the provisions of asc 820 ( topic 820 , “ fair value measurements and disclosures ” ) . asc 820 establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations . asc 820 requires us to maximize the use of observable inputs and minimize the use of unobservable inputs . if a financial instrument uses inputs 86 that fall in different levels of the hierarchy , the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation . intangible assets we operate wireless broadband mobile networks under licenses granted by the fcc for a particular geographic area on spectrum allocated by the fcc for terrestrial wireless broadband services . we hold personal communications services , or pcs , licenses , advanced wireless services , or aws , licenses , and 700 mhz licenses granted or acquired on various dates . the pcs licenses previously included , and the aws licenses currently include , the obligation and resulting costs to relocate existing fixed microwave users of our licensed spectrum if the use of such spectrum interferes with their systems and or reimburse other carriers ( according to fcc rules ) that relocated prior users if the relocation benefits our system .

results of operations year ended december 31 , 2012 compared to year ended december 31 , 2011 operating items set forth below is a summary of certain financial information for the periods indicated : replace_table_token_7_th ( 1 ) cost of service and selling , general and administrative expenses include stock-based compensation expense . for the year ended december 31 , 2012 , cost of service includes $ 3.0 million and selling , general and administrative expenses includes $ 35.0 million of stock-based compensation expense . for the year ended december 31 , 2011 , cost of service includes $ 3.5 million and selling , general and administrative expenses includes $ 38.3 million of stock-based compensation expense . service revenues . service revenues increased $ 111.6 million , or 3 % , to approximately $ 4.5 billion for the year ended december 31 , 2012 from approximately $ 4.4 billion for the year ended december 31 , 2011. the increase in service revenues is primarily attributable to higher average subscribers as well as a $ 0.06 increase in average revenue per customer during the year ended december 31 , 2012 compared to the year ended december 31 , 2011. equipment revenues . equipment revenues increased $ 142.3 million , or 34 % , to $ 561.5 million for the year ended december 31 , 2012 from $ 419.2 million for the year ended december 31 , 2011. the increase is primarily attributable to a $ 122.2 million increase in equipment revenues associated with a decrease in commissions paid to independent retailers due to a 91 lower volume of handsets sold as well as higher average price of handsets sold , accounting for a $ 177.9 million increase . these items were partially offset by a 37 % decrease in gross customer additions which led to a $ 132.2 million decrease , as well as a decrease in upgrade handset sales to existing customers , which led to a $ 24.7 million decrease .

1-800-flowers.com was also rated number one vs. competitors for customer satisfaction by stellaservice and named by the e-tailing group as one of only nine online retailers out of 100 benchmarked to meet the criteria for excellence in online customer service . 1-800-flowers.com has been honored in internet retailer 's `` hot 100 : america 's best retail web sites '' for 2011. the company 's bloomnet® international floral wire service ( www.mybloomnet.net ) provides a broad range of quality products and value-added services designed to help professional florists grow their businesses profitably . the 1-800-flowers.com `` gift shop '' also includes gourmet gifts such as popcorn and specialty treats from the popcorn factory® ( 1-800-541-2676 or www.thepopcornfactory.com ) ; cookies and baked gifts from cheryl's® ( 1-800-443-8124 or www.cheryls.com ) ; premium chocolates and confections from fannie may® confections brands ( www.fanniemay.com and www.harrylondon.com ) ; gift baskets and towers from 1-800-baskets.com® ( www.1800baskets.com ) ; delicious cut-fruit arrangements from fruitbouquets.com ( www.fruitbuquets.com ) ; wine gifts from winetasting.com® ( www.winetasting.com ) ; ultra- premium meats from stockyards.com ( www.stockyards.com ) ; as well as exquisite , customizable invitations and personal stationery from finestationery.com ( www.finestationery.com ) . the company 's celebrations® brand ( www.celebrations.com ) is a new premier online destination for fabulous party ideas and planning tips . 1-800-flowers.com , inc. is involved in a broad range of corporate social responsibility initiatives including continuous expansion and enhancement of its environmentally-friendly `` green '' programs as well as various philanthropic and charitable efforts . on september 6 , 2011 , the company , through the winetasting network subsidiary , completed the sale of certain assets of its non-strategic wine fulfillment services business in order to focus on its core direct-to-consumer wine business . during the fourth quarter of fiscal 2009 , the company made the strategic decision to divest its home & children 's gifts business segment to focus on its core consumer floral , bloomnet wire service and gourmet foods & gift baskets categories , and on january 25 , 2010 , completed the sale of this business . consequently , the company has classified the results of operations of its home & children 's gifts segment and its wine fulfillment services business , which had previously been included within its gourmet foods & gift baskets category , as discontinued operations for all periods presented . shares in 1-800-flowers.com , inc. are traded on the nasdaq global select market , ticker symbol : flws . 31 as a provider of gifts to consumers and wholesalers for resale to consumers , the company is subject to changes in consumer confidence and the economic conditions that impact our customers . demand for the company 's products is affected by the financial health of our customers , which is influenced by macro economic issues such as unemployment , fuel and energy costs , weakness in the housing market and unavailability of consumer credit . during the recent economic downturn , the demand for our products , and accordingly our financial results , compared to pre-recessionary levels , has been adversely affected by the reduction in consumer spending . during fiscal 2012 the company continued to recover from the effects of the recession which began in fiscal 2009 , building on last year 's improved financial performance . as a result of cost reductions and productivity improvements , marketing efficiency and merchandising innovation , the company has been able to make significant annual improvements in ebitda compared to the low point of the recession during fiscal 2010. a key tenet of the company 's strategy during this period was to stabilize the consumer floral operations and minimize business risk during the current recessionary period . in order to improve earnings during this recessionary period , the company took a more conservative view of the economy , and its expectations of demand , in order to minimize the risk of investing marketing and operating spend for revenue growth too early in the economic recovery cycle . this strategy was designed to protect earnings growth that was expected to be achieved through operational improvements and business resizing programs , including a rationalization of marketing spending , but driven by more effective campaigns , that focused on the company 's ability to `` wow '' our customers with differentiated , non-commoditized higher value products . while the economic recovery continues at a slow pace , with the possibility of a `` double-dip '' recession looming as a result of continued high un-employment , energy and commodity prices , the company believes that its sales `` bottomed-out '' in the first half of fiscal 2011 , as it then began to experience modest year-over-year revenue growth . tempered by the continued economic uncertainty , during fiscal 2013 , the company expects to grow revenues across all three of its business segments with consolidated revenue growth for the year anticipated to be in the mid-single-digit range . also , based on continued improvements in gross profit margin and operating leverage , the company anticipates achieving double-digit year-over-year increases in ebitda and eps . the company 's fiscal 2013 guidance is based on the positive trends—both top and bottom-line—that the company has seen over the past two years , balanced by the continued uncertainty in the global economy . the company plans to continue to focus on managing those aspects of the business where it can drive growth and enhanced results , including : merchandising and marketing initiatives featuring truly original products that have helped drive increased average order value and gross profit margins , efforts in manufacturing , sourcing and shipping that have helped absorb rising commodity and fuel costs and enhanced operating cost leverage , and investments in innovation for the future , including its industry leading efforts in social and mobile arenas , bloomnet and franchising programs in consumer floral and fannie may . the company believes these efforts , and others underway , will help continue the positive trends seen in the business as the company deepens its relationships with its customers , helping them deliver smiles , and build shareholder value . story_separator_special_tag excluding the impact of the acquisitions and new license agreements noted above , net of the impact of the fannie may store sales , and adjusting for the 53 rd week in fiscal 2011 , the company 's revenues increased by 5.2 % during the fiscal year ended july 1 , 2012. during the fiscal year ended july 3 , 2011 revenues increased by 2.8 % over the prior year period , as a result of growth across all categories , including the consumer floral category , reversing the trend after two years of revenue declines . e-commerce revenues ( combined online and telephonic ) increased by 6.1 % and 3.3 % during the years ended july 1 , 2012 and july 3 , 2011 , respectively . the company fulfilled approximately 8.3 million , 8.1 million and 8.4 million e-commerce orders during fiscal 2012 , 2011 and 2010 , respectively , while increasing the average order value to $ 62.45 in fiscal 2012 compared to $ 59.58 in fiscal 2011 and $ 55.71 in fiscal 2010. revenue growth was attributed to improved merchandising programs , including the development of innovative and original products such as the expanded line of a-dog-ables , designed to `` wow '' our customers ' gift recipients and our `` never settle for less '' marketing campaigns , which also enabled the company to reduce its promotional activities . other revenues , comprised of the company 's bloomnet wire service category , as well as the wholesale and retail channels of its consumer floral and gourmet food and gift baskets categories , increased by 8.0 % and 1.5 % during fiscal 2012 and fiscal 2011 , respectively , in comparison to the prior year periods primarily as a result of the aforementioned sales growth in the bloomnet wire service 36 business , as well as the contributions from flowerama , a floral franchise operation purchased in august 2011. additionally , during the second quarter of fiscal 2012 , the company completed a 62-store franchise agreement between fannie may and gb chocolates . the agreement includes development rights for 45 new stores to be opened over the next three years in several mid-west states as well as specific cities in florida and ohio , as well as the sale of 17 existing fannie may retail stores located in areas outside of its core chicago market . while the sale of these stores reduced our revenues in comparison to prior year periods , it provides a platform for our franchisor to successfully complete its fannie may development plan , while providing the company with future revenue streams through franchise and area development fees and product sales . the consumer floral category includes the operations of the 1-800-flowers brand which derives revenue from the sale of consumer floral products through its e-commerce sales channels ( telephonic and online sales ) and royalties from its franchise operations , as well as the operations of fine stationery , an e-commerce retailer of personalized stationery , invitations and announcements . net revenues during the fiscal years ended july 1 , 2012 and july 3 , 2011 increased by 7.9 % and 0.7 % over the respective prior year periods , due to a combination of increased order volumes and a higher average order value , driven by enhanced marketing and merchandising programs that encourage our customers to `` wow '' their gift recipients and `` never settle for less . '' fiscal 2012 also benefited from the better tuesday date placement of the valentine 's day holiday , compared to monday in fiscal 2011 , and sunday in fiscal 2010 , as well as the revenue contributions of several small acquisitions , including fine stationery in may 2011 and flowerama in august 2011 , offset in part by the impact of the 53 rd week in fiscal 2011. for the fiscal year ended july 1 , 2012 , revenue growth for the consumer floral category , excluding the impact of the above acquisitions and the 53 rd week in fiscal 2011 , was approximately 5.6 % . the bloomnet wire service category includes revenues from membership fees as well as other product and service offerings to florists . net revenues during the fiscal years ended july 1 , 2012 and july 3 , 2011 increased by 12.7 % and 18.4 % over the respective prior years , primarily as a result of increased shop-to-shop order volume and wholesale product sales . while this order volume positively impacts revenues , at the present time , the impact on gross margin and contribution margin is significantly less than bloomnet 's normal margin . however , bloomnet has begun to monetize this increased order volume through increasing membership , technology , services and product fees . the gourmet food & gift baskets category includes the operations of 1-800-baskets , cheryl 's ( which includes mrs. beasley 's ) , fannie may confections , the popcorn factory , winetasting.com , stockyards.com and designpac businesses . revenue is derived from the sale of gift baskets , cookies , baked gifts , premium chocolates and confections , gourmet popcorn , wine gifts and prime steaks and chops through its e-commerce sales channels ( telephonic and online sales ) and company-owned and operated retail stores under the cheryl 's and fannie may brand names , royalties from fannie may franchise operations , as well as wholesale operations . net revenue during the fiscal year ended july 1 , 2012 and july 3 , 2011 , increased by 3.2 % and 1.7 % , respectively , in comparison to the prior years .

quarterly results of operations the following table provides unaudited quarterly consolidated results of operations for each quarter of fiscal years 2012 and 2011. the company believes this unaudited information has been prepared substantially on the same basis as the annual audited consolidated financial statements and all necessary adjustments , consisting of only normal recurring adjustments , have been included in the amounts stated below to present fairly the company 's results of operations . the operating results for any quarter are not necessarily indicative of the operating results for any future period . replace_table_token_18_th the company 's quarterly results may experience seasonal fluctuations . due to the company 's expansion into non-floral products , the thanksgiving through christmas holiday season , which falls 43 within the company 's second fiscal quarter , generates the highest proportion of the company 's annual revenues . additionally , as the result of a number of major floral gifting occasions , including mother 's day and administrative professionals week , revenues also rise during the company 's fiscal fourth quarter . the easter holiday was in the company 's fourth quarter during fiscal 2011 and 2012 , but will fall in the third quarter of fiscal 2013. liquidity and capital resources at july 1 , 2012 , the company had working capital of $ 29.7 million , including cash and equivalents of $ 28.9 million , compared to working capital of $ 17.3 million , including cash and equivalents of $ 21.4 million , at july 3 , 2011. net cash provided by operating activities of $ 40.2 million for the fiscal year ended july 1 , 2012 was primarily related to net income , adjusted for the gain on the sale of the company 's wine fulfillment services business in september 2011 , non-cash charges for depreciation and amortization , deferred income taxes , and stock-based compensation , offset in part by increases in working capital , including inventory , accounts receivable and prepaid expenses due to expanded wholesale activities .

current and planned operations currently , the company has to travel to and from its only office in north dakota to the mid-west to bid and compete for sales . the company hopes to expand operations by opening a satellite office in the mid-western region whereby it could aggressively bid on projects easier and more efficiently . the company also plans to mitigate the uncertainty of the u.s. economy by increasing its customer base to include mid-sized grocery chains as well . the large national supermarket chains usually remodel their stores every four to six years . the company has noticed that national chains will more typically begin remodeling projects in the second half of the year , with completion before the holiday season . the majority of the company 's revenues are derived from super valu , inc or associated wholesale grocers which are two of many interior grocery store décor design companies . the duration of the contracts awarded can range anywhere from one week to one month , depending on how large the store is . it normally takes 21 to 30 days upon completion of projects to be paid in full . expanding the company 's market reach and physical presence is the key to its continued growth . because current adm staff is limited by geographic considerations when bidding for jobs , it is necessary to provide more staff in more regions . below is a list of planned district offices for the company and the geographical areas they will serve . through the company 's efforts to go public and enter the equities markets , the company is seeking to secure additional funds from outside investors to execute its planned expanded operations in the near future . the company has not entered into any agreements , verbal or written , with regards to securing additional funding necessary to finance planned future operations . moreover , there are no agreements in place with any officer of the company nor with outside entities to fund the company if it were to have a shortfall in capital . it is estimated that each of the company 's five targeted expansion areas will require approximately $ 200,000 each in startup capital for a total of $ 1,000,000 over a two-year rollout period . bismarck , north dakota will continue to remain the headquarters for the company . because approximately 80 % of the company 's current clients come from the kansas city area , this is the first area targeted for expansion . district location geographic area target date kansas city , mo missouri , kansas , oklahoma , arkansas march 1 , 2019 minneapolis , mn minnesota , iowa , wisconsin , northern illinois , and the up of michigan september 1 , 2019 denver , co colorado , wyoming , western nebraska , and western kansas march 1 , 2020 chicago , il illinois , indiana , michigan , and eastern wisconsin september 1 , 2020 spokane , wa washington , california , idaho , and montana march 1 , 2021 8 the company hopes this expansion will result in large revenue gains over the next three years . as each new location becomes self-sufficient , revenues will grow proportionately . in order to ensure each location is self-sufficient as quickly as possible , the company will implement an expansion plan company wide , including the following practices : ● a full technological update , which will include the installation of a computer network with its main server located in bismarck , north dakota . each outlying location will have a computer station so as to centralize each location . the headquarters will continue to be responsible for all accounting , billing , tracking , administrative , and management activities . each location will simply provide data inputs of current activity to keep data current at all times . comparison of the year ended december 31 , 2017 to the year ended december 31 , 2016 story_separator_special_tag text-align : center '' > revenue recognition the company recognizes revenue for our services in accordance with asc 605-10 , “ revenue recognition in financial statements. ” under these guidelines , revenue is recognized on transactions when all of the following exist : persuasive evidence of an arrangement did exist , delivery of service has occurred , the sales price to the buyer is fixed or determinable and collectability is reasonably assured . the company has one revenue stream of providing installation services to grocery decor design companies . stock-based compensation the company accounts for stock-based instruments issued to employees in accordance with asc topic 718. asc topic 718 requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees . the company accounts for non-employee share-based awards in accordance with asc topic 505-50. the value of the portion of an award that is ultimately expected to vest is recognized as an expense over the requisite service periods using the straight-line attribution method . the company estimates the fair value of each stock option at the grant date by using the black-scholes option-pricing model . the company estimates the fair value of each stock option at the grant date by using the black-scholes option-pricing model . recently issued accounting pronouncements we have decided to take advantage of the exemptions provided to emerging growth companies under the jobs act and as a result our financial statements may not be comparable to companies that comply with public company effective dates . we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies , including not being required to comply with the auditor attestation requirements of section 404 of the sarbanes-oxley act , delay compliance with new or revised accounting standards that have different effective dates for public and private companies until they are made applicable to private story_separator_special_tag current and planned operations currently , the company has to travel to and from its only office in north dakota to the mid-west to bid and compete for sales . the company hopes to expand operations by opening a satellite office in the mid-western region whereby it could aggressively bid on projects easier and more efficiently . the company also plans to mitigate the uncertainty of the u.s. economy by increasing its customer base to include mid-sized grocery chains as well . the large national supermarket chains usually remodel their stores every four to six years . the company has noticed that national chains will more typically begin remodeling projects in the second half of the year , with completion before the holiday season . the majority of the company 's revenues are derived from super valu , inc or associated wholesale grocers which are two of many interior grocery store décor design companies . the duration of the contracts awarded can range anywhere from one week to one month , depending on how large the store is . it normally takes 21 to 30 days upon completion of projects to be paid in full . expanding the company 's market reach and physical presence is the key to its continued growth . because current adm staff is limited by geographic considerations when bidding for jobs , it is necessary to provide more staff in more regions . below is a list of planned district offices for the company and the geographical areas they will serve . through the company 's efforts to go public and enter the equities markets , the company is seeking to secure additional funds from outside investors to execute its planned expanded operations in the near future . the company has not entered into any agreements , verbal or written , with regards to securing additional funding necessary to finance planned future operations . moreover , there are no agreements in place with any officer of the company nor with outside entities to fund the company if it were to have a shortfall in capital . it is estimated that each of the company 's five targeted expansion areas will require approximately $ 200,000 each in startup capital for a total of $ 1,000,000 over a two-year rollout period . bismarck , north dakota will continue to remain the headquarters for the company . because approximately 80 % of the company 's current clients come from the kansas city area , this is the first area targeted for expansion . district location geographic area target date kansas city , mo missouri , kansas , oklahoma , arkansas march 1 , 2019 minneapolis , mn minnesota , iowa , wisconsin , northern illinois , and the up of michigan september 1 , 2019 denver , co colorado , wyoming , western nebraska , and western kansas march 1 , 2020 chicago , il illinois , indiana , michigan , and eastern wisconsin september 1 , 2020 spokane , wa washington , california , idaho , and montana march 1 , 2021 8 the company hopes this expansion will result in large revenue gains over the next three years . as each new location becomes self-sufficient , revenues will grow proportionately . in order to ensure each location is self-sufficient as quickly as possible , the company will implement an expansion plan company wide , including the following practices : ● a full technological update , which will include the installation of a computer network with its main server located in bismarck , north dakota . each outlying location will have a computer station so as to centralize each location . the headquarters will continue to be responsible for all accounting , billing , tracking , administrative , and management activities . each location will simply provide data inputs of current activity to keep data current at all times . comparison of the year ended december 31 , 2017 to the year ended december 31 , 2016 story_separator_special_tag text-align : center '' > revenue recognition the company recognizes revenue for our services in accordance with asc 605-10 , “ revenue recognition in financial statements. ” under these guidelines , revenue is recognized on transactions when all of the following exist : persuasive evidence of an arrangement did exist , delivery of service has occurred , the sales price to the buyer is fixed or determinable and collectability is reasonably assured . the company has one revenue stream of providing installation services to grocery decor design companies . stock-based compensation the company accounts for stock-based instruments issued to employees in accordance with asc topic 718. asc topic 718 requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees . the company accounts for non-employee share-based awards in accordance with asc topic 505-50. the value of the portion of an award that is ultimately expected to vest is recognized as an expense over the requisite service periods using the straight-line attribution method . the company estimates the fair value of each stock option at the grant date by using the black-scholes option-pricing model . the company estimates the fair value of each stock option at the grant date by using the black-scholes option-pricing model . recently issued accounting pronouncements we have decided to take advantage of the exemptions provided to emerging growth companies under the jobs act and as a result our financial statements may not be comparable to companies that comply with public company effective dates . we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies , including not being required to comply with the auditor attestation requirements of section 404 of the sarbanes-oxley act , delay compliance with new or revised accounting standards that have different effective dates for public and private companies until they are made applicable to private

results of operations revenue for the year ended december 31 , 2017 , the company had revenues of $ 159,836 compared to $ 189,406 for the same period in 2016. the decrease in revenue of $ 29,570 , or 15.6 % , is primarily due to reduction in customers during the 4 th quarter of 2017. cost of revenues the cost of revenues for the year ended december 31 , 2017 was $ 27,156 compared to $ 53,290 for the same period in 2016. cost of revenues for 2017 was 17.0 % of revenue compared to 28.1 % of revenue for 2016. the primary cause of the decrease in the cost revenue was due to the decrease in revenues whereas the decrease in the percent of revenue was primarily due to increased efficiencies . general and administrative expenses the general and administrative expenses was $ 808,013 for the year ended december 31 , 2017 compared to $ 900,911 for the same period in 2016. the expenses decreased in 2017 primarily due to the decrease in consulting expenses in 2017. net loss the net loss for the year ended december 31 , 2017 was $ 688,165 compared to $ 771,946 for the same period in 2016. liquidity and capital resources general at december 31 , 2017 , we had cash of $ 9,356. we have historically met our cash needs through a combination of cash flows from operating activities and proceeds from loans and financing by our officers and directors . our cash requirements are generally for selling , general and administrative activities . we believe that our cash balance is not sufficient to finance our cash requirements for expected operational activities , capital improvements , and partial repayment of debt through the next 12 months .

the following is a schedule by years of the future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of december 31 , 2015 ( in thousands ) : replace_table_token_24_th ( b ) operating leases the company has certain facility leases with terms ranging between one and five years . lease expense is recognized on a straight-line basis . rental expense for operating leases during the years ended december 31 , 2015 , 2014 and 2013 , was $ 1.7 million , $ 1.2 million , and $ 766,000 respectively , including those with terms less than one year , and has been included in both research and development and general and administration in the consolidated statements of operations . f-12 newlink genetics corporation and subsidiaries notes to consolidated financial statements future minimum lease payments under the noncancelable operating leases ( with initial or remaining lease terms in excess of one year ) as of december 31 , 2015 are as follows ( in thousands ) : replace_table_token_25_th 4. long-term debt and conversion to royalty obligation march 2005 iowa department of economic development loan in march 2005 , the company entered into a $ 6.0 million forgivable loan agreement with the iowa department of economic development , or the ided . under the agreement , in the absence of default , there were no principal or interest payments due until the completion date for the project . the balance outstanding under the loan agreement was $ 6.0 million as of december 31 , 2011. this loan was converted story_separator_special_tag the following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included in part ii , item 8 of this annual report on form 10-k. this discussion contains forward-looking statements that involve risks and uncertainties . as a result of many factors , such as those set forth under “ risk factors ” and elsewhere in this annual report on form 10-k , our actual results may differ materially from those anticipated in these forward-looking statements . you should not place undue reliance on these forward-looking statements , which apply only as of the date of this annual report on form 10-k. except as required by law , we assume no obligation to update these forward-looking statements publicly , or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements , even if new information becomes available in the future . you should read this annual report on form 10-k and the documents that we reference in this annual report on form 10-k completely . overview we are a biopharmaceutical company focused on discovering , developing and commercializing novel immunotherapeutic products to improve treatment options for patients with cancer . our portfolio includes biologic and small-molecule immuno-oncology product candidates intended to treat a wide range of oncology indications . our biologic product candidates are based on our proprietary hyperacute ® cellular immunotherapy technology , which is designed to stimulate the human immune system . algenpantucel-l is our most clinically advanced product candidate from this platform with two phase 3 clinical trials ongoing for patients with pancreatic cancer , one of which is expected to read out data during 2016. our additional hyperacute cellular immunotherapy product candidates in clinical development include tergenpumatucel-l and dorgenmeltucel-l for patients with advanced lung cancer and melanoma , respectively . additional product candidates are also under development for patients with other types of cancer . additionally , we have two small-molecule product candidates currently in clinical development , gdc-0919 and indoximod , which target key immune checkpoints . these product candidates are ido pathway inhibitors and focus on breaking the immune system 's tolerance to cancer . we believe that our immuno-oncology technologies have the potential to lead to multiple product candidates , targeting a wide range of oncology indications that could be used either alone or in combination with other therapies . our hyperacute cellular immunotherapy platform consists of novel biologic product candidates designed to stimulate the patient 's immune system to recognize and attack cancer cells . to date , our hyperacute cellular immunotherapy platform product candidates have been administered to more than 700 patients with cancer , either as a monotherapy or in combination with other treatments and have been generally well tolerated with limited grade 3/4 adverse events . hyperacute cellular immunotherapy product candidates are composed of human cancer cell lines that are tumor specific , but not patient specific . these cells have been modified to express alpha-gal , a carbohydrate for which humans have preexisting immunity . these alpha-gal-modified cancer cells are designed to stimulate an immune response against cancer cells . the objective of hyperacute cellular immunotherapy is to elicit an antitumor response by “ educating ” the immune system to attack a patient 's own cancer cells . hyperacute cellular immunotherapies do not require any tissue from individual patients and use intact whole cells rather than cell fragments or purified proteins . we believe these unique properties of our hyperacute cellular immunotherapy product candidates have the potential to result in the stimulation of a robust immune response in patients with cancer . our most advanced program , algenpantucel-l , which utilizes our hyperacute cellular immunotherapy technology , is being studied in two randomized phase 3 clinical trials . our first phase 3 clinical trial , impress ( immunotherapy for pancreatic resectable cancer survival study ) completed enrollment of 722 patients with surgically resected pancreatic cancer . the primary endpoint for our impress trial is overall survival . we expect to report primary impress results during 2016. our second phase 3 clinical trial , pillar ( pancreatic immunotherapy with algenpantucel-l for locally advanced non-resectable disease ) , has completed enrollment with over 300 patients . the primary endpoint for our pillar trial is overall survival . we initiated these trials based on encouraging phase 2 data that suggest potential to improve both disease-free and overall survival . story_separator_special_tag in addition to milestone payments from merck , the company was awarded contracts for development of the rvsv-zebov rom the biomedical research & development agency , or barda , and the defense threat reduction agency , or dtra , totaling $ 67.0 million during 2014 and 2015. in july 2015 , we announced that the international partnership studying the rvsv-zebov vaccine candidate in guinea released interim data suggesting that it is effective in the prevention of ebola disease in a large phase 3 clinical trial . according to the announcement , the interim results suggest that the vaccine candidate demonstrates efficacy within about 10 days 72 of administration to a person without the infection . the rvsv-zebov product candidate will continue to be studied in clinical trials . in february 2016 , we announced our initiative to develop a vaccine against the zika virus . we believe that the experience gained in the development of our ebola vaccine candidate will give us an advantage in this program . we had a net loss of $ 40.4 million for the year ended december 31 , 2015 . we expect our losses to increase over the next several years as we advance our product candidates through late-stage clinical trials , pursue regulatory approval of our product candidates , and expand our commercialization activities in anticipation of one or more of our product candidates receiving marketing approval . financial overview revenues we have never earned revenue from commercial sales of any of our product candidates . we generated revenues of $ 68.5 million for the year ended december 31 , 2015 . we had grant revenues of $ 32.4 million attributable to revenues earned for the performance of research and development under contracts and grants with the department of defense , or dod , and barda . we also earned license and collaboration revenues of $ 36.1 million which consisted of revenues recognized under the license and collaboration agreements with merck and genentech that we entered into during 2014 , and a milestone payment of $ 20.0 million from merck in february 2015. in the future , we may generate revenue from a variety of sources , including product sales if we develop products which are approved for sale , license fees , milestones , research and development and royalty payments in connection with strategic collaborations or government contracts , or licenses of our intellectual property . we expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of license fees , research and development reimbursements , milestone and other payments we may receive under potential strategic collaborations , and the amount and timing of payments we may receive upon the sale of any products , if approved , to the extent any are successfully commercialized . we do not expect to generate revenue from product sales for several years , if ever . if we fail to complete the development of our product candidates in a timely manner or to obtain regulatory approval for them , our ability to generate future revenue , and our results of operations and financial position , would be materially adversely affected . research and development expenses research and development expenses consist of expenses incurred in connection with the discovery and development of our product candidates . these expenses consist primarily of : employee-related expenses , which include salaries , bonuses , benefits and share-based compensation ; the cost of acquiring and manufacturing clinical trial materials ; expenses incurred under agreements with contract research organizations , investigative sites and consultants that conduct our clinical trials and a substantial portion of our preclinical studies ; facilities , depreciation of fixed assets and other allocated expenses , which include direct and allocated expenses for rent and maintenance of research facilities and equipment ; license fees for and milestone payments related to in-licensed products and technology ; and costs associated with non-clinical activities and regulatory approvals . we expense research and development expenses as incurred . product candidates in late stages of clinical development generally have higher development costs than those in earlier stages of clinical development , primarily due to the increased size , duration and complexity of later stage clinical trials . we plan to increase our research and development expenses for the foreseeable future as we seek to complete development of our most advanced product candidates , and to further advance our earlier-stage research and development projects . for the years ended december 31 , 2015 , 2014 and 2013 we incurred $ 71.4 million , $ 35.7 million , and $ 22.7 million , respectively , in research and development expenses . the following tables summarize our research and development expenses for the periods indicated : 73 replace_table_token_9_th replace_table_token_10_th at this time , we can not accurately estimate or know the nature , specific timing or costs necessary to complete clinical development activities for our product candidates . we are subject to the numerous risks and uncertainties associated with developing biopharmaceutical products including the uncertain cost and outcome of ongoing and planned clinical trials , the possibility that the fda or another regulatory authority may require us to conduct clinical or non-clinical testing in addition to trials that we have planned , rapid and significant technological changes , frequent new product and service introductions and enhancements , evolving industry standards in the life sciences industry and our future need for additional capital . in addition , we currently have limited clinical data concerning the safety and efficacy of our product candidates . a change in the outcome of any of these variables with respect to the development of any of our product candidates could result in a significant change in the costs and timing of our research and development expenses . general and administrative expenses general and administrative expenses consist principally of salaries and related costs for personnel in executive , finance , business development , information technology , legal and human resources functions .

results of operations comparison of the years ended december 31 , 2015 and 2014 revenues . revenues for the year ended december 31 , 2015 were $ 68.5 million , as compared to $ 172.6 million in 2014 , a decrease of $ 104.1 million . licensing and collaboration revenues decreased by $ 129.8 million in 2015. in 2014 , we received an upfront payment from genentech for $ 150.0 million and an upfront payment from merck for $ 30.0 million . our licensing and collaboration revenues decreased in 2015 as we did not receive similar upfront payments . licensing and collaboration revenues in 2015 are comprised primarily of a merck milestone payment received in february 2015 for $ 20.0 million and revenues recognized 78 in 2015 that were previously deferred as of december 31 , 2014. grant revenues increased by $ 25.7 million primarily due to revenues received under our barda government contract for our work with the ebola vaccine . research and development expenses . research and development expenses for the year ended december 31 , 2015 were $ 71.4 million , increasing from $ 35.7 million for the same period in 2014 . the $ 35.7 million increase was due to an $ 11.2 million increase in outside clinical and other expenses , a $ 11.4 million increase relating to contract manufacturing costs for our clinical trials and the ebola vaccine product candidate , a $ 4.0 million increase in supplies and equipment , and a $ 7.6 million increase in personnel-related expenses due to increased staffing levels and compensation increases . the remaining $ 1.5 million increase is due to increases in supplies and equipment-related expenses incurred for our clinical trial activities . general and administrative expenses .

-46- report of independent registered public accounting firm board of directors and stockholders atrion corporation we have audited atrion corporation 's internal control over financial reporting as of december 31 , 2011 , based on criteria established in internal control—integrated framework issued by the committee of sponsoring organizations of the treadway commission ( coso ) . atrion corporation 's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting , included in the accompanying management 's report on internal control over financial reporting . our responsibility is to express an opinion on atrion corporation 's internal control over financial reporting based on our audit . we conducted our audit in accordance with the standards of the public company accounting oversight board ( united states ) . those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects . our audit included obtaining an understanding of internal control over financial reporting , assessing the risk that a material weakness exists , testing and evaluating the design and operating effectiveness of internal control based on the assessed risk , and performing such other procedures as we considered necessary in the circumstances . we believe that our audit provides a reasonable basis for our opinion . a company 's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles . a company 's internal control over financial reporting includes those policies and procedures that ( 1 ) pertain to the maintenance of story_separator_special_tag overview we develop and manufacture products primarily for medical applications . we market components to other equipment manufacturers for incorporation in their products and sell finished devices to physicians , hospitals , clinics and other treatment centers . our medical products primarily serve the fluid delivery , cardiovascular , and ophthalmology markets . our other medical and non-medical products include instrumentation and disposables used in dialysis and valves and inflation devices used in marine and aviation safety products . in 2011 approximately 42 percent of our sales were outside the united states . our products are used in a wide variety of applications by numerous customers . we encounter competition in all of our markets and compete primarily on the basis of product quality , price , engineering , customer service and delivery time . -17- our strategy is to provide a broad selection of products in the areas of our expertise . research and development efforts are focused on improving current products and developing highly-engineered products that meet customer needs in niche markets that are large enough to provide meaningful increases in sales . proposed new products may be subject to regulatory clearance or approval prior to commercialization and the time period for introducing a new product to the marketplace can be unpredictable . we also focus on controlling costs by investing in modern manufacturing technologies and controlling purchasing processes . we have been successful in consistently generating cash from operations and have used that cash to reduce indebtedness , to fund capital expenditures , to make investment purchases , to repurchase stock and to pay dividends . our strategic objective is to further enhance our position in our served markets by : · focusing on customer needs ; · expanding existing product lines and developing new products ; · maintaining a culture of controlling cost ; and · preserving and fostering a collaborative , entrepreneurial management structure . for the year ended december 31 , 2011 , we reported revenues of $ 117.7 million , operating income of $ 38.2 million and net income of $ 26.0 million . story_separator_special_tag operations and for major capital projects or acquisitions , subject to certain limitations and restrictions . borrowings under the credit facility bear interest that is payable monthly at 30-day , 60-day or 90-day libor , as selected by us , plus one percent . from time to time prior to october 1 , 2016 and assuming an event of default is not then existing , we can convert outstanding advances under the revolving line of credit to term loans with a term of up to two years . we had no outstanding borrowings under our credit facility at december 31 , 2011 or at december 31 , 2010. the credit facility contains various restrictive covenants , none of which is expected to impact our liquidity or capital resources . at december 31 , 2011 , we were in compliance with all financial covenants . we believe that the bank providing the credit facility is highly-rated and that the entire $ 40.0 million under the credit facility is currently available to us . if that bank were unable to provide such funds , we believe that such inability would not impact our ability to fund operations . -19- at december 31 , 2011 , we had a total of $ 55.3 million in cash and cash equivalents , short-term investments and long-term investments , an increase of $ 13.6 million from december 31 , 2010. the principal contributor to this increase was the cash generated by operating activities , which was partially offset by payments for acquisitions of property , plant and equipment and the payment of dividends . cash flows provided by operations of $ 30.7 million in 2011 were primarily comprised of net income plus the net effect of non-cash expenses less net changes in working capital items . inventories were the primary contributors to the negative net change in working capital items . the change in inventories was primarily related to increased stocking levels necessary to mitigate a supplier risk , to assure uninterrupted deliveries and to ensure high customer service levels . story_separator_special_tag in making determinations of likely outcomes of litigation matters , we consider the evaluation of legal counsel knowledgeable about each matter , case law and other case-specific issues . we believe these accruals are adequate to cover the legal fees and expenses associated with litigating these matters . however , the time and cost required to litigate these matters as well as the outcomes of the proceedings may vary from what we have projected . -21- we maintain an allowance for doubtful accounts to reflect estimated losses resulting from the failure of customers to make required payments . on an ongoing basis , the collectability of accounts receivable is assessed based upon historical collection trends , current economic factors and the assessment of the collectability of specific accounts . we evaluate the collectability of specific accounts and determine when to grant credit to our customers using a combination of factors , including the age of the outstanding balances , evaluation of customers ' current and past financial condition , recent payment history , current economic environment , and discussions with our personnel and with the customers directly . accounts are written off when it is determined the receivable will not be collected . if circumstances change , our estimates of the collectability of amounts could be changed by a material amount . we are required to estimate our provision for income taxes and uncertain tax positions in each of the jurisdictions in which we operate . this process involves estimating our actual current tax exposure , including assessing the risks associated with tax audits , together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes . these differences result in deferred tax assets and liabilities , which are included within the balance sheet . we assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is more likely than not , do not establish a valuation allowance . in the event that actual results differ from these estimates , the provision for income taxes could be materially impacted . we assess the impairment of our long-lived identifiable assets , excluding goodwill which is tested for impairment as explained below , whenever events or changes in circumstances indicate that the carrying value may not be recoverable . this review is based upon projections of anticipated future cash flows . although we believe that our estimates of future cash flows are reasonable , different assumptions regarding such cash flows or future changes in our business plan could materially affect our evaluations . no such changes are anticipated at this time . we assess goodwill for impairment pursuant to asc 350 , intangibles—goodwill and other , which requires that goodwill be assessed whenever events or changes in circumstances indicate that the carrying value may not be recoverable , or , at a minimum , on an annual basis by applying a fair value test . during 2009 , 2010 and 2011 , none of our critical accounting policy estimates required significant adjustments . we did not note any material events or changes in circumstances indicating that the carrying value of long-lived assets were not recoverable . quantitative and qualitative disclosures about market risks foreign exchange risk we are not exposed to material fluctuations in currency exchange rates because the payments from our international customers are received primarily in united states dollars . principal and interest rate risk our cash equivalents and short-term and long-term investments consist of money-market accounts and taxable high-grade corporate bonds . our investment policy is to seek to manage these assets to achieve the goal of preserving principal , maintaining adequate liquidity at all times , and maximizing returns subject to established investment guidelines . in general , the primary exposure to market risk is interest rate sensitivity . this means that a change in prevailing interest rates may cause the value of and the return on the investment to fluctuate . in recent years , there has been concern in the credit markets regarding the value of a variety of mortgage-backed securities and the resultant effect on various securities markets . we believe that our cash , cash equivalents , and investments do not have significant risk of default or illiquidity . however , our cash equivalents and investments may be subject to adverse changes in market value . -22- forward-looking statements statements in this management 's discussion and analysis and elsewhere in this form 10-k that are forward-looking are based upon current expectations , and actual results or future events may differ materially . therefore , the inclusion of such forward-looking information should not be regarded as a representation by us that our objectives or plans will be achieved . such statements include , but are not limited to , our expectations regarding our research and development expenditures in 2012 , our 2012 effective tax rate , our ability to obtain component parts in the event of a supply disruption , shipments in 2012 to a large customer which had excess inventory at the end of 2011 , earnings in 2012 , a return to double-digit annual growth in earnings per share in 2013 , our 2012 capital expenditures , funding future dividend payments with cash flows from operations , availability of equity and debt financing , our ability to meet our cash requirements for the foreseeable future , our ability to fund operations if the bank providing our credit facility were unable to lend funds to us , the impact on our consolidated financial statement of recently issued accounting standards when we adopt those standards , and increases in 2012 in cash , cash equivalents and investments . words such as “ expects , ” “ believes , ” “ anticipates , ” “ intends , ” “ should , ” “ plans , ” and variations of such words and similar expressions are intended to

results of operations our net income was $ 26.0 million , or $ 12.90 per basic and $ 12.82 per diluted share , in 2011 , compared to net income of $ 21.0 million , or $ 10.38 per basic and $ 10.32 per diluted share , in 2010 and net income of $ 16.8 million , or $ 8.51 per basic and $ 8.36 per diluted share , in 2009. the 2009 results included a $ 643,000 net of tax settlement charge , or $ 0.32 per diluted share , related to the termination of our defined benefit pension plans . revenues were $ 117.7 million in 2011 , compared with $ 108.6 million in 2010 and $ 100.6 million in 2009. the 8 percent revenue increases in 2011 over 2010 and in 2010 over 2009 were generally attributable to higher sales volumes . annual revenues by product lines were as follows ( in thousands ) : replace_table_token_3_th our cost of goods sold was $ 57.7 million in each of 2011 and 2010 and $ 55.3 million in 2009. increased sales volume , increased material costs , and increased manufacturing overhead costs were the primary contributors to the 4 percent increase in cost of goods sold for 2010 over 2009. gross profit in 2011 increased $ 9.1 million to $ 60.0 million , compared with $ 50.9 million in 2010 and $ 45.3 million in 2009. our gross profit was 51 percent of revenues in 2011 , 47 percent of revenues in 2010 and 45 percent of revenues in 2009. the increases in gross profit percentage in each of 2011 and 2010 from the prior year were primarily due to a favorable product mix , improvements in manufacturing efficiencies and the impact of cost-savings projects .

beneficial ownership is determined in accordance with the rules of the securities and exchange commission and generally includes voting or investment power with respect to securities . shares of common stock and options , warrants and convertible securities that are currently exercisable or convertible within 60 days of the date of this document into shares of free flow 's common stock are deemed to be outstanding and to be beneficially owned by the person holding the options , warrants or convertible securities for the purpose of computing the percentage ownership of the person , but are not treated as outstanding for the purpose of computing the percentage ownership of any other person . there are currently 100,000,000 common shares authorized of which 26,200,000 are outstanding at march 4 , 2017 the following sets forth information with respect to our common stock beneficially owned by each officer and director , and by all directors and officers as a group as of december 31 , 2016. replace_table_token_11_th ( 1 ) address is c/o free flow , inc. , 2301 woodland crossing dr. , suite # 155 , herndon , va 20171 . ( 2 ) mr. saleem is an officer , director and or beneficial shareholder of redfield holdings , ltd. redfield holdings , ltd. holds 19,995,000 shares of common stock . ( 3 ) each share of preferred share - series a stock carries voting rights equal to ten thousand ( 10,000 ) votes . redfield holdings , ltd. holds 10,000 shares of preferred shares - series a stock . mr. saleem is an officer , director and or beneficial shareholder of redfield holdings , ltd. as of december 31 , 2016 , 10,000 preferred shares - series a stock was issued and outstanding . 27 item 13. certain relationships and related transactions , and director independence other than the transactions discussed below , we have not entered into any transaction nor are there any proposed transactions in which any of our founders , directors , executive officers , shareholders or any members of the immediate family of any of the foregoing had or is to have a direct or indirect material interest . item 14. principal accounting fees and services east west accounting services , llc ( “ eastwest ” ) is the company 's principal auditing accountant firm . the company 's board of directors has considered whether the provisions of audit services are compatible with maintaining east west 's independence . the engagement of our independent registered public accounting firm was approved by our of our board directors prior to the start of the audit of our consolidated financial statements for the years ended december 31 , 2016. the following table represents aggregate fees billed to the company for the years ended december 31 , 2016 by east west accounting services , llc and anton & chia , cpa the former auditors ; 2015 by paritz & co. cpa ( the former auditors ) . replace_table_token_12_th all audit work was performed by the auditors ' full time employees . 28 part iv item 15. exhibits , financial statement schedules the following is a complete list of exhibits filed as part of this form 10k . exhibit number corresponds to the numbers in the exhibit table of item 601 of regulation s-k. replace_table_token_13_th * filed as exhibits with the company 's s-1 registration statement filed with the securities and exchange commission ( www.sec.gov ) , dated march 6 , 2012 . ( 1 ) pursuant to rule 406t of regulation s-t , this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the securities act of 1933 , is deemed not filed for purposes of section 18 of the securities exchange act of 1934 , and otherwise is not subject to liability under these sections . 29 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 free flow , inc. sabir saleem march 31 , 2017 sabir saleem ( chief executive officer/principal executive officer & principal accounting officer ) 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 . sabir saleem march 31 , 2017 sabir saleem , director fernandino ferrara march 31 , 2017 fernandino ferrara , director 30 story_separator_special_tag managements ' discussion and analysis the following discussion should be read in conjunction with our audited consolidated financial statements and notes thereto included herein . this discussion contains forward-looking statements , such as statements relating to our financial condition , results of operations , plans , objectives , future performance and business operations . these statements relate to expectations concerning matters that are not historical facts . these forward-looking statements reflect our current views and expectations based largely upon the information currently available to us and are subject to inherent risks and uncertainties . although we believe our expectations are based on reasonable assumptions , they are not guarantees of future performance and there are a number of important factors that 6 could cause actual results to differ materially from those expressed or implied by such forward-looking statements . by making these forward-looking statements , we do not undertake to update them in any manner except as may be required by our disclosure obligations in filings we make with the securities and exchange commission under the federal securities laws . our actual results may differ materially from our forward-looking statements the independent registered public accounting firm 's report on the company 's financial statements as of december 31 , 2016 includes a `` going concern '' explanatory paragraph that describes substantial doubt about the company story_separator_special_tag beneficial ownership is determined in accordance with the rules of the securities and exchange commission and generally includes voting or investment power with respect to securities . shares of common stock and options , warrants and convertible securities that are currently exercisable or convertible within 60 days of the date of this document into shares of free flow 's common stock are deemed to be outstanding and to be beneficially owned by the person holding the options , warrants or convertible securities for the purpose of computing the percentage ownership of the person , but are not treated as outstanding for the purpose of computing the percentage ownership of any other person . there are currently 100,000,000 common shares authorized of which 26,200,000 are outstanding at march 4 , 2017 the following sets forth information with respect to our common stock beneficially owned by each officer and director , and by all directors and officers as a group as of december 31 , 2016. replace_table_token_11_th ( 1 ) address is c/o free flow , inc. , 2301 woodland crossing dr. , suite # 155 , herndon , va 20171 . ( 2 ) mr. saleem is an officer , director and or beneficial shareholder of redfield holdings , ltd. redfield holdings , ltd. holds 19,995,000 shares of common stock . ( 3 ) each share of preferred share - series a stock carries voting rights equal to ten thousand ( 10,000 ) votes . redfield holdings , ltd. holds 10,000 shares of preferred shares - series a stock . mr. saleem is an officer , director and or beneficial shareholder of redfield holdings , ltd. as of december 31 , 2016 , 10,000 preferred shares - series a stock was issued and outstanding . 27 item 13. certain relationships and related transactions , and director independence other than the transactions discussed below , we have not entered into any transaction nor are there any proposed transactions in which any of our founders , directors , executive officers , shareholders or any members of the immediate family of any of the foregoing had or is to have a direct or indirect material interest . item 14. principal accounting fees and services east west accounting services , llc ( “ eastwest ” ) is the company 's principal auditing accountant firm . the company 's board of directors has considered whether the provisions of audit services are compatible with maintaining east west 's independence . the engagement of our independent registered public accounting firm was approved by our of our board directors prior to the start of the audit of our consolidated financial statements for the years ended december 31 , 2016. the following table represents aggregate fees billed to the company for the years ended december 31 , 2016 by east west accounting services , llc and anton & chia , cpa the former auditors ; 2015 by paritz & co. cpa ( the former auditors ) . replace_table_token_12_th all audit work was performed by the auditors ' full time employees . 28 part iv item 15. exhibits , financial statement schedules the following is a complete list of exhibits filed as part of this form 10k . exhibit number corresponds to the numbers in the exhibit table of item 601 of regulation s-k. replace_table_token_13_th * filed as exhibits with the company 's s-1 registration statement filed with the securities and exchange commission ( www.sec.gov ) , dated march 6 , 2012 . ( 1 ) pursuant to rule 406t of regulation s-t , this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the securities act of 1933 , is deemed not filed for purposes of section 18 of the securities exchange act of 1934 , and otherwise is not subject to liability under these sections . 29 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 free flow , inc. sabir saleem march 31 , 2017 sabir saleem ( chief executive officer/principal executive officer & principal accounting officer ) 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 . sabir saleem march 31 , 2017 sabir saleem , director fernandino ferrara march 31 , 2017 fernandino ferrara , director 30 story_separator_special_tag managements ' discussion and analysis the following discussion should be read in conjunction with our audited consolidated financial statements and notes thereto included herein . this discussion contains forward-looking statements , such as statements relating to our financial condition , results of operations , plans , objectives , future performance and business operations . these statements relate to expectations concerning matters that are not historical facts . these forward-looking statements reflect our current views and expectations based largely upon the information currently available to us and are subject to inherent risks and uncertainties . although we believe our expectations are based on reasonable assumptions , they are not guarantees of future performance and there are a number of important factors that 6 could cause actual results to differ materially from those expressed or implied by such forward-looking statements . by making these forward-looking statements , we do not undertake to update them in any manner except as may be required by our disclosure obligations in filings we make with the securities and exchange commission under the federal securities laws . our actual results may differ materially from our forward-looking statements the independent registered public accounting firm 's report on the company 's financial statements as of december 31 , 2016 includes a `` going concern '' explanatory paragraph that describes substantial doubt about the company

results of operations for the year ended december 31 , 2016 compared to the year ended december 31 , 2015 during the year ended december 31 , 2016 , the company recognized $ 551,181 in gross revenues . during the year ended december 31 , 2015 , the company recognized no revenues . during the year ended december 31 , 2016 , the company incurred operational expenses of $ 315,153. during the year ended december 31 , 2015 , the company incurred operational expenses of $ 81,092. the increase of approximately $ 234,000 was primarily a result of an increase in salary and other operating expenses . during the year ended december 31 , 2016 , the company recognized a net profit of approximately $ 134,000 compared to a net loss of $ 417,325 during the year ended december 31 , 2015. liquidity the independent registered public accounting firm 's report on the company 's financial statements as of december 31 , 2016 and for each of the years in the two-year period then ended , including a “ going concern ” explanatory paragraph that raises substantial doubt about the company 's ability to continue as a going concern . at december 31 , 2016 , the company had total current assets of $ 274,357 consisting of $ 3,718 in cash , advance for prepaid expense for purchase of parts of $ 14,224 , inventory of $ 200,060 , pre-paid rent for the jk sales , facility of $ 48,600 and trade receivables of $ 7,755 from a number of customers . at december 31 , 2016 , total current liabilities were $ 203,930 consisting of $ 73,156 in accounts payable and notes payable to related party of $ 130,773. during the year ended december 31 , 2016 , the company used $ 132,412 in funds in its operational activities .

the company generally owns the land and building or secures long-term leases for both company-operated and conventional franchised restaurant sites . this maintains long-term occupancy rights , helps control related costs and assists in alignment with franchisees enabling restaurant performance levels that are among the highest in the industry . in certain circumstances , the company participates in the reinvestment for conventional franchised restaurants in an effort to accelerate implementation of certain initiatives . under mcdonald 's developmental license arrangement , licensees provide capital for the entire business , including the real estate interest , and the company generally has no capital invested . in addition , the company has an equity investment in a limited number of affiliates that invest in real estate and operate or franchise restaurants within a market . mcdonald 's is primarily a franchisor and believes franchising is paramount to delivering great-tasting food , locally-relevant customer experiences and driving profitability . franchising enables an individual to be his or her own employer and maintain control over all employment-related matters , marketing and pricing decisions , while also benefiting from the financial strength and global experience of mcdonald 's . however , directly operating restaurants is important to being a credible franchisor and provides company personnel with restaurant operations experience . in company-operated restaurants , and in collaboration with franchisees , mcdonald 's further develops and refines operating standards , marketing concepts and product and pricing strategies , so that only those that the company believes are most beneficial are introduced in the restaurants . mcdonald 's continually reviews its mix of company-operated and franchised restaurants to help optimize overall performance , with a goal to be approximately 95 % franchised over the long term . the company 's revenues consist of sales by company-operated restaurants and fees from restaurants operated by franchisees . revenues from conventional franchised restaurants include rent and royalties based on a percent of sales along with minimum rent payments , and initial fees . revenues from restaurants licensed to affiliates and developmental licensees include a royalty based on a percent of sales , and generally include initial fees . fees vary by type of site , amount of company investment , if any , and local business conditions . these fees , along with occupancy and operating rights , are stipulated in franchise/license agreements that generally have 20-year terms . the business is structured into the following segments that combine markets with similar characteristics and opportunities for growth , and reflect how management reviews and evaluates operating performance : u.s. - the company 's largest segment . international lead markets - established markets including australia , canada , france , germany , the u.k. and related markets . high growth markets - markets that the company believes have relatively higher restaurant expansion and franchising potential including china , italy , korea , the netherlands , poland , russia , spain , switzerland and related markets . foundational markets & corporate - the remaining markets in the mcdonald 's system , each of which the company believes have the potential to operate under a largely franchised model . corporate activities are also reported within this segment . for the year ended december 31 , 2016 , the u.s. , international lead markets and high growth markets accounted for 34 % , 29 % and 25 % of total revenues , respectively . in analyzing business trends , management reviews results on a constant currency basis and considers a variety of performance and financial measures which are considered to be non-gaap , including comparable sales and comparable guest count growth , systemwide sales growth , return on incremental invested capital ( `` roiic '' ) , free cash flow and free cash flow conversion rate , as described below . constant currency results exclude the effects of foreign currency translation and are calculated by translating current year results at prior year average exchange rates . management reviews and analyzes business results in constant currencies and bases most incentive compensation plans on these results because the company believes this better represents its underlying business trends . comparable sales and comparable guest counts are key performance indicators used within the retail industry and are indicative of the impact of the company 's initiatives as well as local economic and consumer trends . increases or decreases in comparable sales and comparable guest counts represent the percent change in sales and transactions , respectively , from the same period in the prior year for all restaurants , whether operated by the company or franchisees , in operation at least thirteen months , including those temporarily closed . some of the reasons restaurants may be temporarily closed include reimaging or remodeling , rebuilding , road construction and natural disasters . comparable sales exclude the impact of currency translation . comparable sales are driven by changes in guest counts and average check , which is affected by changes in pricing and product mix . typically , pricing has a greater impact on average check than product mix . the goal is to achieve a relatively balanced contribution from both guest counts and average check . systemwide sales include sales at all restaurants . while franchised sales are not recorded as revenues by the company , management believes the information is important in understanding the company 's financial performance because these sales are the basis on which the company calculates and records franchised revenues and are indicative of the financial health of the franchisee base . roiic is a measure reviewed by management over one-year and three-year time periods to evaluate the overall profitability of the markets , the effectiveness of capital deployed and the future allocation of capital . the return is calculated by dividing the change in operating income plus depreciation and amortization ( numerator ) by the cash used for investing activities ( denominator ) , primarily capital expenditures . the calculation uses a constant average mcdonald 's corporation 2016 annual report 13 foreign exchange rate over the periods included in the calculation . story_separator_special_tag operating margin , defined as operating income as a percent of total revenues , increased from 28.1 % in 2015 to 31.5 % in 2016. diluted earnings per share of $ 5.44 increased 13 % ( 16 % in constant currencies ) . cash provided by operations was $ 6.1 billion . capital expenditures of $ 1.8 billion were allocated mainly to reinvestment in existing restaurants and , to a lesser extent , to new restaurant openings . across the system , about 900 14 mcdonald 's corporation 2016 annual report restaurants were opened and over 1,700 existing locations were reimaged . free cash flow was $ 4.2 billion and the company 's free cash flow conversion rate was 90 % ( see reconciliation in exhibit 12 ) . one-year roiic was 62.7 % and three-year roiic was 5.1 % for the period ended december 31 , 2016 ( see reconciliation in exhibit 12 ) . the company increased its quarterly cash dividend per share by 6 % to $ 0.94 for the fourth quarter , equivalent to an annual dividend of $ 3.76 per share . the company returned $ 14.2 billion to shareholders through dividends and share repurchases for the year , achieving the company 's targeted return of $ 30 billion for the three-year period ended 2016. strategic direction building on the momentum established in 2016 , the company is beginning to shift focus from revitalizing the business to longer-term growth . the company will move with increased velocity to drive sustainable guest count growth , a reliable long-term measure of the company 's strength that is vital to growing the company 's sales and shareholder value . in order to drive guest count growth in an ever-changing customer environment , the company developed a customer-centric growth strategy for 2017 and beyond , informed by deep customer research across multiple markets . the company 's greatest opportunities are at the heart of the brand - in its food , value and customer experience - and within defined customer groups . this strategy is built on the following three pillars , which will position mcdonald 's as a modern and progressive burger company that `` makes delicious , feel good moments easy for everyone . '' retaining existing customers . the company will renew its focus on areas where the company already has a strong foothold in the ieo , including family occasions and food-led breakfast . regaining lost customers . the company plans to regain customers by recommitting to areas of historic strength , namely quality , convenience and value . converting casual to committed customers . the company will focus on building stronger relationships with customers so they visit more often , by elevating and leveraging the mccafé coffee brand and enhancing snack and treat offerings . the company will continue to build upon its investments in experience of the future ( `` eotf '' ) , which focuses on restaurant modernization and technology , in order to transform the restaurant service experience . the company is also accelerating its pursuit of the following two initiatives designed to further drive growth . digital . as the company accelerates its pace of converting restaurants to eotf , it is placing renewed emphasis on improving its existing service model ( i.e. , eat in , take out , or drive-thru ) and strengthening its relationships with customers through technology . by evolving the technology platform , the company will simplify how customers order , pay and are served through additional functionality on its global mobile app , self-order kiosks and technology-driven models that enable table service and curb-side pick-up . delivery . the company is accelerating its focus and investment on its delivery platform as a way to expand the convenience customers expect from mcdonald 's . the company is conducting various pilot tests in the u.s. , europe and asia and plans to scale quickly based on results of these pilots . areas of focus by segment u.s. while the u.s. has begun to build sales momentum , its greatest opportunity is guest count growth , by focusing on actions that collectively transform the customer experience . a focus on food taste and quality will remain a key priority , including offering the company 's best tasting burger . in 2017 , the u.s. is planning to introduce its signature crafted offering , a premium platform focused on authentic ingredients that allows customers to customize their sandwiches . in addition , the u.s. will remain focused on strengthening its customer-relevant value proposition . the u.s. expects to launch its mobile order and pay functionality as well as curbside pick-up across all traditional restaurants in the fourth quarter 2017. further , most of the system 's traditional restaurants are expected to be converted to eotf by 2020. in addition , the u.s. will continue to test its delivery platform . international lead markets the international lead markets are deepening their connection with customers and meeting their changing needs with meaningful enhancements in menu , accessibility and experience . the segment is focused on providing quality , great taste , value and choice across the entire menu . entry-level value programs appeal to teens and young adults , while other platforms provide budget-conscious customers affordable meal bundles . programs across the segment are energizing the core menu , and every market has successfully extended into premium chicken and beef with locally relevant offerings . all of this is supported by modernized cooking and service platforms that expand capacity and enable hotter , fresher products . the segment will also remain focused on enhancing and expanding the mccafé coffee brand and pastry offerings . the international lead markets continues to lead the mcdonald 's system in the development and deployment of eotf . high growth markets mcdonald 's high growth markets have leveraged learnings from the international lead markets to enhance the customer experience through design , digital , people , menu innovation and value .

consolidated operating results replace_table_token_4_th n/m not meaningful impact of foreign currency translation on reported results while changes in foreign currency exchange rates affect reported results , mcdonald 's mitigates exposures , where practical , by purchasing goods and services in local currencies , financing in local currencies and hedging certain foreign-denominated cash flows . foreign currency translation had a negative impact on consolidated operating results in each of the last three years . in 2016 , results were negatively impacted by the weaker british pound as well as many other currencies . in 2015 , results were negatively impacted by the weaker euro , australian dollar , russian ruble and most other currencies . in 2014 , results were negatively impacted by the weaker russian ruble , australian dollar and certain other currencies , partly offset by the stronger british pound . impact of foreign currency translation on reported results replace_table_token_5_th net income and diluted earnings per common share in 2016 , net income increased 3 % ( 6 % in constant currencies ) to $ 4.7 billion and diluted earnings per common share increased 13 % ( 16 % in constant currencies ) to $ 5.44 . foreign currency translation had a negative impact of $ 0.11 on diluted earnings per share . in 2015 , net income decreased 5 % ( increased 5 % in constant currencies ) to $ 4.5 billion and diluted earnings per common share was relatively flat ( increased 10 % in constant currencies ) at $ 4.80 . foreign currency translation had a negative impact of $ 0.50 on diluted earnings per share .

options generally vest monthly over a period of four years and unexercised options generally expire ten years from the date of grant . the authority of vermillion 's board of directors to grant new stock options and awards under the 2000 plan terminated in 2010. options to purchase 15,000 and 125,000 shares of common stock were exercised during the years ended december 31 , 2014 and 2013 , respectively . as of december 31 , 2013 , options to purchase 57,900 shares of common stock remained outstanding under the 2000 plan . no additional shares of common stock were reserved for future option grants under the 2000 plan . 2010 stock incentive plan under the 2010 plan , employees , directors and consultants of the company are eligible to receive awards . the 2010 plan is administered by the compensation committee of the vermillion board of directors . the 2010 plan permits the granting of a variety of awards , including stock options , share appreciation rights , restricted shares , restricted share units , unrestricted shares , deferred share units , performance and cash-settled awards , and dividend equivalent rights . the 2010 plan originally provided for issuance of up to 1,322,983 shares of vermillion common stock , subject to adjustment as provided in the 2010 plan . on december 12 , 2013 , the company 's stockholders approved an increase of 2,300,000 in the number of shares available for issuance under the 2010 plan for a total of 3,622,983 shares . unexercised options generally expire ten years from the date of grant . options to purchase 163,490 and 246,348 shares of common stock were exercised during the year ended december 31 , 2014 and 2013 , respectively . during the year ended december 31 , 2014 , the company issued to the vermillion board of directors 103,500 shares of restricted stock from the 2010 plan having a fair value of $ 320,000 as payment for services rendered in 2014. during the year ended december 31 , 2013 , the company issued to the vermillion board of directors 160,938 shares of restricted stock from the 2010 plan having a fair value of $ 334,000 as payment for services rendered in 2013. f- 14 the activity related to shares available for grant under the 2000 plan and the 2010 plan for the years ended december 31 , 2014 and 2013 was as follows : replace_table_token_13_th the stock option activity under the 2000 plan and 2010 plan for the years ended december 31 , 2014 and 2013 was as follows : replace_table_token_14_th the range of exercise prices for options outstanding and exercisable at december 31 , 2014 is as follows : f- 15 replace_table_token_15_th replace_table_token_16_th stock-based compensation employee stock-based story_separator_special_tag story_separator_special_tag name= '' _cp_text_1_243 '' > 125 - ii or other tests that quest diagnostics offers . in december 2013 , the cms made its final determination and authorized medicare contractors to set prices for maaa test cpt codes when they determine it is payable . cms also validated that an algorithm has unique value by specifying that the gap-fill process and not cross-walk should be used by contractors to price maaa tests . we expect ova1 to be priced using the gap-fill method . we will be engaged in that process in 2015 for pricing effective january 1 , 2016 . this decision also sets a precedent for recognizing the value of biomarker developed tests and recognizing tests on the value they bring to clinical decision-making and healthcare efficiencies . critical accounting policies and estimates our significant accounting policies are described in note 1 , basis for presentation and summary of significant accounting and reporting policies , of the notes to the consolidated financial statements included in this annual report on form 10-k. the consolidated financial statements are prepared in conformity with generally accepted accounting principles in the united states of america ( “ gaap ” ) . preparation of the financial statements requires us to make judgments , estimates , and assumptions that affect the amounts of assets and liabilities in the financial statements and revenues and expenses during the reporting periods ( and related disclosures ) . we believe the policies discussed below are the company 's critical accounting policies , as they include the more significant , subjective , and complex judgments and estimates made when preparing our consolidated financial statements revenue recognition product revenue . the company derives product revenues from sales of ova1 through quest diagnostics and aspira labs . product revenues are recognized for tests performed when the following revenue recognition criteria are met : ( 1 ) persuasive evidence that an arrangement exists ; ( 2 ) delivery has occurred or services have been rendered ; ( 3 ) the fee is fixed or determinable ; and ( 4 ) collectability is reasonably assured . as the company has not established sufficient payment history with the ins urance companies or private pay e rs for the tests performed at aspira labs , payment is not fixed or determinable and collectability is not reasonably assured , and we will defer recognizing revenues until those criteria are met , which typically coincides with the collection of cash . once we establish a reliable payment history , we plan to return to normal accrual revenue recognition based on our criteria discussed above . license revenue . under the terms of the secured line of credit with quest diagnostics , portions of the borrowed principal amounts may be forgiven upon our achievement of certain milestones relating to the development , regulatory approval and commercialization of certain diagnostic tests . we account ed for forgiveness of principal debt balances as license revenues over the term of the exclusive sales period that quest diagnostics receive d upon commercialization of an approved diagnostic test as we d id 30 not have a sufficient history of product sales that provided a reasonable basis for estimating future product sales . story_separator_special_tag the accounting standard is effective for annual periods ending after december 15 , 2016 and interim periods thereafter . early adoption is permitted . upon adoption , management will evaluate the company 's ability to continue as a going concern based on this guidance . in june 2014 , the fasb issued asu no . 2014-12 , “ accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period , ” ( asu 2014-12 ) . asu 2014-12 requires that a performance target that affects vesting , and that could be achieved after the requisite service period , be treated as a performance condition . as such , the performance target should not be reflected in estimating the grant date fair value of the award . this update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period ( s ) for which the requisite service has already been rendered . the amendments in asu 2014-12 are effective for annual periods and interim periods beginning after december 15 , 2015. early adoption is permitted . entities may apply the amendments in asu 2014-12 either : ( a ) prospectively to all awards granted or modified after the effective date ; or ( b ) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter . the adoption of this standard is not expected to have a material effect on our financial statements . in may 2014 , the fasb issued asu 2014-09 , “ revenue from contracts with customers , ” ( asu 2014-09 ) , which creates a new topic , accounting standards codification topic 606. the standard is principle-based and provides a five-step model to determine when and how revenue is recognized . the core principle of asu 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services . the accounting standard is effective for annual and interim periods beginning after december 15 , 2016 , using either of the following transition methods : ( i ) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical ex p edients , or ( ii ) a retrospective approach with the cumulative effect of initially adopting asu 2014-09 recognized at the date of adoption . early adoption is not permitted . we are currently evaluating the impact and the method of adopting this standard . 32 results of operations – year ended december 31 , 201 4 as compared to year ended december 31 , 201 3 the selected summary financial and operating data of vermillion for the years ended december 31 , 201 4 and 201 3 were as follows : replace_table_token_2_th product revenue . product revenue was $ 2,067 ,000 for the year ended december 31 , 201 4 compared to $ 2,112 ,000 for the same period in 201 3 . we recognized product revenue for the year ended december 31 , 201 4 for the sale of ova1 through quest diagnostics . our total ova1 volume was 16,839 for 2014. this was comprised of 16,427 tests performed by quest diagnostics and 412 ova1 tests performed by aspira labs . there were approximately 17,004 ova1 tests performed during the year ended december 31 , 201 3 . product revenue for aspira labs tests are recognized on the cash basis and thus 2014 revenue was insignificant . we recognized $ 1,2 27 ,000 of deferred revenue in 201 4 upon receipt of an annual royalty report from quest diagnostics compared to $ 1,262 ,000 for 201 3 . the 201 4 annual royalty report of $ 1,2 27 ,000 was based upon 16 , 563 ova1 tests reported by quest diagnostics as resolved in 201 4 , or an average of $ 75 per test resolved . the resolved volume includes both reimbursed and unreimbursed tests for which the payment status was considered final by quest diagnostics as of december 31 , 201 4 . by comparison , the 201 3 annual royalty report of $ 1,262 ,000 was based upon 16,745 ova1 tests reported by quest diagnostics as resolved in 201 3 . the royalty report revenue is incremental to the fixed $ 50 per test recognized for each ova1 performed during the year . based upon the new agreement with quest diagnostics effective march 11 , 2015 , we expect to recognize revenue for ova1 test s performed by quest diagnostics in the period in which the test is performed . 33 cost of revenue . cost of product revenue for the year ended december 31 , 2014 increased $ 1,060,000 compared to the same period in 2013. cost of product revenue for the year ended december 31 , 2014 primarily consists of costs of aspira labs incurred after the lab began accepting test samples on june 23 , 2014 and includes approximately $ 250,000 of non-recurring lab start-up costs . we expect cost of revenue to increase in future periods as sample throughput increases and as we complete the aspira labs buildout . research and development expenses . research and development expenses represent costs incurred to develop our technology and carry out clinical studies , and include personnel-related expenses , regulatory costs , reagents and supplies used in research and development laboratory work , infrastructure expenses , contract services and other outside costs .

dition and results of operation s you should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes thereto , included on pages f-1 through f- 19 of this annual report on form 10-k , and “ risk factors ” , which are discussed in item 1a . the statements below contain forward-looking statements within the meaning of the private securities litigation reform act . see `` forward-looking statements '' on page 1 of this annual report on form 10-k. overview we are dedicated to the discovery , development and commercialization of novel high-value diagnostic and bio-analytical solutions that help physicians diagnose , treat and improve outcomes for women . our tests are intended to detect , characterize and stage disease , and to help guide decisions regarding patient treatment , which may include decisions to refer patients to specialists , to perform additional testing , or to assist in monitoring response to therapy . a distinctive feature of our approach is to combine multiple markers into a single , reportable index score that has higher diagnostic accuracy than its constituents . we concentrate on our development of novel diagnostic tests for gynecologic disease , with an initial focus on ovarian cancer . we also intend to address clinical questions related to early disease detection , treatment response , monitoring of disease progression , prognosis and others through collaborations with leading academic and research institutions . our lead product , ova1 , is a blood test designed to identify women who are at high risk of having a malignant ovarian tumor prior to surgery . the fda cleared ova1 in september 2009 , and we commercially launched ova1 in march 2010. we have completed development and validation work on a second-generation biomarker panel intended to maintain our product 's high sensitivity while improving specificity .

revenue derived from the transaction-based fee contracts are recognized when the underlying transaction is processed , which constitutes delivery story_separator_special_tag the following management 's discussion and analysis of financial condition and results of operations ( “md & a” ) covers : ( i ) the results of operations for the years ended december 31 , 2014 , 2013 and 2012 ; and ( ii ) the financial condition as of december 31 , 2014 and 2013. see note 1 of the notes to audited consolidated financial statements for additional information about the company and the basis of presentation of our financial statements . you should read the following discussion and analysis in conjunction with the financial statements and related notes appearing elsewhere herein . this md & a contains forward-looking statements that involve risks and uncertainties . our actual results may differ from those indicated in the forward-looking statements . see “forward-looking statements” for a discussion of the risks , uncertainties and assumptions associated with these statements . overview evertec is the leading full-service transaction processing business in latin america , providing a broad range of merchant acquiring , payment processing and business process management services . according to the july 2014 nilson report , we are the largest merchant acquirer in the caribbean and central america and one of the largest in latin america , based on total number of transactions . we serve 19 countries in the region from our base in puerto rico . we manage a system of electronic payment networks that process more than two billion transactions annually , and offer a comprehensive suite of services for core bank processing , cash processing and technology outsourcing . in addition , we own and operate the ath network , one of the leading personal identification number ( “pin” ) debit networks in latin america . we serve a diversified customer base of leading financial institutions , merchants , corporations and government agencies with “mission-critical” technology solutions that enable them to issue , process and accept transactions securely . we believe our business is well-positioned to continue to expand across the fast-growing latin american region . we are differentiated , in part , by our diversified business model , which enables us to provide our varied customer base with a broad range of transaction-processing services from a single source across numerous channels and geographic markets . we believe this single-source capability provides several competitive advantages that will enable us to continue to penetrate our existing customer base with complementary new services , win new customers , develop new sales channels and enter new markets . we believe these competitive advantages include : our ability to provide in one package a range of services that traditionally had to be sourced from different vendors ; our ability to serve customers with disparate operations in several geographies with a single integrated technology solution that enables them to manage their business as one enterprise ; and our ability to capture and analyze data across the transaction processing value chain and use that data to provide value-added services that are differentiated from those offered by pure-play vendors that serve only one portion of the transaction processing value chain ( such as only merchant acquiring or payment processing ) . our broad suite of services spans the entire transaction processing value chain and includes a range of front-end customer-facing solutions such as the electronic capture and authorization of transactions at the point-of-sale , as well as back-end support services such as the clearing and settlement of transactions and account reconciliation for card issuers . these include : ( i ) merchant acquiring services , which enable point of sales ( “pos” ) and e-commerce merchants to accept and process electronic methods of payment such as debit , credit , prepaid and electronic benefit transfer ( “ebt” ) cards ; ( ii ) payment processing services , which enable financial institutions and other issuers to manage , support and facilitate the processing for credit , debit , prepaid , automated teller machines ( “atm” ) and ebt card programs ; and ( iii ) business process management solutions , which provide “mission-critical” technology solutions such as core bank processing , as well as it outsourcing and cash 42 index to financial statements management services to financial institutions , corporations and governments . we provide these services through a highly scalable , end-to-end technology platform that we manage and operate in-house and that generates significant operating efficiencies that enable us to maximize profitability . we sell and distribute our services primarily through a proprietary direct sales force with strong customer relationships . we are also building a variety of indirect sales channels that enable us to leverage the distribution capabilities of partners in adjacent markets , including value-added resellers . and we continue to pursue joint ventures and merchant acquiring alliances . we benefit from an attractive business model , the hallmarks of which are recurring revenue , scalability , significant operating margins and low capital expenditure requirements . our revenue is recurring in nature because of the mission-critical and embedded nature of the services we provide , the high switching costs associated with these services and the multi-year contracts we negotiate with our customers . our business model enables us to continue to grow our business organically without significant additional capital expenditures . separation from and key relationship with popular prior to the merger on september 30 , 2010 , evertec group was 100 % owned by popular , the largest financial institution in the caribbean , and operated substantially as an independent entity within popular . after the consummation of the merger , popular retained an approximately 49 % indirect ownership interest in evertec group and is our largest customer . in connection with , and upon consummation of , the merger , evertec group entered into a 15-year master services agreement , and several related agreements with popular . story_separator_special_tag for multiple deliverable arrangements , we evaluate each distinct arrangement to determine if the elements or deliverables within the arrangement represent separate units of accounting pursuant to asc 605-25. if the deliverables are determined to be separate units of accounting , revenues are recognized as units of accounting are 44 index to financial statements delivered and the revenue recognition criteria are met . if the deliverables are not determined to be separate units of accounting , revenues for the delivered services are combined into one unit of accounting and recognized ( i ) over the life of the arrangement if all services are consistently delivered over such term , or if otherwise , ( ii ) at the time that all services and deliverables have been delivered . the selling price for each deliverable is based on vendor-specific objective evidence ( vsoe ) , if available ; on third-party evidence ( tpe ) if vsoe is not available ; or on management 's best estimate of selling price ( besp ) if neither vsoe nor tpe is available . we establish vsoe of selling price using the price charged when the same element is sold separately . we bifurcate or allocate the arrangement consideration to each of the deliverables based on the relative selling price of each unit of accounting . we have two main categories of revenues according to the type of transactions we enter into with our customers : ( a ) transaction-based fees and ( b ) fixed fees and time and material . transaction-based fees we provide services that generate transaction-based fees . typically transaction-based fees depend on factors such as number of accounts or transactions processed . these factors typically consist of a fee per transaction or item processed , a percentage of dollar volume processed , a fee per account on file , or some combination thereof . revenues derived from the transaction-based fee contracts is recognized when the underlying transaction is processed , which constitutes delivery of service . revenues from business contracts in our merchant acquiring segment comprise discounted fees charged to the merchants based on the sales amount of transactions processed . revenues include a discount fee , membership fees charged to merchants , debit network fees , and pos rental fees . pursuant to the guidance from asc 605-45-45 , “ revenue recognition—principal agent considerations , ” we record merchant acquiring revenues net of interchange and assessments charged by the credit and debit card network associations and we recognize such revenues at the time of the sale ( when a transaction is processed ) . payment processing comprises revenues related to providing financial institutions access to the ath network and other card networks , and related services . payment processing revenues also include revenues from card issuer processing services ( such as credit and debit card processing , authorization and settlement , and fraud monitoring and control to debit or credit card issuers ) ; payment processing services ( such as payment and billing products for merchants , businesses and financial institutions ) ; and ebt ( which mostly consists of services to the puerto rico government for the delivery of government benefits to participants ) . revenues in our payment processing segment are mostly comprised of fees per transaction processed or per account on file , or a combination of both ; this revenue is recognized at the time transactions are processed or on a monthly basis for accounts on file . business solutions revenues consist of transaction-based fees from business process management solutions including core bank processing , business process outsourcing , item and cash processing , and fulfillment . transaction-based fee revenues generated by our core bank processing services are derived from fees based on various factors such as the number of accounts on file ( e.g. , savings or checking accounts , loans , etc . ) , and the number of transactions processed or registered users ( e.g. , for online banking services ) . for services dependent on the number of transactions processed , revenues are recognized as the underlying transactions are processed . for services dependent on the number of users or accounts on file , revenues are recognized on a monthly basis based on the number of accounts on file each month . item and cash processing revenues are based on the number of items ( e.g . checks ) processed , and revenues are recognized when the underlying item is processed . fulfillment services include technical and operational resources for producing and distributing variable print documents such as statements , bills , checks and benefits summaries . fulfillment revenues are based on the number pages for printing services and number of envelopes processed for mailing services . revenues are recognized as services are delivered based on a fee per page printed or envelope mailed , as applicable . 45 index to financial statements fixed fees and time and material we also provide services that generate a fixed fee per month or fees based on time and expenses incurred . these services are mostly provided in our business solutions segment . revenues are generated from our core bank solutions , network hosting and management and it consulting services . in core bank solutions , we mostly provide access to applications and services such as back-up or recovery , hosting and maintenance that enable a bank to operate the related hosted services accessing our it infrastructure . these contracts generally contain multiple elements or deliverables evaluated by us . revenues are recognized according to the applicable guidance . revenues are derived from fixed fees charged for the use of hosted services and are recognized on a monthly basis as delivered .

results of operations the following tables set forth certain consolidated financial information for the years ended december 31 , 2014 , 2013 and 2012. these tables and the related discussion should be read in conjunction with the information contained in our audited consolidated financial statements and the notes thereto included elsewhere in this annual report on form 10-k. certain prior period balances have been reclassified to conform to the current presentation format which did not have any impact on net income . comparison of the years ended december 31 , 2014 and 2013 the following tables present the components of our audited consolidated statements of income ( loss ) and comprehensive income ( loss ) by business segment and the change in those amounts for the years ended december 31 , 2014 and 2013. revenues replace_table_token_6_th total revenues for the year ended december 31 , 2014 were $ 361.1 million , an increase of $ 3.1 million or 1 % compared with 2013. merchant acquiring revenues increased $ 5.5 million or 7 % compared with 2013. the revenue growth was primarily the result of an increase in transaction volumes of 19.44 million . payment processing revenues grew $ 5.3 million or 5 % compared with 2013. revenue growth was driven mainly by an increase of $ 3.0 million in our card products business resulting from higher accounts on file due to new customer additions in our latin america operations and by an increase in ath and pos network and processing transactions . business solutions revenues decreased $ 7.7 million or 4 % compared with 2013. the decrease is almost entirely attributable to a decline in hardware and software sales of $ 10.3 million , partially offset by an increase in demand for core banking and other services of $ 2.7 million .

in some cases , you can identify forward-looking statements by terms such as “ may , ” “ will , ” “ should , ” “ expect , ” “ plan , ” “ intend , ” “ forecast , ” “ anticipate , ” “ believe , ” “ estimate , ” “ predict , ” “ potential , ” “ continue ” or the negative of these terms or other comparable terminology . the forward-looking statements contained in this form 10-k involve known and unknown risks , uncertainties and situations that may cause our or our industry 's actual results , level of activity , performance or achievements to be materially different from any future results , levels of activity , performance or achievements expressed or implied by these statements . these forward-looking statements are made in reliance upon the safe harbor provision of the private securities litigation reform act of 1995. these factors include those listed in part i , item 1a under the caption entitled “ risk factors ” in this form 10-k and those discussed elsewhere in this form 10-k. unless the context otherwise requires , references in this form 10-k to “ copart , ” the “ company , ” “ we , ” “ us , ” or “ our ” refer to copart , inc. we encourage investors to review these factors carefully together with the other matters referred to herein , as well as in the other documents we file with the securities and exchange commission ( the sec ) . we may from time to time make additional written and oral forward-looking statements , including statements contained in our filings with the sec . we do not undertake to update any forward-looking statement that may be made from time to time by or on behalf of us . all references to numbered notes are to specific notes to our consolidated financial statements included in this annual report on form 10-k and which descriptions are incorporated into the applicable response by reference . capitalized terms used , but not defined , in this management 's discussion and analysis of financial condition and results of operation ( “ md & a ” ) have the same meanings as in such notes . overview we are a leading provider of online auctions and vehicle remarketing services in the united states ( u.s. ) , canada , the united kingdom ( u.k. ) , brazil , the united arab emirates ( u.a.e . ) , oman , bahrain , ireland , spain and india . we also provide vehicle remarketing services in germany and spain . we provide vehicle sellers with a full range of services to process and sell vehicles primarily over the internet through our virtual bidding third generation internet auction-style sales technology , which we refer to as vb3 . vehicle sellers consist primarily of insurance companies , but also include banks and financial institutions , charities , car dealerships , fleet operators and vehicle rental companies . we sell the vehicles principally to licensed vehicle dismantlers , rebuilders , repair licensees , used vehicle dealers and exporters and , at certain locations , to the general public . the majority of the vehicles sold on behalf of insurance companies are either damaged vehicles deemed a total loss or not economically repairable by the insurance companies , or are recovered stolen vehicles for which an insurance settlement with the vehicle owner has already been made . we offer vehicle sellers a full range of services that expedite each stage of the vehicle sales process , minimize administrative and processing costs , and maximize the ultimate sales price . in the u.s. , canada , brazil , the u.a.e. , oman , bahrain , ireland , spain and india , we sell vehicles primarily as an agent and derive revenue primarily from fees paid by vehicle sellers and vehicle buyers as well as related fees for services , such as towing and storage . in the u.k. , we operate both on a principal basis , purchasing the salvage vehicles outright from the insurance companies and reselling the vehicles for our own account , and as an agent . in germany and spain , we derive revenue from sales listing fees for listing vehicles on behalf of many insurance companies . we monitor and analyze a number of key financial performance indicators in order to manage our business and evaluate our financial and operating performance . such indicators include : service and vehicle sales revenue : our revenue consists of sales transaction fees charged to vehicle sellers and vehicle buyers , transportation revenue , purchased vehicle revenue , and other remarketing services . revenues from sellers are generally generated either on a fixed fee contract basis , where our fees are fixed based on the sale of each vehicle regardless of the selling price of the vehicle or under our percentage incentive program ( pip ) , where our fees are generally based on a predetermined percentage of the vehicle sales price . under the consignment or fixed fee program , we generally charge an additional fee for title processing and special preparation . we may also charge additional fees for the cost of transporting the vehicle to our facility , storage of the vehicle , and other incidental costs not included in the consignment fee . under the consignment program , 31 only the fees associated with vehicle processing are recorded in revenue , not the actual sales price ( gross proceeds ) . sales transaction fees also include fees charged to vehicle buyers for purchasing vehicles , storage , loading , and annual registration . transportation revenue includes charges to sellers for towing vehicles under certain contracts and towing charges assessed to buyers for delivering vehicles . story_separator_special_tag 32 the following table sets forth facilities that we have acquired or opened from august 1 , 2013 through july 31 , 2016 : locations acquisition or greenfield date geographic service area seaford , delaware greenfield july 2014 united states dallas , texas greenfield march 2016 united states wilmer , texas greenfield april 2016 united states temple , texas greenfield april 2016 united states colorado springs , colorado greenfield may 2016 united states denver , colorado greenfield july 2016 united states cartersville , georgia greenfield july 2016 united states montreal , quebec acquisition november 2013 canada moncton , new brunswick greenfield july 2015 canada itaquaquecetuba , brazil ( são paulo ) greenfield january 2014 brazil algete , spain ( madrid ) greenfield july 2016 spain manama , bahrain greenfield may 2015 bahrain muscat , oman greenfield june 2015 oman sonepat , india ( new delhi ) greenfield october 2015 india castledermot , ireland greenfield april 2016 ireland the period-to-period comparability of our consolidated operating results and financial position is affected by business acquisitions , new openings , weather and product introductions during such periods . in particular , we have certain contracts inherited through our u.k. acquisitions that require us to act as a principal , purchasing vehicles from the insurance companies and reselling them for our own account . it has been our practice and remains our intention , where possible , to migrate these contracts to the agency model in future periods . changes in the amount of revenue derived in a period from principal transactions relative to total revenue will impact revenue growth and margin percentages . in addition to growth through business acquisitions , we seek to increase revenues and profitability by , among other things , ( i ) acquiring and developing additional vehicle storage facilities in key markets ; ( ii ) pursuing national and regional vehicle seller agreements ; ( iii ) increasing our service offerings to sellers and members ; and ( iv ) expanding the application of vb3 into new markets . in addition , we implement our pricing structure and auction procedures , and attempt to introduce cost efficiencies at each of our acquired facilities by implementing our operational procedures , integrating our management information systems , and redeploying personnel , when necessary . 33 story_separator_special_tag 2015 of $ 38.1 million , or 21.8 % as compared to fiscal 2014 came from ( i ) a decline in international of $ 30.4 million , which included the beneficial impact of $ 4.1 million due to changes in foreign currency exchange rates , primarily from the change in the british pound to u.s. dollar exchange rate , and ( ii ) a decline in the u.s. of $ 7.7 million . the decline in international resulted primarily from decreased volume in the u.k. from insurance sellers and lower average purchase prices , driven by decreased insurance volume and increased open market purchase activity from the general public . the decline in the u.s. was primarily the result of decreased open market purchase activity from the general public and lower average purchase prices . the following table presents a comparison of general and administrative expenses for fiscal 2016 , 2015 and 2014 : replace_table_token_10_th 36 general and administrative expenses . the decrease in general and administrative expenses for fiscal 2016 of $ 0.9 million , or 0.6 % as compared to fiscal 2015 came primarily from a decrease in the u.s. of $ 1.8 million , partially offset by an increase in international of $ 1.0 million as we continue to expand in these markets . the decrease in the u.s. of $ 5.6 million , excluding depreciation and amortization , resulted from decreased expenditures on technology development ; partially offset by the overall growth in labor costs and professional services associated with domestic expansion , increased stock-based payment compensation and increased depreciation and amortization expenses . the increases in depreciation and amortization expenses came primarily from depreciating certain technology assets placed into service in the u.s. the decrease in general and administrative expenses for fiscal 2015 of $ 25.6 million , or 15.5 % as compared to fiscal 2014 came primarily from a decrease in the u.s. of $ 23.4 million as a result of the integration of the salvage parent , inc. acquisition , the relocation of our technology department being completed in fiscal 2014 , decreased expenditures on technology development , a decrease in stock-based payment compensation and a decrease in depreciation and amortization expenses . included in fiscal 2014 was $ 7.5 million in lease termination , severance and relocation costs associated with the integration of the salvage parent , inc. acquisition , which was finalized in fiscal 2014 , and the relocation of our technology department from california to our dallas , texas corporate headquarters . the decrease in depreciation and amortization expenses came primarily from a decrease in the u.s. as a result of certain assets becoming fully amortized . the following table summarizes impairment , total other expenses and income taxes for fiscal 2016 , 2015 and 2014 : replace_table_token_11_th impairment . during fiscal 2014 , we terminated a contract with kpit ( formerly known as sparta consulting , inc. ) , whereby kpit was engaged to design and implement an sap-based replacement for our existing business operating software that , among other things , would address our international expansion needs . following a review of kpit 's work performed and an assessment of the cost to complete , deployment risk , and other factors , we ceased development of kpit 's software and internally developed a proprietary solution in its place . as a result in fiscal 2014 , we recognized a charge of $ 29.1 million resulting primarily from the impairment of costs previously capitalized in connection with the development of the software . other ( expense ) income .

results of operations the following table shows certain data from our consolidated statements of income expressed as a percentage of total service revenues and vehicle sales for fiscal 2016 , 2015 and 2014 : replace_table_token_5_th comparison of fiscal years ended july 31 , 2016 , 2015 and 2014 the following table presents a comparison of service revenues for fiscal 2016 , 2015 and 2014 : replace_table_token_6_th service revenues . the increase in service revenues for fiscal 2016 of $ 119.0 million , or 12.1 % as compared to fiscal 2015 came from ( i ) growth in the u.s. of $ 110.4 million and ( ii ) growth in international of $ 8.6 million . the growth in the u.s. was driven primarily by increased volume , partially offset by lower average auction selling prices , which we believe is due to lower commodity prices . the increase in volume in the u.s. was derived from ( i ) growth from existing suppliers , driven by what we believe was an increase in salvage frequency , and ( ii ) growth in the number of units sold from new and expanded contracts with insurance companies . excluding a detrimental impact of $ 11.8 million due to changes in foreign currency exchange rates , primarily from changes in the british pound and the brazilian real to u.s. dollar exchange rates , the growth in international of $ 20.4 million was driven primarily by increased volume in the u.k. as we increased our market share and a marginal increase in revenue per car . the increase in service revenues for fiscal 2015 of $ 27.0 million , or 2.8 % as compared to fiscal 2014 came from ( i ) growth in the u.s. of $ 17.6 million and ( ii ) growth in international of $ 9.4 million .

when real property is conveyed from one party to another , occasionally there is an undisclosed defect in the title or a mistake or omission in a prior deed , will or mortgage that may give a third party a legal claim against such property . if a covered claim is made against real property , title insurance provides indemnification against insured defects . there are two basic types of title insurance policies – one for the mortgage lender and one for the real property owner . a lender often requires the property owner to purchase a lender 's title insurance policy to protect its position as a holder of a mortgage loan , but the lender 's title insurance policy does not protect the property owner . the property owner has to purchase a separate owner 's title insurance policy to protect its investment . the company issues title insurance policies through its home and branch offices and through a network of agents . issuing agents are typically real estate attorneys , independent agents or subsidiaries of community and regional mortgage lending institutions , depending on local customs and regulations and the company 's marketing strategy in a particular territory . the ability to attract and retain issuing agents is a key determinant of the company 's growth in title insurance premiums written . revenues for the title insurance segment primarily result from purchases of new and existing residential and commercial real estate , refinance activity and certain other types of mortgage lending such as home equity lines of credit . title insurance premiums vary from state to state and are subject to extensive regulation . statutes generally provide that rates must not be excessive , inadequate or unfairly discriminatory . the process of implementing a rate change in most states involves pre-approval by the applicable state insurance regulator . volume is a factor in the company 's profitability due to fixed operating costs that are incurred by the company regardless of title insurance premium volume . the resulting operating leverage tends to amplify the impact of changes in volume on the company 's profitability . the company 's profitability also depends , in part , upon its ability to manage its investment portfolio to maximize investment returns and to minimize risks such as interest rate changes , defaults and impairments of assets . the company 's volume of title insurance premiums is affected by the overall level of residential and commercial real estate activity , which includes property sales , mortgage financing and mortgage refinancing . real estate activity , home sales and mortgage lending are cyclical in nature . real estate activity is affected by a number of factors , including the availability of mortgage credit , the cost of real estate , consumer confidence , employment and family income levels , and general united states economic conditions . interest rate volatility is also an important factor in the level of residential and commercial real estate activity . the company 's title insurance premiums in future periods are likely to fluctuate due to these and other factors which are beyond management 's control . services other than title insurance provided by operating divisions of the company are not reported separately , but rather are reported collectively in a category called “ all other. ” these other services include those offered by the company and by its wholly owned subsidiaries , investors title exchange corporation ( “ itec ” ) , investors title accommodation corporation ( “ itac ” ) , investors trust company ( “ investors trust ” ) and investors title management services , inc. ( “ itms ” ) . 19 the company 's exchange services division , consisting of the operations of itec and itac , provides customer services in connection with tax-deferred real property exchanges . itec acts as a qualified intermediary in tax-deferred exchanges of property held for productive use in a trade or business or for investment , and its income is derived from fees for handling exchange transactions and interest earned on client deposits held by the company . in its role as qualified intermediary , itec coordinates the exchange aspects of the real estate transaction , and its duties include drafting standard exchange documents , holding the exchange funds between the time the old property is sold and the new property is purchased , and accepting the formal identification of the replacement property within the required identification period . itac provides services as an exchange accommodation titleholder for accomplishing “ parking transactions ” as set forth in the safe harbor contained in internal revenue procedure 2000-37. these transactions include reverse exchanges when taxpayers decide to acquire replacement property before selling the relinquished property , or “ build to suit ” exchanges , when improvements must be made to the replacement property before the taxpayer acquires the improved replacement property . the services provided by the company 's exchange division , itec and itac , are pursuant to provisions in the internal revenue code . from time to time , these laws are subject to review and changes , which may negatively affect the demand for tax-deferred exchanges in general , and consequently , the revenues and profitability of the company 's exchange division . the company 's trust services division , investors trust , provides investment management and trust services to individuals , companies , banks and trusts . itms offers various consulting and management services to provide clients with the technical expertise to start and successfully operate a title insurance agency . business trends and recent conditions the housing market is heavily influenced by government policies and overall economic conditions . regulatory reform and initiatives by various governmental agencies , including the federal reserve 's monetary policy and other regulatory changes , could impact lending standards or the processes and procedures used by the company . the current real estate environment , including interest rates and general economic activity , typically influence the demand for real estate . story_separator_special_tag per the mba forecast , refinancing is expected to be lower in 2019 as mortgage interest rates climb to a projected 4.8 % in the fourth quarter of 2019 . historically , activity in real estate markets has varied over the course of market cycles by geographic region and in response to evolving economic factors . operating results can vary from year to year based on cyclical market conditions and do not necessarily indicate the company 's future operating results and cash flows . critical accounting estimates and policies this discussion and analysis of the company 's financial condition and results of operations is based upon the company 's accompanying consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states . the company 's management makes various estimates and judgments when applying policies affecting the preparation of the consolidated financial statements . actual results could differ from those estimates . significant accounting policies of the company are discussed in note 1 to the accompanying consolidated financial statements . following are the accounting estimates and policies considered critical to the company . reserve for claim losses the company 's reserve for claims is established using estimates of amounts required to settle claims for which notice has been received ( reported ) and the amount estimated to be required to satisfy incurred claims of policyholders which may be reported in the future ( incurred but not reported , or “ ibnr ” ) . the total reserve for all losses incurred but unpaid as of december 31 , 2018 is represented by the reserve for claims totaling $ 31.7 million in the accompanying consolidated balance sheets . of that total , approximately $ 3.0 million was reserved for specific claims which have been reported to the company , and approximately $ 28.7 million was reserved for ibnr claims . a provision for estimated future claims payments is recorded at the time the related policy revenue is recorded . the company records the claims provision as a percentage of net premiums written . this loss provision rate is set to provide for losses on current year policies . by their nature , title claims can often be complex , vary greatly in dollar amounts , vary in number due to economic and market conditions such as an increase in mortgage foreclosures , and involve uncertainties as to ultimate exposure . in addition , some claims may require a number of years to settle and determine the final liability for indemnity and loss adjustment expense . the payment experience may extend for more than 20 years after the issuance of a policy . events such as fraud , defalcation and multiple property defects can substantially and unexpectedly cause increases in estimates of losses . due to the length of time over which claim payments are made and regularly occurring changes in underlying economic and market conditions , these estimates are subject to variability . 21 management considers factors such as the company 's historical claims experience , case reserve estimates on reported claims , large claims , actuarial projections and other relevant factors in determining its loss provision rates and the aggregate recorded expected liability for claims . in establishing the reserve , actuarial projections are compared with recorded reserves to evaluate the adequacy of such recorded claims reserves and any necessary adjustments are then recorded in the current period 's income statement . as the most recent claims experience develops and new information becomes available , the loss reserve estimate related to prior periods will change to more accurately reflect updated and improved emerging data . the company reflects any adjustments to the reserve in the results of operations in the period in which new information ( principally claims experience ) becomes available . the company initially reserves for each known claim based upon an assessment of specific facts and updates the reserve amount as necessary over the course of administering each claim . loss ratios for earlier years tend to be more reliable than recent policy years , as those years are more fully developed . in making loss estimates , management determines a loss provision rate , which it then applies to net premiums written . the company assumes the reported liability for known claims and ibnr , in the aggregate , will be comparable to its historical claims experience unless factors , such as loss experience and charged premium rates , change significantly . also affecting the company 's assumptions are large losses related to fraud and defalcation , as these can cause significant variances in loss emergence patterns . management defines a large loss as one where incurred losses exceed $ 500,000. due to the small volume of large claims , the long-tail nature of title insurance claims and the inherent uncertainty in loss emergence patterns , large claim activity can vary significantly between policy years . the estimated development of large claims by policy year is therefore subject to significant changes as experience develops . the loss provision rate is set to provide for losses on current year policies and changes in prior year estimates . management also considers actuarial analyses in evaluating the claims reserve . the actuarial methods used to evaluate the reserve are loss development methods , bornhuetter-ferguson methods and cape cod methods , all of which are accepted actuarial methods for estimating ultimate losses and , therefore , loss reserves . in the loss development method , each policy year 's paid or incurred losses are projected to an ultimate level using loss development factors . in the bornhuetter-ferguson method , a type of expected loss method , losses for each policy year are estimated based on an expected loss ratio derived directly from a previous estimate of ultimate loss for each policy year plus an additional provision for losses that have not been reported or paid as of the evaluation date .

results of operations the following table presents certain income statement data for the years ended december 31 , 2018 , 2017 and 2016 : replace_table_token_2_th 24 insurance revenues insurance revenues include net premiums written and other title-related income that includes escrow and settlement fees . non-title services revenue , investment-related revenues and other revenues are discussed separately below . the following is a summary of the company 's total revenue broken out between the title insurance segment and all other revenues with intersegment eliminations netted with each segment ; therefore , the individual segment amounts will not agree to note 12 in the accompanying consolidated financial statements . replace_table_token_3_th net premiums written net premiums written decreased 1.7 % in 2018 to $ 138.1 million , compared with $ 140.5 million in 2017 , and increased 14.7 % in 2017 , compared with $ 122.5 million in 2016 . the decrease in 2018 compared with 2017 was primarily due to a decline in refinance activity , partially offset by an increase in purchase activity and higher real estate values . the increase in 2017 compared with 2016 was primarily due to higher levels of home sales in our core markets , a continuation of the multi-year trend of increases in the underlying values of real estate , and business from newly-signed agents , partially offset by a decrease in the level of refinance activity . title insurance companies typically issue title insurance policies directly through home and branch offices or through title agencies . following is a breakdown of premiums generated by branch and agency operations for the years ended december 31 : replace_table_token_4_th home and branch office net premiums : in the company 's home and branch operations , the company issues the insurance policy and retains the entire premium , as no commissions are paid in connection with these policies .

compensation expense is recognized over the vesting period of the applicable award using the straight-line method . compensation costs related to restricted stock units ( ‘rsus ' ) is recorded based on the market price on the grant date . the company uses the black-scholes option pricing model for estimating the fair value of stock options . the use of the option valuation model requires the input of subjective assumptions , including the estimated fair value of the company 's common stock in the periods preceding the ipo story_separator_special_tag of financial condition and results of operations you should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this annual report on form 10-k. some of the information contained in this discussion and analysis or set forth elsewhere in this report including information with respect to our plans and strategy for our business , includes forward-looking statements that involve risks and uncertainties . you should review the “risk factors” section of this report beginning on page 23 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 contained in the following discussion and analysis . overview we are a leading provider of cloud-based benefits software solutions for consumers , employers , insurance carriers , and brokers . the benefitfocus platform provides an integrated suite of solutions that enables our employer and insurance carrier customers to more efficiently shop , enroll , manage , and exchange benefits information . our web-based platform has a user-friendly interface designed to enable the insured consumers to access all of their benefits in one place . our comprehensive solutions support core benefits plans , including healthcare , dental , life , and disability insurance , and voluntary benefits plans , such as critical illness , supplemental income , and wellness programs . as the number of employer benefits plans has increased , with each plan subject to many different business rules and requirements , demand for the benefitfocus platform has grown . we serve two separate but related market segments . our fastest growing market segment , the employer market , consists of employers offering benefits to their employees . within this segment , we mainly target large employers with more than 1,000 employees , of which we believe there are approximately 18,000 in the united states . in our other market segment , we sell our solutions to insurance carriers , enabling us to expand our overall footprint in the benefits marketplace by aggregating many key constituents , including consumers , employers , and brokers . our business model capitalizes on the close relationship between carriers and their members , and the carriers ' ability to serve as lead generators for potential employer customers . carriers pay for services at a rate reflective of the aggregated nature of their customer base on a per application basis . carriers can then deploy their applications to employer groups and members . as employers become direct customers through our employer segment , we provide them our platform offering that bundles many software applications into a comprehensive benefits solution through hr intouch marketplace ( now known as benefitfocus marketplace ) . we believe our presence in both the employer and insurance carrier markets gives us a strong position at the center of the benefits ecosystem . we sell our software solutions and related services primarily through our direct sales force . we derive most of our revenue from software services fees , which primarily consist of monthly subscription fees paid to us for access to and usage of our cloud-based benefits software solutions , and related professional services . software services fees paid to us from our employer customers are generally based on the number of employees covered by the relevant benefits plans at contracted rates for a specified period of time , which is usually one year . software services fees paid to us from our carrier customers are based on the number of members contracted to use our solutions at contracted rates for a specified period of time , which usually ranges from three to five years . our carrier contracts are 55 generally only cancellable by the carrier in an instance of our uncured breach , although some of our carrier customers are able to terminate their respective contracts without cause or for convenience . software services revenue accounted for approximately 91 % , 93 % , and 93 % of our total revenue during the years ended december 31 , 2014 , 2013 and 2012 , respectively . another component of our revenue is professional services . we derive the majority of our professional services revenue from the implementation of our customers onto our platform , which typically includes discovery , configuration and deployment , integration , testing , and training . in general , it takes from four to five months to implement a new employer customer 's benefits systems and eight to 10 months to implement a new carrier customer 's benefits systems . we also provide customer support services and customized media content that supports our customers ' effort to educate and communicate with consumers . professional services revenue accounted for approximately 9 % , 7 % , and 7 % of our total revenue during the years ended december 31 , 2014 , 2013 and 2012 , respectively . increasing our base of large employer customers is an important source of revenue growth for us . we actively pursue new employer customers in the u.s. market , and we have increased the number of large employer customers utilizing our solutions from 121 as of december 31 , 2009 to 553 as of december 31 , 2014 , a 35.5 % compound annual growth rate . story_separator_special_tag we invoice our employer customers for implementation fees at the inception of the arrangement . we generally invoice our carrier customers for implementation fees at various contractually defined times throughout the implementation process . implementation fees that have been invoiced are initially recorded as deferred revenue until recognized as described above . overhead allocation expenses associated with our facilities , it costs , and depreciation and amortization , are allocated between cost of revenue and operating expenses based on employee headcount determined by the nature of work performed . cost of revenue cost of revenue primarily consists of salaries and other personnel-related costs , including benefits , bonuses , and stock-based compensation , for associates providing services to our customers and supporting our saas platform infrastructure . additional expenses in cost of revenue include co-location facility costs for our data centers , depreciation expense for computer equipment directly associated with generating revenue , infrastructure maintenance costs , amortization expenses associated with capitalized software development costs , allocated overhead , and other direct costs . our cost of revenue is expensed as we incur the costs . however , the related revenue from fees we receive for our implementation services performed before a customer is operating on our platform is deferred until the commencement of the monthly subscription and recognized as revenue ratably over the longer of the related contract term or the estimated expected life of the customer relationship . therefore , the cost incurred in providing these services is expensed in periods prior to the recognition of the corresponding revenue . our cost associated with providing implementation services has been significantly higher as a percentage of revenue than our cost associated with providing our monthly subscription services due to the labor associated with providing implementation services . we plan to continue to expand our capacity to support our growth , which will result in higher cost of revenue in absolute dollars . however , we expect cost of revenue as a percentage of revenue to 58 decline and gross margins to increase primarily from the growth of the percentage of our revenue from large employers and the realization of economies of scale driven by retention of our customer base . operating expenses operating expenses consist of sales and marketing , research and development , and general and administrative expenses . salaries and personnel-related costs are the most significant component of each of these expense categories . we expect to continue to hire new associates in these areas in order to support our anticipated revenue growth . as a result , we expect our operating expenses to increase in both aggregate dollars and as a percentage of revenue in the near term , but to decrease over the longer term as we achieve economies of scale . sales and marketing expense . sales and marketing expense consists primarily of salaries and other personnel-related costs , including benefits , bonuses , stock-based compensation , and commissions for our sales and marketing associates . we record expense for commissions at the time of contract signing . additional expenses include advertising , lead generation , promotional event programs , corporate communications , travel , and allocated overhead . for instance , our most significant promotional event is one place , which we have held annually in the second quarter and in 2015 will hold in the first quarter . we expect our sales and marketing expense to increase in both absolute dollars and as a percentage of revenue in the foreseeable future as we further increase the number of our sales and marketing professionals and expand our marketing activities in order to continue to grow our business . research and development expense . research and development expense consists primarily of salaries and other personnel-related costs , including benefits , bonuses , and stock-based compensation for our research and development associates . additional expenses include costs related to the development , quality assurance , and testing of new technology , and enhancement of our existing platform technology , consulting , travel , and allocated overhead . we believe continuing to invest in research and development efforts is essential to maintaining our competitive position . we expect our research and development expense to increase in absolute dollars and as a percentage of revenue for the near term , but decrease as a percentage of revenue over the longer term as we achieve economies of scale . general and administrative expense . general and administrative expense consists primarily of salaries and other personnel-related costs , including benefits , bonuses , and stock-based compensation for administrative , finance and accounting , information systems , legal , and human resource associates . additional expenses include consulting and professional fees , insurance and other corporate expenses , and travel . we expect our general and administrative expenses to increase in absolute terms as a result of operating as a public company and will include costs associated with compliance with the sarbanes-oxley act and other regulations governing public companies , increased costs of directors ' and officers ' liability insurance , increased professional services expenses , and costs associated with an enhanced investor relations function . other income and expense other income and expense consists primarily of interest income and expense , accretion of contingent consideration , and gain ( loss ) on disposal of fixed assets . interest income represents interest received on our cash and cash equivalents . interest expense consists primarily of the interest incurred on outstanding borrowings under our financing obligations , existing notes and credit facilities . income tax expense income tax expense consists of u.s. federal and state income taxes . we incurred minimal income tax expense for 2014 , 2013 , and 2012. net operating loss carryforwards for federal income tax 59 purposes were $ 68,235 million at december 31 , 2014. state net operating loss carryforwards were approximately $ 61,583 million at december 31 , 2014. federal net operating loss carryforwards will expire at various dates beginning in 2022 , if not utilized .

results of operations consolidated statements of operations data the following table sets forth our consolidated statements of operations data for each of the periods indicated ( in thousands ) . replace_table_token_10_th ( 1 ) cost of revenue and operating expenses include stock-based compensation expense as follows ( in thousands ) : replace_table_token_11_th 60 the following table sets forth our consolidated statements of operations data as a percentage of revenue for each of the periods indicated ( as a percentage of revenue ) . replace_table_token_12_th our segments the following table sets forth segment results for revenue and gross profit for the periods indicated ( in thousands ) : replace_table_token_13_th 61 comparison of years ended december 31 , 2014 and 2013 revenue replace_table_token_14_th growth in software services revenue was primarily attributable to the addition of new customers , as the number of large employer and carrier customers increased to 596 as of december 31 , 2014 from 433 as of december 31 , 2013. our professional services revenue increased in absolute terms between the year ended december 31 , 2013 and the year ended december 31 , 2014 , primarily due to revenue recognized from newly completed implementations of $ 3.2 million in addition to $ 2.1 million from the acceleration of the customer relationship period for customers that did not renew their contracts . segment revenue replace_table_token_15_th the growth in our employer revenue was primarily attributable to a $ 20.0 million increase in our employer software services revenue driven primarily by an increase in the number of large employer customers using our platform as of december 31 , 2014 as compared to december 31 , 2013. additionally , employer professional services contributed an increase of $ 1.4 million primarily related to newly completed implementations .

the company assesses the recoverability of long-lived assets at least annually or whenever adverse events or changes in circumstances indicate that impairment may have occurred . if the future undiscounted cash flows expected to result from the use of the related assets are less than the carrying value of such assets , impairment has been incurred and a loss is recognized story_separator_special_tag except for the historical information contained herein , the matters discussed in this management 's discussion and analysis of financial condition and results of operations ( “ md & a ” ) , including discussions of our product development plans , business strategies and market factors influencing our results , may include forward-looking statements that involve certain risks and uncertainties . actual results may differ from those anticipated by us as a result of various factors , both foreseen and unforeseen , including , but not limited to , our ability to continue to develop new products and increase systems sales in markets characterized by rapid technological evolution , consolidation and competition from larger , better-capitalized competitors . many other economic , competitive , governmental and technological factors could affect our 26 ability to achieve our goals and interested persons are urged to review any risks that may be described in “ item 1a . risk factors ” as set forth herein , as well as in our other public disclosures and filings with the securities and exchange commission ( `` sec '' ) . overview this md & a is provided as a supplement to the consolidated financial statements and notes thereto included elsewhere in this annual report on form 10-k ( `` report '' ) in order to enhance your understanding of our results of operations and financial condition and should be read in conjunction with , and is qualified in its entirety by , the consolidated financial statements and related notes thereto included elsewhere in this report . historical results of operations , percentage margin fluctuations and any trends that may be inferred from the discussion below are not necessarily indicative of the operating results for any future period . our md & a is organized as follows : management overview . this section provides a general description of our company and operating segments , a discussion as to how we derive our revenue , background information on certain trends and developments affecting our company , a summary of our acquisition transactions and a discussion on management 's strategy for driving revenue growth . critical accounting policies and estimates . this section discusses those accounting policies that are considered important to the evaluation and reporting of our financial condition and results of operations , and whose application requires us to exercise subjective or complex judgments in making estimates and assumptions . in addition , all of our significant accounting policies , including our critical accounting policies , are summarized in note 2 , “ summary of significant accounting policies , ” of our notes to consolidated financial statements included elsewhere in this report . company overview . this section provides a more detailed description of our company , its operating segments , and the products and services we offer . overview of results of operations and results of operations by operating divisions . these sections provide our analysis and outlook for the significant line items on our consolidated statements of income , as well as other information that we deem meaningful to understand our results of operations on both a consolidated basis and an operating division basis . liquidity and capital resources . this section provides an analysis of our liquidity and cash flows and discussions of our contractual obligations and commitments as of march 31 , 2015 . new accounting pronouncements . this section provides a summary of the most recent authoritative accounting standards and guidance that have either been recently adopted by our company or may be adopted in the future . management overview quality systems , inc. and its wholly-owned subsidiaries operate as four business divisions ( each , a `` division '' ) which are comprised of : ( i ) the qsi dental division , ( ii ) the nextgen division , ( iii ) the hospital solutions division and ( iv ) the rcm services division . we also have a captive entity in india called quality systems india healthcare private limited ( “ qsih ” ) . we primarily derive revenue by developing and marketing healthcare information systems that automate certain aspects of medical and dental practices , networks of practices such as physician hospital organizations ( “ phos ” ) and management service organizations ( “ msos ” ) , accountable care organizations , ambulatory care centers , community health centers and medical and dental schools along with comprehensive systems implementation , maintenance and support and add on complementary services such as revenue cycle management ( “ rcm ” ) and electronic data interchange ( “ edi ” ) . our systems and services provide our customers with the ability to redesign patient care and other workflow processes while improving productivity through the facilitation of managed access to patient information . utilizing our proprietary software in combination with third party hardware and software solutions , our products enable the integration of a variety of administrative and clinical information operations . our scalable interoperability and population health offerings help to improve care collaboration , quality and safety . enabled by our interoperability and enterprise analytics solutions , data-driven patient population healthcare management decisions assist in creating more desirable operational , clinical , and financial outcomes that substantiate the value of patient-centered and accountable care models . story_separator_special_tag we do not recognize revenue for rcm services fees until these collections are made by the customer , as the services fees are not fixed or determinable until such time . a typical system contract contains multiple elements of the items discussed . revenue earned on software arrangements involving multiple elements is allocated to each element based on the relative fair values of those elements . the fair value of an element is based on vendor-specific objective evidence ( “ vsoe ” ) . we limit our assessment of vsoe for each element to the price charged when the same element is sold separately . vsoe calculations are updated and reviewed quarterly or annually depending on the nature of the product or service . we generally establish vsoe for the related undelivered elements based on the bell-shaped curve method . maintenance vsoe for our largest customers is based on stated renewal rates only if the rate is determined to be substantive and falls within our customary pricing practices . when evidence of fair value exists for the delivered and undelivered elements of a transaction , then discounts for individual elements are aggregated and the total discount is allocated to the individual elements in proportion to the elements ' fair value relative to the total contract fair value . when evidence of fair value exists for the undelivered elements only , the residual method is used . under the residual method , we defer revenue related to the undelivered elements in a system sale based on vsoe of fair value of each of the undelivered elements and allocates the remainder of the contract price net of all discounts to revenue recognized from the delivered elements . if vsoe of fair value of any undelivered element does not exist , all revenue is deferred until vsoe of fair value of the undelivered element is established or the element has been delivered . provided the fees are fixed or determinable and collection is considered probable , revenue from licensing rights and sales of hardware and third party software is generally recognized upon physical or electronic shipment and transfer of title . in certain transactions where collection risk is high , the revenue is deferred until collection occurs . if the fee is not fixed or determinable , then the revenue recognized in each period ( subject to application of other revenue recognition criteria ) will be the lesser of the aggregate of amounts due and payable or the amount of the arrangement fee that would have been recognized if the fees were being recognized using the residual method . fees which are considered fixed or determinable at the inception of our arrangements must be negotiated at the outset of an arrangement and generally be based on the specific volume of products to be delivered without being subject to change based on variable pricing mechanisms such as the number of units copied or distributed or the expected number of users . we have historically offered short-term rights of return in certain sales arrangements . if we are able to estimate returns for these types of arrangements , revenue is recognized , net of an allowance for returns , and these arrangements are recorded in the consolidated financial statements . if we are unable to estimate returns for these types of arrangements , revenue is not recognized until the rights of return expire , provided also , that all other criteria for revenue recognition have been met . effect if actual results differ from assumptions although we believe that our approach to estimates and judgments as described herein is reasonable , actual results could differ and we may be exposed to increases or decreases in revenue that could be material . accounts receivable reserves judgments and uncertainties we maintain reserves for potential sales returns and other uncollectible accounts receivable . in aggregate , such reserves reduce our gross accounts receivable to its estimated net realizable value . sales return reserves , which include reserves for returns and other credits , are established based upon the rate of historical returns by revenue type in relation to the corresponding gross revenues . allowances for doubtful accounts and other uncollectible accounts receivable related to estimated losses resulting from our customers ' inability to make required payments are established based on our historical experience of bad debt expense and the aging of our accounts receivable balances , net of deferred revenue and specifically reserved accounts . specific reserves are based on our estimate of the probability of collection for certain troubled accounts . if the financial condition of our customers were to deteriorate resulting in an impairment of their ability to make payments , additional allowances would be required . effect if actual results differ from assumptions although we believe that our approach to estimates and judgments as described herein is reasonable , actual results could differ and we may be exposed to increases or decreases in required reserves that could be material . 29 software development costs judgments and uncertainties development costs , consisting primarily of employee salaries and benefits , incurred in the research and development of new software products and enhancements to existing software products for external use are expensed as incurred until technological feasibility has been established . after technological feasibility is established , any additional external software development costs are capitalized . amortization of capitalized software is recorded using the greater of the ratio of current revenues to the total of current and expected revenues of the related product or the straight-line method over the estimated economic life of the related product , which is typically three years . we periodically reassess the estimated economic life and the recoverability of such capitalized software costs . if a determination is made that capitalized amounts are not recoverable based on the estimated cash flows to be generated from the applicable software , any remaining capitalized amounts are written off .

overview of our results consolidated revenue increased 10.2 % in the year ended march 31 , 2015 , as compared to the prior year period . the increase reflects a 13.2 % growth in recurring services revenue ( i.e . maintenance , edi , rcm and other services revenues ) , partially offset by a 2.0 % decline in system sales revenue . the increase in recurring services revenue is due to an increase across all categories of recurring services , including a substantial increase in subscription revenue of $ 17.3 million in the year ended march 31 , 2015 as compared to the prior year period . subscription revenue included in other revenue was $ 44.6 million in the year ended march 31 , 2015 versus $ 27.3 million in the prior year period . the increase in subscription revenue reflects increases in mirth related interoperability subscription revenue as well as increases in subscription revenue related to our nextgen® patient portal product offering . the decline in system sales revenue reflects the increasingly saturated markets in which our core software products are sold . for the year ended march 31 , 2015 , recurring services revenue comprised 82.7 % of consolidated revenue , as compared to 80.5 % in the prior year period . consolidated gross profit as a percentage of revenue increased to 54.5 % in the year ended march 31 , 2015 , as compared to 50.5 % in the prior year period . the change is primarily the result of $ 20.1 million in impairment charges recorded to cost of software revenue in the prior year period related to the hospital solutions division . consolidated operating income increased 55.7 % , or $ 12.9 million , in the year ended march 31 , 2015 as compared to the prior year period .

the notes are substantially identical to the original notes , except the notes are registered under the securities act of 1933 , and the transfer restrictions , registration rights , and related additional interest provisions applicable to the original notes do not apply to the notes . the notes bear interest at a rate of 4.75 % per year from the date of the original issuance or from the most recent payment date on which interest has been paid or provided for . interest on the notes is payable in arrears on story_separator_special_tag story_separator_special_tag as assisting in establishing relationships with repair shops as customers . our investment expanded our geographic presence into australia and new zealand and provides the opportunity to establish a leadership position in the supply of alternative parts in those countries . during the year ended december 31 , 2012 , we made 30 acquisitions in north america , including 22 wholesale businesses and 8 self service retail operations . these acquisitions enabled us to expand our geographic presence and to enter new markets . additionally , two of our acquisitions were completed with a goal of improving the recovery from scrap and other metals harvested from the vehicles we purchase : a precious metals refining and reclamation business and a scrap metal shredder . sources of revenue we report our revenue in two categories : ( i ) parts and services and ( ii ) other . our parts and services revenue is generated from the sale of vehicle products and related services including ( i ) aftermarket , other new and refurbished products and ( ii ) recycled , remanufactured and related products and services . for the year ended december 31 , 2014 , parts and services revenue represented approximately 90 % of our consolidated revenue . the majority of our parts and services revenue is generated from the sale of vehicle replacement products to collision and mechanical repair shops . our vehicle replacement products include sheet metal crash parts such as doors , hoods , and fenders ; bumper covers ; engines ; head and tail lamps ; and wheels . the demand for these products is influenced by several factors , including the number of vehicles in operation , the number of miles being driven , the frequency and severity of vehicle accidents , the age profile of vehicles in accidents , the availability and pricing of new oem parts , seasonal weather patterns and local weather conditions . additionally , automobile insurers exert significant influence over collision repair shops as to how an insured vehicle is repaired and the cost level of the products used in the repair process . accordingly , we consider automobile insurers to be key demand drivers of our vehicle replacement products . while they are not our direct customers , we do provide insurance carriers services in an effort to promote the increased usage of alternative replacement products in the repair process . such services include the review of vehicle repair order estimates , direct quotation services to insurance company adjusters and an aftermarket parts quality and service assurance program . we neither charge a fee to the insurance carriers for these services nor adjust our pricing of products for our customers when we perform these services for insurance carriers . there is no standard price for many of our vehicle replacement products , but rather a pricing structure that varies from day to day based upon such factors as product availability , quality , demand , new oem product prices , the age and mileage of the vehicle from which the part was obtained , competitor pricing and our product cost . with our january 3 , 2014 acquisition of keystone specialty , our revenue from aftermarket , other new and refurbished products also includes revenue generated from the sale of specialty aftermarket vehicle equipment and accessories . these products are primarily sold to a large customer base of specialty vehicle retailers and equipment installers , including mostly independent , single-site operators . specialty vehicle aftermarket products are typically installed on vehicles within the first year of ownership to enhance functionality , performance or aesthetics . as a result , the demand for these products is influenced by new and used vehicle sales and the overall economic health of vehicle owners , which may be affected by general business conditions , interest rates , inflation , consumer debt levels and other matters that influence consumer confidence and spending . the prices for our specialty vehicle products are based on manufacturers ' suggested retail prices , with discounts applied based on prevailing market conditions , customer volumes and promotions that we may offer from time to time . for the year ended december 31 , 2014 , revenue from other sources represented approximately 10 % of our consolidated sales . these other sources include scrap sales and sales of aluminum ingots and sows . we derive scrap metal from several sources , including vehicles that have been used in both our wholesale and self service recycling operations and from oems and other entities that contract with us for secure disposal of `` crush only '' vehicles . other revenue will vary from period to period based on fluctuations in commodity prices and the volume of materials sold . 37 cost of goods sold our cost of goods sold for aftermarket products includes the price we pay for the parts , freight , and overhead costs related to the purchasing , warehousing and distribution of our inventory , including labor , facility and equipment costs and depreciation . our aftermarket products are acquired from a number of vendors . our cost of goods sold for refurbished products includes the price we pay for cores , freight , and costs to refurbish the parts , including direct and indirect labor , facility and equipment costs , depreciation and other overhead related to our refurbishing operations . story_separator_special_tag on an ongoing basis , we evaluate our estimates , assumptions , and judgments , including those related to revenue recognition , inventory valuation , business combinations , and goodwill impairment . we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances . the results of these estimates form the basis for our judgments about the carrying values of assets and liabilities and our recognition of revenue . actual results may differ from these estimates . revenue recognition we recognize and report revenue from the sale of vehicle products when they are shipped to or picked up by the customers and title has transferred , subject to an allowance for estimated returns , discounts and allowances that management estimates based upon historical information . a product would ordinarily be returned within a few days of shipment . our customers may earn discounts based upon sales volumes or sales volumes coupled with prompt payment . allowances are normally given within a few days following product shipment . we analyze historical returns and allowances activity by comparing the items to the original invoice amounts and dates . we use this information to project future returns and allowances on products sold . if actual returns and allowances are higher than our historical experience , there would be an adverse impact on our operating results in the period of occurrence . we recognize revenue from the sale of scrap metal , other metals , and cores when title has transferred , which typically occurs upon delivery to the customer . inventory accounting aftermarket and refurbished product inventory . our aftermarket inventory cost is established based on the average price we pay for parts , and includes expenses incurred for freight and overhead costs . for items purchased from foreign companies , import fees and duties and transportation insurance are also included . refurbished inventory cost is based on the average price we pay for cores , and also includes expenses incurred for freight , labor and other overhead related to our refurbishing operations . salvage and remanufactured inventory . our salvage inventory cost is established based upon the price we pay for a vehicle , including auction , towing and storage fees , as well as expenditures for buying and dismantling vehicles . inventory carrying value is determined using the average cost to sales percentage at each of our facilities and applying that percentage to the facility 's inventory at expected selling prices , the assessment of which incorporates the sales probability based on a part 's days in stock and historical demand . the average cost to sales percentage is derived from each facility 's historical profitability for salvage vehicles . remanufactured inventory cost is based upon the price paid for cores , and also includes expenses incurred for freight , direct manufacturing costs and overhead related to our remanufacturing operations . all inventory is recorded at the lower of cost or market . the carrying value of our inventory includes a provision for excess and obsolete inventory , which we calculate based on a detailed review of current inventory on hand , historical sales experience , and anticipated demand . the carrying value is adjusted downward when anticipated demand is less than inventory on hand , inventories have become obsolete or inventory costs are in excess of net realizable value . business combinations we record our acquisitions under the acquisition method of accounting , under which the acquisition purchase price is allocated to the assets acquired and liabilities assumed based upon their respective fair values . we utilize management estimates and , in some instances , independent third-party valuation firms to assist in determining the fair values of assets acquired , liabilities assumed and contingent consideration granted . such estimates and valuations require us to make significant assumptions , including projections of future events and operating performance . the purchase price allocation is subject to change during the measurement period , which is limited to one year subsequent to the acquisition date . 39 goodwill impairment we are required to test our goodwill for impairment at least annually . when testing goodwill for impairment , we are required to evaluate events and circumstances that may affect the performance of the reporting unit and the extent to which the events and circumstances may impact the future cash flows of the reporting unit to determine whether the fair value of the assets exceed the carrying value . if these assumptions or estimates change in the future , we may be required to record impairment charges for these assets . in response to changes in industry and market conditions , we may be required to strategically realign our resources and consider restructuring , disposing of , or otherwise exiting businesses , which could result in an impairment of goodwill . we are organized into four operating segments : wholesale-north america ; wholesale-europe ; self service ; and specialty . we have also concluded that these four operating segments are reporting units for purposes of goodwill impairment testing in 2014 . we perform goodwill impairment tests annually in the fourth quarter and between annual tests whenever events indicate that an impairment may exist . during 2014 , we did not identify any events or changes in circumstances that would more likely than not reduce the fair value of our reporting units below their carrying amounts . therefore , we did not perform any impairment tests other than our annual test in the fourth quarter of 2014 . our goodwill would be considered impaired if the net book value of a reporting unit exceeded its estimated fair value . the fair value estimates are established using weightings of the results of a discounted cash flow methodology and a comparative market multiples approach . we believe that using two methods to determine fair value limits the chances of an unrepresentative valuation . as of december 31 , 2014 , we had a total of $ 2.3 billion in goodwill subject to future impairment tests .

overview we provide replacement parts , components and systems used in the repair and maintenance of vehicles , as well as specialty vehicle products and accessories . buyers of vehicle replacement products have the option to purchase from primarily five sources : new products produced by original equipment manufacturers ( `` oems '' ) , which are commonly known as oem products ; new products produced by companies other than the oems , which are sometimes referred to as aftermarket products ; recycled products obtained from salvage vehicles ; used products that have been refurbished ; and used products that have been remanufactured . we distribute a variety of products to collision and mechanical repair shops , including aftermarket collision and mechanical products , recycled collision and mechanical products , refurbished collision products such as wheels , bumper covers and lights , and remanufactured engines . collectively , we refer to these products as alternative parts because they are not new oem products . we are the nation 's largest provider of alternative vehicle collision replacement products and a leading provider of alternative vehicle mechanical replacement products , with our sales , processing , and distribution facilities reaching most major markets in the united states and canada . we are also a leading provider of alternative vehicle replacement and maintenance products in the united kingdom and the benelux region of continental europe . in addition to our wholesale operations , we operate heavy truck facilities and self service retail facilities across the u.s. that sell recycled automotive products from end-of-life-vehicles . in 2014 , we expanded our product offering to include specialty vehicle aftermarket equipment and accessories through the acquisition of keystone specialty . we are organized into four operating segments : wholesale - north america ; wholesale - europe ; self service ; and specialty .

we have also elected , and plan to continue to elect and qualify annually , as a ric under subchapter m of the code for u.s. federal income tax purposes . to the extent that we have net taxable income prior to our qualification as ric , we will be subject to u.s. federal income tax on such income . as a bdc and a ric , respectively , we are and will be required to comply with various regulatory requirements , such as the requirement to invest at least 70 % of our assets in “qualifying assets , ” source of income limitations , asset diversification requirements , and the requirement to distribute annually at least 90 % of our taxable income and tax-exempt interest . our investment activities are managed by our external investment adviser , ab private credit investors llc , an investment adviser that is registered under the advisers act . our required administrative services are provided by state street bank and trust company . we are an “emerging growth company , ” as defined in the jobs act . we will remain an emerging growth company for up to five years following an initial public offering , if any , although if the market value of our common stock that is held by non-affiliates exceeds $ 700 million as of any june 30 before that time , we would cease to be an emerging growth company as of the following december 31. for so long as we remain an emerging growth company under the jobs act , we will be subject to reduced public company reporting requirements . we are conducting private offerings of our common stock to investors in reliance on exemptions from the registration requirements of the securities act . at the closing of any private offering , each investor will make a capital commitment to purchase shares of our common stock pursuant to a subscription agreement entered into with the fund . investors will be required to fund drawdowns to purchase shares our common stock up to the amount of their respective capital commitment on an as needed basis each time we delivers a notice to our investors . on september 29 , 2017 , we completed the initial closing of our private offering after entering into the subscription agreements with several investors , including the adviser , providing for the private placement of our common shares . under the terms of the subscription agreements , investors are required to fund drawdowns to purchase the fund 's common shares up to the amount of their respective capital commitments on an as-needed basis upon the issuance for a capital drawn-down notice . at december 31 , 2019 , we had total capital commitments of $ 397,620,551. at december 31 , 2018 , we had total capital commitments of $ 308,504,110. capital commitments may be drawn down by the fund on a pro rata basis , as needed ( including follow-on investments ) , for paying the fund 's expenses , including fees under the amended and restated advisory agreement , and or maintaining a reserve account for the payment of future expenses or liabilities . revenues our investment objective is to generate current income and prioritize capital preservation through a portfolio that primarily invests in directly-sourced , privately-negotiated , secured , middle market loans . we intend to primarily invest in middle market businesses based in the united states . we expect that the primary use of proceeds by the companies in which we invest will be for leveraged buyouts , recapitalizations , mergers and acquisitions and growth capital . we will seek to build the fund 's portfolio in a defensive manner that minimizes cyclical and correlated risks across individual names and sector verticals by targeting companies with strong underlying business models and durable intrinsic value . we will primarily hold secured loans , which encompass traditional first lien , unitranche and second lien loans , but may also invest in mezzanine , structured preferred stock and non-control equity co-investment opportunities . we will seek to deliver attractive risk adjusted returns with lower volatility and low correlation relative to the public credit markets . the adviser believes our flexibility to invest across the capital structure and liquidity spectrum will allow us to optimize investor risk-adjusted returns . 57 expenses expenses for the year ended december 31 , 2019 , were $ 17,121,122 , which consisted of $ 1,156,419 in collateral management fees , $ 144,606 in directors ' fees , $ 1,507,579 in professional fees , $ 8,465,414 in interest and borrowing expenses , $ 3,688,293 in management fees , $ 261,351 in insurance expense , $ 981,757 in income-based incentive fees , $ 347,444 in administration and custodian fees , $ 28,600 in transfer agent fees , and $ 539,659 in other expenses . pursuant to the expense support and conditional reimbursement agreement , our adviser provided net expense support of $ 339,715 , voluntarily waived collateral management fees of $ 1,156,419 , voluntarily waived a portion of the fund 's management fee of $ 380,701 and voluntarily waived a portion of the fund 's incentive fee of $ 132,327 , reducing our expenses to $ 15,111,960. see “item 15 . — notes to consolidated financial statements — note 3. agreements and related party transactions — expense support and conditional reimbursement agreement.” organization and offering costs since the fund 's inception , the adviser and its affiliates have incurred organizational costs of $ 817,503 and offering costs of $ 209,458 , all of which has been amortized prior to 2019. organization costs include , among other things , the cost of organizing as a maryland corporation , including the cost of legal services , directors ' fees and other fees , including travel-related expenses , pertaining to our organization , all of which are expensed as incurred . offering costs include , among other things , legal fees and other costs pertaining to the preparation of our private placement memorandum and other offering documents . story_separator_special_tag it monitors the financial trends of each portfolio company to determine if they are meeting their respective business plans and to assess the appropriate course of action for each company . the adviser has several methods of evaluating and monitoring the performance and fair value of our investments , which may include the following : assessment of success in adhering to the portfolio company 's business plan and compliance with covenants ; periodic or regular contact with portfolio company management and , if appropriate , the financial or strategic sponsor to discuss financial position , requirements and accomplishments ; comparisons to our other portfolio companies in the industry , if any ; attendance at and participation in board meetings or presentations by portfolio companies ; and review of monthly and quarterly consolidated financial statements and financial projections of portfolio companies . 61 story_separator_special_tag fund did not enter into any hedging contracts . financial condition , liquidity and capital resources at december 31 , 2019 , and december 31 , 2018 , we had $ 14,931,791 and $ 2,510,208 in cash and cash equivalents on hand , respectively . we expect to generate cash primarily from ( i ) the net proceeds of the private offering , ( ii ) cash flows from our operations , ( iii ) any financing arrangements now existing or that we may enter into in the future and ( iv ) any future offerings of our equity or debt securities . we may fund a portion of our investments through borrowings from banks , or other large global institutions such as insurance companies , and issuances of senior securities . our primary use of funds from a credit facility will be investments in portfolio companies , cash distributions to holders of our common stock and the payment of operating expenses . in the future , we may also securitize or finance a portion of our investments with a special purpose vehicle . if we undertake a securitization transaction , we will consolidate our allocable portion of the debt of any securitization subsidiary on our financial statements , and include such debt in our calculation of the asset coverage test , if and to the extent required pursuant to the guidance of the staff of the sec . cash and cash equivalents as of december 31 , 2019 , taken together with our uncalled capital commitments of $ 255,922,617 and $ 30,500,000 undrawn amount on our credit facilities , is expected to be sufficient for our investing activities and to conduct our operations for at least the next twelve months . as of december 31 , 2019 , we had $ 14,931,791 in cash and cash equivalents . during the year ended december 31 , 2019 , we used $ 197,174,227 for operating activities . credit facilities hsbc credit facility agreement on november 15 , 2017 , the fund entered into the hsbc credit agreement to establish the hsbc credit facility with hsbc as administrative agent and any other lender that becomes a party to the hsbc credit facility in accordance with the terms of the hsbc credit facility , as lenders . the initial maximum principal amount ( the “maximum commitment” ) of the hsbc credit facility is $ 30 million . the maximum commitment amount may be increased upon request of the fund to an amount agreed upon by the fund and the administrative agent . such increase may be done in one or more requested increases , each in a minimum amount of $ 10 million and in $ 5 million increments thereof , or such lesser amount to be determined by the administrative agent , subject to certain terms and conditions . on january 31 , 2019 , the fund set the maximum commitment as $ 50 million . so long as no request for borrowing is outstanding , the fund may terminate the lenders ' commitments ( the “commitments” ) or reduce the maximum commitments by giving prior irrevocable written notice to the administrative agent . any reduction of the maximum commitments shall be in an amount equal to $ 10 million or multiples thereof ; and in no event shall a reduction by the fund reduce the commitments to $ 35 million or less ( in each case , except for a termination of all the commitments ) . proceeds under the hsbc credit facility may be used for any purpose permitted under our organizational documents , including general corporate purposes such as the making of investments . borrowings under the hsbc credit facility bear interest , at the fund 's election at the time of drawdown , at a rate per annum equal to ( i ) with respect to libor rate loans , adjusted libor ( as defined in the hsbc credit agreement ) for the applicable interest period ; and ( ii ) with respect 64 to reference rate loans ( as defined in the hsbc credit agreement ) , the greatest of : ( i ) the rate of interest per annum publicly announced from time to time by the administrative agent as its prime rate , ( ii ) the rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the federal reserve system arranged by federal funds brokers on such day , plus two hundred basis points ( 2.00 % ) , provided that if such rate is not so published for any day that is a business day , the average of the quotation for such day on such transactions received by the administrative agent from three ( 3 ) federal funds brokers of recognized standing selected by the administrative agent and , upon request of borrowers , with notice of such quotations to the borrowers and ( iii ) except during any period of time during which libor is unavailable , one-month adjusted libor plus two hundred basis points ( 2.00 % ) . the fund will also pay an unused commitment fee of 35 basis points ( 0.35 % ) on any unused commitments .

results of operations the following is a summary of our operating results for the years ended december 31 , 2019 and 2018. for information regarding results of operations for the year ended december 31 , 2017 , see the fund 's form 10-k for the fiscal year ended december 31 , 2017 filed with the sec on march 20 , 2018. replace_table_token_20_th investment income during the year ended december 31 , 2019 , the fund 's investment income was comprised of $ 21,204,120 of interest income , which includes $ 1,390,648 from the net amortization of premium and accretion of discounts , $ 301,603 of payment-in-kind interest , and $ 229,144 of other fee income . during the year ended december 31 , 2018 , the fund 's investment income was comprised of $ 5,516,602 of interest income , which includes $ 262,280 from the accretion of discounts , $ 19,444 of payment-in-kind interest , and $ 191,375 of other fee income . operating expenses the composition of our operating expenses for the years ended december 31 , 2019 and 2018 were as follows : replace_table_token_21_th 62 total operating expenses for the year ended december 31 , 2019 increased by approximately $ 11.2 million compared to the year ended december 31 , 2018. the increase in 2019 is attributable primarily to higher interest and borrowings expenses , collateral management fees , base management fees , income-based incentive fees and general and administrative expenses offset by lower professional fees . interest and borrowing expenses interest and borrowing expenses includes interest , amortization of debt issuance and deferred financing costs , upfront commitment fees and unused fees on the unused portion of the hsbc credit facility and the barclays credit facility ( each defined herein , and together , the “credit facilities” ) , and the notes ( as defined below ) issued in the clo transaction ( as defined below ) .

plant nutrition north america operating earnings decreased 64 % , or $ 36.8 million , primarily due to the reduction in average sales prices and an 11 % increase in per-unit shipping and handling costs related to higher warehousing costs and an unfavorable geographic sales mix . plant nutrition south america results replace_table_token_43_th plant nutrition south america results commentary : 2016 – 2017 financial results for 2016 represent consolidated financial information with respect to our plant nutrition south america segment from october 3 , 2016 , the produquímica acquisition date , through december 31 , 2016. as such , 2016 results are not comparable to full-year 2017 consolidated financial results . plant nutrition south america 's operating results are impacted by seasonality . sales volumes are usually higher in the third and fourth quarter and lower in the first and second quarters . see “ —seasonality ” for more information . replace_table_token_44_th compass minerals international , inc. outlook the increase in winter weather events in late december and january is expected to benefit 2018 salt segment sales . we expect salt sales volumes to range from 11.8 million to 12.6 million tons in 2018. salt segment operating margins in the first half of 2018 are expected to be impacted by a combination of high cost carry-over inventory and increased shipping and handling costs . plant nutrition north america sales volumes are expected to range from 320,000 to 350,000 tons in 2018. plant nutrition north america operating margins in the first half of 2018 are expected to be impacted by increased logistics costs and depreciation expense . the increase in depreciation expense for plant nutrition north america is expected to be approximately $ 10 million on an annual basis for 2018. we expect 2018 plant nutrition south america sales volumes to range from 700,000 to 900,000 tons . we expect revenues in the first half of 2018 to be higher than those in 2017 and first half operating margins to be essentially flat compared 2017 for our plant nutrition south america segment . investments , liquidity and capital resources overview over the last several years , we have made significant investments in order to strengthen our operational capabilities . we continue to invest in our goderich mine to increase our annual available salt production capability to nine million tons as demand warrants . we continue to invest in our continuous mining project at our goderich mine . we shifted all of our goderich mine production to continuous mining in the fourth quarter of 2017 , and we expect this project to generate annual cost savings of approximately $ 15 million in 2018 and $ 30 million in 2019 if all efficiencies are realized . we invested in our ogden facility to strengthen our solar-pond-based sop production through upgrades to our processing plant and our solar evaporation ponds . this included modifying our existing solar evaporation ponds to increase the annual solar harvest and increasing the extraction yield and processing capacity of our sop plant . these improvements have increased our current annual solar-pond-based sop production capacity to approximately 320,000 tons . we recently completed a project to further expand our sop production capacity at our ogden facility , which increased our sop production capacity to approximately 550,000 tons when supplemental kcl feedstock is used . in addition , we have expanded our ability to compact product into various product grades . in october 2016 , we acquired the remaining 65 % of the issued and outstanding capital stock of produquímica ( see note 3 to our consolidated financial statements for more information ) . in 2014 , we completed the acquisition of wolf trax , inc. , a privately held canadian corporation . the acquisition enhanced our position as a key supplier for premium plant nutrition products by adding innovative plant nutrient products based upon proprietary and patented technologies . as a holding company , cmi 's investments in its operating subsidiaries constitute substantially all of its assets . consequently , our subsidiaries conduct all of our consolidated operations and own substantially all of our operating assets . the principal source of cash needed to pay our obligations is the cash generated from our subsidiaries ' operations and their borrowings . our subsidiaries are not obligated to make funds available to cmi . furthermore , we must remain in compliance with the terms of the credit agreement governing our credit facilities , including the total leverage ratio and interest coverage ratio , in order to pay dividends to our stockholders . we must also comply with the terms of our indenture governing our 4.875 % notes , which limits the amount of dividends we can pay to our stockholders . we are in compliance with our debt covenants as of december 31 , 2017. see note 9 to our consolidated financial statements for a discussion of our outstanding debt . historically , our cash flows from operating activities have generally been adequate to fund our basic operating requirements , ongoing debt service and sustaining investment in our property , plant and equipment . we have also used cash generated from operations to fund capital expenditures which strengthen our operational position , to pay dividends , to fund smaller acquisitions and to repay our debt . we have been able to manage our cash flows generated and used across compass minerals to permanently reinvest earnings in our foreign jurisdictions or efficiently repatriate those funds to the u.s. as of december 31 , 2017 , we had $ 28.0 million of cash and cash equivalents ( in our consolidated balance sheets ) that was either held directly or indirectly by foreign subsidiaries . story_separator_special_tag due in large part to the seasonality of our deicing salt business , we have experienced large changes in our working capital requirements from quarter to quarter . historically , our working capital requirements have been the highest in the fourth quarter and lowest in the second quarter . with the addition of our plant nutrition south america segment , we expect a less seasonal distribution of working capital requirements . when needed , we fund short-term working capital requirements by accessing our $ 300 million revolving credit facility . due to our ability to generate adequate levels of u.s. cash flow on an annual basis , it is our current intention to permanently reinvest our foreign earnings outside of the u.s. we review our tax circumstances on a regular basis with the intent of optimizing cash accessibility and minimizing tax expense . in december 2017 , u.s tax reform legislation was enacted , including a one-time mandatory tax on previously deferred foreign earnings . as a result , we recorded tax expense of $ 55.2 million related to this one-time tax , which will be paid over an eight year period . as of december 31 , 2017 , all non-u.s. undistributed earnings were subject replace_table_token_45_th compass minerals international , inc. to the one-time mandatory tax in the u.s. with the exception of outside basis differences of $ 59.3 million related to our brazilian entities . see note 7 to our consolidated financial statements for a discussion regarding u.s. tax reform . in addition , the amount of permanently reinvested foreign earnings is influenced by , among other things , the profits generated by our foreign subsidiaries and the amount of investment in those same subsidiaries . the profits generated by our u.s. and foreign subsidiaries are impacted by the transfer price charged on the transfer of our products between them . as discussed in note 7 to our consolidated financial statements , our calculated transfer price on certain products between one of our foreign subsidiaries and a domestic subsidiary has been challenged by canadian federal and provincial governments . in the fourth quarter of 2017 , we reached a federal settlement with canadian and u.s. tax authorities related to our transfer pricing issues for our 2007-2012 tax years . the agreement will result in intercompany cash payments from our u.s. subsidiary to our canadian subsidiary of $ 85.7 million and tax payments to canadian taxing authorities of $ 23.4 million with a corresponding tax refund due from u.s. taxing authorities of $ 21.8 million . the timing of the refund is expected to lag the payment to the canadian tax authorities by a year or more . there are ongoing challenges by canadian provincial taxing authorities regarding our transfer prices of certain items . the final resolution of these challenges may not occur for several years . we currently expect the outcome of these matters will not have a material impact on our results of operations . however , it is possible the resolution could materially impact the amount of earnings attributable to our foreign subsidiaries , which could impact the amount of permanently reinvested foreign earnings . see note 7 to our consolidated financial statements for a discussion regarding our canadian tax reassessments and settlements . principally due to the nature of our deicing business , our cash flows from operations have historically been seasonal , with the majority of our cash flows from operations generated during the first half of the calendar year ( see “ seasonality ” section below for more information ) . when we have not been able to meet our short-term liquidity or capital needs with cash from operations , whether as a result of the seasonality of our business or other causes , we have met those needs with borrowings under our revolving credit facility . we expect to meet the ongoing requirements for debt service , any declared dividends and capital expenditures from these sources . this , to a certain extent , is subject to general economic , financial , competitive , legislative , regulatory and other factors that are beyond our control . the table below provides a summary our cash flows by category and year . 2017 2016 2015 operating activities : net cash flows provided by operating activities were $ 146.9 million . » net earnings were $ 42.7 million . » non-cash depreciation and amortization expense was $ 122.2 million . » working capital items were a use of operating cash flows of $ 6.9 million . net cash flows provided by operating activities were $ 167.3 million . » net earnings were $ 162.7 million which included a non-cash remeasurement gain of $ 59.3 million related to the acquisition of produquímica . » non-cash depreciation and amortization expense was $ 90.3 million . » working capital items were a use of operating cash flows of $ 31.7 million . net cash flows provided by operating activities were $ 137.9 million . » net earnings were $ 159.2 million . » non-cash depreciation and amortization expense was $ 78.3 million . » working capital items were a use of operating cash flows of $ 111.0 million . investing activities : net cash flows used by investing activities were $ 119.0 million . » included $ 114.1 million of capital expenditures . net cash flows used by investing activities were $ 467.8 million . » included $ 182.2 million of capital expenditures and cash payments of $ 4.7 million relating to our previously held equity investment and $ 277.7 million for the full acquisition of produquímica . net cash flows used by investing activities were $ 335.4 million . » included $ 217.6 million of capital expenditures and an equity investment of $ 116.4 million . financing activities : net cash flows used by financing activities were $ 73.4 million . » included net proceeds from issuance of debt of $ 38.7 million , payments of

consolidated results of operations replace_table_token_36_th compass minerals international , inc. * refer to “ —sensitivity analysis related to ebitda and adjusted ebitda ” for a reconciliation to the most directly comparable gaap financial measure and the reasons we use this non-gaap measure . consolidated results commentary : 2016 – 2017 total sales increased 20 % , or $ 226.4 million , due to the impact of a full year of produquímica sales and an increase in plant nutrition north america segment sales . this increase was partially offset by a decline in salt segment sales . operating earnings decreased 9 % , or $ 15.4 million , due to lower salt segment operating earnings , partially offset by the inclusion of produquímica in our operating results and an increase in plant nutrition north america operating earnings . diluted earnings per share decreased 74 % , or $ 3.54 . diluted earnings per share in 2017 was negatively impacted by a charge of $ 46.8 million for the impact of the u.s. tax cuts and jobs act ( the “ act , ” which is commonly referred to as “ u.s . tax reform ” ) , legislation enacted in december 2017 and other tax related items ( see note 7 to our consolidated financial statements ) . in contrast , 2016 diluted earnings per share was positively impacted by a $ 59.3 million gain as a result of remeasuring our prior equity investment in produquímica held before the business combination ( see note 3 to our consolidated financial statements ) . ebitda * adjusted for items management believes are not indicative of our ongoing operating performance ( “ adjusted ebitda ” ) * increased 4 % , or $ 11.5 million . consolidated results commentary : 2015 – 2016 total sales increased 4 % , or $ 39.3 million , due to the contribution during the fourth quarter of 2016 from the acquisition of produquímica .

f-12 catabasis pharmaceuticals , inc. notes to consolidated financial statements ( continued ) 2. summary of significant accounting policies ( continued ) the following common stock equivalents were excluded from the calculation of diluted net loss per share for the periods indicated because including them would have had an anti-dilutive effect : story_separator_special_tag you should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in 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 . you should review the `` risk factors '' section of this annual report on form 10-k 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 contained in the following discussion and analysis . overview we are a clinical-stage biopharmaceutical company focused on the discovery , development and commercialization of novel therapeutics . our lead product candidate is edasalonexent , formerly known as cat-1004 , an oral small molecule that inhibits nf- k b , or nuclear factor kappa-light-chain-enhancer of activated b cells , in development for the treatment of duchenne muscular dystrophy , or dmd . we believe edasalonexent has the potential to be a foundational therapy for all patients affected by dmd regardless of the underlying dystrophin mutation . dmd is an ultimately fatal genetic disorder involving progressive muscle degeneration . the united states food and drug administration , or fda , has granted orphan drug , fast track and rare pediatric disease designations to edasalonexent for the treatment of dmd . the european commission , or ec , has granted orphan medicinal product designation to edasalonexent for the treatment of dmd . we initiated a global phase 3 trial of edasalonexent for the treatment of dmd in september 2018 , which we refer to as the polarisdmd trial . the polarisdmd trial is designed to evaluate the efficacy and safety of edasalonexent for registration purposes , with top-line results expected in the second quarter of 2020. our goal is to submit a new drug application for edasalonexent for the treatment of dmd in early 2021. polarisdmd is currently enrolling patients with enrollment expected to be completed in 2019. the trial design was informed by discussions with the fda , as well as input from treating physicians , families of boys affected by dmd and patient advocacy organizations . the polarisdmd trial is a randomized , double-blind , placebo-controlled trial , and we anticipate enrolling approximately 125 patients between the ages of four and seven ( up to eighth birthday ) , regardless of mutation type , who have not been on steroids for at least six months . the primary efficacy endpoint is change in north star ambulatory assessment , or nsaa , score after 12 months of treatment with edasalonexent compared to placebo . key secondary endpoints are the age-appropriate timed function tests : time to stand , 4-stair climb and 10-meter walk/run . assessments of growth , cardiac and bone health are also included in the trial . this month , we are initiating a new open-label extension trial called the galaxydmd trial , in which we plan to enroll all of the boys currently participating in the movedmd open-label extension , and which will also provide the boys who complete the 12-month polarisdmd trial with the opportunity to receive open-label edasalonexent treatment . the galaxydmd trial is designed to provide longer term safety data to support registration filings . our movedmd phase 1/2 trial enrolled ambulatory boys four to seven years old with a genetically confirmed diagnosis of dmd who were steroid naive or had not used steroids for at least six months prior to the trial . boys enrolled in the trial were not limited to any specific dystrophin mutations and the 31 boys in the trial had 26 different dystrophin mutations . the movedmd trial was designed to be conducted in three sequential parts , phase 1 and phase 2 , both of which are completed , and an open-label extension , which is on-going . in phase 1 of the movedmd trial , we assessed the safety , tolerability and pharmacokinetics of edasalonexent in 17 patients , following seven days of dosing , and 82 we reported in january 2016 that all three doses of edasalonexent tested were generally well tolerated with no safety signals observed and there were no serious adverse events and no drug discontinuations . in the phase 2 portion of the trial , we assessed the effects of edasalonexent using magnetic resonance imaging , or mri , t2 as an early biomarker at 12 weeks , and announced in january 2017 that the primary efficacy endpoint of average change from baseline to week 12 in the mri t2 composite measure of lower leg muscles for the pooled edasalonexent treatment groups compared to placebo was not met , although we observed directionally positive results in the 100/mg/kg/day edasalonexent treatment group that were not statistically significant . subsequently , in the open-label extension of the movedmd trial , we observed statistically significant improvement in the rate of change in lower leg composite mri t2 through 12 , 24 , 36 and 48 weeks on 100 mg/kg of edasalonexent treatment compared to the off-treatment control period . we have completed key efficacy and safety assessments from the movedmd trial . in the ongoing open-label extension of the movedmd trial through 72 weeks of oral 100 mg/kg/day edasalonexent treatment , we observed preserved muscle function and consistent improvements in all four assessments of muscle function : nsaa score , time to stand , 4-stair climb and 10-meter walk/run , compared to the rates of change in the control period for boys prior to receiving edasalonexent treatment . story_separator_special_tag we reported results from the phase 1 portion of the movedmd trial in january 2016 and reported top-line safety and efficacy results for the 12-week placebo-controlled phase 2 portion of the trial in january 2017. in july 2016 , we initiated an open-label extension of the movedmd trial , which has provided safety and efficacy data through 24 , 36 , 48 , 60 and 72 weeks of edasalonexent treatment , and we reported efficacy and safety results from the open-label extension in october 2017 , february 2018 , april 2018 and october 2018. we initiated the global phase 3 polarisdmd trial of edasalonexent for the treatment of dmd , regardless of mutation type , in the second half of 2018 with top-line results expected in the second quarter of 84 2020. the polarisdmd trial is designed to evaluate the efficacy and safety of edasalonexent in patients with dmd and is intended to support an application for commercial registration of edasalonexent . edasalonexent for the treatment of bmd— we are evaluating the potential benefits of edasalonexent treatment in bmd and investigating potential approaches for clinical trials in bmd . cat-5571— cat-5571 is a smart linker conjugate that contains cysteamine , a naturally occurring molecule that is a degradation product of the amino acid cysteine , and dha . cat-5571 is a potential oral therapy to treat cf . cat-5571 is a small molecule designed to activate autophagy , a mechanism for recycling cellular components and digesting pathogens , which is important for host defenses and is depressed in cf . we have completed ind-enabling activities for cat-5571 . we typically use our employee , consultant and infrastructure resources across our development programs . we track outsourced development costs by product candidate or development program , but we do not allocate personnel costs , other internal costs or external consultant costs to specific product candidates or development programs . we record our research and development expenses net of any research and development tax incentives we are entitled to receive from government authorities . the following table summarizes our research and development expenses by program ( in thousands ) : replace_table_token_1_th since inception of the edasalonexent and the cat-5571 programs , total direct expenses to support the programs have been $ 37.3 million and $ 4.2 million , respectively . the successful development of our product candidates is highly uncertain . accordingly , at this time , we can not reasonably estimate the nature , timing and costs of the efforts that will be necessary to complete the remainder of the development of these product candidates . we are also unable to predict when , if ever , material net cash inflows will commence from edasalonexent or any of our other current or potential product candidates . this is due to our need to raise additional capital to fund further clinical trials of our product candidates and the numerous risks and uncertainties associated with developing medicines , including the uncertainties of : establishing an appropriate safety profile with ind-enabling toxicology studies ; successful enrollment in , and completion of clinical trials ; 85 receipt of marketing approvals from applicable regulatory authorities ; establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers ; obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates ; launching commercial sales of the products , if and when approved , whether alone or in collaboration with others ; and a continued acceptable safety profile of the products following approval . a change in the outcome of any of these variables with respect to the development of any of our product candidates would significantly change the costs and timing associated with the development of that product candidate . research and development activities are central to our business model . product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development , primarily due to the increased size and duration of later-stage clinical trials . we expect to incur significant research and development costs for the foreseeable future . we expect that our research and development expenses will increase significantly in the near term in connection with the substantial activities required to conduct our polarisdmd trial and prepare for registration and commercialization of edasalonexent for the treatment of dmd . we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization . there are numerous factors associated with the successful commercialization of any of our product candidates , including future trial design and various regulatory requirements , many of which can not be determined with accuracy at this time based on our stage of development . additionally , future commercial and regulatory factors beyond our control will impact our clinical development programs and plans . general and administrative expenses general and administrative expenses consist primarily of salaries and other related costs , including stock-based compensation , for personnel in executive , finance , accounting , business development and human resources functions . other significant costs include facility costs not otherwise included in research and development expenses , legal fees relating to patent and corporate matters , and fees for accounting and consulting services . we anticipate that in the near term our general and administrative expenses will remain relatively consistent with their current levels . as we approach the anticipated read out of top-line results from our polarisdmd trial in the second quarter of 2020 , we may increase our general and administrative expenditures to hire personnel to support potential commercialization of edasalonexent , dependent on our available capital resources and our prospects for obtaining additional financing . restructuring in april 2018 , we announced a strategic shift to focus resources on our lead program edasalonexent .

results of operations comparison of the years ended december 31 , 2018 and 2017 the following table summarizes our results of operations for the years ended december 31 , 2018 and 2017 , together with the dollar change in those items ( in thousands ) : replace_table_token_2_th revenue during the year ended december 31 , 2017 , we recognized revenue of $ 0.5 million related to the option agreement . we did not recognize any revenue in the year ended december 31 , 2018. research and development expenses research and development expenses decreased by $ 1.6 million to $ 17.0 million for the year ended december 31 , 2018 from $ 18.7 million for the year ended december 31 , 2017 , a decrease of 9 % . the decrease in research and development expenses was attributable to a $ 1.9 million decrease in costs to support our cat-5571 program , a $ 0.8 million decrease in costs to support other research and platform programs , a $ 0.4 million decrease in employee compensation due to a reduction in our workforce , a $ 0.4 million decrease in other expenses such as general office items and the research and development portion of depreciation expense and a $ 0.3 million decrease in the research and development portion of facilities costs . these decreases were partially offset by a $ 2.0 million increase in costs to support our edasalonexent program due to activities associated with conducting the polarisdmd trial and a $ 0.2 million increase in consultants and professional expenses . general and administrative expenses general and administrative expenses increased by $ 0.4 million to $ 9.3 million for the year ended december 31 , 2018 from $ 8.9 million for the year ended december 31 , 2017 , an increase of 5 % .

there were 102,424 restricted story_separator_special_tag cautionary statement for `` safe harbor '' purposes under the private securities litigation reform act of 1995 the private securities litigation reform act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the company . this report contains statements that the company believes may be `` forward-looking statements '' within the meaning of section 21e of the securities exchange act of 1934 , particularly statements relating to the company 's objectives , plans or goals , future actions , future performance or results of current and anticipated products , sales efforts , expenditures , and financial results . from time to time , the company also provides forward-looking statements in other publicly-released materials , both written and oral . forward-looking statements provide current expectations and forecasts of future events such as new products , revenues and financial performance , and are not limited to describing historical or current facts . they can be identified by the use of words such as `` believes , '' `` expects , '' `` plans , '' `` intends , '' `` anticipates , '' and other words and phrases of similar meaning . forward-looking statements are necessarily based on assumptions , estimates and limited information available at the time they are made . a broad variety of risks and uncertainties , both known and unknown , as well as the inaccuracy of assumptions and estimates , can affect the realization of the expectations or forecasts in these statements . many of these risks and uncertainties are difficult to predict or are beyond the company 's control . consequently , no forward-looking statements can be guaranteed . actual future results may vary materially . significant factors affecting the expectations and forecasts are set forth under `` item 1a — risk factors '' in this annual report on form 10-k. the company undertakes no obligation to update any forward-looking statements to reflect events or circumstances that arise after the date hereof . investors should refer to the company 's subsequent filings under the securities exchange act of 1934 for further disclosures . income and expense items as a percentage of net sales replace_table_token_10_th executive summary the company reported record earnings per share for 2012 of $ 2.09 per share , an increase of 12 % from 2011. the results reflected continued solid financial performance . worldwide sales were $ 1.01 billion compared with $ 1.04 billion in 2011 , a decrease of 4 percent . foreign exchange had an unfavorable impact on sales of $ 26.5 million or 3 percentage points . in addition to the impact of foreign exchange , several temporary and permanent paper and steel mill closures in europe and north america contributed to the sales decrease , which was partially offset by paper pcc sales from new satellite facilities and the continued ramp up of satellite facilities that began operations in the past year . income from operations grew 10 percent to $ 110.0 million as compared to $ 100.3 million in the prior year . this increase was due to a strong operating performance highlighted by 6-percent company-wide productivity improvements , which resulted in savings of $ 4 million , and a 3 percent decrease , or $ 4 million savings , in total overhead expenses . in 2012 , the company continued to advance the execution of its growth strategies of geographic expansion and new product innovation and development . during the year , we began operations in the fourth quarter of two new satellite plants , one in india and one in thailand . in addition , we signed contracts for two new satellite pcc facilities in china . the two new satellite facilities in china will add approximately 132,000 tons of production capacity and should be operational by the first quarter of 2014. six more commercial agreements were signed with paper mills for our fulfill tm portfolio of products bringing the total to ten as of december 31 , 2012. we presently have eleven commercial contracts for fulfill . in 2012 the fulfill program generated $ 1.4 million of 22 operating income . we expect the contribution of our fulfill program to generate operating income between $ 2.5 million and $ 3.0 million in 2013. the refractory segment introduced a new , fourth generation lacam ® laser measurement system and expect additional lacam ® sales in 2013. we also signed an agreement with united steel company b.s.c . ( sulb ) to perform all refractory maintenance at a greenfield steel mill in bahrain that started up in the third quarter of 2012. minteq , working with other refractory companies , is responsible for coordinating refractory maintenance of the steel furnaces and other steel production vessels . we generated approximately $ 3 million in revenue from this contract in 2012 and we expect to generate between $ 8 million- $ 10 million per year of revenue over the 3 year term of the contract . the company 's balance sheet as of december 31 , 2012 continues to be very strong . cash , cash equivalents and short-term investments at december 31 , 2012 were approximately $ 468 million . our cash flows from operations were approximately $ 139 million in 2012. in addition , we had available lines of credit of $ 183.5 million , our debt to equity ratio was 0.10 , and our current ratio was 3.1. we face some significant risks and challenges in the future : · the industries we serve , primarily paper , steel , construction and automotive , have been adversely affected by the uncertain global economic climate , primarily in europe . although these markets have stabilized , our global business could be adversely affected by further decreases in economic activity . our refractories segment primarily serves the steel industry . although north american production improved slightly in 2012 as compared with the prior year , we saw declines in european steel production and it remains below 2008 levels . story_separator_special_tag in the refractories segment , production margin increased $ 3.7 million , or 5 % as compared with a 9 % increase in sales . this segment incurred higher raw material costs that were partially offset by price increases , higher equipment sales and the effects of foreign exchange . marketing and administrative costs decreased 3 % to $ 89.2 million in 2012 from $ 92.1 million in the prior year . marketing and administrative costs as a percentage of net sales however , represented 8.9 % of net sales as compared with 8.8 % in the prior year . in 2011 , marketing and administrative expenses were 1.7 % higher than in the prior year . research and development expenses increased 5 % in 2012 to $ 20.2 million from $ 19.3 million and represented 2.0 % of net sales . in 2011 , research and development expense decreased 2 % from 2010 and represented 1.9 % of net sales . replace_table_token_13_th the company recorded income from operations in 2012 of $ 110.0 million as compared with $ 100.3 million in the prior year . included in income from operations in 2011 were restructuring charges of $ 0.5 million . the specialty minerals segment recorded income from operations of $ 84.1 million in 2012 as compared with $ 72.8 million in the prior year . included in income from operations in 2011 were restructuring charges of $ 1.0 million . the refractories segment recorded income from operations of $ 32.6 million in 2012 as compared to $ 33.2 million in the prior year . included in income from operations in 2011 were restructuring reversals of ( $ 0.6 ) million . in 2011 , the specialty minerals segment recorded income from operations of $ 72.8 million as compared $ 74.7 million in the prior year . the refractories segment recorded income from operations of $ 33.2 million in 2011 as compared with $ 28.0 million in the previous year . replace_table_token_14_th * percentage not meaningful the company recorded non-operating deductions of $ 3.0 million in 2012 as compared with $ 2.6 million in the previous year . this increase primarily relates to lower interest income and slightly higher foreign exchange losses . the company recorded non-operating deductions of $ 2.6 million in 2011 as compared with non-operating income of $ 0.6 million in the previous year . included in non-operating deductions in 2011 were foreign currency losses of $ 1.4 million recognized upon the sale of a 50 % interest in and deconsolidation of the company 's joint venture in korea . replace_table_token_15_th the company recorded provision for taxes on income of $ 30.8 million in 2012 as compared with $ 27.5 million in the previous year . the effective tax rate for 2012 was 28.8 % as compared with 28.1 % in the prior year . the increase in the tax rate in the current year primarily relates to a prior year favorable united states tax court case settlement and the resulting expiration of the statute of limitations of the tax years related to the tax court case . the company recorded provision for taxes on income of $ 27.5 million in 2011 as compared to $ 29.0 million in the previous year . the effective tax rate for 2011 was 28.1 % as compared with 29.3 % in the previous year . the decrease in the tax rate in the current year primarily relates to a favorable united states tax court case settlement . the factors having the most significant impact on our effective tax rates in recent periods are the rate differential related to foreign earnings indefinitely invested , percentage depletion , and the reversal of tax reserves as a result of a tax court case settlement . 26 percentage depletion allowances ( tax deductions for depletion that may exceed our tax basis in our mineral reserves ) are available to us under the income tax laws of the united states for operations conducted in the united states . the tax benefits from percentage depletion were $ 4.1 million in 2012 , $ 4.0 million in 2011 , and $ 3.7 million in 2010. we operate in various countries around the world that have tax laws , tax incentives and tax rates that are significantly different than those of the united states . many of these differences combine to move our overall effective tax rate higher or lower than the united states statutory rate depending on the mix of income relative to income earned in the united states . the effects of foreign earnings and the related foreign rate differentials resulted in a decrease of income tax expense of $ 5.0 million , $ 0.9 million and $ 3.1 million in 2012 , 2011 and 2010 , respectively . the increase of income tax benefits in 2012 as compared with 2011 results from the change in the mix of earnings in the foreign jurisdictions in 2012 , statutory rate changes and a change in the amount of local income and tax adjustment s. the decrease of income tax benefits in 2011 as compared with 2010 results from the change in the mix of earnings in the foreign jurisdictions in 2011 , statutory tax rate changes , and a change in the amount of local income and tax adjustments . replace_table_token_16_th the company recognized income from continuing operations of $ 76.3 million in 2012 as compared to $ 70.3 million in 2011. in 2010 , the company recorded income from operations of $ 69.9 million . replace_table_token_17_th the decrease in the income attributable to non-controlling interests is due to the lower profitability in our joint ventures . replace_table_token_18_th the company recorded net income of $ 74.1 million in 2012 as compared to $ 67.5 million in 2011. diluted earnings per share were $ 2.09 as compared with $ 1.86 in the previous year .

results of operations sales ( dollars in millions ) replace_table_token_11_th worldwide net sales in 2012 decreased 4 % from the previous year to $ 1.01 billion . foreign exchange had an unfavorable impact on sales of $ 26.5 million or 3 percentage points of growth . sales in the specialty minerals segment , which includes the pcc and processed minerals product lines , decreased 2 % to $ 662.2 million from $ 676.1 million in 2011. sales in the refractories segment decreased 7 % to $ 343.4 million from $ 368.8 million in the previous year . in 2011 , worldwide net sales increased 4 % to $ 1,044.9 billion from $ 1,002.4 billion in the prior year . foreign exchange had a favorable impact on sales of $ 21.0 million , or less than 2 24 percentage points of growth . in 2011 , specialty minerals segment sales increased 2 % and refractories segment sales increased 9 % from 2010 levels . in 2012 , worldwide net sales of pcc , which is primarily used in the manufacturing process of the paper industry , decreased 3 % to $ 546.2 million from $ 560.6 million in the prior year . foreign exchange had an unfavorable impact on sales of approximately $ 17.3 million or 3 percentage points of growth . worldwide net sales of paper pcc decreased 3 % to $ 480.3 million from the $ 497.0 million in the prior year . volumes for this product line decreased 3 percent , primarily in europe . sales were affected by the closure of one satellite pcc facility in finland , and the temporary shutdown of a satellite pcc facility in france , both of which occurred in the fourth quarter of 2011. there were , however , increased volumes from new satellites which largely offset the volume decline .

these licensing arrangements are significantly related to new , biologically-focused applications story_separator_special_tag story_separator_special_tag purchase our instrument systems and , as such , sales growth rates can vary significantly from period to period . operating income was $ 708 million in 2019 , a decrease of 4 % as compared to 2018. this decrease can be attributed to lower sales volume , the effect of foreign currency translation and $ 10 million of severance-related costs in connection with a reduction in workforce that occurred in early 2019 , offset by lower variable incentive compensation costs . 27 operating income increased 12 % in 2018 as compared to 2017. this increase was primarily a result of the effect of higher sales volume achieved in 2018 , as well as the effect of approximately $ 33 million of facility closure , litigation and intellectual property payment charges from 2017 that did not recur in 2018. the company 's effective tax rates were 12.7 % , 13.0 % and 96.8 % for 2019 , 2018 and 2017 , respectively . net income per diluted share was $ 8.69 , $ 7.65 and $ 0.25 in 2019 , 2018 and 2017 , respectively . in 2018 , the company settled a pension plan obligation and incurred a $ 46 million expense which reduced the net income per diluted share by $ 0.39. in 2017 , the company incurred a $ 550 million income tax provision related to the 2017 tax cuts and jobs act ( “ 2017 tax act ” ) which reduced the net income per diluted share by $ 6.82 , and excluding the 2017 tax act income tax provision , the company 's effective tax rate in 2017 would have been 11.0 % . the company generated $ 643 million , $ 604 million and $ 698 million of net cash flows from operations in 2019 , 2018 and 2017 , respectively . the increase in operating cash flow in 2019 was primarily a result of payments made in 2018 that did not recur , including $ 103 million of income tax payments made in the u.s. relating to the company 's estimated 2017 transition tax liability and 2018 estimated tax payments , a $ 15 million litigation settlement payment and $ 11 million of contributions to certain defined benefit pension plans . included in the 2019 net cash flow from operations is $ 29 million of income tax payments made in the u.s. in relation to the 2017 transition tax liability . over the next three years , the company is required to make annual u.s. federal tax payments of approximately $ 38 million to tax authorities in connection with the company 's estimated remaining transition tax liabilities of $ 404 million under the 2017 tax act . the final 60 % of the total liability is required to be paid over a three-year period beginning in 2023. cash flows used in investing activities included capital expenditures related to property , plant , equipment and software capitalization of $ 164 million , $ 96 million and $ 85 million in 2019 , 2018 and 2017 , respectively . in 2019 , $ 68 million of capital expenditures paid related to the expansion of the company 's precision chemistry consumable operations in the u.s. the company has incurred $ 85 million of costs for this facility through the end of 2019. in 2018 , the company acquired the sole intellectual property rights to the desorption electrospray ionization ( “ desi ” ) imaging technology for $ 30 million in cash and a future contractual obligation to pay a minimum royalty of $ 3 million over the remaining life of the patent . desi is a mass spectrometry imaging technique that is used to develop medical therapies . in january 2019 , the company 's board of directors authorized the company to repurchase up to $ 4 billion of its outstanding common stock over a two-year period . during 2019 , 2018 and 2017 , the company repurchased 11.1 million , 6.8 million and 1.8 million shares of the company 's outstanding common stock at a cost of $ 2.5 billion , $ 1.3 billion and $ 323 million , respectively , under the january 2019 authorization and other previously announced programs . as of december 31 , 2019 , the company has a total of $ 1.7 billion authorized for future repurchases . the company believes that it has the financial flexibility to fund these share repurchases given current cash and investment levels and debt borrowing capacity , as well as to invest in research , technology and business acquisitions to further grow the company 's sales and profits . in september 2019 , the company issued fixed interest rate senior unsecured notes with an aggregate principal amount of $ 500 million , of which $ 200 million of the outstanding notes matures in seven years and the remaining $ 300 million matures in 10 years . the company used the proceeds from the issuance of these senior unsecured notes to repay other outstanding debt and for general corporate purposes . during 2019 and 2018 , the company entered into $ 260 million and $ 300 million , respectively , of u.s.-to-euro interest rate cross-currency swap agreements that hedge the company 's net investment in its euro denominated net assets , bringing the total currency interest rate cross-currency swap agreement notional value to $ 560 million at december 31 , 2019. as a result of entering into these agreements , the company lowered its net interest expense by $ 12 million and $ 3 million during 2019 and 2018 , respectively . the company anticipates that these swap agreements will lower net interest expense by approximately $ 15 million in 2020 , $ 11 million in 2021 and $ 1 million in 2022 as the three-year term of the agreements expire . story_separator_special_tag waters sales in japan in 2018 increased 5 % , with the effect of foreign currency translation increasing sales 2 % . sales in asia other declined 2 % in 2018 , primarily due to lower customer demand in india and a negative 2 % impact of foreign currency translation . in the americas , u.s. sales increased 1 % in 2018. ta product and services net sales net sales for ta products and services are as follows for the years ended december 31 , 2019 and december 31 , 2018 ( dollars in thousands ) : replace_table_token_8_th ta 's instrument system sales declined in 2019 primarily due to lower customer demand resulting from macroeconomic conditions , tariff posturing and political instability , while 2018 instrument system sales growth was broad-based across all product classes . ta service sales increased due to sales of service plans and billings to a higher installed base of customers . the effect of foreign currency translation had a minimal impact on ta 's sales in both 2019 and 2018. in 2019 , ta sales decreased 4 % in the americas , 12 % in europe and increased 1 % in asia . ta sales in the u.s. increased 9 % in 2018 , while sales in the rest of the americas increased 8 % . ta 's sales in asia were driven by double-digit sales growth in india and 8 % sales growth in china , which was offset by declines in japan . cost of sales cost of sales for 2019 increased 2 % as compared to 2018 , due to a change in sales mix . the effect of foreign currency translation decreased cost of sales by 1 % in 2019 primarily from the favorable foreign currency translation effect the british pound had on the company 's u.k. manufacturing operations . cost of sales is affected by many factors , including , but not limited to , foreign currency translation , product mix , product costs of instrument systems and amortization of software platforms . at current foreign currency exchange rates , the company expects that the impact of foreign currency translation may decrease sales and gross profit during 2020. selling and administrative expenses selling and administrative expenses were flat in 2019 and decreased 1 % in 2018. in 2019 , selling and administrative expenses were impacted by merit compensation costs that were offset by lower variable incentive compensation costs . in addition , 2019 was also impacted by the $ 10 million of severance-related costs in connection with a reduction in workforce that occurred in january of 2019. the effect of foreign currency translation decreased selling and administrative expenses by 1 % in 2019 and had a minimal impact in 2018. as a percentage of net sales , selling and administrative expenses were 22.2 % , 22.2 % and 23.6 % for 2019 , 2018 and 2017 , respectively . 31 research and development expenses research and development expenses were flat in 2019 and increased 8 % in 2018. research and development expenses in both 2019 and 2018 were impacted by additional headcount , merit compensation and costs associated with new products and the development of new technology initiatives . foreign currency translation decreased research and development costs by 2 % in 2019 and had a minimal impact on research and development costs in 2018. acquired in-process research and development during 2017 , the company incurred charges of $ 5 million for acquired in-process research and development related to milestone payments associated with a licensing arrangement for certain intellectual property relating to mass spectrometry technologies yet to be commercialized and for which there was no future alternative use as of the acquisition date . these licensing arrangements are significantly related to new , biologically-focused applications , as well as other applications , and require the company to make additional future payments of up to $ 7 million if certain milestones are achieved , as well as royalties on future net sales . these future payments may be significant and occur over multiple years . interest expense , net the increase in net interest expense in 2019 was primarily attributable to higher outstanding debt balances and lower interest income on lower cash , cash equivalents and investment balances , being somewhat offset by the additional interest income from the u.s.-to-euro interest rate cross-currency swap agreements . provision for income taxes the company 's effective tax rates were 12.7 % , 13.0 % and 96.8 % in 2019 , 2018 and 2017 , respectively . the company 's effective income tax rate differs from the u.s. federal statutory rate each year due to differences in the proportionate amounts of pre-tax income recognized in jurisdictions with different effective tax rates and the items discussed below . the four principal jurisdictions in which the company manufactures are the u.s. , ireland , the u.k. and singapore , where the statutory tax rates were 21 % , 12.5 % , 19 % and 17 % , respectively , as of december 31 , 2019. the company has a received a tax holiday on qualifying activities in singapore through march 2021 , based upon the achievement of certain contractual milestones , which the company expects to continue to meet . the effect of applying the 0 % contractual tax rate rather than the statutory tax rate to income from qualifying activities in singapore increased the company 's net income during the years ended december 31 , 2019 , 2018 and 2017 by $ 24 million , $ 28 million and $ 25 million , respectively , and increased the company 's net income per diluted share by $ 0.35 , $ 0.36 and $ 0.31 , respectively . during 2019 , the company 's effective tax rate differed from the 21 % u.s. statutory tax rate primarily due to the jurisdictional mix of earnings , an $ 11 million provision related to the global intangible low-taxed income ( “ gilti ” ) tax and a tax benefit of $ 9 million on stock-based compensation .

results of operations business and financial overview the company has two operating segments : waters tm and ta tm . waters products and services primarily consist of high performance liquid chromatography ( “ hplc ” ) , ultra performance liquid chromatography ( “ uplc tm ” and together with hplc , referred to as “ lc ” ) , mass spectrometry ( “ ms ” ) and precision chemistry consumable products and related services . ta products and services primarily consist of thermal analysis , rheometry and calorimetry instrument systems and service sales . the company 's products are used by pharmaceutical , biochemical , industrial , nutritional safety , environmental , academic and governmental customers . these customers use the company 's products to detect , identify , monitor and measure the chemical , physical and biological composition of materials and to predict the suitability and stability of fine chemicals , pharmaceuticals , water , polymers , metals and viscous liquids in various industrial , consumer goods and healthcare products . the company 's operating results are as follows for the years ended december 31 , 2019 , 2018 and 2017 ( dollars in thousands , except per share data ) : replace_table_token_4_th * * percentage not meaningful 26 the company 's net sales decreased approximately 1 % in 2019 as compared to 2018 , and increased 5 % in 2018 as compared to 2017. foreign currency translation decreased sales by 2 % in 2019 and increased sales by 1 % in 2018. unless otherwise noted , sales growth or decline percentages are presented as compared with the same period in the prior year . instrument system sales decreased 4 % and increased 2 % in 2019 and 2018 , respectively . in 2019 , the decrease in instrument system sales was primarily driven by weaker demand for our products by our customers due to uncertainty caused by macroeconomic conditions and governmental policy changes . in 2018 , the increase in instrument system sales was primarily driven by an increase in demand for lc and ta 's instrument systems .

our comprehensive and easy-to-use solutions enable our clients to manage their workforces more effectively . our solutions help drive strategic human capital decision-making and improve employee engagement by enhancing the hr , payroll and finance capabilities of our clients . effective management of human capital is a core function in all organizations and requires a significant commitment of resources . medium-sized organizations operating without the infrastructure , expertise or personnel of larger enterprises are uniquely pressured to manage their human capital effectively . our solutions were specifically designed to meet the payroll and hcm needs of medium-sized organizations . we designed our cloud-based platform to provide a unified suite of applications using a multi-tenant architecture . our solutions are highly flexible and configurable and feature a modern , intuitive user experience . our platform offers automated data integration with over 200 related third-party systems , such as 401 ( k ) , benefits and insurance provider systems . our paylocity web pay product is our core payroll solution and was the first of our current offerings introduced into the market . we believe payroll is the most critical system of record for medium-sized organizations and an essential gateway to other hcm functionality . we have invested in , and we intend to continue to invest in , research and development to expand our product offerings and advance our platform . we believe there is a significant opportunity to grow our business by increasing our number of clients and we intend to invest in our business to achieve this purpose . we market and sell our solutions primarily through our direct sales force . we have increased our sales and marketing expenses as we have added sales representatives and related sales and marketing personnel . we intend to continue to grow our sales and marketing organization across new and existing geographic territories . in addition to growing our number of clients , we intend to grow our revenue over the long term by increasing the number and quality of products that clients purchase from us . to do so , we must continue to enhance and grow the number of solutions we offer to advance our platform . we believe that delivering a positive service experience is an essential element of our ability to sell our solutions and retain our clients . we seek to develop deep relationships with our clients through our unified service model , which has been designed to meet the service needs of medium-sized organizations . we expect to continue to invest in and grow our implementation and client service organization as our client base grows . we believe we have the opportunity to continue to grow our business over the long term , and to do so we have invested , and intend to continue to invest , across our entire organization . these investments include increasing the number of personnel across all functional areas , along with improving our solutions and infrastructure to support our growth . the timing and amount of these investments vary based on the rate at which we add new clients , add new personnel and scale our application development and other activities . many of these investments will occur in advance of experiencing any direct benefit from them which will make it difficult to determine if we are effectively allocating our resources . we expect these investments to increase our costs on an absolute basis , but as we grow our number of clients and our related revenues , we anticipate that we will gain economies of scale and increased operating leverage . as a result , we expect our gross and operating margins will improve over the long term . as our business has grown , we have become increasingly subject to the risks arising from adverse changes in domestic and global economic conditions . if general economic conditions were to deteriorate further , including declines in private sector employment growth and business productivity , increases in the unemployment rate and changes in interest rates , we may experience delays in our sales cycles , increased pressure from prospective customers to offer discounts and increased pressure from existing customers to renew expiring recurring revenue agreements for lower amounts . our interest income on funds held for clients continues to be negatively impacted by historically low interest rates . 32 our operating subsidiary paylocity corporation was incorporated in july 1997 as an illinois corporation . in november 2013 , we formed paylocity holding corporation , a delaware corporation , of which paylocity corporation is now a wholly-owned subsidiary . paylocity holding corporation had no operations prior to the restructuring . all of our business operations have historically been , and are currently , conducted by paylocity corporation , and the financial results presented herein are entirely attributable to the results of its operations . key metrics we regularly review a number of metrics , including the following key metrics , to evaluate our business , measure our performance , identify trends affecting our business , formulate financial projections and make strategic decisions . recurring revenue growth our recurring revenue model and high annual revenue retention rates provide significant visibility into our future operating results and cash flow from operations . this visibility enables us to better manage and invest in our business . recurring revenue , which is comprised of recurring fees and interest income on funds held for clients , increased from $ 72.8 million in fiscal 2013 to $ 101.9 million in fiscal 2014 , representing a 40 % year-over-year increase . recurring revenue increased from $ 101.9 million in fiscal 2014 to $ 144.1 million in fiscal 2015 , representing a 41 % year-over-year increase . recurring revenue represented 94 % of total revenue in each of the fiscal years ended 2013 , 2014 , and 2015. client count growth we believe there is a significant opportunity to grow our business by increasing our number of clients . story_separator_special_tag our agreements with clients do not have a specified term and are generally cancellable by the client on 60 days ' or less notice . our agreements do not include general rights of return and do not provide clients with the right to take possession of the software supporting the services being provided . we recognize recurring fees in the period in which services are provided and when collection of fees is reasonably assured and the amount of fees is fixed or determinable . interest income on funds held for clients we earn interest income on funds held for clients . we collect funds for employee payroll payments and related taxes in advance of remittance to employees and taxing authorities . prior to remittance to employees and taxing authorities , we earn interest on these funds through financial institutions with which we have automated clearing house , or ach , arrangements . implementation services and other implementation services and other revenues primarily consist of implementation fees charged to new clients for professional services provided to implement and configure our payroll and hcm solutions . implementations of our payroll solutions typically require only three to four weeks at which point the new client 's payroll is first run using our solution , our implementation services are deemed completed , and we recognize the related revenue . we implement additional hcm products as requested by clients and leverage the data within our payroll solution to accelerate our implementation processes . implementation services and other revenues may fluctuate significantly from quarter to quarter based on the number of new clients , pricing and the product utilization . 34 cost of revenues cost of recurring revenues costs of recurring revenues are generally expensed as incurred , and include costs to provide our payroll and other hcm solutions primarily consisting of employee-related expenses , including wages , stock-based compensation , bonuses and benefits , relating to the provision of ongoing client support , payroll tax filing and distribution of printed checks and other materials . these costs also include third-party reseller costs , delivery costs , computing costs and amortization of capitalized internal-use software costs , as well as bank fees associated with client fund transfers . we expect to realize cost efficiencies over the long term as our business scales , resulting in improved operating leverage and increased margins . we capitalize a portion of our internal-use software costs , which are then all amortized as a cost of recurring revenues . we amortized $ 3.1 million , $ 2.2 million and $ 2.6 million of capitalized internal-use software costs in fiscal 2013 , 2014 and 2015 , respectively . cost of implementation services and other cost of implementation services and other consists almost entirely of employee-related expenses involved in the implementation of our payroll and other hcm solutions for new clients . implementation costs are generally fixed in the short-term and exceed associated implementation revenue charged to each client . we intend to grow our business through acquisition of new clients , and doing so will require increased personnel to implement our solutions . therefore our cost of implementation services and other is expected to increase in absolute dollars for the foreseeable future . operating expenses sales and marketing sales and marketing expenses consist primarily of employee-related expenses for our direct sales and marketing staff , including wages , commissions , stock-based compensation , bonuses and benefits , marketing expenses and other related costs . commissions are primarily earned and recognized in the month when implementation is complete and the client first utilizes a service , typically by running its first payroll . bonuses paid to sales staff for attainment of certain performance criteria are accrued in the fiscal year in which they are earned and are subsequently paid annually in the first fiscal quarter of the following year . we will seek to grow our number of clients for the foreseeable future and therefore our sales and marketing expense is expected to continue to increase in absolute dollars as we grow our sales organization and expand our marketing activities . research and development research and development expenses consist primarily of employee-related expenses for our research and development and product management staff , including wages , stock-based compensation , benefits and bonuses . additional expenses include costs related to the development , maintenance , quality assurance and testing of new technologies and ongoing refinement of our existing solutions . research and development expenses , other than internal-use software costs qualifying for capitalization , are expensed as incurred . we capitalize a portion of our development costs related to internal-use software . the timing of our capitalized development projects may affect the amount of development costs expensed in any given period . the table below sets forth the amounts of capitalized and expensed research and development expenses for each of fiscal 2013 , 2014 and 2015. replace_table_token_8_th we expect to grow our research and development efforts as we continue to broaden our product offerings and extend our technological leadership by investing in the development of new technologies and introducing them to new and existing clients . we expect research and development expenses to continue to increase in absolute dollars but to vary as a percentage of total revenue on a period-to-period basis . 35 general and administrative general and administrative expenses consist primarily of other employee-related costs , including wages , benefits , stock-based compensation and bonuses for our administrative , finance , accounting , and human resources departments . additional expenses include consulting and professional fees , insurance and other corporate expenses . we expect our general and administrative expenses to continue to increase in absolute dollars as a result of our operation as a public company . these expenses include costs associated with regulations governing public companies , costs of directors ' and officers ' liability insurance and professional services expenses . other income ( expense ) other income ( expense ) consists primarily of interest income and expense .

results of operations the following table sets forth our statements of operations data for each of the periods indicated . replace_table_token_9_th 36 the following table sets forth our statements of operations data as a percentage of revenue for each of the periods indicated . replace_table_token_10_th comparison of fiscal years ended june 30 , 2013 , 2014 and 2015 revenues ( $ in thousands ) replace_table_token_11_th recurring fees recurring fees for the year ended june 30 , 2015 increased by $ 41.8 million , or 42 % , to $ 142.2 million from $ 100.4 million for the year ended june 30 , 2014. recurring fees increased primarily as a result of the continued growth of our client base in fiscal 2015 , as well as increased revenue per client . our client count at june 30 , 2015 increased by 22 % to approximately 10,350 from approximately 8,500 at june 30 , 2014. recurring fees for the year ended june 30 , 2014 increased by $ 29.1 million , or 41 % , to $ 100.4 million from $ 71.3 million for the year ended june 30 , 2013. recurring fees increased primarily as a result of the continued growth of our client base in fiscal 2014 , as well as increased revenue per client . our client count at june 30 , 2014 increased by 24 % to approximately 8,500 from approximately 6,850 at june 30 , 2013 . 37 interest income on funds held for clients interest income on funds held for clients for the year ended june 30 , 2015 increased by $ 0.3 million , or 20 % , to $ 1.9 million from $ 1.6 million for the year ended june 30 , 2014. interest income increased primarily as a result of an increased average daily balance of funds held due to the addition of new clients to our client base .

” the following discussion also contains forward-looking statements that involve a number of risks and uncertainties . see part i , “ special note regarding forward-looking statements ” for a discussion of the forward-looking statements contained below and part i , item 1a , “ risk factors ” for a discussion of certain risks that could cause our actual results to differ materially from the results anticipated in such forward-looking statements . 38 this discussion and analysis deals with comparisons of material changes in the consolidated financial statements for fiscal 2020 and fiscal 2019. for the comparison of fiscal 2019 and fiscal 2018 , see the management 's discussion and analysis of financial condition and results of operations in part ii , item 7 of our 2019 annual report on form 10-k , filed with the securities and exchange commission on february 27 , 2020. overview we have created a comprehensive cloud-based software platform designed to transform and modernize accounting and finance operations for organizations of all types and sizes . our secure , scalable platform supports critical accounting processes such as the financial close , account reconciliations , intercompany accounting , and controls assurance . by introducing software to automate these processes and to enable them to function continuously , we empower our customers to improve the integrity of their financial reporting , increase efficiency in their accounting and finance processes and enhance real-time visibility into their operations . at december 31 , 2020 , we had 291,873 individual users across 3,433 customers . additionally , we continue to build strategic relationships with technology vendors , professional services firms , business process outsourcers , and resellers . we are a holding company and conduct our operations through our wholly-owned subsidiary , blackline systems , inc. ( “ blackline systems ” ) . blackline systems funded its business with investments from our founder and cash flows from operations until september 3 , 2013. on september 3 , 2013 , we acquired blackline systems , and silver lake sumeru and iconiq acquired a controlling interest in us , which we refer to as the “ 2013 acquisition. ” the 2013 acquisition was accounted for as a business combination under accounting principles generally accepted in the united states ( “ gaap ” ) and resulted in a change in accounting basis as of the date of the 2013 acquisition . our cloud-based products include account reconciliations , cash application , compliance , consolidation integrity manager , intercompany hub , journal entry , task management , transaction matching , and variance analysis . these products are offered to customers as scalable solutions that support critical accounting processes , such as the financial close , account reconciliations , cash application , intercompany accounting , and compliance . we derived approximately 93 % of our revenue from subscriptions to our cloud-based software platform and approximately 7 % from professional services for the year ended december 31 , 2020. the majority of subscriptions are sold through one-year non-cancellable contracts , with a growing percentage of subscriptions sold through three-year contracts . we price our subscriptions based on a number of factors , primarily the number of users having access to the products and the number of products purchased by the customer . subscription revenue is recognized ratably over the term of the customer contract . the first year of subscription fees are typically payable within 30 days after execution of a contract , and thereafter upon renewal . professional services consist of implementation and consulting services . although our platform is ready to use immediately after a new customer has access to it , we typically help customers implement our solutions for a fixed fee , which is initially recorded as deferred revenue and recognized on a proportional performance basis as the services are performed . we also provide consulting services to help customers optimize the use of our products . we charge customers for our consulting services on a time-and-materials basis and we recognize that revenue as services are performed . we typically invoice customers annually in advance for annual and multi-year subscriptions and invoice in advance or on a time-and-materials basis for professional services . we record amounts invoiced for portions of annual subscription periods that have not occurred or services that have not been performed as deferred revenue on our consolidated balance sheet . we sell our solutions primarily through our direct sales force , which leverages our relationships with technology vendors , professional services firms and business process outsourcers . in particular , our solution integrates with sap 's erp solutions . in the fourth quarter of 2018 , sap became part of the reseller channel that we use in the ordinary course of business . sap has the ability to resell our solutions , as an sap solution-extension ( “ solex ” ) , for which we receive a percentage of the revenues . our ability to maximize the lifetime value of our customer relationships will depend , in part , on the willingness of customers to purchase additional user licenses and products from us . we rely on our sales and customer 39 success teams to support and grow our existing customers by maintaining high customer satisfaction and educating customers on the value all our products provide . the length of our sales cycle depends on the size of a potential customer and contract , as well as the type of solution or product being purchased . the sales cycle for our global enterprise customers is generally longer than that of our mid-market customers . in addition , the length of the sales cycle tends to increase for larger contracts and for more complex , strategic products like intercompany hub . as we continue to focus on increasing our average contract size and selling more strategic products , we expect our sales cycle to lengthen and become less predictable , which could cause variability in our results for any particular period . story_separator_special_tag we believe that dollar-based net revenue retention rate is an important metric to measure the long-term value of customer agreements and our ability to retain and grow our relationships with existing customers over time . we calculate dollar-based net revenue retention rate as the implied monthly subscription and support revenue at the end of a period for the base set of customers from which we generated subscription revenue in the year prior to the calculation , divided by the implied monthly subscription and support revenue one year prior to the date of calculation for that same customer base . this calculation does not reflect implied monthly subscription and support revenue for new customers added during the one-year period but does include the effect of customers who terminated during the period . we define implied monthly subscription and support revenue as the total amount of minimum subscription and support revenue contractually committed to , under each of our customer agreements over the entire term of the agreement , divided by the number of months in the term of the agreement . at december 31 , 2020 , our dollar-based net revenue retention rate declined primarily due to lower net growth in existing customer accounts . we believe that the financial challenges caused by covid-19 contributed to lower technology spending by our existing customers . our ability to maximize the lifetime value of our customer relationships will depend , in part , on the willingness of the customer to purchase additional user licenses and products from us . we rely on our customer success and sales teams to support and grow our existing customers by maintaining high customer satisfaction and educating the customer on the value all our products provide . number of customers . we believe that our ability to expand our customer base is an indicator of our market penetration and the growth of our business . we define a customer as an entity with an active subscription agreement as of the measurement date . in situations where an organization has multiple subsidiaries or divisions , each entity that is invoiced as a separate entity is treated as a separate customer . however , where an existing customer requests its invoice be divided for the sole purpose of restructuring its internal billing arrangement without any incremental increase in revenue , such customer continues to be treated as a single customer . for the years ended december 31 , 2020 , 2019 and 2018 , no single customer accounted for more than 10 % of our total revenues . number of users . since our customers generally pay fees based on the number of users of our platform within their organization , we believe the total number of users is an indicator of the growth of our business . we are also beginning to sell an increasing number of non-user based strategic products , such as transaction matching and intercompany hub . key components of our results of operations 41 revenues subscription and support . the majority of subscriptions are sold through one-year non-cancellable contracts and a growing percentage of subscriptions are sold through three-year contracts . fees are based on a number of factors , including the solutions subscribed to by the customer and the number of users having access to the solutions . the first year of subscription fees are typically payable within 30 days after execution of a contract , and thereafter upon renewal . we initially record the subscription fees as deferred revenue and recognize revenue ratably over the term of the contract . at any time during the subscription period , customers may increase their number of users and add products . additional fees are payable for the remainder of the initial or renewed contract term . customers may only reduce their number of users or subscription to products upon renewal of their arrangement . revenues from subscriptions to our cloud-based software platform composed approximately 93 % of our revenues for the year ended december 31 , 2020. subscription and support revenues also include revenues associated with sales of on-premise software licenses and related support . prior to our migration to saas in 2012 , we licensed our legacy on-premise software . we no longer develop any new applications or functionality for our legacy on-premise software . professional services . we offer our customers implementation and consulting services . although our platform is ready to use immediately after a new customer has access to it , we typically help customers implement our solutions for a fixed fee . we also provide consulting and training services to help customers optimize the use of our products . these services are considered distinct performance obligations . professional services do not result in significant customization of the subscription service . we apply the practical expedient to recognize professional services revenue when we have the right to invoice based on time and materials incurred . professional services revenues composed approximately 7 % of our revenues for the year ended december 31 , 2020. for a description of our revenue accounting policies , see “ management 's discussion and analysis of financial condition and results of operations—critical accounting policies and estimates. ” cost of revenues subscription and support cost of revenues . subscription and support cost of revenues primarily consists of amortization of acquired developed technology costs , salaries , benefits and stock-based compensation associated with our hosting operations and support personnel , data center costs related to hosting our cloud-based software , and amortization of capitalized internal-use software costs . we also allocate a portion of overhead to subscription and support cost of revenues . professional services costs of revenues . costs associated with providing professional services primarily consist of salaries , benefits and stock-based compensation associated with our implementation personnel . these costs are expensed as incurred when the services are performed . we also allocate a portion of overhead to professional services cost of revenues . operating expenses sales and marketing .

results of operations the following tables set forth selected historical consolidated statements of operations data , which should be read in conjunction with critical accounting policies and estimates , liquidity and capital resources , and contractual obligations and commitments included in this item 7 , as well as quantitative and qualitative 44 disclosures about market risk and the consolidated financial statements and notes thereto included elsewhere in this annual report on form 10-k. consolidated statements of operations information was as follows ( in thousands ) : replace_table_token_5_th revenues replace_table_token_6_th replace_table_token_7_th the increase in revenues for the year ended december 31 , 2020 , compared to the year ended december 31 , 2019 , was primarily due to an increase in the number of customers , an increase in the number of users added by 45 existing customers , and an increase in non-user based strategic product sales . the total number of customers and users increased by 14 % and 9 % , respectively , during the year ended december 31 , 2020. cost of revenues replace_table_token_8_th the increase in cost of revenues for the year ended december 31 , 2020 , compared to the year ended december 31 , 2019 , was primarily due to a $ 10.0 million increase in salaries , benefits , and stock-based compensation ; a $ 2.7 million increase in computer software expenses ; a $ 1.7 million increase in amortization of internally developed technology ; and a $ 0.6 million increase in professional services expense . these increases were partially offset by a $ 3.1 million decrease in depreciation and amortization ; a $ 1.5 million decrease in travel-related expenses ; and a $ 0.8 million decrease in data center costs .

the annual report on form 10-k contains forward-looking statements within the meaning of the federal securities laws , principally , but not only , under the captions “ business ” , “ risk factors ” and “ management 's discussion and analysis of financial condition and results of operations. ” we caution investors that any forward-looking statements in this report , or which management may make orally or in writing from time to time , are based on management 's beliefs and on assumptions made by , and information currently available to , management . when used , the words “ anticipate ” , “ believe ” , “ expect ” , “ intend ” , “ may ” , “ might ” , “ plan ” , “ estimate ” , “ project ” , “ should ” , “ will ” , “ result ” and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements . these statements are subject to risks , uncertainties and assumptions and are not guarantees of future performance , which may be affected by known and unknown risks , trends , uncertainties and factors that are beyond our control . should one or more of these risks or uncertainties materialize , or should underlying assumptions prove incorrect , actual results may vary materially from those anticipated , estimated or projected . we caution you that , while forward-looking statements reflect our good faith beliefs when we make them , they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements . we expressly disclaim any responsibility to update our forward-looking statements , whether as a result of new information , future events or otherwise . accordingly , investors should use caution in relying on past forward-looking statements , which are based on results and trends at the time they are made , to anticipate future results or trends . some of the risks and uncertainties that may cause our actual results , performance or achievements to differ materially from those expressed or implied by forward-looking statements include , among others , the following : · general risks affecting the real estate industry ( including , without limitation , the inability to enter into or renew leases , dependence on tenants ' financial condition , and competition from other developers , owners and operators of real estate ) ; · risks associated with the availability and terms of financing and the use of debt to fund acquisitions and developments ; · failure to manage effectively our growth and expansion into new markets or to integrate acquisitions successfully ; · risks and uncertainties affecting property development and construction ( including , without limitation , construction delays , cost overruns , inability to obtain necessary permits and public opposition to such activities ) ; · risks associated with downturns in the national and local economies , increases in interest rates , and volatility in the securities markets ; · costs of compliance with the americans with disabilities act and other similar laws and regulations ; · potential liability for uninsured losses and environmental contamination ; · risks associated with our dependence on key personnel whose continued service is not guaranteed ; and · the other risk factors identified in this form 10-k , including those described under the caption “ risk factors. ” the risks included here are not exhaustive . other sections of this report , including part i item 1a . “ risk factors , ” include additional factors that could adversely affect our business and financial performance . moreover , we operate in a very competitive and rapidly changing environment . new risk factors emerge from time to time and it is not possible for management to predict all such risk factors , nor can we assess the impact of all such risk factors on our business or the extent to which any factor , or combination of factors , may cause actual results to differ materially from those contained in any forward-looking statements . given these risks and uncertainties , investors should not place undue reliance on forward-looking statements as a prediction of actual results . investors should also refer to our quarterly reports on form 10-q for future periods and current reports on form 8-k as we file them with the sec , and to other materials we may furnish to the public from time to time through forms 8-k or otherwise . overview we are an externally advised and managed real estate investment company that owns a diverse portfolio of income-producing properties and land held for development . the company 's portfolio of income-producing properties includes residential apartment communities , office buildings and other commercial properties . our investment strategy includes acquiring existing income-producing properties as well as developing new properties on land already owned or acquired for a specific development project . we acquire land primarily in in-fill locations or high-growth suburban markets . we are an active buyer and seller of real estate and during 2015 we acquired $ 130 million and sold $ 118 million of land and income-producing properties . as of december 31 , 2015 , we owned 7,983 units in 48 residential apartment communities , eight commercial properties comprising approximately 1.9 million rentable square feet , and a golf course . in addition , we own 3,665 acres of land held for development . the company currently owns income-producing properties and land in ten states as well as in the u.s. virgin islands . 20 we finance our acquisitions primarily through operating cash flow , proceeds from the sale of land and income-producing properties and debt financing primarily in the form of property-specific first-lien mortgage loans from commercial banks and institutional lenders . we finance our development projects principally with short-term , variable interest rate construction loans that are converted to long-term , fixed rate amortizing mortgages when the development project is completed and occupancy has been stabilized . story_separator_special_tag 21 real estate upon acquisitions of real estate , we assess the fair value of acquired tangible and intangible assets , including land , buildings , tenant improvements , “ above- ” and “ below-market ” leases , origination costs , acquired in-place leases , other identified intangible assets and assumed liabilities in accordance with asc topic 805 “ business combinations ” , and allocate the purchase price to the acquired assets and assumed liabilities , including land at appraised value and buildings at replacement cost . we assess and consider fair value based on estimated cash flow projections that utilize appropriate discount and or capitalization rates , as well as available market information . estimates of future cash flows are based on a number of factors including the historical operating results , known and anticipated trends , and market and economic conditions . the fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant . we also consider an allocation of purchase price of other acquired intangibles , including acquired in-place leases that may have a customer relationship intangible value , including ( but not limited to ) the nature and extent of the existing relationship with the tenants , the tenants ' credit quality and expectations of lease renewals . based on our acquisitions to date , our allocation to customer relationship intangible assets has been immaterial . we record acquired “ above- ” and “ below-market ” leases at their fair values ( using a discount rate which reflects the risks associated with the leases acquired ) equal to the difference between ( 1 ) the contractual amounts to be paid pursuant to each in-place lease and ( 2 ) management 's estimate of fair market lease rates for each corresponding in-place lease , measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases . other intangible assets acquired include amounts for in-place lease values that are based on our evaluation of the specific characteristics of each tenant 's lease . factors to be considered include estimates of carrying costs during hypothetical expected lease-up periods considering current market conditions , and costs to execute similar leases . in estimating carrying costs , we include real estate taxes , insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods , depending on local market conditions . in estimating costs to execute similar leases , we consider leasing commissions , legal and other related expenses . transfers to or from our parent , arl , or other related parties reflect a basis equal to the cost basis in the asset at the time of the sale . depreciation and impairment real estate is stated at depreciated cost . the cost of buildings and improvements includes the purchase price of property , legal fees and other acquisition costs . costs directly related to the development of properties are capitalized . capitalized development costs include interest , property taxes , insurance , and other direct project costs incurred during the period of development . a variety of costs are incurred in the acquisition , development and leasing of properties . after determination is made to capitalize a cost , it is allocated to the specific component of a project that is benefited . determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment . our capitalization policy on development properties is guided by asc topic 835-20 “ interest - capitalization of interest ” and asc topic 970 “ real estate—general ” . the costs of land and buildings under development include specifically identifiable costs . the capitalized costs include pre-construction costs essential to the development of the property , development costs , construction costs , interest costs , real estate taxes , salaries and related costs and other costs incurred during the period of development . we consider a construction project as substantially completed and held available for occupancy upon the receipt of certificates of occupancy , but no later than one year from cessation of major construction activity . we cease capitalization on the portion ( 1 ) substantially completed and ( 2 ) occupied or held available for occupancy , and we capitalize only those costs associated with the portion under construction . management reviews its long-lived assets used in operations for impairment when there is an event or change in circumstances that indicates impairment in value . an impairment loss is recognized if the carrying amount of its assets is not recoverable and exceeds its fair value . fair value is determined by a recent appraisal , comparable based upon prices for similar assets , executed sales contract , a present value and or a valuation technique based upon a multiple of earnings or revenue . if such impairment is present , an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value . the evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy , rental rates and capital requirements that could differ materially from actual results in future periods . if we determine that impairment has occurred , the affected assets must be reduced to their face value . 22 asc topic 360 “ property , plant and equipment ” requires that qualifying assets and liabilities and the results of operations that have been sold , or otherwise qualify as “ held for sale , ” be presented as discontinued operations in all periods presented if the property operations are expected to be eliminated and the company will not have significant continuing involvement following the sale .

results of operations the discussion of our results of operations is based on management 's review of operations , which is based on our segments . our segments consist of apartments , commercial buildings , land and other . for discussion purposes , we break these segments down into the following sub-categories ; same property portfolio , acquired properties , and developed properties in the lease-up phase . the same property portfolio consists of properties that were held by us for the entire period for both years being compared . the acquired property portfolio consists of properties that we acquired but have not held for the entire period for both periods being compared . developed properties in the lease-up phase consist of completed projects that are being leased-up . as we complete each phase of the project , we lease-up that phase and include those revenues in our continued operations . once a developed property becomes leased-up ( 80 % or more ) and is held the entire period for both years under comparison , it is considered to be included in the same property portfolio . income-producing properties that we have sold during the year are reclassified to discontinued operations for all periods presented . the other segment consists of revenue and operating expenses related to the notes receivable and corporate entities . the following discussion is based on our consolidated statements of operations for the twelve months ended december 31 , 2015 , 2014 , and 2013 as included in item 8 . “ financial statements and supplementary data ” . the prior year 's property portfolios have been adjusted for subsequent sales . continuing operations relates to income-producing properties that were held during those years as adjusted for sales in the subsequent years . 24 at december 31 , 2015 , 2014 and 2013 , we owned or had interests in a portfolio of 57 , 45 and 45 income-producing properties , respectively .

we recognize interest and penalties , if any , related to unrecognized tax benefits in other income ( expense ) in the consolidated statements of operations . basic and diluted net loss per share income ( loss ) per share : basic income ( loss ) per share is computed by dividing consolidated net income ( loss ) by the weighted average number of common shares outstanding during the period , excluding unvested restricted stock . for periods of net income when the effects are not anti-dilutive , diluted earnings per share is computed by dividing our net income by the weighted average number of shares outstanding and the impact of all potential dilutive common shares , consisting primarily of stock options , unvested restricted stock and stock purchase warrants . the dilutive impact of our dilutive potential common shares resulting from stock options and stock purchase warrants is determined by applying the treasury stock method . f- 12 for the periods of net loss , diluted loss per share is calculated similarly to basic loss per share because the impact of all dilutive potential common shares is anti-dilutive due to the net losses . a total of approximately 12.0 million and 10.7 million potential dilutive shares have been excluded in the calculation of diluted net loss per share in 2011 and 2010 , respectively , because their inclusion would be anti-dilutive . recent accounting pronouncements in october 2009 , the financial accounting standards board , or the fasb , issued accounting standards update 2009-13 , “ revenue recognition ( topic 605 ) multiple-deliverable revenue arrangements , a consensus of the fasb emerging issues task force , ” or asu 2009-13. asu 2009-13 amends existing accounting guidance for separating consideration in multiple-deliverable arrangements . asu 2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable . the selling price used for each deliverable will be based on vendor-specific objective evidence if available , third party evidence if vendor-specific evidence is not available , or the estimated selling price if neither vendor-specific evidence nor third-party evidence is available . asu 2009-13 eliminates the residual method of allocation and requires that consideration be allocated at the inception of the arrangement to all deliverables using the “ relative selling price method . ” the relative selling price method allocates any discount in the arrangement proportionately to each deliverable on the basis of each deliverable 's selling price . asu 2009-13 requires that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a stand-alone basis . asu 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after june 15 , 2010 , with earlier adoption permitted . we adopted asu 2009-13 on january 1 , 2011. the adoption of asu 2009-13 did not have any material effect on our results of operation , financial position or cash flows . in april 2010 , the fasb issued accounting standards update 2010-17 , “ revenue recognition—milestone method ( topic 605 ) milestone method of revenue recognition , a consensus of the fasb emerging issues task force ” or asu 2010-17. asu 2010-17 provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate . a vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive . for the milestone to be considered substantive , the considerations earned by achieving the milestone should meet all of the following criteria : ( i ) be commensurate with either the vendor 's performance to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from the vendor 's performance to achieve the milestone , ( ii ) relate solely to past performance , and ( iii ) be reasonable relative to all deliverables and payment terms in the arrangement story_separator_special_tag the following discussion should be read in conjunction with our consolidated financial statements , which present our results of operations for the years ended december 31 , 2011 and 2010 as well as our financial positions at december 31 , 2011 and 2010 , contained elsewhere in 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 and related financing , includes forward-looking statements that involve risks and uncertainties . you should review the “ special note regarding forward looking statements ” and “ risk factors ” sections 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 contained in the following discussion and analysis . overview we are a biodefense company engaged in the development and commercialization of next generation medical countermeasures against biological and chemical threats . our biodefense portfolio as of december 31 , 2011 included the following product candidates : · sparvax , a second generation recombinant protective antigen ( “ rpa ” ) anthrax vaccine , · valortim ® , a fully human monoclonal antibody for the prevention and treatment of anthrax infection , and · rbche ( recombinant butyrylcholinesterase ) , countermeasures for nerve agent poisoning by organophosphorous compounds , including nerve gases and pesticides . story_separator_special_tag the ltip also provides for awards in the form of stock appreciation rights , restricted or unrestricted stock awards , stock-equivalent units or performance-based stock awards . we account for share-based awards to employees and non-employee directors pursuant to fasb asc topic 718 , compensation – stock compensation , which requires that compensation cost resulting from share-based payment transactions be recognized in the financial statements at fair value over the service period . the amount of compensation expense recognized using the fair value method requires us to exercise judgment and make assumptions relating to the factors that determine the fair value of our stock option grants . we use the black-scholes-merton model to estimate the fair value of our option grants . the fair value calculated by this model is a function of several factors , including grant price , the risk-free interest rate , the estimated term of the option and the estimated future volatility of the option . the estimated term and estimated future volatility of the options require our judgment . intangible assets and goodwill in 2010 all of the patents associated with protexia ® were written down by approximately $ 0.8 million associated with the decision to shut down the canadian operation upon the expiration of the protexia ® contract with the dod . there were no patents capitalized as of december 31 , 2011 and december 31 , 2010. goodwill represents the excess of purchase price over the fair value of net identifiable assets associated with acquisitions . we review the market value of the company as set by its stock price and the number of outstanding shares as of the end of the year . if that value is greater than the net book value of the company 's equity , no further analysis is needed . changes in the company 's business strategy or adverse changes in market conditions could impact the impairment analyses and require the recognition of an impairment charge equal to the excess of the carrying value over its estimated fair value . 40 story_separator_special_tag times new roman , times , serif ; margin : 0 '' > depreciation and intangible amortization ( including impairment charges ) depreciation and amortization expenses were approximately $ 0.5 million and $ 5.7 million for the years ended december 31 , 2011 and 2010 , respectively . these expenses are lower in 2011 primarily as a result of the impairment charge taken in december 2010 of $ 4.6 million with the closing of our canadian operations . other income ( expense ) other income ( expense ) primarily consists of income on our investments , interest expense on our debt and other financial obligations , changes in market value of our derivative financial instruments , and foreign currency transaction gains or losses . we incurred interest expense of approximately $ 0.1 million and $ 5.9 million for the years ended december 31 , 2011 and 2010 , respectively . interest expense for 2011 primarily relate to the settlement with avecia for termination of a subcontract agreement with that organization . interest expense for 2010 relates primarily to interest on our then-outstanding convertible notes , including the amortization of the debt discount arising from the allocation of fair value to the warrants issued in connection with such notes . in november and december 2010 , our outstanding 10 % convertible notes were converted into shares of common stock ( with one note being redeemed for cash ) . gain on sale of assets held for sale of $ 0.8 million was the result of the sale of land and buildings associated with our canadian operations , which were closed in 2010 . 42 the change in the fair value of our derivative instruments was a decrease of our liability of approximately $ 7.1 million for the year ended december 31 , 2011 compared to an increase of our liability of approximately $ 5.5 million for the year ended december 31 , 2010. the fair value of these derivative instruments is estimated using the black-scholes option pricing model . the decrease in fair value realized as of december 31 , 2011 was primarily the result of the decrease in pharmathene 's stock price from $ 4.23 per share on december 31 , 2010 to $ 1.27 per share on december 31 , 2011. liquidity and capital resources overview our primary cash requirements for 2012 are to fund our operations ( including our research and development programs ) and support our general and administrative activities . our future capital requirements will depend on many factors , including , but not limited to , timing , amount and profitability of sales of st-246 , if any ; the progress of our research and development programs ; the progress of pre-clinical and clinical testing ; the time and cost involved in obtaining regulatory approval ; the cost of filing , prosecuting , defending and enforcing any patent claims and other intellectual property rights ; changes in our existing research relationships ; competing technological and marketing developments ; our ability to establish collaborative arrangements and to enter into licensing agreements and contractual arrangements with others ; and any future change in our business strategy . these cash requirements could change materially as a result of shifts in our business and strategy . during 2011 and the first quarter 2012 , we implemented certain cost reduction activities that we believe will reduce our net operating cash needs for 2012 and 2013 significantly as compared to 2010 and 2011. as a result we currently anticipate that our current cash on hand and collection of accounts receivables at december 31 , 2011 as well as cash to be collected from 2012 contract revenue under contracts currently in place will be sufficient to meet pharmathene 's ongoing expenses and capital requirements through2012 and into year 2013. since our inception , we have not generated positive cash flows from operations .

results of operations revenue we recognized revenue of $ 24.3 million and $ 21.0 million during the years ended december 31 , 2011 and 2010 , respectively . our revenue was derived primarily from contracts with the u.s. government for the development of sparvax and valortim ® . our revenue for the year ended december 31 , 2011 changed from 2010 primarily due to the following : · under our contract for the development of sparvax , we recognized approximately $ 19.3 million and $ 11.7 million of revenue for the years ended december 31 , 2011 and 2010 , respectively . the increase in revenue for the sparvax program during 2011 is attributable to additional work in preparation and execution of the scale up campaign at our u.s.-based sparvax bulk drug substance manufacturer as well as an increase in our billing rate to the customer . additional activities related to the establishment of analytical and stability-indicating assays for characterization of the product . of the revenue amounts set forth above , $ 3.5 million in 2011 and $ 1.8 million in 2010 represent substantive milestone payments that were tied to our successful achievement of certain technical activities . · under the september 2007 contract for the advanced development of valortim ® , we recognized approximately $ 3.7 million and $ 3.0 million of revenue for the years ended december 31 , 2011 and 2010 , respectively . revenue in 2011 reflects both clinical and non clinical work following the release of the fda partial clinical hold in december 2010. final patient dosing in clinical trial was completed in april 2011 and the in-life portion of the trial ended in the third quarter 2011. revenue in 2010 was largely attributable to reimbursement of costs related to clinical and non-clinical studies , including work in connection with the investigation related to the partial clinical hold and certain manufacturing-related activities .

upon acquisition , the properties were 100 % leased in the aggregate with lease expirations ranging from 2019 through 2032 story_separator_special_tag the purpose of this management 's discussion and analysis ( `` md & a '' ) is to provide an understanding of the company 's consolidated financial condition , results of operations and cash . md & a is provided as a supplement to , and should be read in conjunction with , the company 's consolidated financial statements and accompanying notes . overview we were organized in the state of maryland on march 28 , 2014. we are a self-administered , self-managed healthcare reit that acquires and owns properties that are leased to hospitals , doctors , healthcare systems or other healthcare service providers in our target submarkets . the company conducts its business through an upreit structure in which its properties are owned by its operating partnership , either directly or through subsidiaries . the company is the sole general partner , owning 100 % of the op units . emerging growth company we have elected to be an emerging growth company , as defined in the jobs act since 2015. an emerging growth company may take advantage of specified reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies . as an emerging growth company , among other things : we are exempt from the requirement to obtain an attestation and report from our auditors on the assessment of our internal control over financial reporting pursuant to the sarbanes-oxley act ; we are permitted to provide less extensive disclosure about our executive compensation arrangements ; and we are not required to give our stockholders non-binding advisory votes on executive compensation or golden parachute arrangements . the jobs act also permits us , as an emerging growth company , to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies and thereby allows us to delay the adoption of those standards until those standards would apply to private companies . we have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards , and , therefore , will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies . we may take advantage of these provisions for up to five years or such earlier time that we are no longer an emerging growth company . we will cease to be an emerging growth company upon the earliest to occur of : ( i ) the last day of the first fiscal year in which we have more than $ 1.07 billion in annual revenues ; ( ii ) the date we qualify as a `` large accelerated filer , '' with at least $ 700 million in market value of our common stock held by non-affiliates ; ( iii ) the issuance , in any three-year period , of more than $ 1.0 billion of non-convertible debt securities ; and ( iv ) the last day of the fiscal year ending after the fifth anniversary of our ipo in may 2015. trends and matters impacting operating results management monitors factors and trends that it believes are important to the company and the reit industry in order to gauge their potential impact on the operations of the company . certain of the factors and trends that management believes may impact the operations of the company are discussed below . real estate investments during 2017 , the company invested in 28 real estate properties for an aggregate purchase price of approximately $ 133.2 million , including cash consideration of approximately $ 132.6 million . upon acquisition , the real estate 45 properties were approximately 98.8 % leased in the aggregate with lease expirations through 2032 . the company also acquired a property , adjacent to its corporate office , for a cash purchase price of approximately $ 0.9 million . the property is leased to a tenant but the company intends to use the property for future expansion of its corporate office . in addition , we funded a $ 5.0 million mezzanine loan to the tenant of one of the properties acquired and purchased $ 11.45 million face value of certain promissory notes , secured by accounts receivable of our bankrupt borrower , for $ 8.75 million from a syndicate of banks , a $ 2.7 million discount to face value . see notes 4 and 5 to the consolidated financial statements for further discussion related to this note purchase and bankruptcy . acquisition pipeline the company has three properties under definitive purchase agreements for an aggregate purchase price of approximately $ 16.8 million with expected returns ranging from approximately 9.0 % to 9.6 % . the company anticipates these properties will close during the first quarter of 2018. however , the company is currently performing due diligence procedures customary for these types of transactions and can not provide assurance as to the timing of when , or whether , these transactions will actually close . the company also has three properties under definitive purchase agreements , to be acquired after completion and occupancy , for an aggregate expected purchase price of approximately $ 40.4 million . the company expects to close on one of these properties sometime in the first half of 2018 and expects to close on the remaining two properties sometime in the second half of 2018. the company 's expected aggregate return on these investments ranges up to approximately 11 % . however , the company can not provide assurance as to the timing of when , or whether , these transactions will actually close . the company anticipates funding these investments with cash from operations , through proceeds from its credit facility or from net proceeds from additional debt or equity offerings . story_separator_special_tag replace_table_token_6_th revenues revenues for the year ended december 31 , 2016 compared to the same period in 2015 increased approximately $ 16.6 million due to the acquisition during 2016 of 17 real estate properties and one mortgage note , which was subsequently converted upon the acquisition of the real estate securing the note , resulting in approximately $ 6.8 million in revenues in 2016 , as well as the increase in revenue from 2015 to 2016 resulting from the acquisition of 40 real estate properties and 1 mortgage note from our initial public offering in late may 2015 through december 31 , 2015 , resulting in approximately $ 9.8 million in increased revenues . 50 property operating expenses property operating expenses for the year ended december 31 , 2016 compared to the same period in 2015 increased approximately $ 2.7 million due to the acquisition during 2016 of 17 real estate properties , resulting in approximately $ 1.2 million in property operating expenses in 2016 , as well as the increase in property operating expenses from 2015 to 2016 due to the acquisition of 40 real estate properties from our initial public offering in late may 2015 through december 31 , 2015 , resulting in approximately $ 2.8 million in increased property operating expenses . also , we recorded contingent consideration related to three of our acquisitions . adjustments to the fair value of the contingent consideration during 2016 resulted in a reduction to property operating expense of approximately $ 1.3 million . general and administrative expenses general and administrative expenses for the year ended december 31 , 2016 compared to the same period in 2015 increased approximately $ 0.8 million . compensation-related expenses and occupancy costs related to our employees and corporate office increased approximately $ 1.4 million due mainly to the partial year reflected in the results for 2015 since our initial public offering , as well as the addition of employees during 2016. transaction costs , related to acquisitions in 2016 and 2015 and our public offering in 2015 , decreased by approximately $ 0.8 million in 2016 compared to 2015. depreciation and amortization expense depreciation and amortization expense for the year ended december 31 , 2016 compared to the same period in 2015 increased approximately $ 8.0 million . the 17 real estate acquisitions during 2016 resulted in approximately $ 2.8 million in depreciation and amortization in 2016 ; the 40 real estate acquisitions during 2015 resulted in an increase of approximately $ 5.1 million from 2015 to 2016 due mainly to the partial year reflected in the results for 2015 since our initial public offering ; and capital improvements resulted in an increase of approximately $ 0.1 million . interest expense interest expense for the year ended december 31 , 2016 compared to the same period in 2015 increased approximately $ 0.8 million due mainly to an increase in our weighted average outstanding balance on our revolving credit facility throughout 2016. iquidity and capital resources the company monitors its liquidity and capital resources and relies on several key indicators in its assessment of capital markets for financing acquisitions and other operating activities as needed , including the following : leverage ratios and financial covenants included in our credit facility ; dividend payout percentage ; and interest rates , underlying treasury rates , debt market spreads and equity markets . the company uses these indicators and others to compare its operations to its peers and to help identify areas in which the company may need to focus its attention . sources and uses of cash the company derives most of its revenues from its real estate property and mortgage notes portfolio , collecting rental income , operating expense reimbursements and mortgage interest based on contractual arrangements with its tenants and borrowers . these sources of revenue represent our primary source of liquidity to fund our dividends , 51 general and administrative expenses , property operating expenses , interest expense on our credit facility and other expenses incurred related to managing our existing portfolio and investing in additional properties . to the extent additional resources are needed , the company will fund its investment activity generally through equity or debt issuances either in the public or private markets or through proceeds from our credit facility . the company expects to meet its liquidity needs through cash on hand , cash flows from operations and cash flows from sources discussed above . the company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements . the company can not , however , be certain that these sources of funds will be available at a time and upon terms acceptable to the company in sufficient amounts to meet its liquidity needs . operating activities cash flows provided by operating activities for the years ended december 31 , 2017 , 2016 and 2015 were approximately $ 22.1 million , $ 14.9 million , and $ 3.0 million , respectively . cash flows provided by operating activities for the years ended december 31 , 2017 , 2016 and 2015 were generally provided by contractual rents and mortgage interest , net of property operating expenses not reimbursed by the tenants and general and administrative expenses . investing activities cash flows used in investing activities for the years ended december 31 , 2017 , 2016 and 2015 were approximately $ 147.6 million , $ 117.1 million , and $ 140.6 million , respectively . during 2017 , the company invested in 28 real estate properties and acquired a property adjacent to its corporate office for cash consideration of approximately $ 133.5 million , and funded or purchased notes totaling approximately $ 13.8 million . during 2016 , the company invested in 17 real estate properties for cash consideration of approximately $ 103.2 million , excluding closing costs , and funded one mortgage note for approximately $ 12.4 million . during 2015 , the company invested in 40 real estate properties for cash consideration of approximately $ 129.0 million and funded one mortgage note for approximately $ 10.9

results of operations our results of operations are most significantly impacted each year by our acquisitions in and funding of our real estate investments , as well as expenses related to our employees , professional fees and other costs related to operating the reit and its related subsidiaries . as of december 31 , 2017 , we had invested approximately $ 399.1 million in 86 real estate properties , including a mortgage note , which are located in 26 states and total over 2.0 million square feet . during 2017 , we acquired 28 real estate properties which in the aggregate were 98.8 % leased for cash consideration of approximately $ 133.5 million . during 2016 , we acquired 17 real estate properties for cash consideration of approximately $ 103.2 million and funded a mortgage note receivable for approximately $ 12.4 million . year ended december 31 , 2017 compared to december 31 , 2016 the table below shows our results of operations for the year ended december 31 , 2017 compared to the same period in 2016 and the effect of changes in those results from period to period on our net income . replace_table_token_5_th 48 revenues revenues increased approximately $ 12.1 million or 48.2 % , for the year ended december 31 , 2017 compared to the same period in 2016 due mainly to the following : acquisitions during 2017 contributed revenues of approximately $ 6.7 million in 2017 ; acquisitions during 2016 , including one mortgage note that was subsequently converted upon the acquisition of the real estate securing the note , contributed an increase in revenues of approximately $ 7.0 million in 2017 ; and revenues for 2017 decreased approximately $ 1.6 million related to the properties acquired during 2015 due to a reduction in tenant reimbursement revenue impacted by a reduction in operating expenses on certain properties , as well as decrease in revenues

the model the valuation service uses to price u.s. government securities and securities of states and municipalities incorporates inputs from active market makers and inter-dealer brokers . to price corporate bonds and agency securities , the valuation service calculates non-call yield spreads on all issuers , uses 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 elsewhere in this form 10-k. this discussion and analysis contains forward-looking statements that involve risks , uncertainties and assumptions . the 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 which are not within our control . overview : discussion of our business and overall financial results , and other highlights related to our results of operations for the periods presented . financial results highlights for the year ended december 31 , 2014 approximately 209,400 policies in-force at december 31 , 2014 , of which approximately 74.1 % were assumed from citizens , 14.2 % were assumed from ssic and 11.7 % were from voluntary sales gross premiums written of $ 436.4 million and total revenue of $ 233.8 million net premiums earned of $ 223.6 million net income of $ 47.1 million combined ratio of 79.4 % on a gross basis and 71.4 % on a net basis cash , cash equivalents and investments of $ 491.6 million , with total assets of $ 615.0 million story_separator_special_tag securities , short term securities and other investments , dividends on equity securities , and the gains or losses from the sale of investments . other revenue . other revenue represents rental income due under non-cancelable leases for space at our commercial property in clearwater , florida that we acquired in april 2013 , and all policy and pay-plan fees . florida law allows insurers to charge policyholders a $ 25 policy fee on each policy written ; these fees are not subject to refund , and we recognize the income immediately when collected . we also charge pay-plan fees to policyholders that pay their premium in more than one installment and record the fees as income when collected . expenses losses and loss adjustment expenses . losses and loss adjustment expenses reflect losses paid , expenses paid to resolve claims , such as fees paid to adjusters , attorneys and investigators , and changes in our reserves for unpaid losses and loss adjustment expenses during the period , in each case net of losses ceded to reinsurers . our reserves for unpaid losses and loss adjustment expenses represent the estimated ultimate cost of resolving all reported claims plus all losses we incurred related to insured events that we assume have occurred as of the reporting date , but that policyholders have not yet reported to us ( which are commonly referred to as incurred but not reported , or “ibnr” ) . we estimate our reserves for unpaid losses using individual case-based estimates for reported claims and actuarial estimates for ibnr losses . we continually review and adjust our estimated losses as necessary based on industry development trends , our evolving claims experience and new information obtained . if our unpaid losses and loss adjustment expenses are considered deficient or redundant , we increase or decrease the liability in the period in which we identify the difference and reflect the change in our current period results of operations . policy acquisition costs . policy acquisition costs consist of the following items : ( i ) commissions paid to outside agents at the time of policy issuance , ( ii ) policy administration fees paid to a third-party administrator at the time of policy issuance , ( iii ) premium taxes and ( iv ) inspection fees . we recognize policy acquisition costs ratably over the term of the underlying policy . until renewed , policies assumed from citizens have no associated policy acquisition costs . policy acquisition costs also include the costs to acquire the ssic policies . we recognize these costs ratably over the term of the unearned premium acquired in the transaction . general and administrative expenses . general and administrative expenses include compensation and related benefits , professional fees , office lease and related expenses , information system expenses , corporate insurance , and other general and administrative costs . provision for income taxes . provision for income taxes historically consisted of income taxes associated with our subsidiaries that are taxed as corporations . on may 22 , 2014 , we converted from a limited liability company to a corporation . as a corporation , we are subject to typical corporate u.s. federal and state income tax rates which we expect to result in a statutory tax rate of approximately 38.575 % under current tax law . ratios ceded premium ratio . our ceded premium ratio represents ceded premiums as a percentage of gross premiums earned . gross loss ratio . our gross loss ratio represents losses and loss adjustment expenses as a percentage of gross premiums earned . 35 net loss ratio . our net loss ratio represents losses and loss adjustment expenses as a percentage of net premiums earned . gross expense ratio . our gross expense ratio represents policy acquisition costs and general and administrative expenses as a percentage of gross premiums earned . net expense ratio . our net expense ratio represents policy acquisition costs and general and administrative expenses as a percentage of net premiums earned . combined ratios . our combined ratio on a gross basis represents the sum of ceded premiums , losses and loss adjustment expenses , policy acquisition costs and general and administrative expenses as a percentage of gross premiums earned . our combined ratio on a net basis represents the sum of losses and loss adjustment expenses , policy acquisition costs and general and administrative expenses as a percentage of net premiums earned . story_separator_special_tag losses and loss adjustment expenses for the year ended december 31 , 2014 include losses paid of $ 57.4 million and a $ 32.1 million increase in unpaid losses and loss adjustment expenses , including the addition of $ 19.1 million of ibnr reserves . as of december 31 , 2014 , we reported $ 51.5 million in unpaid losses and loss adjustment expenses which included $ 30.1 million attributable to ibnr , or 58.4 % of total reserves for unpaid losses and loss adjustment expenses . policy acquisition costs policy acquisition costs increased from $ 6.2 million for the year ended december 31 , 2013 to $ 36.5 million for the year ended december 31 , 2014. the increase is primarily attributable to the significant increase in new and renewed policies , which have associated commissions and administration fees paid to outside agents and administrators at the time of policy issuance , premium taxes and inspection fees , none of which are associated with policies assumed from citizens prior to their renewal . in addition , $ 7.6 million of the $ 10 million ssic policy acquisition fee was amortized during the year ended december 31 , 2014. general and administrative expenses general and administrative expenses increased from $ 24.7 million for the year ended december 31 , 2013 to $ 33.5 million for the year ended december 31 , 2014. the increase in 2014 was due primarily to the growth in our infrastructure resulting in greater costs associated with our personnel , facilities and overall business activity . 37 provision for income taxes provision for income taxes was $ 21.2 million and $ 27.2 million for the years ended december 31 , 2013 and 2014 , respectively . our effective tax rates for the years ended december 31 , 2013 and 2014 was 38.3 % and 36.6 % , respectively . the decrease in the effective tax rate is a result of limited liability company status income in 2014 , prior to the conversion of the parent to a corporation in may 2014 compared to a loss recognized by the limited liability company status of the parent company in 2013. net income our results of operations for the year ended december 31 , 2014 reflect net income of $ 47.1 million , or $ 1.82 earnings per diluted common share , compared to net income of $ 34.2 million , or $ 2.36 earnings per diluted common share , for the year ended december 31 , 2013. the weighted average shares outstanding on a diluted basis increased from 14.5 million shares to 25.8 million shares as of december 31 , 2014 , primarily due to the company 's ipo on may 22 , 2014 and related warrants exercise . this caused the reduced earnings per diluted share in 2014 , despite the increase in net income . ratios – year ended december 31 , 2014 compared to december 31 , 2013 due to the impact our reinsurance costs have on net premiums earned from period to period , our management believes the ratios discussed below are more meaningful when viewed on a gross basis . ceded premium ratio our ceded premium ratio decreased from 32.0 % for the year ended december 31 , 2013 to 28.2 % for the year ended december 31 , 2014. this decrease is primarily due to lower reinsurance costs due to favorable reinsurance market conditions , the availability of lower cost reinsurance related to $ 200 million of catastrophe bonds issued by a third party and improved geographic spread of risk . gross loss ratio our gross loss ratio increased from 27.5 % for the year ended december 31 , 2013 to 28.7 % for the year ended december 31 , 2014 , primarily due to an increase in ibnr . net loss ratio our net loss ratio decreased from 40.5 % for the year ended december 31 , 2013 to 40.1 % for the year ended december 31 , 2014 , primarily as a result in the improvement of the ceded premium ratio to gross earned premiums . gross expense ratio our gross expense ratio increased modestly from 22.0 % for the year ended december 31 , 2013 to 22.5 % for the year ended december 31 , 2014 , primarily as a result of the acquisition costs associated with the ssic book of business that was acquired on june 27 , 2014. net expense ratio our net expense ratio decreased from 32.4 % for the year ended december 31 , 2013 to 31.3 % for the year ended december 31 , 2014 , primarily as a result of the improvement of the ceded premium ratio to gross earned premiums . combined ratio our combined ratio on a gross basis decreased from 81.5 % for the year ended december 31 , 2013 to 79.4 % for the year ended december 31 , 2014. our combined ratio on a net basis decreased from 72.9 % for the year ended december 31 , 2013 to 71.4 % for the year ended december 31 , 2014. the changes in our combined ratio , on both a gross and net basis , are primarily as a result of the improvement of the ceded premium ratio to gross earned premiums . 38 period from august 7 , 2012 ( inception ) to december 31 , 2012 our company was formed in august 2012. we did not generate revenue until december 2012 when we commenced our first assumption transaction with citizens , and wrote our first voluntary policies .

consolidated results of operations : an analysis and discussion of our financial results comparing our consolidated results of operations for the year ended december 31 , 2014 to the year ended december 31 , 2013 , is discussed below . our company was formed in august 2012 and we did not generate revenue until december 2012 when we commenced our first assumption transaction with citizens , and wrote our first voluntary policies . due to the limited operating activities in 2012 , we are not presenting a comparative analysis between the year ended december 31 , 2013 and the period august 7 , 2012 ( inception ) to december 31 , 2012. consolidated results of operations the following table summarizes our results of operations for the periods indicated ( in thousands , except per share amounts ) : replace_table_token_6_th 33 replace_table_token_7_th 1. retroactive reinsurance income of $ 26.0 million during the year ended december 31 , 2013 represents premiums earned , net of losses , for the period from january 1 , 2013 through may 31 , 2013 from a retroactive reinsurance quota share agreement entered into in connection with our assumption of approximately 39,000 policies from citizens in june 2013. see note 2 to our consolidated financial statements included elsewhere in this annual report . 2. general and administrative expenses for the years ended december 31 , 2014 , december 31 , 2013 and for the period august 7 , 2012 ( inception ) to december 31 , 2012 includes $ 3.3 million , $ 5.7 million and $ 5.5 million of stock-based compensation expense , respectively . 3. share and per share data for the periods presented gives retroactive effect to the 2,550-for-1 stock split effected on may 7 , 2014 , but does not give retroactive effect to the “warrant exercise” and , together with the conversion , the “reorganization transactions” . 4. includes the value , as of the end of each period , of the redeemable equity .

generally , words such as “ may , ” “ will , ” “ should , ” “ could , ” “ anticipate , ” “ expect , ” “ intend , ” “ estimate , ” “ plan , ” “ continue , ” “ goal ” and “ believe , ” or the negative of or other variations on these and other similar expressions identify forward-looking statements . these forward-looking statements are made only as of the date of this filing . we do not undertake to update or revise the forward-looking statements , whether as a result of new information , future events or otherwise . forward-looking statements are based on current expectations and involve risks and uncertainties . our future results could differ significantly from those expressed or implied by our forward-looking statements . these risks and uncertainties include , without limitation , those described below and under the heading “ risk factors ” within this annual report on form 10-k for the fiscal year ended september 27 , 2014 ( the “ annual report ” ) and our other reports and registration statements filed from time to time with the securities and exchange commission . this discussion should be read in conjunction with the consolidated financial statements and notes included in this report , as well as our audited financial statements included in the annual report . we operate in a rapidly changing and competitive environment . new risks emerge from time to time and it is not possible for us to predict all risks that may affect us . future events and actual results , performance and achievements could differ materially from those set forth in , contemplated by or underlying the forward-looking statements , which speak only as of the date on which they were made . except as required by law , we assume no obligation to update or revise any forward-looking statement to reflect actual results or changes in , or additions to , the factors affecting such forward-looking statements . given those risks and uncertainties , investors should not place undue reliance on forward-looking statements as predictions of actual results . introduction kulicke and soffa industries , inc. ( the `` company '' or `` k & s '' ) designs , manufactures and sells capital equipment and expendable tools used to assemble semiconductor devices , including integrated circuits ( “ ics ” ) , high and low powered discrete devices , light-emitting diodes ( “ leds ” ) , and power modules . we also service , maintain , repair and upgrade our equipment . our customers primarily consist of semiconductor device manufacturers , outsourced semiconductor assembly and test providers ( “ osats ” ) , other electronics manufacturers and automotive electronics suppliers . we operate two main business segments , equipment and expendable tools . our goal is to be the technology leader and the most competitive supplier in terms of cost and performance in each of our major product lines . accordingly , we invest in research and engineering projects intended to enhance our position at the leading edge of semiconductor assembly technology . we also remain focused on our cost structure through continuing improvement and optimization of operations . cost reduction efforts remain an important part of our normal ongoing operations and are expected to generate savings without compromising overall product quality and service levels . business environment the semiconductor business environment is highly volatile , driven by internal dynamics , both cyclical and seasonal , in addition to macroeconomic forces . over the long term , semiconductor consumption has historically grown , and is forecast to continue to grow . this growth is driven , in part , by regular advances in device performance and by price declines that result from improvements in manufacturing technology . in order to exploit these trends , semiconductor manufacturers , both integrated device manufacturers ( “ idms ” ) and osats , periodically invest aggressively in latest generation capital equipment . this buying pattern often leads to periods of excess supply and reduced capital spending - the so called semiconductor cycle . within this broad semiconductor cycle there are also , generally weaker , seasonal effects that are specifically tied to annual , end-consumer purchasing patterns . typically , semiconductor manufacturers prepare for heightened demand by adding or replacing equipment capacity by the end of the september quarter . occasionally , this results in subsequent reductions in the december quarter . this annual seasonality can occasionally be 24 overshadowed by effects of the broader semiconductor cycle . macroeconomic factors also affect the industry , primarily through their effect on business and consumer demand for electronic devices , as well as other products that have significant electronic content such as automobiles , white goods , and telecommunication equipment . our equipment segment is primarily affected by the industry 's internal cyclical and seasonal dynamics in addition to broader macroeconomic factors that positively and negatively affect our financial performance . the sales mix of idm and osat customers in any period also impacts financial performance , as changes in this mix can affect our products ' average selling prices and gross margins due to differences in volume purchases and machine configurations required by each customer type . our expendable tools segment is less volatile than our equipment segment . expendable tools sales are more directly tied to semiconductor unit consumption rather than capacity requirements and production capability improvements . we continue to position our business to leverage our research and development leadership and innovation and to focus our efforts on mitigating volatility , improving profitability and ensuring longer-term growth . we remain focused on operational excellence , expanding our product offerings and managing our business efficiently throughout the business cycles . our visibility into future demand is generally limited , forecasting is difficult , and we generally experience typical industry seasonality . to limit potential adverse cyclical , seasonal and macroeconomic effects on our financial position , we have de-leveraged and strengthened our balance sheet . story_separator_special_tag typical applications include complementary metal-oxide semiconductor ( “ cmos ” ) image sensors , surface acoustical wave ( “ saw ” ) filters and high brightness leds . these applications are commonly used in most , if not all , smartphones available today in the market . we also have expanded the use of at premier plus for wafer level wire bonding for micro-electro-mechanical systems ( “ mems ” ) and other sensors . our technology leadership and bonding process know-how have enabled us to develop highly function-specific equipment with best-in-class throughput and accuracy . this forms the foundation for our advanced packaging equipment development . we established a dedicated team to develop and manufacture advanced packaging bonders for the emerging 2.5 dimensional ( “ 2.5d ic ” ) and 3 dimensional integrated circuit ( “ 3d ic ” ) markets . in november 2013 , we shipped the first tcb ( thermo-compression bonder ) c2s ( chip-to-substrate ) alpha machine to an initial strategic customer and have subsequently shipped additional variants to other customers . by reducing the interconnect dimensions , 2.5d and 3d ics are expected to provide form factor , performance and power efficiency enhancements over traditional flip-chip packages in production today . high-performance processing and memory applications , in addition to mobile devices such as smartphones and tablets , are anticipated to be earlier adopters of this new packaging technology . we bring the same technology focus to our expendable tools business , driving tool design and manufacturing technology to optimize the performance and process capability of the equipment in which our tools are used . for all our equipment products , expendable tools are an integral part of their process capability . we believe our unique ability to simultaneously develop both equipment and tools is a core strength supporting our products ' technological differentiation . products and services we supply a range of bonding equipment and expendable tools . the following tables reflect net revenue by business segment for fiscal 2014 , 2013 , and 2012 : replace_table_token_7_th see note 12 to our consolidated financial statements included in item 8 of this report for our financial results by business segment . 26 equipment segment we manufacture and sell a line of ball bonders , wafer level bonders and heavy wire wedge bonders that are sold to semiconductor device manufacturers , osats , other electronics manufacturers and automotive electronics suppliers . ball bonders are used to connect very fine wires , typically made of gold or copper , between the bond pads of the semiconductor device , or die , and the leads on its package . wafer level bonders mechanically apply bumps to die , typically while still in the wafer format , for some variants of the flip chip assembly process . heavy wire wedge bonders use either aluminum wire or ribbon to perform the same function in packages that can not use gold or copper wire because of either high electrical current requirements or other package reliability issues . in september 2014 , we introduced the apama ( advanced packaging with adaptive machine analytics ) c2s bonder , which is designed for performance and high accuracy applications , delivering die-stacking solutions for 2.5 dimensional , 3 dimensional or through silicon via ( tsv ) integrated chips . we believe our equipment offers competitive advantages by providing customers with high productivity/throughput , superior package quality/process control , and , as a result , a lower cost of ownership . 27 our principal equipment segment products include : business unit product name ( 1 ) typical served market ball bonders iconn ps advanced and ultra fine pitch applications iconn ps plus advanced and ultra fine pitch applications iconn ps la large area substrate and matrix applications iconn ps plus la large area substrate and matrix applications iconn ps procu high-end copper wire applications demanding advanced process capability and high productivity iconn ps procu plus high-end copper wire applications demanding advanced process capability and high productivity iconn ps procu la large area substrate and matrix applications for copper wire iconn ps procu plus la large area substrate and matrix applications for copper wire connx ps plus high productivity bonder for low-to-medium pin count applications connx ps led led applications connx ps vled vertical led applications connx ps plus la cost performance large area substrate and matrix applications at premier plus advanced wafer level bonding application wedge bonders 3600plus power hybrid and automotive modules using either heavy aluminum wire or powerribbon® 3700plus hybrid and automotive modules using thin aluminum wire 7200plus power semiconductors using either aluminum wire or powerribbon® 7200hd smaller power packages using either aluminum wire or powerribbon® powerfusion ps tl power semiconductors using either aluminum wire or powerribbon® powerfusion ps hl smaller power packages using either aluminum wire or powerribbon® advanced packaging apama c2s flip chip thermo-compression bonding applications ( 1 ) power series ( “ ps ” ) 28 ball bonders a utomatic ball bonders represent the largest portion of our semiconductor equipment business . our main product platform for ball bonding is the power series - a family of assembly equipment that is setting new standards for performance , productivity , upgradeability , and ease of use . our portfolio of ball bonding products includes : the iconn ps : high-performance ball bonders which can be configured for either gold or copper wire . the iconn ps la : high-performance large area ball bonders which can be configured for either gold or copper wire . the connx ps plus : cost-performance ball bonders which can be configured for either gold or copper wire . the connx ps plus la : cost-performance large area ball bonders which can be configured for either gold or copper wire . the connx ps led and connx ps vled : ball bonders targeted specifically at the fast growing led market . the iconn ps procu plus : high-performance copper wire ball bonders for advanced wafer nodes at 28 nanometer and below .

results of operations results of operations for fiscal 2014 and 2013 the following table reflects our income from operations for fiscal 2014 and 2013 : replace_table_token_8_th bookings and backlog a booking is recorded when a customer order is reviewed and it is determined that all specifications can be met , production ( or service ) can be scheduled , a delivery date can be set , and the customer meets our credit requirements . we use bookings to evaluate the results of our operations , generate future operating plans and assess the performance of our company . while we believe that this non-gaap financial measure is useful in evaluating our business , this information should be considered as supplemental in nature and is not meant as a substitute for revenue recognized in accordance with gaap . in addition , other companies , including companies in our industry , may calculate bookings differently or not at all , which reduces its usefulness as a comparative measure . reconciliation of bookings to net revenue is not practicable . our backlog consists of customer orders scheduled for shipment within the next twelve months . a majority of our orders are subject to cancellation or deferral by our customers with limited or no penalties . also , customer demand for our products can vary dramatically without prior notice . because of the volatility of customer demand , possibility of customer changes in delivery schedules or cancellations and potential delays in product shipments , our backlog as of any particular date may not be indicative of net revenue for any succeeding period .

in addition , mr. mccaney was granted options to purchase up to 310,002 shares of our common stock , having a term of ten years , as follows : ( i ) 108,501 shares vesting in three substantially equal installments on the first , second and third anniversaries of october 31 , 2016 ; and ( ii ) up to 201,501 shares vesting in three substantially equal annual installments upon a determination by our board that we had achieved the following milestones for each of the 2017 , 2018 and 2019 fiscal years , respectively : ( a ) one-third if we achieve the revenue plan established by our board for such year , ( b ) one-third if we achieve the ebitda plan established by our board for such year , and ( c ) one-third if we achieve the goals established by our board for such year ; provided that any such stock option that has not vested with respect to any particular year due to the failure to satisfy a milestone condition for that year will terminate as of the end of that year and will no longer become exercisable . the milestones for the year ended december 31 , 2017 , were not achieved , resulting in the forfeiture of 67,167 options . story_separator_special_tag the following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report . dollar amounts are reported in thousands , except per share and per treatment data . as described in note 2 , “ restatement of previously issued 2017 consolidated financial information ” under item 8 of this form 10-k , we restated our audited financial statements as of and for the year ended december 31 , 2017. the impact of the restatement is reflected in management 's discussion and analysis ( “ md & a ” ) of financial condition and results of operations below . we have also restated certain unaudited quarterly results as of and for the periods ended march 31 , june 30 , and september 30 , 2018 and 2017 which are presented in note 22 “ quarterly financial information ( unaudited ) . '' the impact of the restatement to the quarterly 2018 and 2017 financial statements is fully described in the explanatory note and the notes to the financial statements and should be read in conjunction with the previously filed forms 10-q and , with the exception to the impact on working capital as disclosed below , are immaterial and therefore these disclosures have not been included below . introduction , outlook and overview of business operations strata skin sciences is a medical technology company in dermatology and plastic surgery dedicated to developing , commercializing and marketing innovative products for the treatment of dermatologic conditions . its products include the xtrac® excimer laser and vtrac® lamp systems utilized in the treatment of psoriasis , vitiligo and various other skin conditions ; and the stratapen® microsystem , marketed specifically for the intended use of micropigmentation . the xtrac device is utilized to treat psoriasis , vitiligo and other skin diseases . the xtrac device received fda clearance in 2000 and has since become a widely recognized treatment among dermatologists . the system delivers targeted 308um ultraviolet light to affected areas of skin , leading to psoriasis clearing and vitiligo repigmentation , following a series of treatments . as of december 31 , 2018 , there were 746 xtrac systems placed in dermatologists ' offices in the united states under our dermatology recurring procedure model , down from 753 at the end of december 31 , 2017. under the dermatology recurring procedure model , the xtrac system is placed in a physician 's office and fees are charged on a per procedure basis or a fee is charged on a periodic basis not to exceed an agreed upon number of procedures . the xtrac system 's use for psoriasis is covered by nearly all major insurance companies , including medicare . the vtrac excimer lamp system , offered internationally in addition to the xtrac , provides targeted therapeutic efficacy demonstrated by excimer technology with the simplicity of design and reliability of a lamp system . there are approximately 7.5 million people in the united states and up to 125 million people worldwide suffering from psoriasis , and 1 % to 2 % of the world 's population suffers from vitiligo . in 2018 over 275,000 xtrac laser treatments were performed on approximately 17,000 patients in the united states . - 33 - effective february 1 , 2017 , we entered into an exclusive oem distribution agreement with esthetic education , llc to be the exclusive marketer and seller of private label versions of the skinstylus® microsystem and associated parts under the name of stratapen . this three-year agreement has minimum annual sales requirements for renewal . the company does not expect to meet the criteria for renewal . during 2017 we entered into an agreement to license the nordlys product line from ellipse a/s . in 2018 , following the financing , we determined we would no longer market the line and the agreement was terminated . for 2017 quarterly sales of the nordlys product line were $ 0 , $ 391 , $ 118 , $ 698 for the first through fourth quarters of 2017 , respectively . for 2018 quarterly sales were $ 218 , $ 59 , $ 57 and $ 75 for the first through fourth quarters of 2018 , respectively . we discontinued carrying the nordlys product line and the distribution agreement with ellipse a/s was terminated on may 31 , 2018. key technology xtrac® excimer laser . xtrac received fda clearance in 2000 and has since become a widely recognized treatment among dermatologists for psoriasis and other skin diseases . the xtrac excimer laser delivers ultra-narrowband ultraviolet b ( “ uvb ” ) light to affected areas of skin . following a series of treatments typically performed twice weekly , psoriasis remission can be achieved , and vitiligo patches can be re-pigmented . story_separator_special_tag there are additional contingencies included in the spa 's but the company has determined they are not probable or estimable and or contractually obligated at this time . in connection with the spas , we entered into a registration rights agreement ( the “ registration rights agreement ” ) with the investors to prepare and file with the commission a registration statement covering the shares of common stock issued in the financing . the company filed a registration statement on form s-3 , which became effective on september 24 , 2018. midcap credit facility on may 29 , 2018 , we entered into a fourth amendment to credit agreement ( the “ amendment ” ) , pursuant to which the company repaid $ 3.0 million in principal of the existing $ 10.6 million credit facility established with midcap financial trust ( “ midcap ” ) in 2015. the terms of the credit facility have been amended to impose less restrictive covenants and lower prepayment fees for the company and extended the maturity date to may 2022. the amendment modified the principal payments payable under the credit agreement including a period of 18 months where there are no principal payments due . the interest rate on the credit facility is one-month libor plus 7.25 % . principal payments , beginning december 2019 , are $ 252 plus interest per month . the company was in compliance with the covenant as of december 31 , 2018. on april 30 , july 15 , august 26 , and october 15 , 2019 , we received waivers from midcap as administrative agent for the lenders who are party to the agreement , wherein the lenders waived our events of default and compliance with the obligation to deliver audited financial statements within 120 days of our year-end pursuant to the agreement . the waivers are effective through november 7 , 2019. sales and marketing as of december 31 , 2018 , our sales and marketing personnel consisted of 51 full-time employees , inclusive of a vice president of sales , a direct sales organization , as well as an in-house call center staffed with patient advocates and a reimbursement group that provides necessary insurance information to our physician partners and their patients . - 35 - reverse stock split on april 6 , 2017 , we completed the reverse split of our common stock in the ratio of 1-for-5 . our common stock began trading at the market opening on april 7 , 2017 , on a split-adjusted basis . all data on common stock and equivalents was retroactively adjusted to be shown herein as reflective of this reverse stock split . critical accounting policies and estimates the discussion and analysis of our financial condition and results of operations in this report are based upon our consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states ( “ us gaap ” ) . the preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities , revenues and expenses and disclosures at the date of the financial statements . on an on-going basis , we evaluate our estimates , including , but not limited to , those related to revenue recognition , accounts receivable , deferred revenues , inventories , useful lives and impairment of property and equipment and of intangibles and goodwill , fair value of equity-based awards , sales and use tax , deferred taxes , financial instruments ( derivative instruments and warrants ) and accruals for warranty claims . we use authoritative pronouncements , historical experience and other assumptions as the basis for making estimates . actual results could differ from those estimates . management believes that the following critical accounting policies affect our more significant judgments and estimates in the preparation of our consolidated financial statements . revenue recognition in the dermatology recurring procedures segment we have two types of arrangements for its phototherapy treatment equipment as follows : ( i ) we place our lasers in a physician 's office at no charge to the physician , and generally charge the physician a fee for access codes for an agreed upon number of treatments ; or ( ii ) we place our lasers in a physician 's office and charge the physician a fixed fee for a specified period of time not to exceed an agreed upon number of treatments ; if that number is exceeded additional fees will have to be paid . for the purposes of u.s. gaap only , these two types of arrangements are treated under the guidance of asc 840 , leasing . while these are not contractually operating leases as we sell the physician access codes in order to operate the treatment equipment , these arrangements are similar to operating leases for accounting purposes since , in these arrangements , the company provides the customers with limited rights to use the treatment equipment , while we may exercise the right to remove the equipment upon notice , while the physician controls the utility and output of such equipment during the term of the arrangement as it pertains to the use of the access codes to treat the patients . for the first type of arrangement , sale of access codes are recognized as revenue over the estimated usage period of the agreed upon number of treatments . for the second type of arrangement , customers purchase access codes and revenue is recognized ratably on a straight line basis as the lasers are being used over the term period specified in the agreement . contingent amounts that will be paid only if the customer exceeds the agreed upon number of treatments are recognized only when such treatments are being exceeded and used . pre-paid amounts are recorded in deferred revenue and recognized as revenue over the lease term in the patterns described above .

results of operations ( the following financial data , in this narrative , are expressed in thousands , except for the earnings per share and per treatment . amounts have been revised to give effect to the restatements of the 2017 financial statements as described in note 2 to the consolidated financial statements . ) revenues the following table presents revenues from our three segments for the periods indicated below : replace_table_token_1_th dermatology recurring procedures revenues from dermatology recurring procedures for the year ended december 31 , 2018 was $ 21,053 which approximates 300,000 treatments , with prices from $ 65 to $ 95 per treatment . revenues from dermatology recurring procedures for the year ended december 31 , 2017 was $ 22,954 which approximates 328,000 treatments , with prices from $ 65 to $ 95 per treatment . - 39 - increases in procedures are dependent upon building market acceptance through marketing programs with our physician partners and their patients to show that the xtrac procedures will be of clinical benefit and will be generally reimbursed by insurers . we believe that several factors have had a negative impact on the prescribed use of xtrac treatments for psoriasis and vitiligo patients . specifically , we believe that there is a lack of awareness of the positive effects of xtrac treatments among both sufferers and providers ; and the treatment regimen which can sometimes require up to 12 or more treatments has limited xtrac use to certain patient populations . therefore , we have initiated a direct to patient program for xtrac advertising in the united states , targeting psoriasis and vitiligo patients through a variety of media including television and radio ; and through our use of social media such as facebook and twitter . we monitor the results of our advertising expenditures in this area to reach the more than 10 million patients in the united states afflicted with these diseases .

30 , 2018 ( dollar amounts in thousands ) net 1 ueps technologies , inc. shareholders number accumulated redeemable number of number of additional other total non- common of treasury treasury shares , net of paid-in retained comprehensive net1 controlling stock shares amount shares shares treasury story_separator_special_tag and results of operations the following discussion and analysis should be read in conjunction with item 6—“selected financial data” and item 8—“financial statements and supplementary data.” in addition to historical consolidated financial information , the following discussion and analysis contains forward-looking statements that involve risks , uncertainties and assumptions . see item 1a— “risk factors” and “forward looking statements.” overview we are a leading provider of payment solutions , transaction processing services and financial technology across multiple industries and in a number of emerging and developed economies . we have developed and market a comprehensive transaction processing solution that encompasses our smart card-based alternative payment system for the unbanked and under-banked populations of developing economies and for mobile transaction channels . our market-leading system can enable the billions of people globally who generally have limited or no access to a bank account to enter affordably into electronic transactions with each other , government agencies , employers , merchants and other financial service providers . our ueps , and ueps/emv derivative discussed below , uses biometrically secure smart cards that operate in real-time but either offline or online , unlike traditional payment systems offered by major banking institutions that require immediate access through a communications network to a centralized computer . this offline capability means that users of our system can conduct transactions at any time with other card holders in even the most remote areas so long as a smart card reader , which is often portable and battery powered , is available . our off-line systems also offer the highest level of availability and affordability by removing any components that are costly and are prone to outages . our latest version of the ueps technology has been certified by emv , which facilitates our proprietary ueps system to interoperate with the global emv standard and allows card holders to transact at any emv-enabled point of sale terminal or atm . the ueps/emv technology has been deployed on an extensive scale in south africa through the issuance of mastercard-branded ueps/emv cards to our social welfare grant customers . in addition to effecting purchases , cash-backs and any form of payment , our system can be used for banking , healthcare management , international money transfers , voting and identification . we also provide secure financial technology solutions and services , by offering transaction processing and financial products to various industries . we have extensive expertise in secure online transaction processing , cryptography , mobile telephony , integrated circuit card ( chip/smart card ) technologies , and the design and provision of financial and value-added services to our cardholder base . our technology is widely used in south africa today , where we provide bank accounts to approximately 3.0 million epe customers and are in the last month of our contract to distribute welfare payments , using our ueps/emv technology , process debit and credit card payment transactions on behalf of a wide range of retailers through our easypay system , process value-added services such as bill payments and prepaid airtime and electricity for the major bill issuers and local councils in south africa , and provide mobile telephone top-up transactions for all of the south african mobile carriers . we are the largest provider of third-party and associated payroll payments in south africa through our fihrst service . we provide financial inclusion services such as microloans , insurance , mobile transacting and prepaid utilities to our cardholder base . in addition , through ksnet , we are one of the top three value-added network , or van , processors in south korea , and we offer card processing , payment gateway and banking value-added services in that country . we also offer end-to-end payment services through ipg in europe , the u.k. , asia and the united states . we are also collaborating with bank frick on exploiting opportunities in the blockchain and cryptocurrency environments . our applied technologies business unit has an array of web and mobile applications and payment technologies , such as mvc , chip and gsm licensing and vtu , and has deployed solutions in many countries , including south africa , namibia , nigeria , malawi , cameroon , the philippines , india and colombia . sources of revenue we generate our revenues by charging transaction fees to government agencies , merchants , financial service providers , utility providers , bill issuers , employers ; and cardholders ; by providing loans and insurance products and by selling hardware , licensing software and providing related technology services . we have structured our business and our business development efforts around four related but separate approaches to deploying our technology . in our most basic approach , we act as a supplier , selling our equipment , software , and related technology to a customer . the revenue and costs associated with this approach are reflected in our financial inclusion and applied technologies segment . 39 we have found that we have greater revenue and profit opportunities , however , by acting as a service provider instead of a supplier . in this approach we own and operate the ueps ourselves , charging one-time and on-going fees for the use of the system either on a fixed or ad valorem basis . this is the case in south africa , where we distribute welfare grants on behalf of the south african government on a fixed fee basis , provide bank accounts on a fixed fee basis , but charge a fee on an ad valorem basis for goods and services purchased using our smart card . the revenue and costs associated with this approach are reflected in our south african transaction processing and financial inclusion and applied technologies segments . story_separator_special_tag if the amount payable to us is not commercially reasonable , our results of operations , financial position and cash flows may be adversely affected.” on april 25 , 2018 , we , and other bidders , received a notice from sassa informing us of the suspension of the tender issued in december 2017 for the appointment of a service provider to distribute grants in cash at pay points when our contract expires on september 30 , 2018. in an affidavit filed with the constitutional court , the recently appointed minister of social development , ms. susan shabangu , indicated that she had ordered the suspension of the tender due to objections received regarding the completeness of the tender document from a prospective bidder , as well as the fact that the bid evaluation committee did not have the required skills to evaluate a tender of this nature . minister shabangu also indicated to members of the portfolio committee for social development in the south african parliament that there will be no request for a further extension of our contract when it expires on september 30 , 2018. sassa has subsequently informed the constitutional court that it has amended the contract with the sapo to include the servicing of pay points when our contract expires . we are relieved that we finally have visibility regarding the end of our contract and we look forward to the successful completion of our contract on september 30 , 2018. we are extremely proud of our achievements of uninterrupted grant delivery to 11.0 million social grant recipients since the inception of our contract in april 2012 , and the saving of more than zar 2.0 billion per annum that our biometric payment technology realized for government due to the elimination of fraudulent grants . we intend to focus our resources and technology on the provision of financial inclusion services to our target market after our contract expires , without the contractual constraints and challenges we have experienced during the past six years . epe , moneyline and smart life in june 2015 , we began the rollout of epe , our business-to-consumer offering in south africa . as of july 31 , 2018 , we had more than 3.0 million epe accounts , compared to 2.0 million as of july 31 , 2017. epe is a fully transactional , low cost account created to serve the needs of south africa 's unbanked and under-banked population , many of whom are social grant recipients . the epe account offers customers a comprehensive suite of financial services and various financial inclusion services , such as prepaid products , in an economical , convenient and secure solution . epe provides account holders with a biometrically-enabled ueps/emv debit mastercard , mobile and internet banking services , atm and pos services , as well as loans , insurance and other financial products and value-added services . in order for us to address the sizeable opportunity for epe and related financial inclusion services in south africa , in fiscal 2016 , we began to expand our brick-and-mortar financial services branch infrastructure , which supplements our nationwide distribution , with a biometrically-enabled ueps/emv atm network , and hired a dedicated sales force . we are currently expanding our physical branch and atm infrastructure and our efforts will be supplemented by employing a roaming sales force equipped with a biometrically-enabled ueps/emv card-issuing work station . in january 2018 , we deployed an additional 500 portable card-issuing working stations and employed 625 temporary staff to achieve this objective . at july 31 , 2018 , we had 169 branches ( april 30 , 2018 : 152 ) , 1,175 atms ( april 30 , 2018 : 1,100 ) , and 2,977 ( april 30 , 2018 : 2,371 ) dedicated employees , including the temporary staff . our efforts have resulted in an increased rate in the number of epe accounts opened , the amount of loans disbursed and the number of insurance policies sold . we have opened approximately 815,000 epe accounts during the last seven months since january 1 , 2018 , and we will have additional capacity to further increase our activities when our staff members and infrastructure currently dedicated to the sassa contract become available for this initiative when our contract with sassa ends . we have , however , experienced significant “churn” of our epe accounts due to the unilateral decision by sassa to open sapo accounts for some of our epe cardholders and to deposit their grants into these accounts , despite the legal and valid request by these cardholders to be paid via their epe accounts . we have laid complaints with the relevant regulators in an effort to remedy this unfortunate situation but we have not received any response to date . for additional information refer to “item 1a.—risk factors—we face competition from the incumbent retail banks in south africa and sapo in the unbanked market segment , which could limit growth in our transaction-based activities segment.” 41 our loan book under moneyline has continued to grow despite our tightening of lending criteria given the current changes in the grant recipient environment . during the 13 months since july 1 , 2017 , we sold approximately 172,000 new policies related to our simple , low-cost life insurance products , in addition to the free basic life insurance policy provided with every epe account opened . on may 2 , 2018 , we introduced low-cost mobile telephony and data packages , designed in collaboration with cell c and dni , as part of our “lifestyle” product offering and we intend to deploy further relevant products in the near future . while the initial take up has been disappointing , we believe cell c 's recently concluded infrastructure sharing deal in south africa with mtn will significantly lift the market penetration of these products .

consolidated overall results of operations this discussion is based on the amounts which were prepared in accordance with u.s. gaap . the following tables show the changes in the items comprising our statements of operations , both in u.s. dollars and in zar : replace_table_token_8_th 49 replace_table_token_9_th in zar , the decrease in revenue was primarily due to lower prepaid airtime sales , a decline in the number of sassa biometrically-enabled ueps/emv grant recipients paid and fewer ad hoc terminal sales , which was partially offset by higher revenue from masterpayment and transact 24 , epe and related atm services , and growth in our insurance business . ksnet 's revenue contribution was flat compared with fiscal 2017 due to the ongoing impact of regulatory changes in south korea . in zar , the decrease in cost of goods sold , it processing , servicing and support was primarily due to fewer prepaid airtime and ad hoc terminal sales , which was partially offset by increases in goods and services purchased from third parties , higher expenses incurred due to increased usage of the south african national payment system by beneficiaries , and inflationary pressures on the cost base . our selling , general and administration expense increased primarily due to an increase in our allowance for doubtful working capital finance receivables of $ 7.8 million , a $ 4.6 million non-cash loss on re-measurement of the previously held equity interest in dni upon acquisition , the impact of october 2017 annual salary increases for our south african employees , an increase in our allowance for doubtful microlending finance loans receivable , and an increase in goods and services purchased from third parties .

we acquired other companies in 2015 which is described in note 2 — acquisitions in the notes to the condensed consolidated financial statements included in this annual report on form 10-k. the operating results of these acquired businesses have been included in our consolidated and segment operating results beginning on their respective dates of acquisition and these results were not material to our consolidated or segment results for 2015. forward-looking statements in addition to historical information , this annual report on form 10-k contains certain 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 . forward-looking statements are any statements other than statements of historical fact , including statements regarding our expectations , beliefs , hopes , intentions or strategies regarding the future . in some cases , forward-looking statements can be identified by the use of words such as “ may , ” “ will , ” “ expect , ” “ should , ” “ could , ” “ believe , ” “ plan , ” “ anticipate , ” “ estimate , ” “ predict , ” “ potential , ” “ continue , ” or other words of similar meaning . forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in , or implied by , the forward-looking statements . factors that might cause such a difference include , but are not limited to , those discussed in part 1 , item 1a , risk factors . readers should not place undue reliance on these forward-looking statements , which reflect management 's opinion only as of the date on which they were made . except as required by law , we disclaim any obligation to review or update these forward-looking statements to reflect events or circumstances as they occur . readers should review carefully any risk factors described in other reports we filed with the sec . business overview gartner , inc. is the world 's leading information technology research and advisory company that helps executives use technology to build , guide and grow their enterprises . we offer independent and objective research and analysis on the information technology , computer hardware , software , communications and related technology industries . we provide comprehensive coverage of the it industry to thousands of client organizations across the globe . our client base consists of cios , other senior it personnel , executives , and others from a wide variety of business enterprises , government agencies and the investment community . gartner is headquartered in stamford , connecticut , u.s.a. , and as of december 31 , 2015 , we had 7,834 associates , including 1,731 research analysts and consultants , and clients in over 90 countries . we have three business segments : research , consulting and events . research provides objective insight on critical and timely technology and supply chain initiatives for cios , other it professionals , supply chain leaders , digital marketing professionals , technology companies and the institutional investment community through reports , briefings , proprietary tools , access to our analysts , peer networking services and membership programs that enable our clients to make better decisions about their it , supply chain and digital marketing investments . consulting provides customized solutions to unique client needs through on-site , day-to-day support , as well as proprietary tools for measuring and improving it performance with a focus on cost , performance , efficiency , and quality . events provides it , supply chain , digital marketing and business professionals the opportunity to attend various symposia , conferences and exhibitions to learn , contribute and network with their peers . from our flagship symposium/itxpo series , to summits focused on specific technologies and industries , to experimental workshop-style seminars , our events distill the latest gartner research into applicable insight and advice . 17 business measurements we believe the following business measurements are important performance indicators for our business segments : business segment business measurements research contract value represents the value attributable to all of our subscription-related research products that recognize revenue on a ratable basis . contract value is calculated as the annualized value of all subscription research contracts in effect at a specific point in time , without regard to the duration of the contract . client retention rate represents a measure of client satisfaction and renewed business relationships at a specific point in time . client retention is calculated on a percentage basis by dividing our current clients , who were also clients a year ago , by all clients from a year ago . client retention is calculated at an enterprise level , which represents a single company or customer . wallet retention rate represents a measure of the amount of contract value we have retained with clients over a twelve-month period . wallet retention is calculated on a percentage basis by dividing the contract value of clients , who were clients one year ago , by the total contract value from a year ago , excluding the impact of foreign currency exchange . when wallet retention exceeds client retention , it is an indication of retention of higher-spending clients , or increased spending by retained clients , or both . wallet retention is calculated at an enterprise level , which represents a single company or customer . consulting consulting backlog represents future revenue to be derived from in-process consulting , measurement and strategic advisory services engagements . utilization rate represents a measure of productivity of our consultants . utilization rates are calculated for billable headcount on a percentage basis by dividing total hours billed by total hours available to bill . billing rate represents earned billable revenue divided by total billable hours . story_separator_special_tag revenue is only recognized once all required criteria for revenue recognition have been met . revenue by significant source is accounted for as follows : research revenues are mainly derived from subscription contracts for research products . the related revenues are deferred and recognized ratably over the applicable contract term . fees derived from assisting organizations in selecting the right business software for their needs is recognized when the leads are provided to vendors . consulting revenues are principally generated from fixed fee and time and material engagements . revenues from fixed fee contracts are recognized on a proportional performance basis . revenues from time and materials engagements are recognized as work is delivered and or services are provided . revenues related to contract optimization contracts are contingent in nature and are only recognized upon satisfaction of all conditions related to their payment . events revenues are deferred and then recognized upon the completion of the related symposium , conference or exhibition . the majority of research contracts are billable upon signing , absent special terms granted on a limited basis from time to time . all research contracts are non-cancelable and non-refundable , except for government contracts that may have cancellation or fiscal funding clauses . it is our policy to record the entire amount of the contract that is billable as a fee receivable at the time the contract is signed with a corresponding amount as deferred revenue , since the contract represents a legally enforceable claim . uncollectible fees receivable — we maintain an allowance for losses which is composed of a bad debt allowance and a sales reserve . provisions are charged against earnings , either as a reduction in revenues or an increase to expense . the determination of the allowance for losses is based on historical loss experience , an assessment of current economic conditions , the aging of outstanding receivables , the financial health of specific clients , and probable losses . this evaluation is inherently judgmental and requires estimates . these valuation reserves are periodically re-evaluated and adjusted as more information about the ultimate collectability of fees receivable becomes available . circumstances that could cause our valuation reserves to increase include changes in our clients ' liquidity and credit quality , other factors negatively impacting our clients ' ability to pay their obligations as they come due , and the effectiveness of our collection efforts . the following table provides our total fees receivable and the related allowance for losses ( in thousands ) : replace_table_token_3_th goodwill and other intangible assets — the company evaluates recorded goodwill in accordance with financial accounting standards board ( fasb ) accounting standards codification ( asc ) topic no . 350 , which requires goodwill to be assessed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable . in addition , an impairment evaluation of our amortizable intangible assets may also be performed if events or circumstances indicate potential impairment . among the factors that could trigger an impairment review are our current operating results relative to our annual plan or historical performance ; changes in our strategic plan or use of our assets ; restructuring charges or other changes in our business segments ; competitive pressures and changes in the general economy or in the markets in which we operate ; a significant decline in our stock price and our market capitalization relative to our net book value . asc topic no . 350 requires an annual assessment of the recoverability of recorded goodwill , which can be either quantitative or qualitative in nature , or a combination of the two . both methods require the use of estimates which in turn contain judgments and assumptions regarding future trends and events . as a result , both the precision and reliability of the resulting estimates are subject to uncertainty . if our annual goodwill impairment evaluation determines that the fair value of a reporting unit is less than its related carrying amount , we may recognize an impairment charge against earnings . among the factors we consider in a qualitative assessment are general economic conditions and the competitive environment ; actual and projected reporting unit financial performance ; forward-looking business measurements ; and external market assessments . a quantitative analysis requires 20 management to consider all of the factors relevant to a qualitative assessment , as well as the utilization of detailed financial projections , to include the rate of revenue growth , profitability , and cash flows , as well as assumptions regarding discount rates , the company 's weighted-average cost of capital , and other data , in order to determine a fair value for our reporting units . we conducted a quantitative assessment of the fair value of all of the company 's reporting units during the third quarter of 2015. the results of this test determined that the fair values of the company 's reporting units continue to exceed their respective carrying values . see note 1 — business and significant accounting policies in the notes to the consolidated financial statements for additional information regarding goodwill and amortizable intangible assets . accounting for income taxes — the company uses the asset and liability method of accounting for income taxes . we estimate our income taxes in each of the jurisdictions where we operate . this process involves estimating our current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes . these differences result in deferred tax assets and liabilities , which are included within our consolidated balance sheets . in assessing the realizability of deferred tax assets , management considers if it is more likely than not that some or all of the deferred tax assets will not be realized . we consider the availability of loss carryforwards , projected reversal of deferred tax liabilities , projected future taxable income , and ongoing prudent and feasible tax planning strategies in making this assessment .

segment results we evaluate reportable segment performance and allocate resources based on gross contribution margin . gross contribution is defined as operating income excluding certain cost of services and product development charges , sg & a , depreciation , acquisition and integration charges , and amortization of intangibles . gross contribution margin is defined as gross contribution as a percentage of revenues . the following sections present the results of our three business segments as of and for the three years-ended december 31 , 2015. research the following table presents the financial results and business measurements of our research segment for the twelve months ended december 31 : replace_table_token_10_th ( 1 ) dollars in thousands . 2015 versus 2014 research segment revenues increased 10 % in 2015 compared to 2014. excluding the unfavorable impact of foreign currency , research revenues increased 16 % in 2015. the segment gross contribution margin was 69 % in both annual periods . the contribution margin remained at 69 % in spite of a 12 % increase in segment headcount , mostly driven by new hires but also to a lesser extent the additional employees resulting from our acquisitions . the overall headcount increase reflects our continuing investment in this business . research contract value increased 10 % in 2015 to $ 1.761 billion , and increased 14 % year-over-year adjusted for the impact of foreign currency exchange . the growth in contract value was broad-based , with every region , client size , and industry sector growing at double-digit rates , with the exception of the energy and utilities sector , which still increased year-over-year but at a slower rate . the number of our research client enterprises increased by 8 % in 2015 , to 10,796. both client retention and wallet retention remained strong , at 84 % and 105 % respectively , as of december 31 , 2015 . 2014 versus 2013 research segment revenues in 2014 increased 14 % compared to 2013. the impact of foreign exchange translation was not significant .

these statements generally can be identified by the use of forward-looking words or phrases such as `` believe , '' `` expect , '' `` expectation , '' `` anticipate , '' `` may , '' `` could , '' `` intend , '' `` belief , '' `` estimate , '' `` plan , '' `` target , '' `` predict , '' `` likely , '' `` will , '' `` should , '' `` forecast , '' `` outlook , '' or other similar words or phrases . these statements are not guarantees of performance and are inherently subject to known and unknown risks , uncertainties and assumptions that are difficult to predict and could cause our actual results to differ materially from those indicated by those statements . we can not assure you that any of our expectations , estimates or projections will be achieved . the forward-looking statements included in this document are only made as of the date of this document and we disclaim any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances . numerous factors could cause our actual results and events to differ materially from those expressed or implied by forward-looking statements , including , without limitation : market and economic conditions ; market trends in the categories in which we compete ; the success of new products and the ability to continually develop and market new products ; our ability to attract , retain and improve distribution with key customers ; our ability to continue planned advertising and other promotional spending ; our ability to timely execute strategic initiatives , including restructurings , and international go-to-market changes in a manner that will positively impact our financial condition and results of operations and does not disrupt our business operations ; the impact of strategic initiatives , including restructurings , on our relationships with employees , customers and vendors ; our ability to maintain and improve market share in the categories in which we operate despite heightened competitive pressure ; our ability to improve operations and realize cost savings ; the impact of foreign currency exchange rates and currency controls , as well as offsetting hedges ; the impact of raw materials and other commodity costs ; costs and reputational damage associated with cyber-attacks or information security breaches ; our ability to acquire and integrate businesses , and to realize the projected results of acquisitions ; the impact of advertising and product liability claims and other litigation ; compliance with debt covenants and maintenance of credit ratings as well as the impact of interest and principal repayment of our existing and any future debt ; and the impact of legislative or regulatory determinations or changes by federal , state and local , and foreign authorities , including taxing authorities . in addition , other risks and uncertainties not presently known to us or that we consider immaterial could affect the accuracy of any such forward-looking statements . the list of factors above is illustrative , but by no means exhaustive . all 24 forward-looking statements should be evaluated with the understanding of their inherent uncertainty . additional risks and uncertainties include those described in the sections entitled “ risk factors ” and “ management 's discussion and analysis of financial condition and results of operations ” in this report , as updated from time to time in the company 's public filings . non-gaap financial measures while the company reports financial results in accordance with accounting principles generally accepted in the u.s. ( “ gaap ” ) , this discussion includes non-gaap measures . these non-gaap measures , such as adjusted net earnings , adjusted net earnings per diluted share , operating results , organic net sales , gross margin , sg & a as a percent of net sales ( exclusive of spin costs , restructuring related charges and integration expenses ) , advertising and promotional expense as a percent of net sales and other comparison changes , the costs associated with restructuring and other initiatives , costs associated with the spin-off transaction , cost of early debt retirement , certain charges related to the venezuela deconsolidation , changes to our international go to market strategy , costs associated with acquisition integration , adjustments to prior year tax accruals and certain other items as outlined in this announcement , are not in accordance with , nor are they a substitute for gaap measures . additionally , we are unable to provide a reconciliation of forward-looking non-gaap measures due to uncertainty regarding future restructuring related charges , spin-off related charges , the impact of fluctuations in foreign currency movements and the cost of raw materials . the company believes these non-gaap measures provide a meaningful comparison to the corresponding historical or future period and assist investors in performing analysis consistent with financial models developed by research analysts . investors should consider non-gaap measures in addition to , not as a substitute for , or superior to , the comparable gaap measures . the separation on july 1 , 2015 , edgewell personal care company completed the previously announced separation of its business ( the spin-off or spin ) into two separate independent public companies , energizer holdings , inc. ( energizer or the company ) and edgewell personal care company ( edgewell ) . to effect the separation , edgewell undertook a series of transactions to separate net assets and legal entities . as a result of these transactions , energizer now holds the household products ' product group and edgewell holds the personal care product group . as a result of the spin-off , energizer now operates as an independent , publicly traded company on the new york stock exchange trading under the symbol `` enr . '' in conjunction with the spin-off , on july 1 , 2015 , edgewell distributed 62,193,281 shares of energizer holdings , inc. common stock to edgewell shareholders . story_separator_special_tag the venezuela deconsolidation charge was reported on a separate line in the consolidated statements of earnings and comprehensive income . net sales and segment profit recognized prior to the deconsolidation , through the second quarter of fiscal 2015 , are $ 8.5 and $ 2.5 , respectively . included within energizer 's fiscal year 2014 results for venezuela are net sales of $ 25.8 and segment profit of $ 13.1. see “ financial results ” for further discussion . emea . the emea segment accounts for approximately 23 % of global sales and 15 % of segment profit in fiscal year 2015. premium and performance alkaline , as well as rechargeable battery penetration is high across many european markets , while carbon zinc represents the majority of the category volume in our middle east and africa markets . the energizer and eveready brands allow us to compete effectively across this diverse set of markets offering consumers and retailers a portfolio of products under a premium brand and a price brand . the demand for private label batteries remains high in certain european markets , primarily germany , france and spain . asia pacific . the asia pacific segment accounts for approximately 19 % of global sales and 20 % of segment profit in fiscal year 2015. the energizer and eveready dual brand strength provides critical mass and category leadership in certain asia pacific markets as we are able to offer retailers and consumers a full portfolio of products both under a premium brand and a price brand . we use the energizer name and logo as our trademark as well as those of our subsidiaries . product names appearing throughout are trademarks of energizer . this management 's discussion and analysis of financial condition and results of operations also may refer to brand names , trademarks , service marks and trade names of other companies and organizations , and these brand names , trademarks , service marks and trade names are the property of their respective owners . 27 financial results net loss for the fiscal year ended september 30 , 2015 was $ 4.0 , or a loss of $ 0.06 per diluted share , compared to net earnings of $ 157.3 , or $ 2.53 , per diluted share and net earnings of $ 114.9 , or $ 1.85 , per diluted share , for the fiscal year ended september 30 , 2014 and 2013 , respectively . ( loss ) /earnings before income taxes , net ( loss ) /earnings and diluted ( loss ) /earnings per share ( eps ) for the time periods presented were impacted by certain items related to the venezuela deconsolidation , spin-off transaction costs , restructuring and realignment activities , acquisition integration costs , spin-off transaction costs , adjustments to prior years ' tax accruals and certain other adjustments as described in the tables below . the impact of these items on reported ( loss ) /earnings before income taxes , reported net ( loss ) /earnings and reported net ( loss ) /earnings per diluted share are provided below as a reconciliation to arrive at respective non-gaap measures . replace_table_token_5_th ( 1 ) includes pre-tax costs of $ 97.6 and $ 21.3 recorded in sg & a for the years ended september 30 , 2015 and 2014 , respectively , and $ 0.5 recorded in cost of products sold for the year ended september 30 , 2015 on the consolidated statements of earnings and comprehensive income . ( 2 ) included in interest expense on the consolidated statements of earnings and comprehensive income . ( 3 ) includes pre-tax costs of $ 3.1 , $ 1.0 and $ 6.1 and $ 0.3 , $ 5.9 and $ 2.6 for the years ended september 30 , 2015 , 2014 and 2013 , respectively , recorded within cost of products sold and sg & a on the combined statements of earnings and comprehensive income , respectively . ( 4 ) includes pre-tax costs of $ 0.3 and $ 1.3 recorded in cost of products sold and sg & a , respectively , for the year ended september 30 , 2015 . ( 5 ) on july 1 , 2015 , edgewell distributed 62.2 million shares of energizer holdings , inc. common stock to edgewell shareholders in connection with its spin-off of energizer holdings , inc. basic and diluted earnings per common share and the average number of common shares outstanding were retrospectively restated for fiscal years 2014 and 2013 for the number of energizer holdings , inc. shares outstanding immediately following this transaction . for twelve months ended september 30 , 2015 , adjusted earnings per share is calculated utilizing the diluted weighted average shares as the company has adjusted - non gaap net earnings rather than a loss . 28 story_separator_special_tag was 455.1 % . this rate was largely impacted by the venezuela deconsolidation charge of $ 65.2 , which had no accompanying tax benefit . partially offsetting this expense were pre-tax losses in high tax rate jurisdictions driven by spin costs of $ 137.2 , interest payments as a result of the early debt retirement of $ 26.7 and restructuring charges of $ 13.0. excluding the tax impact of these specific or unusual items , the non-gaap effective tax rate for fiscal year 2015 was 27.0 % , consistent with fiscal year 2014. for fiscal 2014 , the effective tax rate was 26.9 % , which was favorably impacted by costs related to the separation and the 2013 restructuring project . both of these charges were primarily incurred in the u.s. , which resulted in a higher tax benefit as compared to our overall global effective tax rate . excluding the impact of these items , the non-gaap effective tax rate for fiscal year 2014 was 27.5 % . this rate was more favorable versus the prior year due to the mix of countries from which earnings were derived as foreign earnings increased in lower tax rate countries , most significantly singapore .

operating results net sales replace_table_token_6_th ( 1 ) to compete more effectively as an independent company , we intend to increase our use of exclusive and non-exclusive third-party distributors and wholesalers , and decrease or eliminate our business operations in certain countries , consistent with our international go-to-market strategy . in order to capture the impact of these international go-to-market changes and exits , we have separately identified the impact within the tables below , which represents the year over year change in those markets since the date of exit . we expect to realize the majority of this impact from these changes in the upcoming three quarters . the market exits should be fully realized in the earlier part of that time frame , while the distributor transition may be more protracted . ( 2 ) as previously announced , we deconsolidated our venezuelan subsidiaries on march 31 , 2015 and began accounting for our investment in our venezuelan operations using the cost method of accounting . subsequent to march 31 , 2015 , our financial results will not include the operating results of our venezuelan operations . as a result of the deconsolidation , we have taken the year over year change in venezuela results and separately identified that impact in the tables below . net sales for the year ended september 30 , 2015 decreased 11.3 % , inclusive of a $ 109.7 , or 5.9 % , due to the unfavorable impact of currency movements , $ 17.3 , or 0.9 % , due to change in venezuela results as a result of the deconsolidation and $ 16.4 , or 0.9 % , related to the initial impacts of the international go-to-market changes ( including exits and shift to distributors ) .

two milestone events were achieved associated with the july 2007 acquisition of surmodics pharmaceuticals and $ 5.7 million of additional purchase story_separator_special_tag the following discussion and analysis of our financial condition , results of operations and trends for the future should be read together with “selected financial data” and our audited consolidated financial statements and related notes appearing elsewhere in this report . any discussion and analysis regarding trends in our future financial condition and results of operations are forward-looking statements that involve risks , uncertainties and assumptions , as more fully identified in “forward-looking statements” and “risk factors.” our actual future financial condition and results of operations may differ materially from those anticipated in the forward-looking statements . overview surmodics is a leading provider of drug delivery and surface modification technologies to the healthcare industry . as further discussed in item 1 overview — recent sale of pharmaceuticals business , in december 2010 we announced that the board of directors of the company had authorized the company to explore strategic alternatives for our pharmaceuticals business , including a potential sale of that business . this decision by the board reflected our focus on returning the company to profitable growth , and our renewed commitment to pursuing growth opportunities and investments in our medical device and in vitro diagnostics businesses . on november 1 , 2011 , we entered into a purchase agreement to sell substantially all of the assets of surmodics pharmaceuticals to evonik . the pharma sale closed on november 17 , 2011. the total consideration received 31 from the sale was $ 30.0 million in cash . of the total consideration , $ 3.275 million was placed in escrow at closing for any inventory shortfall and the payment of certain contingent consideration obligations related to our acquisition of surmodics pharmaceuticals in july 2007. because the pharma sale closed subsequent to our fiscal year ended september 30 , 2011 , the discussion for all fiscal years includes our pharmaceuticals segment results as reported . we will report the pharmaceuticals segment as discontinued operations beginning in the first quarter of fiscal 2012 , as disclosed in note 1 to the consolidated financial statements . in october 2010 , we announced a change in our organizational structure moving from a functional structure into one consisting of three business units : medical device , pharmaceuticals , and in vitro diagnostics . we believe this structure improves the visibility , marketing and adoption of the company 's broad array of technologies within specific markets and helps our customers in the medical device , pharmaceutical and life science industries better solve unmet clinical needs . the october 2010 organizational change resulted in the company presenting revenue and operating results according to its three segments , as follows : ( 1 ) the medical device unit , which is comprised of surface modification coating technologies to improve access , deliverability , and predictable deployment of medical devices , as well as drug delivery coating technologies to provide site-specific drug delivery from the surface of a medical device . end markets include coronary , peripheral , and neuro-vascular , and urology , among others ; ( 2 ) the pharmaceuticals unit , which incorporates a broad range of drug delivery technologies for injectable therapeutics , including microparticles , nanoparticles , and implants addressing a range of clinical applications including ophthalmology , oncology , dermatology and neurology , among others . based in birmingham , alabama , the pharmaceuticals business includes our cgmp manufacturing facility ; and ( 3 ) the in vitro diagnostics unit , which consists of component products and technologies for diagnostic test kits and biomedical research applications . products include microarray slide technologies , protein stabilization reagents , substrates , and antigens . our revenue is derived from three primary sources : ( 1 ) royalties and license fees from licensing our proprietary drug delivery and surface modification technologies and in vitro diagnostic formats to customers ; the vast majority ( typically in excess of 90 % ) of revenue in the “royalties and license fees” category is in the form of royalties ; ( 2 ) the sale of polymers and reagent chemicals , stabilization products , antigens , substrates and microarray slides to the diagnostics and biomedical research industry ; and ( 3 ) research and development fees generated on customer projects . revenue fluctuates from quarter to quarter depending on , among other factors : our customers ' success in selling products incorporating our technologies ; the timing of introductions of licensed products by customers ; the timing of introductions of products that compete with our customers ' products ; the number and activity level associated with customer development projects ; the number and terms of new license agreements that are finalized ; the value of reagent chemicals and other products sold to customers ; and the timing of future acquisitions we complete , if any . for financial accounting and reporting purposes , we report our results for the three reportable segments noted above . we made this determination based on how we manage our operations and the information provided to our chief operating decision maker who is our chief executive officer . in june 2007 , we entered into a license and research collaboration agreement and separate supply agreement with merck related to our i-vation ™ ta intravitreal implant . under the terms of the merck agreements , we received an upfront license fee of $ 20.0 million and were eligible to receive up to an additional $ 288.0 million in fees and development milestones associated with the successful product development and attainment of appropriate u.s. and eu regulatory approvals , as well as payment for our research and development activities . story_separator_special_tag prior to october 1 , 2009 , arrangements such as license and development agreements were analyzed to determine whether the deliverables , which often include a license and performance obligations such as research and development , could be separated , or whether they must be accounted for as a single unit of accounting in accordance with accounting guidance . the company had one significant multiple element arrangement prior to october 1 , 2009 that was accounted for as a single unit of accounting resulting in deferral and recognition of all related payments received for license and research and development activities using a time-based model . this arrangement was terminated during the first quarter of fiscal 2009. in october 2009 , the fasb amended the accounting standards for multiple deliverable revenue arrangements to : ( i ) provide updated guidance on whether multiple deliverables exist , how the deliverables in an arrangement should be separated , and how the consideration should be allocated ; ( ii ) require an entity to allocate revenue in an arrangement using estimated selling prices ( “esp” ) of deliverables if a vendor does not have vendor-specific objective evidence of selling price ( “vsoe” ) or third-party evidence of selling price ( “tpe” ) ; and ( iii ) eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method . we elected to early adopt this accounting guidance at the beginning of our first quarter of fiscal 2010 , on a prospective basis , for applicable transactions originating or materially modified on or after october 1 , 2009. in connection with the adoption of the amended accounting standard we also changed our policy prospectively for multiple element arrangements , whereby we account for revenue using a multiple attribution model in which consideration allocated to research and development activities is recognized as performed , and milestone payments are recognized when the milestone events are achieved , when such activities and milestones are deemed substantive . accordingly , in situations where a unit of accounting includes both a license and research and development activities , and when a license does not have stand-alone value , the company applies a multiple attribution model in which consideration allocated to the license is recognized ratably , consideration allocated to research and development activities is recognized as performed and milestone payments are recognized when the milestone events are achieved , when such activities and milestones are deemed substantive . the company enters into license and development arrangements that may consist of multiple deliverables which could include a license ( s ) to surmodics ' technology , research and development activities , manufacturing services , and product sales based on the needs of its customers . for example , a customer may enter into an arrangement to obtain a license to surmodics ' intellectual property which may also include research and development activities , and supply of products manufactured by surmodics . for these services provided , surmodics could receive upfront license fees upon signing of an agreement and granting the license , fees for research and development activities as such activities are performed , milestone payments contingent upon advancement of the product through development and clinical stages to successful commercialization , fees for manufacturing services and supply of product , and royalty payments based on customer sales of product incorporating surmodics ' technology . our license and development arrangements generally do not have refund provisions if the customer cancels or terminates the agreement . typically all payments made are non-refundable . 34 under the accounting guidance , we are still required to evaluate each deliverable in a multiple element arrangement for separability . we are then required to allocate revenue to each separate deliverable using a hierarchy of vsoe , tpe , or esp . in many instances , we are not able to establish vsoe for all deliverables in an arrangement with multiple elements which may be a result of surmodics infrequently selling each element separately or having a limited history with multiple element arrangements . when vsoe can not be established , surmodics attempts to establish a selling price of each element based on tpe . tpe is determined based on competitor prices for similar deliverables when sold separately . when we are unable to establish a selling price using vsoe or tpe , we use esp in our allocation of arrangement consideration . the objective of esp is to determine the price at which surmodics would transact a sale if the product or service were sold on a stand-alone basis . esp is generally used for highly customized offerings . surmodics determines esp for undelivered elements by considering multiple factors including , but not limited to , market conditions , competitive landscape and past pricing arrangements with similar features . the determination of esp is made through consultation with the company 's management , taking into consideration the marketing strategies for each business unit . costs related to products and services delivered are recognized in the period revenue is recognized except for services related to the merck agreement , which were recognized as incurred . customer advances are accounted for as a liability until all criteria for revenue recognition have been met . valuation of long-lived assets . accounting guidance requires us to periodically evaluate whether events and circumstances have occurred that may affect the estimated useful life or the recoverability of the remaining balance of long-lived assets , such as property and equipment and intangibles . if such events or circumstances were to indicate that the carrying amount of these assets may not be recoverable , we would estimate the future cash flows expected to result from the use of the assets and their eventual disposition . if the sum of the expected future cash flows ( undiscounted and without interest charges ) were less than the carrying amount of the assets , we would recognize an impairment charge to reduce such assets to their fair value .

segment operating results operating ( loss ) income for each of our reportable segments was as follows ( in thousands ) : replace_table_token_5_th medical device . operating income was $ 19.8 million in fiscal 2011 , compared with $ 19.5 million in fiscal 2010. the increased operating income was driven by $ 1.5 million in lower development costs ( reflecting the $ 0.8 million federal qualified therapeutic discovery project program and lower customer and internal project material expense ) , $ 1.3 million in lower compensation costs resulting from our august 2011 and october 2010 reorganizations and $ 0.6 million in lower product costs . the savings from these reduced operating costs were substantially offset by lower revenue . pharmaceuticals . operating loss was $ 32.5 million in fiscal 2011 , compared with a loss of $ 26.5 million in fiscal 2010. fiscal 2011 loss included a goodwill impairment charge of $ 5.7 million and asset impairment charges of $ 17.9 million . adjusting for the event-specific items , the operating loss was $ 8.9 million . the fiscal 2010 loss included a goodwill impairment charge of $ 13.8 million and asset impairment charges of $ 1.9 million . adjusting for these one-time items , operating loss was $ 10.8 million . the decrease in the fiscal 2011 operating loss ( as adjusted ) was driven primarily by a $ 1.1 million reduction in product costs , $ 0.9 million reduction in research and development operating expenses , mostly related to lower external costs associated with the cgmp facility , and $ 0.7 million reduction in sg & a expenses , offset partially by $ 0.6 million in lower revenue . in vitro diagnostics .

under the agreement the company is responsible to pay duke for their work managing certain aspects of the clinical study , including clinical site recruitment and clinical site management . upon completion of the clinical study , the agreement will terminate . the agreement can be terminated earlier by the company for any reason with 90 days written notice to duke . in the event of an early termination , the company and duke would coordinate efforts for an orderly wind-down of the study , and the company would be responsible to pay duke for time and effort incurred through the date of termination and through the wind-down period . university of cincinnati in april 2011 , the company entered into a license agreement with the university of cincinnati to license exclusive worldwide rights to a portfolio of u.s. and international patents , which includes certain u.s. and international diagnostic patents covering genetic markers for arca 's lead drug candidate , gencaro . these patents provide the basis for exclusive worldwide development , use and commercialization of the genetic test which may indicate a patient 's likely response to gencaro as a treatment for chronic hf , af , and other indications . under the terms of the agreement , arca agreed to pay the university of cincinnati annual license fees and is obligated to future milestone payments for each united states patent issued subsequent to the date of the agreement . the agreement also requires royalty payments on net sales from genetic testing performed expressly for the purpose of prescribing bucindolol . cardiovascular pharmacology and engineering consultants , llc , or cpec arca has licensed worldwide rights to gencaro , including all preclinical and clinical data from cardiovascular pharmacology and engineering consultants , llc , or cpec , who has licensed rights in gencaro from bms . cpec is a licensing subsidiary of indevus pharmaceuticals inc. ( a wholly owned subsidiary of endo pharmaceuticals ) , holding ownership rights to certain clinical trial data of gencaro . under the terms of its license agreement with cpec , the company will incur milestone and royalty obligations upon the occurrence of certain events . in august 2008 , the company paid cpec a milestone payment of $ 500,000 based on the july 31 , 2008 submission of its nda with the fda . if the fda grants marketing approval for gencaro , the company will owe cpec another milestone payment of $ 8.0 million , which is due within six months after fda approval . the company also has the obligation to make milestone payments of up to $ 5.0 million in the aggregate upon regulatory marketing approval in europe and japan . the company 's royalty obligation ranges from 12.5 % to 25 % of revenue from the related product based on achievement of specified product sales levels , including a 5 % royalty that cpec is obligated to pay under its original license agreement for gencaro . the company has the right to buy down the royalties to a range of 12.5 % to 17 % by making a payment to cpec within six months of regulatory approval . ( 8 ) equity financings and warrants 2012 equity financings registered direct offering on august 2 , 2012 , the company entered into subscription agreements with certain institutional investors ( the “ investors ” ) in connection with its registered direct public offering ( the “ 2012 offering ” ) , pursuant to which the company sold an aggregate of 406,099 shares of its common stock and warrants to purchase up to 304,575 additional shares of its common stock to the investors for aggregate gross proceeds of approximately $ 953,000 , before deducting placement agent fees and other estimated offering expenses payable by the company . the net proceeds to the company were approximately $ 741,000 , and the 2012 offering closed on august 8 , 2012 . 55 the common stock and warrants were sold in units consisting of one share of common stock and a warrant to purchase 0.75 shares of common stock . the purchase price for each unit was $ 2.35 . subject to certain ownership limitations , the warrants became exercisable six months after the issuance date , expire six years from their initial exercise date , and have an exercise price of $ 2.76 per share , equal to the closing bid price of arca 's common stock on the nasdaq capital market on august 2 , 2012. the 2012 offering was effected as a takedown off the company 's s-3 registration statement , which became effective on april 4 , 2011 , pursuant to a prospectus supplement filed with the securities and exchange commission on august 3 , 2012. the warrant agreements story_separator_special_tag we have included or incorporated by reference into this management 's discussion and analysis of financial condition and results of operations and elsewhere in this annual report on form 10-k , and from time to time our management may make , statements that constitute “ forward-looking statements ” within the meaning of section 27a of the securities act and section 21e of the exchange act . forward-looking statements may be identified by words including “ anticipate , ” “ plan , ” “ believe , ” “ intend , ” “ estimate , ” “ expect , ” “ should , ” “ may , ” “ potential ” and similar expressions . these statements involve known and unknown risks , uncertainties and other factors that may cause our actual results , levels of activity , performance or achievements to be materially different from the 35 information expressed or implied by these forward-looking statements . story_separator_special_tag the securities were sold pursuant to a placement agreement and have been registered under the securities act of 1933 pursuant to the our registration statement on form s-1 , as amended ( no.333-187508 ) , which was declared effective by the securities and exchange commission on may 29 , 2013 , and the preferred stock and warrants were offered and sold pursuant to a prospectus dated may 30 , 2013. in connection with the preferred stock financing , the company recorded a non-cash dividend of approximately $ 2.0 million to recognize the intrinsic value of the embedded beneficial conversion feature . typically , such a deemed dividend would be represented as a reduction in a company 's retained earnings and an increase in additional paid in capital in recognition of the reapportionment of common shareholder value to the preferred stock purchasers . however , since we have an accumulated deficit , the deemed dividend is recognized by a reapportionment of additional paid in capital from common shareholders to additional paid in capital of preferred stock purchasers , which are combined in the company 's statement of stockholders ' equity . registered direct equity offering completed subsequent to december 31 , 2013 on february 3 , 2014 , we agreed to sell to certain investors an aggregate of 5,116,228 shares of our common stock and warrants to purchase an aggregate of 1,279,057 shares of our common stock at a purchase price of $ 1.70 per share of common stock , for aggregate gross proceeds of approximately $ 8.7 million , before deducting placement agent fees and other offering related expenses . the offering closed on february 7 , 2014 , and the net proceeds to us were approximately $ 7.9 million . the common stock and warrants were sold in combination consisting of one share of common stock and a warrant to purchase 0.25 shares of common stock . the warrants were exercisable upon issuance , expire five years from the date of issuance , and have an exercise price of $ 2.125 per share , equal to 125 % of the closing bid price of our common stock on the nasdaq capital market on february 3 , 2014. the offering was effected as a takedown off our registration statement on form s-3 , as amended , which became effective on april 4 , 2011 , pursuant to a prospectus supplement filed with the securities and exchange commission on february 4 , 2014. the warrants provide for cashless exercise and settlement in unregistered shares if there is no effective registration statement registering , or the prospectus contained therein is not available for , the issuance of the shares of common stock underlying the warrants at the time of exercise . the common stock and warrants were sold pursuant to a placement agency agreement dated january 21 , 2014 , as amended . 38 in addition to the cash compensation paid to the placement agent in conjunction with the transaction , and pursuant to the placement agency agreement , we issued warrants to the placement agent to purchase 153,486 shares of our common stock , which have not been registered under the securities act of 1933 , as amended . the warrants issued to the placement agent warrants have substantially the same terms as the warrants issued to the purchasers in the offering , except that such warrants expire on april 4 , 2016 , or the five year anniversary of the effective date of the registration statement , and are restricted from transfer for a period of 180 days from the date of commencement of sales in connection with the offering . we believe these financings have positioned us to initiate our planned genetic-af phase 2b/3 clinical trial for which we currently anticipate initiating patient enrollment in the first quarter of 2014. our ability to initiate and execute our genetic-af phase 2b trial in accordance with our projected time line depends on a number of factors , including , but not limited to , the following : recruitment of sufficient clinical trial sites , enrollment of patients and enrollment at a rate consistent with our projected timeline ; our ability to control costs associated with the clinical trial and our operations ; our ability to retain the listing of our common stock on the nasdaq capital market ; the market price of our stock and the availability and cost of additional equity capital from existing and potential new investors ; general economic and industry conditions affecting the availability and cost of capital ; the costs of filing , prosecuting , defending and enforcing any patent claims and other intellectual property rights ; and the terms and conditions of our existing collaborative and licensing agreements . the sale of additional equity or convertible debt securities will be necessary for us to complete both phase 2b and phase 3 of the genetic-af clinical trial and submit for fda approval of gencaro . such financing would likely result in additional dilution to our existing stockholders . if we raise additional funds through the incurrence of indebtedness , the obligations related to such indebtedness would be senior to rights of holders of our capital stock and could contain covenants that would restrict our operations . we anticipate that our current cash and cash equivalents , including the approximately $ 7.9 million of net proceeds from our february 2014 equity offering , will be sufficient to fund our operations , at our projected cost structure , through at least the end of 2015 . however , our forecast of the period of time through which our financial resources will be adequate to support our current and forecasted operations could vary materially . critical accounting policies and estimates a critical accounting policy is one that is both important to the portrayal of our financial condition and results of operation and requires management 's most difficult , subjective or complex judgments , often as a result of the

results of operations research and development expenses research and development , or r & d , expense is comprised of clinical , regulatory , and manufacturing process development activities and costs . our research and development expenses totaled $ 2.9 million for the year ended december 31 , 2013 as compared to $ 1.1 million for 2012 , an increase of approximately $ 1.8 million . during 2013 , our r & d efforts and costs were almost entirely related to the development of gencaro . clinical expense increased approximately $ 590,000 for the year ended december 31 , 2013. the increase is primarily due to project initiation costs for cro and similar service providers that we have engaged for our planned genetic-af clinical trial . we have also added staff during the year to initiate and oversee our planned genetic-af clinical trial project . regulatory and manufacturing process costs increased approximately $ 1.2 million for the year ended december 31 , 2013 compared to the year-ended december 31 , 2012. approximately $ 738,000 of the increase is due to costs incurred for development and production of clinical trial materials , and costs for acquiring the active comparator drug product . our regulatory costs increased approximately $ 351,000 in this same period , which includes costs paid by us to labcorp for development of the diagnostic test for use in our planned genetic-af clinical trial and includes costs of regulatory audits of suppliers to be used in such clinical trial . a portion of the additional costs is attributable to personnel costs as we have increased staff during the year to prepare the clinical trial . r & d expense in 2014 will be substantially higher than 2013 if we initiate our genetic-af clinical trial and begin enrolling patients .

financial result highlights of 2013 net income available to common stockholders for the company of $ 7.9 million , or $ 0.98 per diluted share for 2013 , compared to $ 2.1 million , or $ 0.31 per diluted share for 2012 and net loss available to common stockholders of $ 11.5 million or $ ( 1.93 ) per diluted share for 2011. the significant factors impacting earnings of the company during 2013 were : · net income of $ 9.0 million for 2013 compared to a net income of $ 3.2 million for 2012 and net loss of $ 10.5 million for 2011 . · net interest margin for the twelve months ended december 31 , 2013 improved to 4.51 % compared to 4.49 % for the year ended 2012 . · provision for loan losses was ( $ 1.9 million ) for 2013 compared to $ 4.3 million in 2012 and $ 14.6 million in 2011 , resulting from decreased net charge offs which were $ 0.3 million for 2013 compared to $ 5.1 million in 2012 and $ 12.6 million in 2011 along with continued improvement in credit quality . · reversal of $ 2.8 million in deferred tax assets valuation allowance at december 31 , 2013 . · net nonaccrual loans decreased to $ 16.8 million at december 31 , 2013 , compared to $ 22.4 million at december 31 , 2012 . · allowance for loan losses was $ 12.2 million at december 31 , 2013 , or 2.98 % of total loans held for investment compared to 3.66 % at december 31 , 2012 . · other assets acquired through foreclosure increased to $ 3.8 million at december 31 , 2013 from $ 1.9 million at december 31 , 2012 primarily due to one property located in oregon . · during 2013 , $ 6.4 million debentures converted to common stock . outstanding debentures at december 31 , 2013 were $ 1.4 million . common shares outstanding at december 31 , 2013 were 7.9 million . · total loans increased 2.9 % to $ 462.0 million at december 31 , 2013 compared to $ 449.2 million at december 31 , 2012. the impact to the company from these items , and others of both a positive and negative nature , will be discussed in more detail as they pertain to the company 's overall comparative performance for the year ended december 31 , 2013 throughout the analysis sections of this report . subsequent event effective as of january 27 , 2014 , the regulatory agreement between community west bank and the office of the comptroller of the currency ( “ occ ” ) , the bank 's primary banking regulator , was terminated and , therefore , the bank is no longer subject to the requirements of that regulatory agreement . similarly , effective march 11 , 2014 , the federal reserve board , ( “ frb ” ) terminated its regulatory agreement ( the “ frb agreement ” ) with the company and therefore , the company is no longer subject to the requirements of that regulatory agreement . in accordance with the terms of the frb agreement , the company applied for approval to pay the dividends on the company 's outstanding series a preferred stock due on may 15 , 2012 , august 15 , 2012 , november 15 , 2012 , february 15 , 2013 , may 15 , 2013 and august 15 , 2013 which application was denied . on december 26 , 2013 , the frb approved the company 's request to pay outstanding cumulative dividends on its series a preferred stock . these deferred dividends were paid by the company on february 18 , 2014 . 15 index a summary of our results of operations and financial condition and select metrics is included in the following table : replace_table_token_3_th as a bank holding company , management focuses on key ratios in evaluating the company 's financial condition and results of operations . in the current economic environment , key ratios regarding asset credit quality and efficiency are more informative as to the financial condition of the company than those utilized in a more normal economic period such as return on equity and return on assets . asset quality for all banks and bank holding companies , asset quality plays a significant role in the overall financial condition of the institution and results of operations . the company measures asset quality in terms of nonaccrual loans as a percentage of gross loans , and net charge-offs as a percentage of average loans . net charge-offs are calculated as the difference between charged-off loans and recovery payments received on previously charged-off loans . the following table summarizes asset quality metrics : replace_table_token_4_th asset and deposit growth the ability to originate new loans and attract new deposits is fundamental to the company 's asset growth . the company 's assets and liabilities are comprised primarily of loans and deposits . total assets increased to $ 539.0 million at december 31 , 2013 from $ 532.1 million at december 31 , 2012. total loans including net deferred fees and unearned income increased by $ 12.8 million , or 2.9 % , to $ 462.0 million as of december 31 , 2013 compared to december 31 , 2012. total deposits increased slightly to $ 436.1 million as of december 31 , 2013 from $ 434.2 million as of december 31 , 2012 . story_separator_special_tag additional information regarding income taxes , including a reconciliation of the differences between the recorded income tax provision and the amount of tax computed by applying statutory federal and state income tax rates before income taxes , can be found in note 7 “ income taxes ” to the consolidated financial statements of this annual report on form 10-k beginning on page 78. balance sheet analysis total assets increased $ 6.9 million to $ 539.0 million at december 31 , 2013 compared to $ 532.1 million at december 31 , 2012. the majority of the increase was in total loans of $ 10.5 million , or 2.3 % , to $ 474.2 million . investment securities increased by $ 4.1 million as the company invested excess liquidity . total liabilities decreased $ 7.6 million , or 1.6 % to $ 471.4 million at december 31 , 2013 from $ 479.1 million at december 31 , 2012. total deposits increased slightly by $ 1.9 million to $ 436.1 million at december 31 , 2013 from $ 434.2 million at december 31 , 2012. non-interest bearing demand deposits decreased slightly to $ 52.5 million at december 31 , 2013 from $ 53.6 million at december 31 , 2012. total stockholders ' equity increased by $ 14.6 million to $ 67.6 million at december 31 , 2013 from $ 53.0 million at december 31 , 2012 . 23 index the following tables present the company 's average balances as of the dates indicated : replace_table_token_12_th 24 index loan portfolio the table below summarizes the distribution of the company 's loans at the year-end : replace_table_token_13_th commercial loans commercial loans consist of term loans and revolving business lines of credit . under the terms of the revolving lines of credit , the company grants a maximum loan amount , which remains available to the business during the loan term . the collateral for these loans typically are secured by uniform commercial code ( “ ucc-1 ” ) lien filings , real estate and personal guarantees . the company does not extend material loans of this type in excess of two years . commercial real estate commercial real estate and construction loans are primarily made for the purpose of purchasing , improving or constructing , commercial and industrial properties or single-family residences . this loan category also includes sba 504 loans and land loans . commercial and industrial real estate loans are secured by nonresidential property . office buildings or other commercial property primarily secure these types of loans . loan to appraised value ratios on nonresidential real estate loans are generally restricted to 75 % of appraised value of the underlying real property if occupied by the owner or owner 's business ; otherwise , these loans are generally restricted to 70 % of appraised value of the underlying real property . the company makes real estate construction loans on commercial properties and single family dwellings . these loans are collateralized by first and second trust deeds on real property . construction loans are generally written with terms of six to eighteen months and usually do not exceed a loan to appraised value of 80 % . sba 504 loans are made in conjunction with certified development companies . these loans are granted to purchase or construct real estate or acquire machinery and equipment . the loan is structured with a conventional first trust deed provided by a private lender and a second trust deed which is funded through the sale of debentures . the predominant structure is terms of 10 % down payment , 50 % conventional first loan and 40 % debenture . construction loans of this type must provide additional collateral to reduce the loan-to-value to approximately 75 % . conventional and investor loans are sometimes funded by our secondary-market partners and the bank receives a premium for these transactions . 25 index sba loans sba loans consist of sba 7 ( a ) and business and industry loans ( “ b & i ” ) . the sba 7 ( a ) loan proceeds are used for working capital , machinery and equipment purchases , land and building purposes , leasehold improvements and debt refinancing . at present , the sba guarantees as much as 85 % on loans up to $ 150,000 and 75 % on loans more than $ 150,000. in certain instances , the company sells a portion of the loans , however , under the sba 7 ( a ) loan program ; the company is required to retain a minimum of 5 % of the principal balance of each loan it sells into the secondary market . b & i loans are guaranteed by the u.s. department of agriculture . the maximum guaranteed amount is 80 % . b & i loans are similar to the sba 7 ( a ) loans but are made to businesses in designated rural areas . these loans can also be sold into the secondary market . agricultural loans for real estate and operating lines the company has an agricultural lending program for agricultural land , agricultural operational lines , and agricultural term loans for crops , equipment and livestock . the primary product is supported by guarantees issued from the u.s. department of agriculture ( “ usda ” ) , farm service agency ( “ fsa ” ) , and the usda business and industry loan program . the fsa loans typically issue a 90 % guarantee up to $ 1,355,000 ( amount adjusted annually based on inflation ) for up to 40 years . cwb is an approved federal agricultural mortgage corporation ( “ farmer mac ” ) lender under the farmer mac i and farmer mac ii programs . under the farmer mac i program , loans are sourced by cwb , underwritten , funded and serviced by farmer mac . cwb receives an origination fee and an ongoing field servicing fee for maintaining the relationship with the borrower and performing certain loan compliance monitoring , and other duties as directed by the central servicer .

results of operatons the following table sets forth a summary financial overview for the comparable years : replace_table_token_5_th 17 index interest rates and differentials the following table illustrates average yields on interest-earning assets and average rates on interest-bearing liabilities for the periods indicated : replace_table_token_6_th ( 1 ) includes nonaccrual loans . ( 2 ) net interest income is the difference between the interest and fees earned on loans and investments and the interest expense paid on deposits and liabilities . the amount by which interest income will exceed interest expense depends on the volume or balance of earning assets compared to the volume or balance of interest-bearing deposits and liabilities and the interest rate earned on those interest-earning assets compared to the interest rate paid on those interest-bearing liabilities . net interest margin is computed by dividing net interest income by total average earning assets . it is used to measure the difference between the average rate of interest earned on assets and the average rate of interest that must be paid on liabilities used to fund those assets . to maintain its net interest margin , the company must manage the relationship between interest earned and paid . ( 3 ) net interest spread represents average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities . ( 4 ) certain amounts have been reclassified to conform to the current year presentation . 18 index replace_table_token_7_th ( 1 ) includes nonaccrual loans . ( 2 ) net interest income is the difference between the interest and fees earned on loans and investments and the interest expense paid on deposits and liabilities .

our mission is to provide our customers with superior manufacturing and engineering services at the lowest total cost for the highest quality products , and create long-term mutually beneficial business relationships by employing our “ trust , commitment , results ” philosophy . executive summary during fiscal year 2015 , despite slowdowns by some longstanding customers , we made significant progress ramping up new programs , expanding our customer base and extending our worldwide capabilities . the major event of the year was our acquisition and successful integration of ayrshire electronics , which significantly increased our combined annual revenue and more than doubled our number of customers , giving us a much stronger and more diverse foundation for growth . net sales of $ 434.0 million for fiscal year 2015 increased by 42.1 percent as compared to net sales of $ 305.4 million in fiscal year 2014 . the increase in net sales was primarily driven by the addition of ayrshire . moving into the first quarter of fiscal year 2016 , our new customer programs continue to steadily ramp up and we expect to see renewed sequential growth . for the first quarter of fiscal year 2016 , the company expects to report revenue in the range of $ 122 million to $ 130 million . future results will depend on actual levels of customers ' orders , the timing of the start-up of production of new product programs and the potential impact of the macroeconomic uncertainty . we believe that we are well positioned in the ems industry to continue expansion of our customer base and continue long-term growth . the concentration of our largest customers decreased during fiscal year 2015 with the top five customers ' sales decreasing to 42 percent of total sales in 2015 from 62 percent in 2014 , and 71 percent in 2013 . this decrease was primarily the result of the acquisition of ayrshire as well as the impact of the reduction in production levels for certain longstanding customers . we continue to diversify our customer base by adding additional programs and customers . our current customer relationships involve a variety of products , including consumer electronics , electronic storage devices , plastics , household products , gaming devices , specialty printers , telecommunications , industrial equipment , military supplies , computer accessories , electronic whiteboards , medical , educational , irrigation , automotive , transportation management , robotics , rfid , power supply , off-road vehicle equipment , fitness equipment , hvac controls , consumer products , home building products , material handling systems and lighting equipment . gross profit as a percent of sales was 7.7 percent in fiscal year 2015 compared to 8.8 percent for the prior fiscal year . the decrease in gross profit as a percentage of net sales was primarily due to an unfavorable product mix and an increase in certain overhead costs partially offset by the positive impact of the ayrshire acquisition . the level of gross margin is impacted by product mix , timing of the startup of new programs , facility utilization , pricing within the electronics industry and material costs , which can fluctuate significantly from quarter to quarter and year to year . operating income as a percentage of sales for fiscal year 2015 was 1.5 percent compared to 3.0 percent for fiscal year 2014 . the decrease in operating income as a percentage of net sales was primarily due to a decrease in gross profit as discussed above . net income for fiscal year 2015 was $ 4.3 million or $ 0.38 per diluted share , as compared to net income of $ 7.6 million or $ 0.67 per diluted share for fiscal year 2014 . the decrease in net income for fiscal year 2015 as compared to fiscal year 2014 was primarily due to a decrease in sales from longstanding customers and an increase in interest expense , partially offset by the positive impact of the ayrshire acquisition . 19 we maintain a strong balance sheet with a current ratio of 2.1 and a debt to equity ratio of 0.43 . total cash provided by operating activities as defined on our cash flow statement was $ 7.7 million during fiscal year 2015 . we maintain sufficient liquidity for our expected future operations . as of june 27 , 2015 , we had $ 11.6 million outstanding on our revolving line of credit with wells fargo bank , n.a . as a result , $ 18.0 million remained available to borrow as of june 27 , 2015 . we believe cash flow from operations , our borrowing capacity , our accounts receivable sale program , and equipment lease financing should provide adequate capital for planned growth over the long term . story_separator_special_tag style= '' line-height:120 % ; padding-top:8px ; font-size:10pt ; '' > international subsidiaries we offer customers a complete global manufacturing solution . our facilities provide our customers the opportunity to have their products manufactured in the facility that best serves specific cost , product manufacturing and distribution needs . the locations of active foreign subsidiaries are as follows : key tronic juarez , sa de cv owns five facilities and leases three facilities in juarez , mexico . these facilities include an smt facility , an assembly and molding facility , a sheet metal fabrication facility , and assembly and storage facilities . this subsidiary is primarily used to support our u.s. operations . key tronic computer peripherals ( shanghai ) co. , ltd. leases two facilities with smt , assembly , global purchasing and warehouse capabilities in shanghai , china , which began operations in 1999. its primary function is to provide ems services for export ; however , it is also currently manufacturing certain electronic keyboards . foreign sales ( based on shipping instructions ) from our worldwide operations , including domestic exports , were $ 132.1 million , $ 107.7 million and $ 115.0 million in fiscal years 2015 , 2014 and 2013 , respectively . story_separator_special_tag in addition , sg & a expenses for fiscal year 2013 , included a positive impact of a non-recurring adjustment of approximately $ 0.5 million related to the reversal of a deferred compensation liability . total sg & a expenses as a percent of net sales were 3.9 percent and 3.1 percent in fiscal years 2014 and 2013 , respectively . this 0.8 percent percentage point increase in sg & a is primarily related to an increase in labor related expenses and the decrease in net sales . 24 interest expense we had net interest expense of $ 0.1 million and $ 0.3 million in fiscal years 2014 and 2013 , respectively . this decrease in interest expense is primarily related to a decrease in the average balance outstanding on our line of credit and to a lesser extent paying down existing capital leases . income tax provision we had an income tax expense of $ 1.6 million during fiscal year 2014 as compared to an income tax expense of $ 5.3 million in fiscal year 2013. the income tax expense recognized during both fiscal years 2014 and 2013 was primarily a function of u.s. and foreign taxes recognized at the statutory rates offset by the net benefit associated with federal research and development tax credits , changes in potential foreign tax credits and changes in foreign tax regimes . the impact of this offset was greater in 2014 because the company recognized a one-time benefit related to the repeal of the ietu tax regime in mexico during fiscal year 2014. we continually review our requirements for liquidity domestically to fund current operations , revenue growth and to look for potential future acquisitions . we continue to anticipate repatriating a portion of our unremitted foreign earnings . the associated taxes and potential foreign tax credits are included in the income tax calculation . for further information on taxes please review footnote 6 of the “ notes to consolidated financial statements. ” capital resources and liquidity operating cash flow net cash provided by operating activities for fiscal year 2015 was $ 7.7 million compared to net cash provided by operating activities of $ 1.5 million and $ 29.3 million in fiscal years 2014 and 2013 , respectively . the working capital year-over-year change is primarily related to an $ 18.0 million increase in accounts payable , offset by a $ 14.7 million increase in inventory and a $ 2.1 million increase in accounts receivable after the $ 7.3 million impact of factoring . the working capital changes during fiscal year 2014 were primarily due to a $ 10.5 million increase in inventory , a $ 2.7 million increase in accounts receivable , partially offset by a $ 6.1 million increase in accounts payable . the working capital changes during fiscal year 2013 are primarily due to a $ 13.3 million decrease in inventory and a $ 13.6 million decrease in accounts receivable , which were partially offset by a $ 16.6 million decrease in accounts payable . accounts receivable fluctuates based on the timing of shipments , terms offered and collections . in addition , accounts receivable will fluctuate based upon the amount of accounts receivable sold under our trade accounts receivable purchase program . during fiscal year 2015 , we received cash proceeds of $ 7.3 million from accounts receivable sold to wfb , which are not included on our consolidated balance sheet . the company did not have the trade accounts receivable purchase program during fiscal year 2014 . we purchase inventory based on customer forecasts and orders , and when those forecasts and orders change , the amount of inventory may also fluctuate . accounts payable fluctuates with changes in inventory levels , volume of inventory purchases , negotiated supplier terms , and taking advantage of early pay discounts . investing cash flow cash flows used in investing activities were $ 48.1 million , $ 13.8 million , and $ 3.3 million in fiscal years 2015 , 2014 and 2013 , respectively . our primary investing activity during fiscal year 2015 , was the acquisition of ayrshire as discussed in further detail in footnote 14 of the “ notes to consolidated financial statements. ” our primary investing activity during fiscal year 2014 , was the acquisition of sabre as discussed in further detail in footnote 14 of the “ notes to consolidated financial statements. ” our primary investing activity during fiscal year 2013 related to the purchase of property and equipment . operating and capital leases are often utilized when potential technical obsolescence and funding requirement advantages outweigh the benefits of equipment ownership . capital expenditures and periodic lease payments are expected to be financed with internally generated funds and available borrowing capacities . during fiscal year 2015 , we received $ 8.6 million of cash resulting from the sale and leaseback of equipment under operating leases . we did not enter into sale and leaseback transactions during fiscal year 2014 or fiscal year 2013. financing cash flow on september 3 , 2014 , we entered into an amended credit agreement which provided the company with a term loan in the amount of $ 35.0 million . as of june 27 , 2015 , our credit agreement with wells fargo bank n.a . provided a revolving line of credit facility of up to $ 30 million , subject to availability . 25 cash flows provided by financing activities was $ 35.0 million in fiscal year 2015 as compared to cash flows provided by financing activities of $ 7.3 million and cash flows used in financing activities of $ 15.7 million in fiscal years 2014 and 2013 , respectively . our primary financing activities during fiscal year 2015 , was borrowings on our term loan of $ 31.3 million , net of repayments , related to the ayrshire acquisition as well as borrowings and repayments under our revolving line of credit facility .

results of operations comparison of the fiscal year ended june 27 , 2015 with the fiscal year ended june 28 , 2014 the following table sets forth for the periods indicated certain items of the consolidated statements of income expressed as a percentage of net sales . the financial information and discussion below should be read in conjunction with the consolidated financial statements and notes contained in this annual report . replace_table_token_6_th net sales the increase in net sales from prior year was primarily driven by an approximate $ 124.6 million increase in revenue related to ayrshire and by an approximate $ 17.3 million increase in revenues related to new program wins , partially offset by an approximate $ 7.0 million decrease in revenue related to decreased demand from current customer programs and an approximate $ 6.3 million decrease in revenue related to program losses . the following table shows the revenue by industry sectors as a percentage of revenue for fiscal years 2015 and 2014 : replace_table_token_7_th we provide services to customers in a number of industries and produce a variety of products for our customers in each industry . as we continue to diversify our customer base and win new customers , we will continue to see a change in the industry concentrations of our revenue . sales to foreign locations outside the united states represented 30.4 percent and 35.3 percent of our total net sales in fiscal years 2015 and 2014 , respectively . 20 cost of sales total cost of sales as a percentage of net sales was 92.3 percent and 91.2 percent in fiscal years 2015 and 2014 , respectively . total cost of materials as a percentage of net sales was approximately 64.6 percent and 64.5 percent in fiscal years 2015 and 2014 , respectively .

although the company deposits its cash with multiple financial institutions , its story_separator_special_tag f financial condition and results of operations the following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements appearing elsewhere in this annual report on form 10-k. some of the information contained in this discussion and analysis or set forth elsewhere in this report include the identification of certain trends and other statements that may predict or anticipate future business or financial results that are subject to important factors that could cause our actual results to differ materially from those indicated . see “ item 1a risk factors ” included elsewhere in this annual report on form 10-k. overview we are a medical technology company focused on the design , development , and advancement of technology for better surgical treatment of spinal disorders . we are dedicated to revolutionizing the approach to spine surgery . we have a broad product portfolio designed to address the majority of u.s. market for fusion-based spinal disorder solutions . we intend to drive growth by exploiting our collective spine experience and investing in the research and development to continually differentiate our solutions and improve spine surgery . we believe our future success will be fueled by introducing market-shifting innovation to the spine market , and that we are well-positioned to capitalize on current spine market dynamics . we market and sell our products in the u.s. through a network of independent distributors and direct sales representatives . an objective of our leadership team is to deliver increasingly consistent , predictable growth . to accomplish this , we have partnered more closely with new and existing distributors to create a more dedicated and loyal sales channel for the future . we have added , and intend to continue to add , new high-quality dedicated distributors to expand future growth . we believe this will allow us to reach an untapped market of surgeons , hospitals , and national accounts across the u.s. , as well as better penetrate existing accounts and territories . we have continued to make progress in the transition of our sales channel since early 2017 , driving the percent of sales contributed by our strategic distribution channel from approximately 80 % for the year ended december 31 , 2018 to 88 % for the year ended december 31 , 2019. going forward , we intend to continue to relentlessly drive toward a fully exclusive network of independent and direct sales agents . recent consolidation in the industry is facilitating the process , as large , seasoned agents are seeking opportunities to re-enter the spine market by partnering with spine-focused companies that have broad , growing product portfolios . recent developments on february 28 , 2020 , we announced an agreement to acquire eos imaging , sa , or eos . eos imaging is a leader in outcome-improving orthopedic medical imaging and software solutions , and is globally recognized for its rapid , low dose , biplanar full-body imaging and 3d modeling capabilities . the eos technology informs the entire surgical process by capturing a calibrated , full-body image in a standing ( weight-bearing ) position , enabling precise measurement of anatomical angles and dimensions . the resulting imaging drives a more accurate understanding of patient alignment during diagnosis , elevates the likelihood of surgical goal fulfillment by integrating a fully informed plan into surgery , and enables a post-operative assessment against the original surgical plan we believe the addition of eos imaging will advance our alphainformatix platform , providing capabilities in surgical planning , patient-specific implants , intraoperative alignment reconciliation , and other intraoperative functionalities resulting in a platform distinctively equipped to address the requirements of spine surgery . we expect the transaction to close in the third quarter of 2020. revenue and expense components the following is a description of the primary components of our revenues and expenses : revenues . we derive our revenues primarily from the sale of spinal surgery implants used in the treatment of spine disorders . spinal implant products include pedicle screws and complementary implants , interbody devices , plates , and tissue-based materials . our revenues are generated by our direct sales force and independent distributors . our products are requested directly by surgeons and shipped and billed to hospitals and surgical centers . currently , most of our business is conducted with customers within markets in which we have experience and with payment terms that are customary to our business . we may defer revenues until the time of collection if circumstances related to payment terms , regional market risk or customer history indicate that collectability is not certain . cost of revenues . cost of revenues consists of direct product costs , royalties , milestones and the amortization of purchased intangibles . our product costs consist primarily of direct labor , overhead , and raw materials and components . the product costs of 44 certain of our biologics products include the cost of procuring and processing human tissue . we incur royalties related to the technologies that we license from others and the pr oducts that are developed in part by surgeons with whom we collaborate in the product development process . amortization of purchased intangibles consists of amortization of developed product technology . research and development expenses . research and development expense consists of costs associated with the design , development , testing , and enhancement of our products . research and development expense also includes salaries and related employee benefits , research-related overhead expenses , fees paid to external service providers in both cash and equity , and costs associated with our scientific advisory board and executive surgeon panels . sales , general and administrative expenses . story_separator_special_tag as more fully described in note 5 , our existing credit agreements with midcap and squadron ( collectively , the “ current lenders ” ) include a financial covenant that requires the company to maintain a minimum cash balance of $ 5.0 million . the minimum cash covenant converts to a minimum fixed charge coverage ratio beginning april 30 , 2020. we expect that we will be unable to meet the fixed charge covenant at that time . in order to avoid a default on its existing credit agreements , we expect to refinance our existing debt prior to april 30 , 2020 , pursuant to a binding commitment letter with a new lender , as further described in note 15. should such re-financing not occur prior to april 30 , 2020 we have entered into letter agreements with the current lenders , agreeing to work together in good faith to amend our existing covenants to extend the minimum cash covenant and defer the fixed charge covenant through at least april 1 , 2021. the committed refinancing is subject to customary closing conditions , and , therefore , there is no guarantee that we will be able to successfully close such refinancing on or before april 30 , 2020 , or at all . in addition , if required , there is no guarantee that we will be able to obtain the necessary waivers or amendments from our current lenders . if we are unable to refinance our existing debt or are unable to secure waivers or amendments from our current lenders , the current lenders have the right to accelerate the repayment of all amounts outstanding . in addition , we would be required to classify its obligations under existing debt agreements in current liabilities on its consolidated balance sheet . these events would negatively impact the our ability to meet ongoing financial obligations . we believe the refinancing of existing debt under our commitment letter with the new lender and or obtaining waivers or amendments of current debt covenants is probable to occur . these factors alleviate substantial doubt about our ability to continue as a going concern . amended credit facility , squadron credit agreement and other debt our amended credit facility with midcap provides for a revolving credit commitment up to $ 22.5 million . as of december 31 , 2019 , $ 12.8 million was outstanding under the revolving line of credit . the revolving line of credit accrues interest at libor plus 6.0 % , reset monthly . at december 31 , 2019 , the revolving line of credit carried an interest rate of 7.69 % . the borrowing base is determined based on the value of domestic eligible accounts receivable . as collateral for the amended credit facility , midcap has a first lien security interest in accounts receivable and a second lien on substantially all other assets . the amended credit facility also includes several event of default provisions , such as payment default , insolvency conditions and a material adverse effect clause , which could cause interest to be charged at a rate which is up to five percentage points above the rate effective immediately before the event of default or result in midcap 's right to declare all outstanding obligations immediately due and payable . on september 1 , 2016 , we entered into the globus facility , pursuant to which globus agreed to loan us up to $ 30 million . we made an initial draw of $ 25 million under the globus facility with an additional draw of $ 5 million made in the fourth quarter of 2016. in november 2018 , the $ 29.2 million outstanding was paid in full . 49 on november 6 , 2018 , we closed the $ 35.0 millio n term loan with squadron for net proceeds of approximately $ 34.1 million , which were partially used to retire our existing $ 29.2 million term debt with globus noted above . the debt has a five-year maturity and bears interest at libor plus 8 % ( 10.0 % as of december 31 , 2019 ) per annum . the agreement specifies a minimum interest rate of 10 % and a maximum of 13 % per year . interest-only payments are due monthly through may 2021 , followed by $ 10 million in principal payable in 29 equal monthly installments begin ning june 2021 and a $ 25 million lump-sum payment payable at maturity in november 2023. as collateral for the term loan , squadron has a first lien security interest in substantially all assets except for accounts receivable . we entered into an inventory financing agreement whereby we may draw up to $ 3.0 million for the purchase of inventory to accrue interest at a rate of libor plus 8 % and also includes a 10 % floor and 13 % ceiling . all principal will become due and payable upon maturity on november 6 , 2023 and all interest will be paid monthly . should we elect to prepay the squadron credit agreement , all amounts due under the inventory financing agreement will become mandatorily due . our various debt agreements include several event of default provisions , such as payment default , insolvency conditions and a material adverse effect clause , which could cause interest to be charged at a rate which is up to five percentage points above the rate effective immediately before the event of default or result in squadron 's right to declare all outstanding obligations immediately due and payable .

results of operations the first table below sets forth our statements of operations data for the periods presented . our historical results are not necessarily indicative of the operating results that may be expected in the future . replace_table_token_1_th replace_table_token_2_th 46 year ended december 31 , 2019 compared to the year ended december 31 , 2018 total revenues . total revenues increased by $ 21.7 million , or 23.7 % , primarily due to sales growth from strategic distribution channels and new product launches . revenue from u.s. products increased by $ 24.6 million , or 29.4 % . the increase in revenue was attributed primarily to the launch of new products and our focus on the strategic distribution channel , as detailed below ( in thousands ) : replace_table_token_3_th revenue from international supply agreement , which is attributed to sales to globus under which we supply to globus certain of its implants and instruments at agreed-upon prices for a minimum term of three years , decreased by $ 2.9 million . we expect these revenues to continue to decrease over the next several quarters , as globus continues to register its own products in international markets . globus has the option to extend the term for up to two additional twelve month periods subject to globus meeting specified purchase requirements . during the first quarter of 2019 , globus notified us that it would exercise the option to extend the agreement an additional twelve months through august 2020. cost of revenues . total cost of revenues increased by $ 7.4 million , or 25.9 % , primarily due to increased sales and excess and obsolescence expense related to new and legacy products .

the 2017 notes and related guarantees are secured by a first-priority lien on substantially all of our and our guarantors ' present and future assets located in the united story_separator_special_tag the following discussion and analysis should be read in conjunction with item 6 . “selected financial data” and the audited consolidated financial statements of ryerson holding corporation and subsidiaries and the notes thereto in item 8 . “financial statements and supplementary data.” this discussion contains forward-looking statements that involve risks and uncertainties . see the section entitled “special note regarding forward-looking statements.” our actual results and the timing of selected events could differ materially from those discussed in these forward-looking statements as a result of certain factors , including those discussed in item 1a . “risk factors” and elsewhere in this form 10-k. overview business ryerson holding corporation ( “ryerson holding” ) , a delaware corporation , is the parent company of joseph t. ryerson & son , inc. ( “jt ryerson” ) , a delaware corporation . on december 17 , 2014 , ryerson inc. ( “ryerson” ) , formerly a direct , wholly-owned subsidiary of ryerson holding , merged with and into jt ryerson which was previously an indirect , wholly-owned subsidiary of ryerson holding , with jt ryerson as the surviving corporation . as a result of such merger , from and after december 17 , 2014 , jt ryerson has been a direct , wholly-owned subsidiary of ryerson holding . affiliates of platinum equity , llc ( “platinum” ) own approximately 66 % of ryerson holding . ryerson holding conducts materials distribution operations in the united states through its wholly-owned direct subsidiary jt ryerson , in canada through its indirect wholly-owned subsidiary ryerson canada , inc. , a canadian corporation ( “ryerson canada” ) and in mexico through its indirect wholly-owned subsidiary ryerson metals de mexico , s. de r.l . de c.v. , a mexican corporation ( “ryerson mexico” ) . in addition to our north american operations , we conduct materials distribution operations in china through ryerson china limited ( “ryerson china” ) , a company in which we have a 100 % ownership percentage and in brazil through açofran aços e metais ltda ( “açofran” ) , a company in which we have had a 50 % direct ownership percentage since february 17 , 2012. unless the context indicates otherwise , ryerson holding , jt ryerson , ryerson canada , ryerson china , ryerson mexico and açofran together with their subsidiaries ( including ryerson prior to its dissolution through merger ) , are collectively referred to herein as “ryerson holding , ” “we , ” “us , ” “our , ” or the “company.” on july 23 , 2014 , our board of directors approved a 4.25 for 1.00 stock split of the company 's common stock effective august 5 , 2014. per share and share amounts presented herein have been adjusted for all periods presented to give retroactive effect to 4.25 for 1.00 stock split . on august 13 , 2014 , ryerson holding completed an initial public offering of 11 million shares of common stock at a price to the public of $ 11.00 per share . net proceeds from the offering totaled $ 112.4 million , after deducting the underwriting discount and offering expenses , and were used to ( i ) redeem $ 99.5 million in aggregate principal amount of the 11 1 ⁄ 4 % senior notes due 2018 ( the “2018 notes” ) , ( ii ) pay platinum equity advisors llc ( “platinum advisors” ) , and its affiliates $ 15.0 million of the $ 25.0 million owed as consideration for terminating the services agreement between jt ryerson and platinum advisors , an affiliate of platinum ( the remaining $ 10.0 million will be paid in august 2015 ) and ( iii ) pay related transaction fees , expenses and premiums in connection with the offering , which were approximately $ 11.2 million . we borrowed an additional $ 23.3 million under our amended and restated $ 1.35 billion revolving credit facility ( the “ryerson credit facility” ) as part of the funding of these transactions . industry and operating trends we purchase large quantities of metal products from primary producers and sell these materials in smaller quantities to a wide variety of metals-consuming industries . more than one-half of the metals products sold are processed by us by burning , sawing , slitting , blanking , cutting to length or other techniques . we sell our products and services to many industries , including industrial equipment manufacturing , industrial fabrication , electrical machinery production , transportation equipment manufacturing , heavy equipment manufacturing and oil and gas . revenue is recognized upon delivery of product to customers . the timing of shipment is substantially the same as the timing of delivery to customers given the proximity of our distribution sites to our customers . 27 sales , cost of materials sold , gross profit and operating expense control are the principal factors that impact our profitability : net sales . our sales volume and pricing is driven by market demand , which is largely determined by overall industrial production and conditions in specific industries in which our customers operate . sales prices are also primarily driven by market factors such as overall demand and availability of product . our net sales include revenue from product sales , net of returns , allowances , customer discounts and incentives . cost of materials sold . cost of materials sold includes metal purchase and in-bound freight costs , third-party processing costs and direct and indirect internal processing costs . the cost of materials sold fluctuates with our sales volume and our ability to purchase metals at competitive prices . increases in sales volume generally enable us both to improve purchasing leverage with suppliers , as we buy larger quantities of metals inventories , and to reduce operating expenses per ton sold . gross profit . gross profit is the difference between net sales and the cost of materials sold . story_separator_special_tag 31 other expenses interest and other expense on debt decreased to $ 110.5 million in 2013 from $ 126.5 million in 2012 , primarily due to lower interest rates after we refinanced our debt in the fourth quarter of 2012. on october 10 , 2012 , we issued $ 600 million of 9 % senior secured notes due 2017 ( the “2017 notes” ) and $ 300 million of 11 1 ⁄ 4 % senior notes due 2018 ( the “2018 notes” and , together with the 2017 notes , the “2017 and 2018 notes” ) . in connection therewith , we redeemed the $ 368.7 million outstanding principal of our 12 % senior secured notes due november 1 , 2015 ( “2015 notes” ) , $ 102.9 million outstanding principal of our floating rate senior secured notes due november 1 , 2014 ( “2014 notes” and , together with the 2015 notes , the “ryerson notes” ) and $ 344.9 million outstanding principal of our 14 1 ⁄ 2 % senior discount notes due 2015 ( the “ryerson holding notes” ) . in addition , interest expense on our credit agreement borrowings was lower in 2013 compared to 2012 primarily due to a lower level of borrowings outstanding . other income and ( expense ) , net was expense of $ 0.2 million in 2013 as compared to expense of $ 33.5 million in 2012. the year 2012 expense was primarily related to a $ 32.8 million loss on the redemption of the ryerson notes and the ryerson holding notes . provision for income taxes the company recorded an income tax benefit of $ 112.3 million in 2013 compared to an income tax benefit of $ 5.5 million in 2012. the $ 112.3 million income tax benefit in 2013 primarily relates to a reduction in valuation allowance previously recorded against u.s. deferred tax assets . the $ 5.5 million income tax benefit in 2012 primarily relates to the impact of acquisition-related elections and settlements , as well as net changes in valuation allowance . noncontrolling interest ryerson china 's and açofran 's results of operations was a loss in 2013 and 2012. the portion of the loss attributable to the noncontrolling interest in ryerson china and açofran was $ 1.1 million for 2013 and $ 1.3 million for 2012. earnings per share basic and diluted earnings per share was $ 5.99 in 2013 and $ 2.22 in 2012. the changes in earnings per share are due to the results of operations discussed above . liquidity and capital resources the company 's primary sources of liquidity are cash and cash equivalents , cash flows from operations and borrowing availability under the $ 1.35 billion revolving credit facility agreement ( as amended and restated , the “ryerson credit facility” ) that matures on the earlier of ( a ) april 3 , 2018 or ( b ) august 16 , 2017 ( 60 days prior to the scheduled maturity date of the 2017 notes ) , if the 2017 notes are then outstanding . its principal source of operating cash is from the sale of metals and other materials . its principal uses of cash are for payments associated with the procurement and processing of metals and other materials inventories , costs incurred for the warehousing and delivery of inventories and the selling and administrative costs of the business , capital expenditures , and for interest payments on debt . the following table summarizes the company 's cash flows : replace_table_token_10_th the company had cash and cash equivalents at december 31 , 2014 of $ 60.0 million , compared to $ 74.4 million at december 31 , 2013 and $ 71.2 million at december 31 , 2012. the company had $ 1,259 million , $ 1,295 million and $ 1,305 million of total debt outstanding , a debt-to-capitalization ratio of 111 % , 109 % and 129 % and $ 245 million , $ 234 million and $ 293 million available under the ryerson credit facility at december 31 , 2014 , 2013 and 2012 , respectively . the company had total liquidity ( defined as cash and cash equivalents , marketable securities and availability under the ryerson credit facility and foreign debt facilities ) of $ 328 million , $ 351 million and $ 406 million at december 31 , 2014 , 2013 and 2012 , respectively . total liquidity is not a u.s. generally accepted accounting principles ( “gaap” ) financial measure . we believe that total liquidity provides additional information for measuring our ability to fund our operations . total liquidity does not represent , and should not be used as a substitute for , net income or cash flows from operations as determined in accordance with gaap and total liquidity is not necessarily an indication of whether cash flow will be sufficient to fund our cash requirements . 32 below is a reconciliation of cash and cash equivalents to total liquidity : replace_table_token_11_th of the total cash and cash equivalents as of december 31 , 2014 , $ 43 million was held in subsidiaries outside the united states which is deemed to be permanently reinvested . ryerson holding does not currently foresee a need to repatriate funds from its non-u.s. subsidiaries . although the company has historically satisfied needs for more capital in the u.s. through debt or equity issuances , it could elect to repatriate funds held in foreign jurisdictions which could result in higher effective tax rates . the company has not recorded a deferred tax liability for the effect of a possible repatriation of these assets as management intends to permanently reinvest these assets outside of the u.s. specific plans for reinvestment include funding for future international acquisitions and funding of existing international operations . during the year ended december 31 , 2014 , net cash used in operating activities was $ 73.3 million . during the years ended december 31 , 2013 and 2012 , net cash provided by operating activities was $ 48.1 million , and $ 186.5 million , respectively .

results of operations replace_table_token_9_th comparison of the year ended december 31 , 2014 with the year ended december 31 , 2013 net sales net sales increased 4.7 % to $ 3.6 billion in 2014 as compared to $ 3.5 billion in 2013. average selling price increased 5.4 % while tons sold decreased 0.7 % reflecting stable economic conditions in the metals market in 2014 compared to 2013. the average selling price per ton increased in 2014 to $ 1,790 from $ 1,698 in 2013. average selling prices per ton increased for most of our product lines in 2014 with the largest increase in our stainless steel plate , carbon steel plate and carbon steel flat product lines . tons sold in 2014 decreased for our carbon steel flat and aluminum long product lines , offset by increased tons sold for our aluminum sheet and aluminum plate product lines . tons sold per ship day were 8,032 in 2014 as compared to 8,087 in 2013. cost of materials sold cost of materials sold increased 6.5 % to $ 3.0 billion in 2014 compared to $ 2.8 billion in 2013. the increase in cost of materials sold in 2014 compared to 2013 was primarily due to an increase in the average cost of materials sold per ton . the average cost of materials sold per ton increased to $ 1,497 in 2014 from $ 1,396 in 2013. the average cost of materials sold for our carbon steel flat , carbon steel plate and stainless steel flat product lines increased more than our other products , in line with the change in average selling price per ton . during 2014 , lifo expense was $ 42 million related to increases in pricing for all product lines . during 2013 , lifo income was $ 33 million related to decreases in pricing for all product lines .

these increases were partially offset by lower margins of $ 28.2 million primarily due to ngl price declines . operations and maintenance expenses decreased $ 0.3 million , or 0 % . other operating expenses , net other operating expenses , net increased $ 19.0 million , or 7 % , from the year ended december 31 , 2012 to the year ended december 31 , 2013 , as summarized in the following schedule : replace_table_token_9_th depreciation and amortization expense increased $ 39.2 million , or 25 % , from 2012 to 2013. the increase primarily resulted from higher capitalized costs on the cana system . devon and other producers have continued to grow natural gas production in the cana-woodford shale . as a result , we have increased our throughput capacity by expanding our pipeline and gathering systems and our cana processing facility . historical general and administrative expenses consist of costs allocated by devon for shared services that consist primarily of accounting , treasury , information technology , human resources , legal and facilities management . the costs were allocated based on a proportionate share of devon 's revenues , employee compensation and gross property , plant and equipment . general and administrative expense increased $ 3.4 million , or 8 % , primarily due to higher employee compensation and benefits . non-income tax expense consists primarily of ad valorem taxes . non-income taxes increased $ 4.8 million , or 36 % , from 2012 to 2013 primarily due to higher ad valorem tax assessments on midstream holdings ' cana assets . in 2013 and 2012 , devon recognized asset impairments of $ 18.2 million and $ 50.1 million , respectively . devon determined that the carrying amounts of certain midstream facilities located in south and east texas were not recoverable from estimated future cash flows due to declining dry natural gas production . consequently , the assets were written down to their estimated fair values , which were determined using discounted cash flows . none of the asset impairments in 2013 were related to assets that were contributed to midstream holdings . during 2013 and 2012 , our predecessor recognized $ 0.5 million of net other expense and $ 3.0 million of net other income , respectively . in the second quarter of 2012 , predecessor received insurance proceeds of $ 5.6 million related to business interruption that occurred at gulf coast fractionators . 47 income tax expense . during 2013 and 2012 , effective income tax rates were 36 % for both periods . these rates differed from the u.s. statutory income tax rate due to the effect of state income taxes . discontinued operations . the predecessor has sold certain non-core assets that are presented as discontinued operations in the predecessor 's historical financial statements . net income from discontinued operations decreased $ 8.2 million from 2012 to 2013. the decrease was primarily due to the gain recognized on the divestiture of the west johnson county processing facility and gathering system in 2012. year ended december 31 , 2012 compared to year ended december 31 , 2011 operating margin . operating margin decreased $ 88.5 million , or 20 % , from the year ended december 31 , 2011 to the year ended december 31 , 2012 , as summarized in the following schedule : replace_table_token_10_th higher gathering , processing and transportation volumes were responsible for an increase in operating margin of $ 20.8 million for the year ended december 31 , 2012 compared to the year ended december 31 , 2011. residue volumes increased 7 % , resulting in a $ 9.1 million increase to operating margin . the remainder of the operating margin increase resulted from higher natural gas gathered volumes and ngl production , which increased 3 % and 2 % , respectively . these volume increases primarily resulted from the restart of midstream holdings ' cana processing facility following tornado damage in 2011 , higher volumes on midstream holdings ' east johnson county gathering system and continued development of the liquids-rich areas in the cana-woodford and barnett shales . changes in pricing led to a decrease in operating margin of $ 93.8 million for the year ended december 31 , 2012 compared to the year ended december 31 , 2011. lower ngl and residue natural gas prices reduced operating margin by $ 71.0 million and $ 42.8 million , respectively . these decreases were partially offset by higher gathering and compression fees which increased $ 20.0 million , or 9 % . operations and maintenance expenses increased $ 15.5 million , or 10 % , partially due to higher volumes , including the cana system expansion . expenses also increased due to repair and testing activities that were required on midstream holdings ' bridgeport gathering systems in 2012. other operating expenses , net . other operating expenses , net increased $ 121.5 million , or 85 % , from the year ended december 31 , 2011 to the year ended december 31 , 2012 , as summarized in the following schedule : replace_table_token_11_th depreciation and amortization expense increased $ 15.0 million , or 10 % , from 2011 to 2012. the increase primarily resulted from higher capitalized costs on the cana system . devon and other producers have continued to grow natural gas production in the cana-woodford shale . as a result , midstream holdings increased throughput capacity by expanding its pipeline and gathering systems and our cana processing facility . story_separator_special_tag historical general and administrative expenses consist of costs allocated by devon for shared services that consist primarily of accounting , treasury , information technology , human resources , legal and facilities management . the costs were allocated based on a proportionate share of devon 's revenues , employee compensation and gross property , plant and equipment . general and administrative expense increased $ 3.5 million , or 9 % , from 2011 to 2012 , primarily due to higher employee compensation and benefits . non-income tax expense consists primarily of ad valorem taxes . non-income taxes decreased $ 2.1 million , or 14 % , from 2011 to 2012 primarily due to lower ad valorem tax assessments on midstream holdings ' barnett assets . 48 the following schedule summarizes asset impairments recognized in 2012. there were no asset impairments in 2011. due to declining natural gas production resulting from low natural gas and ngl prices , midstream holdings ' determined that the carrying amounts of certain of the predecessors ' midstream assets , including the northridge system , were not recoverable from estimated future cash flows . consequently , the northridge system and other assets of the predecessor were written down to their estimated fair values , which were determined using discounted cash flow models . 2012 ( in millions ) northridge $ 16.4 other assets not being contributed to midstream holdings 33.7 total asset impairments $ 50.1 during 2012 and 2011 , the predecessor recognized $ 3.0 million and $ 58.0 million of net other income , respectively . in 2012 , the predecessor received insurance proceeds of $ 5.6 million related to business interruption that occurred at gulf coast fractionators . in 2011 , the predecessor received $ 57.8 million of excess insurance recoveries related to business interruption and equipment damage at the cana system that resulted from tornadoes . income tax expense . during 2012 and 2011 , midstream holdings ' effective income tax rates were 36 % for both periods . these rates differed from the u.s. statutory income tax rate due to the effect of state income taxes . discontinued operations . net income from discontinued operations decreased $ 1.2 million from 2011 to 2012. the decrease was due to lower operating earnings subsequent to the divestiture of the west johnson county processing facility and gathering system in 2012 , partially offset by the $ 8.3 million gain recognized on the divestiture . midstream holdings ' critical accounting policies and estimates the preparation of financial statements in conformity with gaap requires midstream holdings to make estimates , judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements , and the reported amounts of revenues and expenses during the reporting period . actual amounts could differ from these estimates , and changes in these estimates are recorded when known . changes in these estimates can have a material effect on the financial statements . the critical accounting policies used by management in the preparation of midstream holdings ' combined financial statements are those that require significant judgments by management with regard to estimates used and are important both to the presentation of its financial condition and results of operations . midstream holdings ' critical accounting policies and significant judgments and estimates related to those policies are described below . allocation of devon corporate overhead costs certain of devon 's centralized overhead and operating costs are incurred for the benefit of its subsidiaries and affiliates , including midstream holdings . as a result , a portion of such costs are allocated to midstream holdings ' operations . the portion of such costs that directly benefits midstream holdings ' operations is allocated entirely to midstream holdings . the remaining portion of costs that benefits midstream holdings and other devon affiliates is allocated using a three-factor formula . this formula uses an equal weighting of revenues , employee compensation and gross property , plant and equipment balances to determine amounts to be allocated to midstream holdings and other devon affiliates . these cost allocations are affected by the amount of costs devon incurs for its centralized overhead and operating activities and the allocation methodologies chosen . determining the amount of costs devon incurs for its centralized overhead and operating activities generally does not require significant judgment by management because such costs are readily identifiable . although there are a number of alternative methodologies for allocating devon 's centralized overhead and operating costs , management believes the allocation methodologies used are based on assumptions that are reasonable . however , if certain costs were allocated using different methodologies , midstream holdings ' profitability and financial condition could change significantly . depreciation of property , plant and equipment midstream holdings ' depreciation calculations include estimates of salvage value and useful lives . as estimates of salvage values decrease , the amount of depreciation recognized in successive periods and over the estimated useful life of pp & e increases . midstream holdings estimates salvage values to be near zero at the end of the asset 's useful life . similar to salvage value estimates , as estimates of useful lives decrease , the amount of depreciation recognized in successive periods increases . however , useful life estimates have no impact on the amount of depreciation recognized over the life of pp & e . for assets subject to the straight-line method of calculating depreciation , midstream holdings utilizes estimated useful lives ranging from three to 25 years . these estimates are based on the historical usage of similar assets . for assets subject to the units-of-production basis of calculating depreciation , useful lives are estimated based on proved oil , natural gas and ngl reserve estimates from the fields being serviced by those assets . estimates of reserves are forecasts based on engineering data , projected future rates of production and the timing of future expenditures

overview we are a delaware limited liability company formed in october 2013. our assets consist of equity interests in enlink midstream partners , lp , enlink midstream holdings , lp , e2 energy services , llc and e2 appalachian compression , llc ( collectively , “e2” ) . enlink midstream partners , lp is a publicly traded limited partnership engaged in the gathering , transmission , processing and marketing of natural gas and natural gas liquids , or ngls , condensate and crude oil , as well as providing crude oil , condensate and brine services to producers . enlink midstream holdings , lp , a partnership owned by the partnership and us , is engaged in the gathering , transmission and processing of natural gas . e2 is a services company focused on the utica shale play in the ohio river valley . effective as of march 7 , 2014 , enlink midstream , inc. ( formerly known as crosstex energy , inc. ) ( “emi” ) merged with and into our wholly-owned subsidiary and acacia natural gas corp i , inc. ( “new acacia” ) , formerly a wholly-owned subsidiary of devon , merged with and into a wholly-owned subsidiary of the company ( collectively , the “mergers” ) . pursuant to the mergers , each of emi and new acacia became wholly-owned subsidiaries of the company and the company became publicly held . emi owns common units representing an approximate 7 % limited partner interest in enlink midstream partners , lp ( formerly known as crosstex energy , l.p. ) ( the “partnership” ) as of march 24 , 2014 and also owns enlink midstream partners gp , llc ( formerly known as crosstex energy gp , llc ) ( the “general partner” ) . new acacia directly owns a 50 % limited partner interest in enlink midstream holdings , lp ( “midstream holdings” ) .

accordingly , there was no indication of impairment , and further quantitative analysis was not required . intangible assets deemed to have finite lives are amortized on a straight-line basis over their estimated useful lives , which generally range from one to eleven years . the useful life is the period over which the asset is expected to contribute directly , or indirectly , to its future cash flows . intangible assets are reviewed for impairment when certain events or circumstances exist . for amortizable intangible assets , impairment exists when the undiscounted cash flows exceed its carrying value and an impairment charge would be recorded for the excess of the carrying value over its fair value . at least annually , the remaining useful life is evaluated . impairment of long-lived assets . the company reviews long-lived assets , including property and equipment , for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable . factors that the company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations , significant negative industry or economic trends , and significant changes or planned changes in the use of the assets . if an impairment review is performed to evaluate a long-lived asset for recoverability , the company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value . an impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount . the impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value , determined based on discounted cash flows . f- 9 capitalized software . the company capitalizes certain internal and external costs incurred to acquire or create internal use software . costs to create internal software are capitalized during the application development period . capitalized software is included in property and equipment and is depreciated over three years once development is complete . revenue recognition . under asc 606 , revenue is recognized when a customer obtains control of promised goods or services , in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services . to determine revenue recognition for arrangements that an entity determines are within the scope of asc 606 , the company performs the following five steps : ( i ) identify the contract ( s ) with a customer ; ( ii ) identify the performance obligations in the contract ; ( iii ) determine the transaction price ; ( iv ) allocate the transaction price to the performance obligations in the contract ; and ( v ) recognize revenue when ( or as ) the entity satisfies a performance obligation . the company records product revenues primarily from the sale of its regenerative tissue products . the company sells its products to healthcare providers ( customers ) , primarily through direct sales representatives . product revenues consist of a single performance obligation that the company satisfies at a point in time . in general , the company recognizes product revenue upon delivery to the customer . in the contract services segment , the company records service revenues from the sale of its contract research services , which includes delivery of preclinical studies and other research services to unrelated third parties . service revenues generally consist of a single performance obligation that the company satisfies over time using an input method based on costs incurred to date relative to the total costs expected to be required to satisfy the performance obligation . the company believes that this method provides a faithful depiction of the transfer of services over the term of the performance obligation based on the remaining services needed to satisfy the obligation . this requires the company to make reasonable estimates of the extent of progress toward completion of the contract . as a result , unbilled receivables and deferred revenue are recognized based on payment timing and work completed . generally , a portion of the payment is due upfront and the remainder upon completion of the contract , with most contracts completing in less than a year . contract services include research and laboratory testing services to unrelated third parties on a contract basis . these customer contracts generally consist of a single performance obligation that the company satisfies at a point in time . the company recognizes revenue upon delivery of testing results to the customer . as of december 31 , 2020 and 2019 , the company had unbilled receivables of $ 0.2 million and $ 0.1 million , respectively , and deferred revenue of $ story_separator_special_tag the following information should be read in conjunction with the consolidated financial statements and related notes thereto included in this annual report on form 10-k. in addition to historical information , this report contains forward-looking statements that involve risks and uncertainties that may cause our actual results to differ materially from plans and results discussed in forward-looking statements . we encourage you to review the risks and uncertainties discussed in the sections entitled item 1a . “ risk factors ” and “ forward-looking statements ” included at the beginning of this annual report on form 10-k. the risks and uncertainties can cause actual results to differ significantly from those in our forward-looking statements or implied in historical results and trends . story_separator_special_tag our net losses may fluctuate significantly from quarter-to-quarter and year-to-year , depending upon the timing of our clinical trials and our expenditures for satisfying all the conditions of obtaining fda market approval for skinte . cash used to fund operating expenses is impacted by the timing of when we pay these expenses , as reflected in the change in our accounts payable and accrued research and development and other current liabilities . recent developments capital formation we raised capital in december 2020 and january 2021 to fund our operations . we previously reported in november 2020 that at september 30 , 2020 , our cash and cash equivalents totaled $ 23.186 million , which would not be adequate to fund our operations beyond the first quarter of 2021. we embarked on a plan to raise capital to fund our operations that began with a restructuring in november 2020 of warrants sold in a public offering in february 2020 , which we believed had a chilling effect on our ability to attract institutional investors and depressed the public trading price of our common stock . 39 after the warrant restructuring we sold 5,450,000 shares of common stock , pre-funded warrants to purchase up to 5,238,043 shares of common stock ( with an exercise price of $ 0.001 ) , and accompanying common warrants to purchase up to 10,688,043 shares of common stock to a single healthcare-dedicated institutional investor in a registered direct offering . each common share and pre-funded warrant were sold together with a common warrant . the combined offering price of each common share and accompanying common warrant was $ 0.7485 and for each pre-funded warrant and accompanying common warrant was $ 0.7475. the pre-funded warrants were subsequently exercised in january 2021 and the net proceeds we received from the offering were $ 7.2 million . in january 2021 , the holder of the common warrants exercised all 10,688,043 warrants at an exercise price of $ 0.624 per share resulting in gross proceeds of $ 6.7 million . in exchange for the agreement of the holder to exercise those common warrants we issued to the holder new common stock purchase warrants at a price of $ 0.125 per new warrant to purchase up to 8,016,033 shares of common stock at an exercise price of $ 1.20 per share . gross proceeds from the sale of the new warrants was $ 1.0 million . also in january 2021 we sold to the same institutional investor who participated in the december registered direct offering 6,670,000 shares of common stock , pre-funded warrants to purchase up to 2,420,910 shares of common stock ( with an exercise price of $ 0.001 ) , and accompanying common warrants to purchase up to 9,090,910 shares of common stock in another registered direct offering . each common share and pre-funded warrant were sold together with a common warrant . the combined offering price of each common share and accompanying common warrant was $ 1.10 and for each pre-funded warrant and accompanying common warrant was $ 1.099. the pre-funded warrants were subsequently exercised so the gross proceeds of the offering were $ 10.0 million . the common warrants sold in the registered direct offering have an exercise price of $ 1.20 per share . we believe this capital infusion from the foregoing offerings will enable us to fund our ind filing and the start of at least two clinical trials under the bla for skinte . business effects of covid-19 the current covid-19 pandemic has presented a substantial public health and economic challenge around the world and is affecting our employees , patients , clinicians , communities , and business operations , as well as the u.s. economy and financial markets . the full extent to which the covid-19 pandemic will directly or indirectly impact the timing and cost of pursuing fda approval of skinte under a bla is highly uncertain and can not be accurately predicted . we will need to engage contract research organizations ( “ cros ” ) for our future clinical trials and the covid-19 pandemic and response efforts may have an impact on the ability of cros to timely perform the trials we need for skinte . we saw a decrease in skinte cases in march 2020 and procedures scheduled for april 2020 postponed or not being scheduled , which was a trend we expected would continue and adversely affect our results of operations . as a result of our decision to file an ind for skinte and the disturbing trend in skinte cases , in may 2020 we reduced our workforce within our regenerative medicine business segment , which is engaged primarily in the commercialization of skinte . we also refocused our commercialization effort on the territories where we have current and repeat users of skinte , and this new focus resulted in a quarter over quarter increase in the average wound size treated and a concomitant increase in revenues , which we did not expect . in the contract services segment covid-19 had a significant adverse effect on pre-clinical research business from march through the end of 2020 , so we expected our contract services business would also suffer as a result of covid-19 . however , we unexpectedly received inquiries in april 2020 from third parties acquainted with our management team regarding our laboratory and its ability to perform covid-19 testing , which we attribute to the surge in covid-19 testing throughout the united states and what we believe to be a lack of laboratory testing capacity to meet the surging demand . management evaluated arches ' resources and found that it has the capability of performing molecular polymerase chain reaction testing for covid-19 .

results of operations replace_table_token_3_th * not meaningful 41 net revenues net revenues increased by 79 % to $ 10.126 million in 2020. the increase in net revenues for sale of products was the result of a sales strategy adopted in may 2020 to focus on regions and facilities where we had repeat users of skinte . for 2020 the average wound size treated with skinte was 219 cm 2 compared to 120 cm 2 in 2019 , which corresponds with the difference in revenue between those years . the increase in net revenues for services was the result of $ 4.324 million in new covid-19 testing services we began to offer through arches at the end of may 2020. in 2019 services net revenues was derived primarily from pre-clinical testing services provided through ibex , which were adversely impacted by covid-19 in 2020. cost of sales cost of sales increased by 78 % to $ 4.424 million in 2020 , which is attributable to the cost of sales of $ 2.417 million for providing covid-19 testing services that were added in 2020. the cost of sales for products were lower in 2020 by 22 % over 2019 due to the economies of scale gained from selling skinte for larger wounds . operating costs and expenses total operating costs and expenses decreased to $ 51.642 million in 2020 from $ 96.566 million in 2019 , or 47 % . this is the most significant change in our results of operations period over period and is attributable to the 46 % reduction in personnel from the end of 2019 to the end of 2020. the reduction in personnel substantially reduced salary and benefit costs across the company .

overview we are a delaware limited liability company formed in october 2013. our assets consist of equity interests in enlink midstream partners , lp , a publicly traded limited partnership engaged in the gathering , transmission , processing and marketing of natural gas and natural gas liquids , or ngls , condensate and crude oil , as well as providing crude oil , condensate and brine services to producers . our interests in enlink midstream partners , lp , consist of the following as of december 31 , 2015 : 88,528,451 common units representing an aggregate 26.5 % limited partner interest in the partnership ; and 100.0 % ownership interest in enlink midstream partners gp , llc , the general partner of the partnership ( the “ general partner ” ) , which owns a 0.5 % general partner interest and all of the incentive distribution rights in the partnership . the partnership is required by its partnership agreement to distribute all its cash on hand at the end of each quarter , less reserves established by the general partner in its sole discretion to provide for the proper conduct of the partnership 's business , or to provide for future distributions . the incentive distribution rights in the partnership entitle us to receive an increasing percentage of cash distributed by the partnership as certain target distribution levels are reached . specifically , they entitle us to receive 13.0 % of all cash distributed in a quarter after each unit has received $ 0.25 for that quarter , 23.0 % of all cash distributed after each unit has received $ 0.3125 for that quarter and 48.0 % of all cash distributed after each unit has received $ 0.375 for that quarter . since we control the general partner interest in the partnership , we reflect our ownership interest in the partnership on a consolidated basis , which means that our financial results are combined with the partnership 's financial results and the results of our other subsidiaries . our consolidated results of operations are derived from the results of operations of the partnership and also include our deferred taxes , interest of non-controlling partners in the partnership 's net income , interest income ( expense ) and general and administrative expenses not reflected in the partnership 's results of operations . accordingly , the discussion of our financial position and results of operations in this “ management 's discussion and analysis of financial condition and results of operations ” primarily reflects the operating activities and results of operations of the partnership . the partnership primarily focuses on providing midstream energy services , including gathering , processing , transmission , fractionation , condensate stabilization , brine services and marketing , to producers of natural gas , ngls , crude oil and condensate . the partnership 's midstream energy asset network includes approximately 9,400 miles of pipelines , 16 natural gas processing plants , seven fractionators , 3.2 million barrels of ngl cavern storage , 19.1 bcf of natural gas storage , rail terminals , barge terminals , truck terminals and a fleet of approximately 150 trucks . the partnership manages and reports its activities primarily according to the nature of activity and geography . the partnership has five reportable segments : ( 1 ) texas , which includes the partnership 's natural gas gathering , processing and transmission activities in north texas and the permian basin in west texas ; ( 2 ) oklahoma , which includes the partnership 's natural gas gathering , processing and transmission activities in cana-woodford and arkoma-woodford shale areas ; ( 3 ) louisiana , which includes the partnership 's natural gas pipelines , 59 natural gas processing plants and ngl assets located in louisiana ; ( 4 ) crude and condensate , which includes the partnership 's ohio river valley ( “ orv ” ) crude oil , condensate and brine disposal activities in the utica and marcellus shales , its equity interests in e2 energy services , llc , e2 appalachian compression , llc and e2 ohio compression , llc ( collectively , “ e2 ” ) , its crude oil operations in the permian basin and its crude oil activities associated with the victoria express pipeline and related truck terminal and storage assets ( “ vex ” ) located in the eagle ford shale ; and ( 5 ) corporate , which includes the partnership 's unconsolidated affiliate investments in howard energy partners ( “ hep ” ) , in the eagle ford shale , its contractual right to the economic burdens and benefits associated with devon 's ownership interest in gcf in south texas and our general partnership property and expenses . the partnership manages its operations by focusing on gross operating margin because the partnership 's business is generally to gather , process , transport or market natural gas , ngls , crude oil and condensate using its assets for a fee . the partnership earns its fees through various contractual arrangements , which include stated fixed-fee contract arrangements or arrangements where the partnership purchases and resells commodities in connection with providing the related service and earns a net margin for its fees . while the partnership 's transactions vary in form , the essential element of each transaction is the use of its assets to transport a product or provide a processed product to an end-user at the tailgate of the plant , barge terminal or pipeline . the partnership defines gross operating margin as operating revenue minus cost of sales . gross operating margin is a non-gaap financial measure and is explained in greater detail under “ non-gaap financial measures ” under “ item 6. selected financial data. story_separator_special_tag the partnership realizes gross operating margins from its processing services primarily through different contractual arrangements : processing margins ( “ margin ” ) , percentage of liquids ( “ pol ” ) , percentage of proceeds ( “ pop ” ) or fixed-fee based . under margin contract arrangements the partnership 's gross operating margins are higher during periods of high liquid prices relative to natural gas prices . gross operating margin results under pol contracts are impacted only by the value of the liquids produced with margins higher during periods of higher liquids prices . gross operating margin results under pop contracts are impacted only by the value of the natural gas or liquids produced with margins higher during periods of higher natural gas and liquids prices . under fixed-fee based contracts the partnership 's gross operating margins are driven by throughput volume . see “ item 7a . quantitative and qualitative disclosures about market risk — commodity price risk. ” operating expenses are costs directly associated with the operations of a particular asset . among the most significant of these costs are those associated with direct labor and supervision , property insurance , property taxes , repair and maintenance expenses , contract services and utilities . these costs are normally fairly stable across broad volume ranges and therefore do not normally decrease or increase significantly in the short term with decreases or increases in the volume of gas , liquids , crude oil and condensate moved through or by the asset . devon energy transaction and emh drop downs on march 7 , 2014 , we consummated the transactions contemplated by the agreement and plan of merger , dated as of october 21 , 2013 ( the “ merger agreement ” ) , among enlink midstream , inc. ( “ emi ” ) , devon , acacia natural gas corp i , inc. , formerly a wholly-owned subsidiary of devon ( “ acacia ” ) , and certain other wholly-owned subsidiaries of devon pursuant to which emi and acacia each became our wholly-owned subsidiaries . upon completion of the merger with acacia , we indirectly owned a 50 % limited partner interest in midstream holdings . also on march 7 , 2014 , the partnership consummated the transactions contemplated by the contribution agreement , dated as of october 21 , 2013 , among the partnership , enlink midstream operating , devon and certain of devon 's wholly-owned subsidiaries . on february 17 , 2015 , acacia contributed a 25 % interest in midstream holdings ( the “ february transferred interests ” ) to the partnership in a drop down transaction ( the “ february emh drop down ” ) in exchange for 31.6 million units in the partnership , representing an approximate 9.5 % limited partner interest in the partnership as of december 31 , 2015 . on may 27 , 2015 , acacia contributed the remaining 25 % limited partner interest in midstream holdings ( the “ may transferred interests ” ) to the partnership in a drop down transaction ( the “ may emh drop down ” and together with the february emh drop down , the “ emh drop downs ” ) in exchange for 36.6 million units in the partnership , representing an approximate 11.0 % limited partner interest in the partnership as of december 31 , 2015 . after giving effect to the emh drop-downs , the partnership owns 100 % of midstream holdings . recent growth developments acquisitions tall oak . on january 7 , 2016 , we and partnership acquired a 16 % and 84 % interest , respectively , in subsidiaries of tall oak midstream , llc ( “ tall oak ” ) for $ 1.55 billion , subject to certain adjustments ( the “ tall oak acquisition ” ) . the first installment of $ 1.05 billion for the acquisition was paid at closing and the final installment of $ 500.0 million is due no later than the first anniversary of the closing date with the option to defer $ 250.0 million of the final installment up to 24 months following the closing date . the first installment consisted of approximately $ 1.05 billion and was funded by ( a ) approximately $ 788.0 million in cash contributed by the partnership , a portion of which was derived from the proceeds from the issuance of the preferred units ( as defined under “ issuance of preferred units ” below ) , and ( b ) ( i ) 15,564,009 of our common units issued directly by us and ( ii ) approximately $ 19.5 million in cash contributed by us . 61 tall oak 's assets serve gathering and processing needs in the growing sooner trend anadarko basin canadian and kingfisher counties ( “ stack ” ) and central northern oklahoma woodford ( “ cnow ” ) plays in oklahoma and are supported by long-term , fixed-fee contracts with acreage dedications that have a remaining weighted-average term of approximately 15 years . tall oak 's assets are strategically located in the core areas of the stack and cnow plays and include : chisholm plant . the chisholm plant , which serves the stack play , is a cryogenic gas processing plant with a current capacity of 100 mmcf/d . depending on future volume requirements , the chisholm plant could be expanded by an additional 600 mmcf/d for a total processing capacity of 700 mmcf/d . the plant is connected to a 200-mile , low and high-pressure gathering system with compression facilities . additional gathering pipelines and compression facilities are currently under construction . battle ridge plant .

results of operations the table below sets forth certain financial and operating data for the periods indicated . we manage our operations by focusing on gross operating margin which we define as operating revenue less cost of purchased gas , ngls , condensate and crude oil as reflected in the table below . items affecting comparability of our financial results our historical financial results discussed below may not be comparable to our future financial results , and our historical financial results for the years ended december 31 , 2015 , 2014 and 2013 may not be comparable for the following reasons : in connection with the business combination , the partnership entered into new agreements with devon that were effective on march 1 , 2014 pursuant to which the partnership provides services to devon under fixed-fee arrangements in which the partnership does not take title to the natural gas gathered or processed or the ngls it fractionates . prior to the effectiveness of these agreements , the predecessor provided services to devon under a percent-of-proceeds arrangement in which it took title to the natural gas it gathered and processed and the ngls it fractionated . prior to march 7 , 2014 , our financial results only included the assets , liabilities and operations of our predecessor . beginning on march 7 , 2014 , our financial results also consolidate the assets , liabilities and operations of the legacy business of the partnership prior to giving effect to the business combination . our financial statements for the years ended december 31 , 2015 and 2014 report financial results according to operating segments based principally upon geographic regions served . the predecessor had no operations for certain of those reporting segments . all historical affiliated transactions prior to march 7 , 2014 related to our continuing operations were net settled within our combined financial statements because these transactions related to devon and were funded by devon 's working capital .

ability to respond to rapidly evolving technology and customer requirements , our ability to protect our proprietary technology , the security of our software , our dependence on our management team and key personnel , our ability to hire and retain future key personnel , our ability to maintain an effective system of internal controls , or risks associated with our contracts with the u.s. federal government . these and other risks are more fully described herein and in our other filings with the securities and exchange commission . this section should be read in combination with the accompanying audited consolidated financial statements and related notes prepared in accordance with united states generally accepted accounting principles . overview bridgeline digital is a developer of an award-winning web experience management ( wem ) product suite named iapps ® and award-winning interactive technology solutions that help organizations optimize business processes . bridgeline 's iapps product suite combined with its interactive development capabilities assists customers in maximizing revenue , improving customer service and loyalty , enhancing employee knowledge , and reducing operational costs by leveraging web based technologies . bridgeline digital 's iapps product suite provides solutions that deeply integrate web content management , ecommerce , emarketing , deep within the website , web applications , or on-line stores in which they reside ; enabling business users to enhance and optimize the value of their web properties . combined with award-winning interactive development capabilities , bridgeline helps customers cost-effectively accommodate the changing needs of today 's rapidly evolving web properties . the iapps product suite is delivered through a cloud-based saas ( “ software as a service ” ) business model , whose flexible architecture provides customers with state of the art deployment providing maintenance , daily technical operation and support ; or via a traditional perpetual licensing business model , in which the iapps software resides on a dedicated server in either the customer 's facility or bridgeline 's co-managed hosting facility . kmworld magazine editors selected iapps as atrend setting product in both 2010 and 2011. iapps content manager won the 2010 codie award for best content management solution globally , and was a finalist for the same award in 2011. iapps commerce was also selected as a finalist for the 2011 codie award for best electronic commerce solution , globally . b2b interactive has selected bridgeline digital as one of the top interactive technology companies in the united states in 2009 , 2010 and 2011. bridgeline 's team of microsoft ® gold certified developers specialize in end-to-end interactive technology solutions which include digital strategy , user-centered design , web application development , sharepoint development , rich media development , search engine optimization and web application hosting management . sales and marketing bridgeline employs a direct sales force and each sale takes on average 60 to 180 days to complete . our direct sales force focuses its efforts selling to medium-sized and large companies . these companies are generally categorized in the following vertical markets : ( i ) financial services , ( ii ) consumer products and goods ( iii ) health services and life sciences , ( iv ) high technology , ( software and hardware ) , ( v ) retail brand names , ( vi ) transportation and storage , ( vii ) associations and foundations and ( viii ) the u.s. government . we have eight geographic locations in the united states with full-time professional direct sales personnel . our geographic locations are in the metropolitan atlanta , baltimore , boston , chicago , denver , new york , philadelphia , and tampa areas . we have a value added reseller channel to supplement our direct sales force for our iapps product suite . our value added resellers are generally located in territories where we do not have a direct sales force . acquisitions bridgeline plans to continue expanding its distribution of iapps and its interactive development capabilities throughout north america through acquisitions . due to the nature of our sales process and delivery requirements , we believe local staff is required in order to maximize market-share objectives . 18 we believe the web application development market in north america and europe is growing and fragmented . we believe established yet small web application development companies have the ability to market , sell and install our iapps product suite in their local metropolitan markets . we believe these companies also have a .net customer base and a niche presence in the local markets in which they operate . we believe there is an opportunity for us to acquire companies that specialize in web application development that are based in large north american cities in which we currently do not operate . we believe that by acquiring certain of these companies and applying our business practices and efficiencies , we can accelerate our time to market of the iapps product suite . we did not complete any acquisitions during the fiscal year ended september 30 , 2011. however , on october 3 , 2011 , we completed the acquisition of magnetic corporation ( “ magnetic ” ) , a tampa , florida based web technology company . the company acquired all of the outstanding capital stock of magnetic for consideration consisting of ( i ) $ 150 thousand in cash ( ii ) assumption of $ 130 thousand of indebtedness and ( iii ) contingent consideration of up to $ 600 thousand in cash and 166,666 shares of bridgeline digital common stock . the contingent consideration is payable quarterly over the 12 consecutive calendar quarters following the acquisition , contingent upon the acquired business achieving certain quarterly revenue and quarterly operating income targets during the period . the contingent common stock has been issued and is being held in escrow pending satisfaction of the applicable targets . to the extent that either the quarterly revenue targets or the quarterly operating income targets are not met in a particular quarter , the earn-out period will be extended for up to four additional quarters . story_separator_special_tag this increase is primarily attributable to additional amortization expense for intangible assets resulting from acquisitions completed in fiscal 2010. income ( loss ) from operations the loss from operations was ( $ 547 ) thousand for fiscal 2011 compared to a loss from operations of ( $ 239 ) for fiscal 2010. this increase in loss from operations is primarily due to increases in amortization of intangibles resulting from acquisitions completed in fiscal 2010 , investment in research and development , and sales and marketing costs to support our iapps products , offset by the increase in revenues and decrease in general and administrative expenses . interest income ( expense ) , net interest income ( expense ) , net increased to a $ 211 thousand net expense from a $ 65 thousand net expense for fiscal 2011 and 2010 , respectively . the increase in net expense in fiscal 2011 is attributable to interest expense incurred in relation to the company 's bank term loans and subordinated debt . also , contributing to the net increase in interest expense is interest incurred in relation to capital equipment leases . provision for income taxes the provision for income tax expense was $ 24 thousand and $ 73 thousand for fiscal 2011 and fiscal 2010 , respectively . income tax expense represents the estimated liability for federal and state income taxes owed by the company , including the alternative minimum tax . the company has net operating loss carryforwards and other deferred tax benefits that are available to offset future taxable income . a valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized . accordingly , the company has established a full valuation allowance against its net deferred tax asset at september 30 , 2011 and 2010. the federal net operating loss ( nol ) carryforward of approximately $ 4.0 million as of september 30 , 2011 expires on various dates through 2028. internal revenue code section 382 places a limitation on the amount of taxable income which can be offset by nol carryforwards after a change in control of a loss corporation . generally , after a change in control , a loss corporation can not deduct nol carryforwards in excess of the section 382 limitation . due to these “ change of ownership ” provisions , utilization of nol carryforwards may be subject to an annual limitation regarding their utilization against taxable income in future periods . the company has not performed a section 382 analysis . however , if performed , section 382 may be found to limit potential future utilization of our nol carryforwards . adjusted ebitda we also measure our performance based on a non-gaap ( “ generally accepted accounting principles ” ) measurement of earnings before interest , taxes , depreciation , and amortization and before stock compensation expense and impairment of goodwill and intangible assets ( “ adjusted ebitda ” ) . we believe this non-gaap financial measure of adjusted ebitda is useful to management and investors in evaluating our operating performance for the periods presented and provides a tool for evaluating our ongoing operations . adjusted ebitda , however , is not a measure of operating performance under gaap and should not be considered as an alternative or substitute for gaap profitability measures such as ( i ) income from operations and net income , or ( ii ) cash flows from operating , investing and financing activities , both as determined in accordance with gaap . adjusted ebitda as an operating performance measure has material limitations since it excludes the financial statement impact of income taxes , net interest expense , amortization of intangibles , depreciation , other amortization and stock-based compensation , and therefore does not represent an accurate measure of profitability . as a result , adjusted ebitda should be evaluated in conjunction with net income for a complete analysis of our profitability , as net income includes the financial statement impact of these items and is the most directly comparable gaap operating performance measure to adjusted ebitda . our definition of adjusted ebitda may also differ from and therefore may not be comparable with similarly titled measures used by other companies , thereby limiting its usefulness as a comparative measure . because of the limitations that adjusted ebitda has as an analytical tool , investors should not consider it in isolation , or as a substitute for analysis of our operating results as reported under gaap . 23 the following table reconciles net income ( which is the most directly comparable gaap operating performance measure ) to ebitda , and ebitda to adjusted ebitda : replace_table_token_2_th adjusted ebitda was $ 1.527 million for the year ended september 30 , 2011 compared with $ 1.859 million for the year ended september 30 , 2010 , a decrease of 18 % . the decrease in adjusted ebitda results primarily from a lower amount of net income for the current period as compared with the prior period . liquidity and capital resources cash flows operating activities cash provided by operating activities was $ 823 thousand for the year ended september 30 , 2011 , compared to $ 1.5 million for fiscal 2010. this decrease in cash from operating activities is primarily attributable to lower net income for fiscal 2011 as compared with fiscal 2010 and an increase in accounts receivable .

summary of results of operations total revenue for the fiscal year ended september 30 , 2011 ( “ fiscal 2011 ” ) increased 11 % compared with total revenue for the fiscal year ended september 30 , 2010 ( “ fiscal 2010 ” ) . loss from operations for fiscal 2011 was ( $ 547 ) thousand compared with loss from operations of ( $ 239 ) thousand for fiscal 2010. we had a net loss for fiscal 2011 of ( $ 782 ) thousand compared with a net loss of ( $ 377 ) thousand for fiscal 2010. loss per share for fiscal 2011 was ( $ 0.06 ) compared with loss per share of ( $ 0.03 ) for fiscal 2010. in fiscal 2010 , we completed two acquisitions . we acquired tmx interactive , inc. ( now bridgeline philadelphia ) on may 11 , 2010 and e.magination network , llc . ( now bridgeline baltimore ) on july 09 , 2010. the results of operations for these two acquisitions are included in our results of operations from the date of acquisition . highlights of fiscal 2011 highlights of fiscal 2011 include the achievement of record revenues , record iapps license sales and key iapps product releases and updates : · in fiscal 2011 , bridgeline digital achieved record revenues of $ 26.3 million , an 11 % increase compared to fiscal 2010 . · in fiscal 2011 , bridgeline digital had a record number of iapps licenses sold within a fiscal year . the company sold 213 new iapps licenses during fiscal 2011 , a 47 % increase when compared to fiscal 2010 . · iapps version 4.6 – in the third quarter of fiscal 2011 , bridgeline released iapps version 4.6 providing multiple feature enhancements to iapps analyzer and various key updates to iapps content manager and iapps marketier .

the ground support services segment , comprised of its global aviation services , llc ( “ gas ” ) subsidiary , provides ground support equipment maintenance and facilities maintenance services to domestic airlines and aviation service providers . each business segment has separate management teams and infrastructures that offer different products and services . the company evaluates the performance of its operating segments based on operating income . 12 following is a table detailing revenues by segment and by major customer category : replace_table_token_4_th mac and csa provide small package overnight airfreight delivery services on a contract basis throughout the eastern half of the united states and the caribbean . mac and csa 's revenues are derived principally pursuant to “ dry-lease ” service contracts with fedex . under the dry-lease service contracts in place during the fiscal years ended march 31 , 2015 and 2014 , fedex leased its aircraft to mac and csa for a nominal amount and paid a monthly administrative fee to mac and csa to operate the aircraft . under these contracts , all direct costs related to the operation of the aircraft ( including fuel , outside maintenance , landing fees and pilot costs ) were passed through to fedex without markup . these pass through costs totaled $ 32,672,000 and $ 33,076,000 for the years ended march 31 , 2015 and 2014 , respectively . these agreements were renewable on one-year terms and could be terminated by fedex at any time upon 30 days ' notice . the company believes that the short term and other provisions of its agreements with fedex are standard within the airfreight contract delivery service industry . fedex has been a customer of the company since 1980. loss of its contracts with fedex would have a material adverse effect on the company . as of march 31 , 2015 , mac and csa had an aggregate of 79 aircraft under agreement with fedex . separate agreements cover the three types of aircraft operated by mac and csa for fedex -- cessna caravan , atr-42 and atr-72 . pursuant to such agreements , fedex determines the schedule of routes to be flown by mac and csa . included within the 79 aircraft are five cessna caravan aircraft that are considered soft-parked . soft-parked aircraft remain covered under our agreements with fedex although at a reduced administrative fee compared to aircraft that are in operation . mac and csa continue to perform maintenance on soft-parked aircraft , but they are not crewed and do not operate on scheduled routes . on june 1 , 2015 mac commenced leasing an additional atr-72 aircraft from fedex , increasing the aggregate number of leased aircraft to 80. the administrative fee paid to mac for atr aircraft is significantly greater than the administrative fee for cessna caravan aircraft . on june 1 , 2015 , mac and csa entered into new dry-lease agreements with fedex with terms different from our prior dry-lease service contracts . the new dry-lease agreements provide for the lease of specified aircraft by mac and csa in return for the payment of monthly rent with respect to each aircraft leased , which monthly rent was increased from the prior dry-lease service contracts to reflect an estimate of a fair market rental rate . the new dry-lease agreements provide for the reimbursement by fedex of our costs , without mark up , incurred in connection with the operation of the leased aircraft for the following : fuel , landing fees , third-party maintenance , parts and certain other direct operating costs . unlike the prior dry-lease contracts , under the new dry-lease agreements , certain operational costs incurred by mac and csa in operating the aircraft under the new dry-lease agreements are not reimbursed by fedex at cost , and such operational costs are to be borne solely by us . under the new dry-lease agreements , mac and csa are required to perform maintenance of the leased aircraft in return for a maintenance fee based upon an hourly maintenance labor rate , which has been increased from the rate in place under the prior dry-lease service contracts and had not been adjusted since 2008. the new dry-lease agreements provide for the payment by fedex to mac and csa of a monthly administrative fee based on the number and type of aircraft leased and routes operated . the amount of the monthly administrative fee under the new dry-lease agreements is greater than under the prior dry-lease service contracts with fedex , in part to reflect the greater monthly lease payment per aircraft and that certain operational costs are to be borne by mac and csa and not reimbursed . 13 ggs manufactures and supports aircraft deicers and other specialized equipment on a worldwide basis . ggs manufactures five basic models of mobile deicing equipment with capacities ranging from 700 to 2,800 gallons . ggs also offers fixed-pedestal-mounted deicers . each model can be customized as requested by the customer , including single operator configuration , fire suppressant equipment , open basket or enclosed cab design , a patented forced-air deicing nozzle and on-board glycol blending system to substantially reduce glycol usage , color and style of the exterior finish . ggs also manufactures five models of scissor-lift equipment , for catering , cabin service and maintenance service of aircraft , and has developed a line of decontamination equipment , flight-line tow tractors , glycol recovery vehicles and other special purpose mobile equipment . ggs competes primarily on the basis of the quality , performance and reliability of its products , prompt delivery , customer service and price . in july 2009 , ggs was awarded a new contract to supply deicing trucks to the usaf , which expired in july 2014. on may 15 , 2014 , ggs was awarded a new contract to supply deicing trucks to the usaf . the initial contract award is for two years through july 13 , 2016 with four additional one-year extension options that may be exercised by the usaf . story_separator_special_tag of this amount , $ 2,799,000 was invested in accounts not insured by the federal deposit insurance corporation ( “ fdic ” ) . as of march 31 , 2015 , the company 's working capital amounted to $ 30,425,000 , an increase of $ 8,292,000 compared to march 31 , 2014. as of march 31 , 2015 , the company had a $ 7,000,000 secured long-term revolving credit line with an expiration date of august 31 , 2016. the revolving credit line contained customary events of default , a subjective acceleration clause and a fixed charge coverage requirement , with which the company was in compliance at march 31 , 2015. at march 31 , 2015 , aggregate outstanding borrowings under the line of credit were $ 5,000,000. see note 7 in the consolidated financial statements , included elsewhere in this report , for further discussion . on april 1 , 2015 , the company replaced this credit line with a senior secured revolving credit facility of $ 20.0 million ( the “ revolving credit facility ” ) . the revolving credit facility includes a sublimit for issuances of letters of credit of up to $ 500,000. under the revolving credit facility , each of the company , mac , csa , ggs and gas may make borrowings . initially , borrowings under the revolving credit facility bear interest ( payable monthly ) at an annual rate of one-month libor plus 1.50 % , although the interest rates under the revolving credit facility are subject to incremental increases based on a consolidated leverage ratio . in addition , a commitment fee accrues with respect to the unused amount of the revolving credit facility at an annual rate of 0.15 % . amounts applied to repay borrowings under the revolving credit facility may be reborrowed , subject to the terms of the facility . the revolving credit facility matures on april 1 , 2017 . 16 borrowings under the revolving credit facility , together with hedging obligations , if any owing to the lender under the revolving credit facility or any affiliate of such lender , are secured by a first-priority security interest in substantially all assets of the company and the other borrowers ( including , without limitation , accounts receivable , equipment , inventory and other goods , intellectual property , contract rights and other general intangibles , cash , deposit accounts , equity interests in subsidiaries and joint ventures , investment property , documents and instruments , and proceeds of the foregoing ) , but excluding interests in real property . the agreement governing the revolving credit facility contains affirmative and negative covenants , including covenants that restrict the ability of the company and the other borrowers to , among other things , incur or guarantee indebtedness , incur liens , dispose of assets , engage in mergers and consolidations , make acquisitions or other investments , make changes in the nature of their business , enter into certain operating leases , and make certain capital expenditures . the credit agreement also contains financial covenants , including a minimum consolidated tangible net worth of $ 22.0 million , a minimum consolidated fixed charge coverage ratio of 1.35 to 1.0 , a minimum consolidated asset coverage ratio of 1.75 to 1.0 , and a maximum consolidated leverage ratio of 3.5 to 1.0. the agreement governing the revolving credit facility contains events of default including , without limitation , nonpayment of principal , interest or other obligations , violation of covenants , misrepresentation , cross-default to other debt , bankruptcy and other insolvency events , judgments , certain erisa events , certain changes of control of the company , termination of , or modification to materially reduce the scope of the services required to be provided under , certain agreements with fedex , and the occurrence of a material adverse effect upon the company and the other borrowers as a whole . the company is exposed to changes in interest rates on its prior line of credit and its current revolving credit facility . if the libor interest rate had been increased by one percentage point , based on the weighted average balance outstanding for the year , the change in annual interest expense would have been negligible . following is a table of changes in cash flow for the respective years ended march 31 , 2015 and 2014 : replace_table_token_5_th cash provided by operating activities was $ 8,527,000 more in fiscal 2015 compared to fiscal 2014. the most significant factor was inventories which decreased substantially during the current year , a result of focus on reducing inventories from substantially higher levels . this change was somewhat offset by related movements in accounts payable related to inventories . an additional offsetting factor was notes receivable which decreased during the current year while increasing in the prior year . cash used in investing activities was $ 117,000 less in fiscal 2015 due to a $ 4,528,000 increase in the purchase of marketable securities in the current fiscal year , offset by proceeds of $ 515,000 from the sale of marketable securities and $ 3,359,000 of proceeds from the sale of the king air aircraft , shorts aircraft , and leased deicers . cash provided by financing activities was $ 7,201,000 more in fiscal 2015 than in the corresponding prior year period due primarily to $ 5,000,000 in proceeds from the line of credit and $ 130,000 paid to repurchase stock options , offset by $ 151,000 received from the exercise of stock options . there are currently no commitments for significant capital expenditures . of the $ 1,932,000 of capital expenditures in fiscal 2015 , $ 1,132,000 was for the capitalization of commercial aircraft deicers to be held for lease by ggs , compared to the capitalization in fiscal 2014 of $ 788,000 of commercial deicers held for lease . in may 2014 , the company 's board of directors adopted a policy to discontinue the payment of a regularly scheduled annual cash dividend .

2015 summary revenues for our overnight air cargo segment totaled $ 49,865,000 for the year ended march 31 , 2015 , representing a $ 2,477,000 ( 5 % ) decrease over the prior year . revenues were down primarily as a result of a decrease in maintenance labor revenue due to the completion of two- , four- and eight-year heavy maintenance checks during the prior fiscal year which did not recur in fiscal 2015. in addition , the segment experienced a slight decrease in the administrative fee revenue and a reduction in reimbursement for flight crew costs due to fewer aircraft in full revenue service in fiscal 2015 , which was partially offset by a modest increase in other reimbursable costs . the segment 's operating income decreased by $ 984,000 or 46 % in fiscal 2015. operating income for the segment in fiscal year 2015 included a $ 374,000 gain from the sale in november 2014 of the company owned king air aircraft which had been primarily used to support the air cargo segments operations . the segment 's operating income was also adversely affected by a $ 107,000 regulatory penalty assessed in fiscal 2015 and $ 94,000 incurred for the mandated regulatory rewrite of applicable maintenance manuals that began in fiscal 2015. the company anticipates an additional approximately $ 500,000 in costs related to the rewrite of these manuals will be incurred as this project is completed during fiscal 2016 . 14 even after consideration of the additional expense associated with the mandated manual rewrite , the company anticipates improved profitability of this segment going forward due to changes reflected in the new dry-lease agreements with fedex , including the first increase in maintenance labor rate in approximately eight years .

the new business will consist of enlink midstream partners , l.p. ( the “partnership” ) and enlink midstream , llc ( “enlink” ) , a master limited partnership and a general partner entity , which will both be publicly traded entities . the new midstream business will own devon 's midstream assets in the barnett shale in north texas and the cana and arkoma woodford shales in oklahoma , as well as devon 's economic interest in gulf coast fractionators in mt . belvieu , texas . devon will own a 70 percent controlling interest in enlink and an approximate 53 percent controlling interest in the partnership . story_separator_special_tag ended december 31 , 2013. our profit largely increased due to the effects of pricing and marketing activities . our profit increased nearly $ 40 million due to our ngl and gas marketing . additionally , changes in pricing led to an increase in operating profit of approximately $ 32 million . higher residue natural gas prices were the primary contributor to the higher profit . higher gathering and processing volumes were responsible for an increase in operating profit of $ 21 million . higher volumes were primarily the result of ngl production . the increase was largely driven by higher inlet volumes at the cana processing facility , improved efficiencies at the cana and bridgeport processing facilities and downtime impacting our bridgeport processing facility in 2012 . 30 operations and maintenance expenses decreased $ 11 million , or 6 percent primarily due to expenditures for regulatory testing in 2012 . 2012 vs. 2011 marketing and midstream operating profit decreased $ 124 million , or 23 percent , from the year ended december 31 , 2011 to the year ended december 31 , 2012. our profit largely decreased due to the effects of pricing and marketing activities . changes in pricing led to a decrease in operating profit of approximately $ 106 million . lower residue natural gas and ngl prices were the primary contributor to the lower profit . additionally , our profit decreased $ 13 million primarily due to lower profits on our ngl marketing . higher gathering , processing and transportation volumes were responsible for an increase in operating profit of $ 11 million . higher volumes were primarily the result of additional throughput at bridgeport and cana gathering . operations and maintenance expenses increased $ 16 million , or 9 percent primarily due to expenditures for regulatory testing in 2012. lease operating expenses ( “loe” ) replace_table_token_22_th 2013 vs. 2012 loe increased $ 0.67 per boe largely because of our liquids production growth , particularly in the permian basin and the mississippian-woodford trend in the u.s. these projects generally require a higher per unit cost than our gas projects , particularly because they are in the early stages of development . additionally , we conducted a turnaround at jackfish 2 in the third quarter of 2013 , contributing to higher unit costs in 2013. we also experienced inflationary pressures on costs in certain operating areas , which increased loe per boe . 2012 vs. 2011 loe increased $ 0.59 per boe largely because of our oil production growth , particularly at our jackfish thermal heavy oil projects in canada and in the permian basin in the u.s. we also experienced inflationary pressures on costs in certain operating areas , which increased loe per boe . general and administrative expenses ( “g & a” ) replace_table_token_23_th 31 2013 vs. 2012 net g & a and net g & a per boe decreased largely due to lower personnel expenses and office rent as a result of the houston office consolidation in 2012 and lower costs as a result of the company-wide implementation of sap in q2 2012. higher reimbursements due to increased liquids drilling activity and reimbursement rates also contributed to the decrease in net g & a and net g & a per boe . 2012 vs. 2011 net g & a and net g & a per boe increased largely due to higher employee compensation and benefits . employee costs increased primarily from an expansion of our workforce as part of growing production operations at certain of our key areas , including jackfish , the permian basin and the anadarko basin . production and property taxes replace_table_token_24_th 2013 vs. 2012 production and property taxes increased primarily due to an increase in our u.s. revenues , on which the majority of our production taxes are assessed . 2012 vs. 2011 production and property taxes decreased primarily due to a decrease in our u.s. revenues , on which the majority of our production taxes are assessed . depreciation , depletion and amortization ( “dd & a” ) replace_table_token_25_th a description of how dd & a of our oil and gas properties is calculated is included in note 1 to the financial statements included in “item 8. financial statements and supplementary data” of this report . generally , when reserve volumes are revised up or down , then the dd & a rate per unit of production will change inversely . however , when the depletable base changes , then the dd & a rate moves in the same direction . the per unit dd & a rate is not affected by production volumes . absolute or total dd & a , as opposed to the rate per unit of production , generally moves in the same direction as production volumes . 32 2013 vs. 2012 oil and gas property dd & a decreased $ 61 million largely as a result of the asset impairment charges recognized in 2012 and 2013. depreciation and amortization on our other properties increased $ 30 million largely from the construction of our new headquarters in oklahoma city and natural gas pipeline development in the cana-woodford shale . story_separator_special_tag however , these items have a more noticeable impact to our rate for the years ended december 31 , 2013 and 2012 , respectively , because of the relatively small pre-tax income/loss for those periods . for 2013 “other” was comprised primarily of tax audit adjustments and a favorable tax impact due to acquisition financing . earnings ( loss ) from discontinued operations replace_table_token_30_th 35 the earnings ( loss ) in each period were primarily driven by gains ( losses ) on the sales of our oil and gas assets in each period . in 2012 we incurred a loss of $ 16 million ( $ 21 million net of taxes ) for the sale of our assets in angola . in 2011 we generated a gain of $ 2.5 billion ( $ 2.5 billion net of taxes ) for the sale of our assets in brazil . capital resources , uses and liquidity sources and uses of cash the following table presents the major source and use categories of our cash and cash equivalents . replace_table_token_31_th operating cash flow – continuing operations net cash provided by operating activities ( “operating cash flow” ) continued to be a significant source of capital and liquidity in 2013. our operating cash flow increased 10 percent during 2013 primarily due to higher commodity prices and production growth , partially offset by higher expenses . our operating cash flow decreased 21 percent during 2012 primarily due to lower commodity prices and higher expenses , partially offset by additional cash flow from our production growth and higher cash settlements from our commodity derivatives . during 2013 our operating cash flow funded approximately 80 percent of our cash payments for capital expenditures . leveraging our liquidity , we used cash balances , short-term debt and divestiture proceeds to fund the remainder of our cash-based capital expenditures . capital expenditures replace_table_token_32_th 36 our capital expenditures consist of amounts related to our oil and gas exploration and development operations , our midstream operations and other corporate activities . the vast majority of our capital expenditures are for the acquisition , drilling and development of oil and gas properties , which totaled $ 6.0 billion , $ 7.4 billion and $ 6.9 billion in 2013 , 2012 and 2011 , respectively . the 20 percent decline in exploration , development and acquisition capital spending in 2013 was primarily due to a decline in new venture acreage acquisitions and utilization of the drilling carries in 2013 from our sinopec and sumitomo joint venture arrangements . the higher exploration and development capital spending in 2012 and 2011 was primarily due to new venture acreage acquisitions and increased drilling and development . with rising oil prices and proceeds from our offshore divestitures , we increased our onshore north american acreage positions and associated exploration and development activities to drive near-term growth of our oil production . capital expenditures for our midstream operations are primarily for the construction and expansion of natural gas processing plants , natural gas gathering systems and oil pipelines . our midstream capital expenditures are largely impacted by oil and gas drilling activities . the higher 2013 midstream expenditures primarily relate to expansions of our plants serving the barnett shale and cana-woodford shale and our access pipeline transporting heavy oil in canada . capital expenditures related to other activities decreased in 2013. this decrease is largely driven by the construction of our new headquarters in oklahoma city , which was completed in 2012. debt activity , net during 2013 , we increased our debt borrowings by $ 361 million as a result of issuing $ 2.25 billion of debt related to the planned eagle ford shale acquisition , which is expected to close in the first quarter of 2014 , and repaying approximately $ 1.9 billion of outstanding short-term debt . in december 2013 , to provide funding for our planned eagle ford shale acquisition , we issued $ 2.25 billion aggregate principal amount of fixed and floating rate senior notes resulting in cash proceeds of approximately $ 2.2 billion , net of discounts and issuance costs . during 2012 , we increased our debt borrowings by $ 1.9 billion as a result of issuing $ 2.5 billion of long-term debt and repaying approximately $ 0.6 billion of outstanding short-term debt . the additional borrowings were primarily used to fund capital expenditures in excess of our operating cash flow . during 2011 , we increased our commercial paper borrowings by $ 3.7 billion and received $ 0.5 billion from new debt issuances , net of debt maturities . proceeds were primarily used to fund capital expenditures and common stock repurchases in excess of operating cash flow . shareholder distributions the following table summarizes our share repurchases and our common stock dividends ( amounts and shares in millions ) . replace_table_token_33_th in connection with our offshore divestitures , we conducted a $ 3.5 billion share repurchase program that we completed in the fourth quarter of 2011. under the program , we repurchased 49.2 million shares , representing 11 percent of our outstanding shares , at an average price of $ 71.18 per share . 37 divestitures of property and equipment in 2013 , we sold our thunder creek operations in wyoming for approximately $ 148 million and our bear paw basin assets in havre , montana for approximately $ 73 million . we also sold other minor oil and gas assets . during 2012 , we closed joint venture transactions with sinopec and sumitomo . sinopec paid approximately $ 900 million in cash and received a 33.3 percent interest in five of our new ventures exploration plays in the u.s. sinopec is also funding approximately $ 1.6 billion of our share of future exploration , development and drilling costs associated with these plays . sumitomo paid approximately $ 400 million and received a 30 percent interest in the cline and midland-wolfcamp shale plays in texas . additionally , sumitomo is

results of operations all amounts in this document related to our international operations are presented as discontinued . therefore , the production , revenue and expense amounts presented in this “results of operations” section exclude amounts related to our international assets unless otherwise noted . 26 oil , gas and ngl production replace_table_token_15_th 27 oil , gas and ngl pricing replace_table_token_16_th ( 1 ) prices presented exclude any effects due to oil , gas and ngl derivatives . commodity sales the volume and price changes in the tables above caused the following changes to our oil , gas and ngl sales . replace_table_token_17_th volumes 2013 vs. 2012 – upstream sales increased $ 625 million due to a 15 percent increase in our liquids production , partially offset by a 7 percent decline in our gas production . oil production was the largest driver of the increase , accounting for 85 percent of the higher sales . largely due to continued development of our properties in the permian basin , the mississippian-woodford trend and the anadarko basin , our oil sales increased $ 531 million . bitumen sales increased $ 65 million due to development of our jackfish thermal heavy oil projects in canada . additionally , our ngl sales increased $ 181 million as a result of continued drilling in the liquids-rich gas portions of the barnett shale and the anadarko basin . these increases were partially offset by a 7 percent decrease in our 2013 gas production , resulting in a $ 152 million decline in sales . volumes 2012 vs. 2011 – upstream sales increased $ 695 million due to a 4 percent increase in production . oil and bitumen production were the largest drivers of the increase , accounting for nearly 90 percent of the higher sales .

introduction we are a diversified global manufacturer and provider of products for customers primarily in the consumer products , aerospace and industrial end markets . our wide range of innovative product solutions are engineered and designed to solve application-specific challenges that our customers face . we believe our businesses share important and distinguishing characteristics , including : well-recognized and leading brand names in the focused markets we serve ; innovative product technologies and features ; customer approved processes and qualified products ; established distribution networks ; relatively low ongoing capital investment requirements ; strong cash flow conversion and long-term growth opportunities . while the majority of our revenue is in the united states , we manufacture and supply products globally to a wide range of companies . we are principally engaged in three reportable segments : packaging , aerospace and specialty products . in december 2019 , we completed the sale of our lamons division ( `` lamons '' ) , a manufacturer and distributor of industrial sealing , fastening and specialty products primarily used in the petrochemical and petroleum-refining industries , to two wholly-owned subsidiaries of an investment fund sponsored by first reserve . the sale of lamons was an important strategic step for trimas , as we simplify and streamline our portfolio of businesses , significantly reducing our exposure to the oil and gas end market and allowing us to further focus on the businesses reported in our packaging and aerospace segments and the markets they serve . net after-tax proceeds from the sale were approximately $ 110.9 million , and remain subject to customary post-closing adjustments . the financial results of lamons were previously reported within our specialty products reportable segment . the financial position , results of operations and cash flows of lamons are reflected as discontinued operations for all periods presented through the date of disposition . key factors and risks affecting our reported results our businesses and results of operations depend upon general economic conditions . we serve customers in industries that are highly competitive , cyclical and that may be significantly impacted by changes in economic or geopolitical conditions . net sales for the year increased approximately $ 18.5 million , primarily as a result of sales from businesses acquired during 2019 in our packaging segment . sales growth from these acquisitions , plus from dispensers for health , beauty and home care applications and aerospace fastening products was partially offset by declines in sales of north american industrial , food and beverage and oil and gas-related products . while sales levels increased , our gross profit and operating profit decreased from 2018 levels , primarily due to a less favorable product sales mix , as a result of certain 2019 and 2018 non-operating liabilities and as a result of higher freight costs . other than the sale of lamons , the most significant drivers of change in the results of our operations in 2019 compared with 2018 were the impact of our two acquisitions in 2019 , which drove the overall sales growth but at lower operating margins than overall trimas , a decline in industrial end market sales and related profit , and three non-cash settlements of previously recorded liabilities . we acquired plastic srl and taplast s.p.a. ( `` taplast '' ) in january 2019 and april 2019 , respectively . plastic srl is a manufacturer of single-bodied and assembled polymeric caps and closures for use in home care product applications . taplast is a designer and manufacturer of dispensers , closures and containers for the beauty and personal care , household , and food and beverage packaging end markets . these acquisitions contributed $ 35.3 million of sales during 2019 within our packaging segment , and provide opportunities for future growth , as well as additional manufacturing and engineering capacity , in the european market . while plastic srl and taplast were accretive to 2019 operating profit dollars , their relative contribution was below the segment overall margin rate , impacting the packaging segment operating profit margin by more than 100 basis points . we expect , over time , to fully integrate these acquisitions utilizing the trimas business model ( `` tbm '' ) , achieving planned synergies and improving margins . 29 while demand levels in certain end markets were strong , especially for health , beauty and home care products as well as commercial aircraft fastening products , sales of north american industrial-related products declined by nearly $ 20 million from prior year levels . in our specialty products segment , industrial sales were down approximately $ 13.8 million , with cylinder sales lower due to the impact of customer consolidation and inventory management , and sales of upstream oil and gas products lower due to reduced oilfield-related activity . in our packaging segment , industrial sales were down approximately $ 5.8 million due to lower demand levels . given this level of sales , operating profit levels were significantly impacted , primarily in our specialty products segment , which declined by 300 basis points year-over-year due to lower fixed cost absorption and higher conversion costs . while difficult to quantify , we believe demand levels , primarily in the packaging end markets , are being affected by uncertainties related to the direct and indirect impact of current and proposed tariffs and other restrictions on trade . an additional factor significantly impacting 2019 versus 2018 results of operations related to the termination of a legacy liability of approximately $ 8.2 million , which resulted in a non-cash reduction to corporate office selling , general and administrative expenses in 2018 that did not repeat in 2019. prior to 2002 , we were wholly-owned by metaldyne corporation ( `` metaldyne '' ) . in connection with the reorganization between trimas and metaldyne in june 2002 , we assumed certain liabilities and obligations of metaldyne , mainly comprised of contractual obligations to former trimas employees , tax-related matters , benefit plan liabilities and reimbursements to metaldyne of normal course payments to be made on trimas ' behalf . story_separator_special_tag we will continue to evaluate opportunities to return capital to shareholders through the purchase of our common stock , depending on market conditions and other factors . 31 segment information and supplemental analysis the following table summarizes financial information for our three reportable segments ( dollars in thousands ) : replace_table_token_5_th ( a ) corporate capital expenditures for the years ended december 31 , 2018 and 2017 , respectively , are primarily related to purchases of machinery and equipment formerly held under operating leases . these purchased assets were subsequently transferred from corporate to the reportable segment utilizing the assets . 32 story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > 29.6 % of sales , in 2019 , as compared to $ 119.6 million , or 32.5 % of sales , in 2018 . gross profit decreased by approximately $ 3.2 million due to higher freight costs , more than half of which was as a result of expediting shipments to fulfill committed delivery dates , and by approximately $ 2.0 million due to unfavorable currency exchange , as our reported results in u.s. dollars were negatively impacted as a result of the stronger u.s. dollar relative to foreign currencies . while the increase in net sales contributed incremental gross profit dollars , we experienced a less favorable product sales mix , primarily due to gross margins of the acquired businesses being below the current overall segment margin , which impacted gross margin by nearly 100 basis points . in addition , sales to the health , beauty and home care end market comprised a larger percentage of net sales in 2019 compared to 2018 , and yield a lower gross profit margin . packaging 's selling , general and administrative expenses increased approximately $ 0.3 million to $ 35.3 million , or 9.0 % of sales , in 2019 , as compared to $ 35.0 million , or 9.5 % of sales , in 2018 , primarily due to higher ongoing selling , general and administrative costs associated with the acquisitions completed in 2019 as well as non-cash purchase accounting-related expenses of approximately $ 0.8 million related to the write-off of the trade name acquired in the plastic srl acquisition that will not be used . these increases were partially offset by an approximate $ 3.9 million non-cash reversal of a contingent liability for which the underlying obligation expired in 2019. packaging 's operating profit decreased approximately $ 3.8 million to $ 80.8 million , or 20.6 % of sales , in 2019 , as compared to $ 84.6 million , or 23.0 % of sales , in 2018 , as the impact of higher freight costs , unfavorable foreign currency exchange , a less favorable product sales mix , and higher selling , general and administrative expenses more than offset the impact of higher sales levels . aerospace . net sales increased approximately $ 8.4 million , or 5.4 % , to $ 164.8 million in 2019 , as compared to $ 156.4 million in 2018 , due to steady demand levels for fastener products combined with improved production throughput at our manufacturing facilities . gross profit within aerospace increased approximately $ 4.8 million to $ 50.0 million , or 30.3 % of sales , in 2019 , from $ 45.2 million , or 28.9 % of sales , in 2018 , as the higher sales were more profitable as a result of production efficiencies . in addition , gross profit and related margin increased due to a favorable product sales mix of more highly-engineered fasteners . selling , general and administrative expenses increased approximately $ 1.3 million to $ 21.5 million , or 13.1 % of sales , in 2019 , as compared to $ 20.3 million , or 13.0 % of sales , in 2018 , consistent with the increase in sales levels on percentage basis . operating profit within aerospace increased approximately $ 3.5 million to $ 28.4 million , or 17.2 % of sales , in 2019 , as compared to $ 24.9 million , or 15.9 % of sales , in 2018 , primarily due to higher sales levels , improved production efficiencies and a more favorable product sales mix , which were partially offset by higher selling , general and administrative expenses . 34 specialty products . net sales decreased approximately $ 14.1 million , or 7.8 % , to $ 166.4 million in 2019 , as compared to $ 180.5 million in 2018 . sales of engines , compressors and related parts used in upstream oil and gas applications decreased approximately $ 7.1 million due to lower oil and gas drilling investment activity in the u.s. and canada . sales of our industrial cylinder products decreased approximately $ 6.7 million , primarily due to decreased demand for both high pressure and acetylene steel cylinders , we believe , as a result of customer consolidation and related asset cylinder inventory management . in addition , net sales decreased by approximately $ 0.3 million due to lower sales of machined components products . gross profit within specialty products decreased approximately $ 7.5 million to $ 27.8 million , or 16.7 % of sales , in 2019 , as compared to $ 35.3 million , or 19.6 % of sales , in 2018 . gross profit decreased primarily due to lower sales , reduced fixed cost absorption , and higher conversion costs for our cylinder products and machined components . selling , general and administrative expenses within specialty products decreased approximately $ 0.7 million to $ 11.2 million , or 6.7 % of sales , in 2019 , as compared to $ 11.8 million , or 6.6 % of net sales , in 2018 . selling , general and administrative expenses decreased as we have continued to manage spending levels consistent with current lower demand levels .

results of operations year ended december 31 , 2019 compared with year ended december 31 , 2018 the principal factors impacting us during the year ended december 31 , 2019 , compared with the year ended december 31 , 2018 were : the impact of our two acquisitions , plastic srl and taplast , acquired in january 2019 and april 2019 , respectively , which drove the overall sales growth but at lower operating margins ; a decline in north american industrial end market sales and related operating profit , primarily in our specialty products and packaging reportable segments ; the termination of a corporate liability , resulting in an approximate $ 8.2 million reduction in selling , general and administrative expenses during 2018 which did not repeat in 2019 ; an approximate $ 3.9 million non-cash reversal of a contingent liability in our packaging reportable segment , for which the underlying obligation expired in 2019 ; and the settlement of defined benefit obligations in 2018 , which resulted in an approximate $ 2.5 million non-cash settlement charge that did not repeat in 2019. overall , net sales increased approximately $ 18.5 million , or approximately 2.6 % , to $ 723.5 million in 2019 , as compared to $ 705.0 million in 2018 . the acquisitions of taplast , in april 2019 , and plastic srl , in january 2019 , contributed approximately $ 35.3 million of sales in our packaging segment . organic sales overall , excluding the impact of currency exchange , decreased by approximately $ 11.0 million compared to 2018. we experienced approximately $ 12.2 million higher sales to the packaging segment 's health , beauty and home care end markets and $ 8.4 million higher sales within our aerospace segment , both due to solid demand levels primarily in north america .

we consider all available evidence , both positive and negative , including historical levels of income , expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance . if it is more likely than not that we will not realize our deferred tax assets , we will increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be realizable . the available positive evidence at december 31 , 2017 included historical operating profits and a projection of future income sufficient to realize most of our remaining deferred tax assets . as of december 31 , 2017 , it was considered more likely than not that our deferred tax 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 consolidated financial statements and related notes included elsewhere in this annual report on form 10-k. overview our goal is to establish invisalign clear aligners as the standard method for treating malocclusion and to establish the itero intraoral scanner as the preferred scanning device for 3d digital scans , ultimately driving increased product adoption by dental professionals . we intend to achieve this by continued focus and execution of our strategic growth drivers set forth in the business strategy section in this annual report on form 10-k. the successful execution of our business strategy in 2018 and beyond may be affected by a number of other factors including : new products , feature enhancements and technology innovation . product innovation drives greater treatment predictability and clinical applicability and ease of use for our customers which supports adoption of invisalign treatment in their practices . our focus is to develop solutions and features to treat a wide range of cases from simple to complex . most recently , in march 2017 , we announced invisalign teen with mandibular advancement , the first clear aligner solution for class ii correction in growing tween and teen patients . this new offering combines the benefits of the most advanced clear aligner system in the world with features for moving the lower jaw forward while simultaneously aligning the teeth . invisalign teen with mandibular advancement is now available in canada , and select europe , middle east and africa ( `` emea '' ) , asia pacific ( `` apac '' ) and latin america ( `` latam '' ) countries . invisalign teen with mandibular advancement is pending 510 ( k ) clearance and is not yet available in the united states ( `` u.s. '' ) . we believe that over the long-term , clinical solutions and treatment tools will increase adoption of invisalign and increase sales of our intraoral scanners ; however , it is difficult to predict the rate of adoption which may vary by region and channel . invisalign adoption . our goal is to establish invisalign as the treatment of choice for treating malocclusion ultimately driving increased product adoption and frequency of use by dental professionals , also known as `` utilization rates . '' our quarterly utilization rates for the last 9 quarters are as follows : * invisalign utilization rates = # of cases shipped divided by # of doctors cases were shipped to 35 ◦ total utilization in the fourth quarter of 2017 increased to 5.7 cases per doctor compared to 5.2 in the fourth quarter of 2016 . ▪ north america : utilization among our north american orthodontist customers reached an all time high in the fourth quarter of 2017 at 14.0 cases per doctor . compared to 11.3 cases per doctor utilized in the fourth quarter of 2016 , the increase in north america orthodontist utilization in the fourth quarter of 2017 reflects improvements in product and technology which continues to strengthen our doctors ' clinical confidence such that they now utilize invisalign more often and on more complex cases , including their teenage patients . ▪ international : international doctor utilization of 5.2 cases per doctor in the fourth quarter of 2017 compared to 5.0 in the fourth quarter of 2016. the international utilization reflects growth in both the emea and apac regions due to increasing adoption of the product due in part to its ability to treat more complex cases . we expect that over the long-term our utilization rates will gradually improve as a result of advancements in product and technology , which continue to strengthen our doctors ' clinical confidence in the use of invisalign . in addition , since the teenage market makes up 75 % of the 10 million total orthodontic case starts each year and as we continue to drive adoption of teenage patients through sales and marketing programs , we expect our utilization rate to improve . in 2017 , 25.5 % of our volume was from teenagers starting treatment with invisalign , an increase of 40.4 % from 2016. our utilization rates , however , may fluctuate from period to period due to a variety of factors , including seasonal trends in our business along with adoption rates of new products and features . number of new invisalign doctors trained . we continue to expand our invisalign customer base through the training of new doctors . in 2017 , invisalign growth was driven primarily by increased utilization across all regions as well as by the continued expansion of our customer base as we trained a total of 16,500 new invisalign doctors , of which 67 % were trained internationally . international invisalign growth . we will continue to focus our efforts towards increasing invisalign adoption by dental professionals in our direct international markets . on a year over year basis , international invisalign volume increased 52.3 % driven primarily by strong performance in our apac and emea regions . story_separator_special_tag the sdc entities also allege that align has breached confidentiality provisions applicable to the sdc financial llc members and demands that align cease all activities related to the invisalign store pilot project , close existing invisalign stores and cease using sdc 's confidential information . align disputes the allegations that it has breached its obligations to the sdc entities , including the allegation that the sdc entities are entitled to exercise a repurchase right . pursuant to the parties ' agreement , the dispute will be arbitrated if it is not resolved through negotiations . we are currently evaluating the potential impact that this could have on our consolidated financial statements . story_separator_special_tag style= '' line-height:120 % ; text-align : justify ; text-indent:32px ; font-size:10pt ; '' > scanner net revenues increased by $ 76.2 million in 2016 compared to 2015 primarily as a result of an increase in the number of scanners recognized as we began shipping our next generation itero element scanner in september 2015 , which contributed $ 43.3 million in net revenues and , to a lesser extent , an increase in asp . which contributed $ 23.7 million to net revenues . 39 cost of net revenues and gross profit ( in millions ) : replace_table_token_6_th changes and percentages are based on actual values . certain tables may not sum or recalculate due to rounding . cost of net revenues for our clear aligner and scanner segments includes personnel-related costs including payroll and stock-based compensation for staff involved in the production process , the cost of materials , packaging , shipping costs , depreciation on capital equipment and facilities used in the production process , amortization of acquired intangible assets and training costs . fiscal year 2017 compared to fiscal year 2016 clear aligner the gross margin percentage declined slightly in 2017 compared to 2016 primarily due to an increase in aligners per case driven by additional aligners which was partially offset by higher absorption as a result of increased production volumes . scanner the gross margin percentage increased in 2017 compared to 2016 primarily due to a favorable product mix shift to our lower cost itero element scanner . this was partially offset by a lower asp . fiscal year 2016 compared to fiscal year 2015 clear aligner the gross margin percentage declined in 2016 compared to 2015 primarily driven by a higher number of aligners per case and lower asp which was partially offset by higher absorption as a result of increased production volumes . scanner the gross margin percentage increased in 2016 compared to 2015 due to a product mix shift to our itero element scanner which has a higher asp along with lower costs per unit . 40 selling , general and administrative ( in millions ) : replace_table_token_7_th changes and percentages are based on actual values . certain tables may not sum or recalculate due to rounding . selling , general and administrative expense includes personnel-related costs including payroll , commissions and stock-based compensation for our sales force , marketing and administration in addition to media and advertising expenses , clinical education , trade shows and industry events , product marketing , outside consulting services , legal expenses , depreciation and amortization expense , the medical device excise tax ( `` mdet '' ) and allocations of corporate overhead expenses including facilities and it . selling , general and administrative expense increased in 2017 compared to 2016 primarily due to higher compensation related costs of $ 85.6 million mainly as a result of increased headcount resulting in higher salaries expense , incentive bonuses and fringe benefits . we also incurred higher expenses from advertising and marketing of $ 34.2 million , equipment and maintenance costs of $ 21.9 million , and outside services costs of $ 20.3 million . selling , general and administrative expense increased in 2016 compared to 2015 primarily due to higher compensation related costs of $ 47.1 million as a result of increased headcount resulting in higher salaries expense , incentive bonuses and fringe benefits . we also incurred higher expenses from advertising and marketing of $ 16.5 million , outside services costs of $ 12.2 million , equipment and material costs of $ 6.8 million , travel and related costs of $ 6.0 million and credit card processing fees of $ 4.2 million . in addition , during the first quarter of 2015 , there was a refund of mdet taxes paid in 2014 of $ 6.8 million as our aligners are no longer subject to the excise tax . research and development ( in millions ) : replace_table_token_8_th changes and percentages are based on actual values . certain tables may not sum or recalculate due to rounding . research and development expense includes the personnel-related costs including stock-based compensation and outside consulting expenses associated with the research and development of new products and enhancements to existing products and allocations of corporate overhead expenses including facilities and it . research and development expense increased in 2017 compared to 2016 primarily due to higher compensation costs as a result of increased headcount resulting in higher salaries expense , incentive bonuses and fringe benefits . research and development expense increased in 2016 compared to 2015 due to higher compensation costs as a result of increased headcount resulting in higher salaries expense , incentive bonuses and fringe benefits . 41 income from operations ( in millions ) : replace_table_token_9_th changes and percentages are based on actual values . certain tables may not sum or recalculate due to rounding . ( 1 ) refer to note 16 `` segments and geographical information '' of the notes to consolidated financial statements for details on unallocated corporate expenses and the reconciliation to total income from operations . fiscal year 2017 compared to fiscal year 2016 clear aligner operating margin percentage increased slightly in 2017 compared to 2016 as we leveraged our operating expenses on higher clear aligner revenues .

results of operations net revenues by reportable segment comparison for year ended december 31 , 2017 , 2016 and 2015 : we group our operations into two reportable segments : clear aligner segment and scanner segment our clear aligner segment consists of comprehensive products , non-comprehensive products and non-case revenues as defined below : 37 ◦ comprehensive products include our invisalign full , teen and assist products . ◦ non-comprehensive products include our invisalign express , invisalign lite , invisalign i7 and invisalign go products in addition to revenues from the sale of aligners to smiledirectclub ( “ sdc ” ) under our supply agreement . revenue from sdc is recorded after eliminating outstanding intercompany transactions . ◦ non-case includes our vivera retainers along with our training and ancillary products for treating malocclusion . our scanner segment consists of intraoral scanning systems and additional services available with the intraoral scanners that provide digital alternatives to the traditional cast models . this segment includes our itero scanner and orthocad services . net revenues for our clear aligner segment and scanner segment by region for the year ended december 31 , 2017 , 2016 and 2015 are as follows ( in millions ) : replace_table_token_4_th changes and percentages are based on actual values . certain tables may not sum or recalculate due to rounding . clear aligner case volume by region case volume data which represents clear aligner case shipments by region , for the year ended december 31 , 2017 , 2016 and 2015 is as follows ( in millions ) : replace_table_token_5_th changes and percentages are based on actual values . certain tables may not sum or recalculate due to rounding . fiscal year 2017 compared to fiscal year 2016 total net revenues increased by $ 393.6 million in 2017 as compared to 2016 primarily as a result of case volume growth across all regions and products as well as increased non-case revenue .

these statements involve a number of risks , uncertainties and other factors that could cause actual results to differ materially from those reflected in any forward looking statements , as a result of a variety of risks and uncertainties , including those described under “cautionary statements concerning forward looking statements” and “risk factors.” overview our history exone was formed on january 1 , 2013 , when the ex one company , llc , a delaware limited liability company , merged with and into a delaware corporation , which survived and changed its name to the exone company . as a result of our reorganization on january 1 , 2013 , the ex one company , llc became exone , the common and preferred interest holders of the ex one company , llc became holders of common stock and preferred stock , respectively , of exone , and the subsidiaries of the ex one company , llc became the subsidiaries of exone . on february 12 , 2013 , we completed our ipo , raising approximately $ 90.4 million in net proceeds after expenses to us . on september 13 , 2013 , we completed a secondary public offering , raising an additional $ 64.9 million in net proceeds after expenses to us . our business we are a global provider of 3d printing machines and 3d printed and other products , materials and services to industrial customers . our business primarily consists of manufacturing and selling 3d printing machines and printing products to specification for our customers using our installed base of 3d printing machines . we offer pre-production collaboration and printed products for customers through our eight production pscs , which are located in the united states , germany , italy and japan . we build 3d printing machines at our facilities in the united states and germany . we also supply the associated materials , including consumables and replacement parts , and other services , including training and technical support , necessary for purchasers of our machines to print products . we believe that our ability to print in a variety of industrial materials , as well as our industry-leading printing capacity ( as measured by build box size and print head speed ) uniquely position us to serve the needs of industrial customers . 2014 developments and 2015 outlook our results of operations for 2014 were negatively affected by lower than expected sales of 3d printing machines as a result of longer than expected sales cycles for certain customers , as well as increased costs for production , research and development and selling , general and administrative activities , principally in the form of expanded facilities and personnel costs ( consistent with our plan for 2014 ) . offsetting these negative effects , were increases in revenues associated with 3d printed and other products , materials and services , mostly due to increased customer acceptance and demand for our additive manufacturing technologies . note the following operations highlights for 2014 : commencing transition to our new facility in gersthofen , germany . when complete , this transition will result in approximately doubling our available facility space and will substantially increase our production capacity of indirect printing machines and psc operations . this transition also results in a full consolidation of our production , research and development , sales and marketing and administrative teams under one combined facility . 40 initiating expansion of our north huntingdon , pa facility . upon completion , this expansion doubles the available psc production space for this facility and also expands our available space for research and development activities . opening our psc in italy . we opened our newest psc site in italy , which also serves as a machine sales center for the country . upgrading our united states pscs . we upgraded our united states pscs with new technology , effectively expanding our capacity with newer , faster machines to print products for customers . our united states pscs are certified to iso 9000:2008. significant developments with our machines . we committed significant resources in 2014 to the development of our machine technologies . during 2014 we introduced our exerial , s-max+ and innovent machine platforms and sold our first m-print unit . developments with our binder jetting technology and printable materials . we continued to evolve our qualified and printable materials capabilities . during 2014 , we commercialized our first near 100 % dense material , a nickel-based alloy . in addition , we introduced several materials capable of direct printing for research and development activities . our continued goal is to qualify an additional indirect or directly printed industrial material every six months . acquisitions . in march 2014 , we acquired mam and mwt which have enhanced our post-printing capabilities by providing specialty machining support ( mam ) and microwave technologies ( mwt ) which are a complementary element to certain of our 3d printing technologies . with our facilities expansion substantially behind us , and our new machine platforms gaining market attention , we plan to focus our attention in 2015 on the operational effectiveness of our business with the primary goal being the continued global adoption of our binder jetting technologies . this includes further expanding our business focus from predominantly prototyping activities and short-run production to series production , principally through our introduction of the exerial machine platform . we plan to complete an extensive strategic review of our businesses which will consider the markets we serve , our customers and our geographic footprint . we intend to place a firm emphasis of maximizing revenues from our 3d printing machines and continuing to grow our revenues from 3d printed and other products , materials and services . we also plan to continue to effectively manage our costs of production and operating expenses such that we align our spending plans with the anticipated growth of our business . how we measure our business we use several financial and operating metrics to measure our business . story_separator_special_tag 42 story_separator_special_tag style= '' font-family : times new roman '' > selling , general and administrative expenses for 2014 were $ 24,029 compared with selling , general and administrative expenses of $ 16,119 for 2013 , an increase of $ 7,910 , or 49.1 % . this increase was principally due to ( i ) personnel costs associated with an increased headcount ( including salaries , related benefits , travel expenses and equity-based compensation ) , ( ii ) an increase in provisions for bad debts as a result of certain receivables experiencing deteriorating credit quality based on either customer-specific or macroeconomic factors , ( iii ) other growth-related expenses ( consulting and professional fees ) , ( iv ) higher selling expenses ( including higher sales commissions expense and increased trade show expenses ) , and ( v ) the impact of the mam and mwt acquisitions ( acquired in march 2014 ) , principally amortization of identified intangible assets . operating expenses for 2013 were $ 21,246 compared with operating expenses of $ 20,215 for 2012 , an increase of $ 1,031 , or 5.1 % . operating expenses as a percentage of revenue were 53.8 % for 2013 , compared with 70.5 % for 2012. research and development expenses for 2013 were $ 5,127 compared with research and development expenses of $ 1,930 for 2012 , an increase of $ 3,197 , or 165.6 % . this increase was due primarily to ( i ) increased costs associated with our materials qualification activities , including additional research and development headcount , materials usage and facilities costs associated with our materials development laboratory in the united states and ( ii ) continued investment in enhancing our 3d printing machine technology for both direct and indirect printing . selling , general and administrative expenses for 2013 were $ 16,119 compared with selling , general and administrative expenses of $ 18,285 for 2012 , a decrease of $ 2,166 , or 11.8 % . this decrease was due principally to a net decrease in equity-based compensation expense for 2013 compared to 2012. the net decrease in equity- 45 based compensation expense is as a result of the absence of $ 7,735 in expense for 2012 related to the sale of common units by the majority member of the former limited liability company to another member and two executives of the former limited liability company . offsetting the net decrease in equity-based compensation were increases in selling , general and administrative expenses in 2013 compared to 2012 associated with ( i ) merger and acquisition related activities following our secondary public offering of common stock in september 2013 , ( ii ) increased professional service fees ( including legal , audit and other consulting expenses ) , ( iii ) increased personnel costs associated with an increased headcount ( including salaries and related benefits ) in making the transition from a private company to a publicly traded company and ( iv ) increased selling costs ( principally selling commissions for machine sale transactions ) . interest expense interest expense for 2014 was $ 144 compared with interest expense of $ 372 in 2013 , a decrease of $ 228 , or 61.3 % . this decrease was due principally to a lower average outstanding debt balance for 2014 , as compared to 2013 , mostly due to ( i ) the retirement of the demand note payable to a member in february 2013 and ( ii ) the settlement of debt held by variable interest entities in connection with our acquisition of certain related assets of those entities in march 2013. interest expense for 2013 was $ 372 compared with interest expense of $ 842 in 2012 , a decrease of $ 470 , or 55.8 % . this decrease was due principally to a lower average outstanding debt balance for 2013 , as compared to 2012 , mostly due to ( i ) the retirement of the demand note payable to a member in february 2013 and ( ii ) the settlement of debt held by variable interest entities in connection with our acquisition of certain related assets of those entities in march 2013. other income — net other income — net for 2014 was $ 210 compared with other income — net of $ 98 for 2013 and other income — net of $ 221 for 2012. amounts for all periods consist principally of interest income on cash deposits and other financing activity benefits . provision for income taxes the provision for income taxes for 2014 , 2013 and 2012 was $ 159 , $ 370 and $ 995 , respectively . the effective tax rate for 2014 , 2013 and 2012 was 0.7 % , 6.2 % and 11.5 % ( provision on a loss ) , respectively . for 2014 and 2013 , the effective tax rate differed from the u.s. federal statutory rate of 34.0 % primarily due to net changes in valuation allowances for the period . for 2012 , the effective tax rate differed from the u.s. federal statutory rate of 34.0 % primarily due to the effects of ( i ) limited liability company losses not subject to tax and ( ii ) net changes in valuation allowances for the period . we have provided a valuation allowance for our net deferred tax assets as a result of our inability to generate consistent net operating profits in jurisdictions in which we operate . as such , any benefit from deferred taxes in any of the periods presented in our consolidated financial statements has been fully offset by changes in the valuation allowance for net deferred tax assets .

results of operations summary net loss attributable to exone for 2014 was $ 21,843 or $ 1.52 per basic and diluted share , compared with a net loss attributable to exone of $ 6,455 or $ 0.51 per basic and diluted share for 2013. the increase in our net loss was principally due to ( i ) a decrease in our gross profit attributed to an unfavorable mix of sales and increases in production costs associated with the expansion of our global facilities and ( ii ) an increase in operating expenses attributed to increased spending in research and development activities ( for materials qualification and machine development ) and selling , general and administrative expense ( due to increased personnel costs and an increase in provisions for bad debts ) . net loss attributable to exone for 2013 was $ 6,455 or $ 0.51 per basic and diluted share , compared with a net loss attributable to exone of $ 10,168 for 2012. the decrease in our net loss was principally due to an increase in our revenue and gross profit as a result of a significant increase in 3d printing machine sales for 2013 compared to 2012. revenue the following table summarizes revenue by product line for each of the years ending december 31 : replace_table_token_4_th revenue for 2014 was $ 43,900 compared with revenue of $ 39,480 for 2013 , an increase of $ 4,420 , or 11.2 % .

10 we consider the following accounting policies to be those most important to the portrayal of our financial condition and those that require the most subjective judgment : revenue recognition revenue consists primarily of fees charged to customers based on the volume of images printed from devices supported under a long-term contract . revenue also includes the sale of equipment . with respect to revenue recognition for multiple deliverables , we have evaluated and determined that two separate units of accounting exist : recurring service revenue and equipment sale revenue . revenue is allocated to each unit of accounting using the relative selling price method , which allocates revenue to each unit of accounting based on the relative selling price for both the delivered and undelivered items . we use a combination of third party evidence and historical experiences of our costs to deliver the services in order to determine the estimated amounts to allocate to each unit . if billings for the sale of equipment exceed the amount of contract proceeds allocated to the equipment unit , revenue is deferred . we recognize recurring service revenue over the period the service is performed and revenue from equipment sales at the time equipment is placed in service . we recognize revenue when the following four basic criteria have been met : ( 1 ) persuasive evidence that an arrangement exists , ( 2 ) delivery has occurred or services were rendered , ( 3 ) the fee is either fixed or determinable and ( 4 ) collectability is reasonably assured . amounts billed which do not meet such criteria are deferred until all four criteria have been met . stock-based compensation under the fair value recognition provisions of the authoritative guidance , stock-based compensation cost granted to employees is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service or performance period , which is the vesting period . stock options and warrants issued to consultants and other non-employees as compensation for services to be provided to us are accounted for based upon the fair value of the services provided or the estimated fair value of the option or warrant , whichever can be more clearly determined . we currently use the black-scholes option pricing model to determine the fair value of stock options . the determination of the fair value of stock-based payment awards 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 our expected stock price volatility over the term of the awards , the expected term of the award , the risk-free interest rate and any expected dividends . compensation cost associated with grants of restricted stock units are also measured at fair value . we evaluate the assumptions used to value restricted stock units on a quarterly basis . when factors change , including the market price of the stock , share-based compensation expense may differ significantly from what has been recorded in the past . if there are any modifications or cancellations of the underlying unvested securities , we may be required to accelerate , increase or cancel any remaining unearned share-based compensation expense . income taxes the preparation of consolidated financial statements in conformity with gaap requires management to make estimates and assumptions that affect the reported amount of tax-related assets and liabilities and income tax expense . these estimates and assumptions are based on the requirements of the financial accounting standards board ( “ fasb ” ) accounting standards codification ( “ asc ” ) relating to accounting for uncertainty in income taxes . our policy is to classify interest and penalties related to unrecognized income tax benefits as a component of income tax expense . 11 we assess whether previously unrecognized tax benefits may be recognized when the tax position is ( 1 ) more likely than not of being sustained based on its technical merits , ( 2 ) effectively settled through examination , negotiation or litigation , or ( 3 ) settled through actual expiration of the relevant tax statutes . implementation of this requirement requires the exercise of significant judgment . recognizing deferred tax assets will increase tax benefits and increase net income . impairment of intangible assets we account for goodwill in accordance with fasb 's authoritative guidance which requires that goodwill and certain intangible assets are not amortized , but are subject to an annual impairment test . we complete our goodwill impairment test on an annual basis , during the fourth quarter of our fiscal year , or more frequently , if changes in facts and circumstances indicate that impairment in the value of goodwill recorded on our balance sheet may exist . for purposes of testing the impairment of goodwill , we have one reporting unit . our methodology for testing goodwill impairment consists of one , and possibly two steps . in step one of the goodwill impairment test , we compare our carrying amount ( including goodwill ) of our entity-wide reporting unit and auxilio 's fair value based on market capitalization . we evaluated how this market capitalization measure compared to the performance based multiples of revenue and earnings methods and feel it most accurately reflects the company 's valuation given our recent revenue growth accompanied by losses which causes performance based metrics to portray the company at an unrealistic value . our market capitalization is based on the closing price of our common stock as quoted on the otcbb multiplied by our outstanding shares of common stock . story_separator_special_tag there was no impairment of goodwill as a result of the annual impairment tests completed during the fourth quarters of 2012 and 2011. excluding goodwill , we have no intangible assets deemed to have indefinite lives . at december 31 , 2012 , the fair value of auxilio , based on our market capitalization , was approximately $ 18.8 million , exceeding our book value of negative $ 378,000. the second step of the impairment test , which compares the implied fair value of the goodwill with the book value , was not required since we passed step one . new customer implementation costs we ordinarily incur additional costs to implement our services for new customers . these costs are comprised primarily of additional labor and support , with the efforts going to identify , map and record all existing devices and support arrangements for all subject devices . once this effort is complete , it need not be repeated . this ordinarily takes one to six months to complete , depending on the size of the new customer . these costs are expensed as incurred , and have a negative impact on our statements of operations and cash flows during the implementation phase . derivative liabilities the company 's derivative warrants and additional investment rights liabilities are measured at fair value using the black-scholes valuation model which takes into account , as of the measurement date , factors including the current exercise price , the term of the instrument , the current price of the underlying stock and its expected volatility , expected dividends on the stock and the risk-free interest rate for the term of the item . these derivative liabilities are revalued at each reporting period and changes in fair value are recognized currently in the consolidated statements of operations under the caption “ change in fair value of derivative liabilities. ” the above listing is not intended to be a comprehensive list of all of our accounting policies . in many cases , the accounting treatment of a particular transaction is specifically dictated by gaap , with no need for management 's judgment in its application . there are also areas in which management 's judgment in selecting any available alternative would not produce a materially different result . please see our audited financial statements and notes thereto which begin on page f-1 of this annual report on form 10-k , which contain accounting policies and other disclosures required by gaap and please refer to the disclosures in note 1 of our financial statements for a summary of our significant accounting policies . 12 story_separator_special_tag began in may 2012. interest income is primarily derived from short-term interest-bearing securities and money market accounts . we had a convertible debt offering which contained a beneficial exchange feature from july 2011 to july 2012. as a result , there was a change in fair value of derivative liabilities charge of $ 279,000 in 2012 compared to a credit of $ 62,000 in 2011. this 2012 charge was reflective of the increase in the market value of the underlying stock from the beginning of 2012 to the end of the beneficial exchange feature in july 2012. this compared to the decrease in market value from when the convertible debt offering first occurred in july 2011 to the end of 2011. income tax expense income tax expense for the year ended december 31 , 2012 was $ 7,440 and was $ 7,495 for the year ended december 31 , 2011. the charges in both years are primarily for minimum payments and charges for state income taxes in apportioned states that disallow consolidated tax return filings . liquidity and capital resources at december 31 , 2012 , our cash and cash equivalents were $ 2,190,972 and our negative working capital was $ 661,457. our principal cash requirements were for operating expenses , including equipment , supplies , employee costs , and capital expenditures and funding of the operations . our primary sources of cash were from service and equipment sale revenues , commercial line of credit borrowings , the exercise of options and warrants and the sale of common stock in compliance with applicable federal and state securities laws . during the year ended december 31 , 2012 , cash used for operating activities was $ 29,601 as compared to $ 2,023,052 for the same period in 2011. the difference in cash from operating activities in 2011 was primarily due to the costs incurred to implement our new recurring revenue contracts , more aggressive sales and marketing efforts to obtain new clients and legal and consulting fees in connection with the development of operational training tools , statutory filings , the drafting and adoption of the new stock incentive plan and investor relations . we expect to continue to establish recurring revenue contracts to new customers throughout 2013. since we expect higher cost of revenues at the start of our engagement with most new customers , we may seek additional financing , which may include debt and or equity financing or funding through third party agreements . in july of 2011 , we closed on a private offering of secured convertible notes and warrants with gross proceeds of $ 1,850,000. in addition , in may 2012 we entered into an asset based line of credit agreement with a financial institution . this facility provides for borrowings up to $ 2,000,000 not to exceed 80 % of eligible receivables . we may seek additional financing , however there can be no assurance that additional financing will be available on acceptable terms , if at all . any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants . management believes that cash generated from debt and or equity financing arrangements along with funds from operations will be sufficient to sustain our business operations over the next twelve months . 14 off-balance sheet arrangements our off-balance sheet

results of operations year ended december 31 , 2012 compared to the year ended december 31 , 2011 net revenue revenues consist of equipment sales and ongoing service fees . net revenue increased by $ 13,801,402 to $ 35,647,021 for the year ended december 31 , 2012 , as compared to the same period in 2011. service revenue in 2012 totaled approximately $ 30,500,000 compared to approximately $ 19,800,000 in 2011. of this increase , approximately $ 10,700,000 was a result of the addition of eight new recurring revenue contracts between july 2011 and august 2012. another $ 1,000,000 of the increase was due to the expansion of services at existing customers . partially offsetting these increases was a decrease in revenue of approximately $ 700,000 at existing customers , where there was a reduction in unit price and sales volume . we anticipate this trend to continue as we renew our customers ' contracts but anticipate overall revenue growth as a result of the expansion of our customer base . equipment sales for the year ended december 31 , 2012 were approximately $ 5,200,000 as compared to approximately $ 2,100,000 for the same period in 2011. of this increase , approximately $ 3,000,000 was from large copier equipment conversions at three customers , of which approximately $ 1,600,000 was from an arrangement whereby we are contractually limited to billing for the equipment at our cost . we limit our revenue recognition of delivered equipment to the extent of funds received for such equipment , and thus only recognized revenue for equipment to the extent of our direct cost for this contract . cost of revenue cost of revenue consists of document imaging equipment , parts , supplies and salaries expense for field services personnel .

key references used in this management 's discussion and analysis unless the context requires otherwise , references to “ we , ” “ us , ” “ our , ” “ enterprise ” or “ enterprise products partners ” are intended to mean the business and operations of enterprise products partners l.p. and its consolidated subsidiaries . references to “ epo ” mean enterprise products operating llc , which is a wholly owned subsidiary of enterprise , and its consolidated subsidiaries , through which enterprise products partners l.p. conducts its business . enterprise is managed by its general partner , enterprise products holdings llc ( “ enterprise gp ” ) , which is a wholly owned subsidiary of dan duncan llc , a privately held texas limited liability company . the membership interests of dan duncan llc are owned by a voting trust , the current trustees ( “ dd llc trustees ” ) of which are : ( i ) randa duncan williams , who is also a director and chairman of the board of directors ( the “ board ” ) of enterprise gp ; ( ii ) richard h. bachmann , who is also a director and vice chairman of the board of enterprise gp ; and ( iii ) dr. ralph s. cunningham . ms. duncan williams and mr. bachmann also currently serve as managers of dan duncan llc along with w. randall fowler , who is also a director and president of enterprise gp . references to “ epco ” mean enterprise products company , a privately held texas corporation , and its privately held affiliates . a majority of the outstanding voting capital stock of epco is owned by a voting trust , the current trustees ( “ epco trustees ” ) of which are : ( i ) ms. duncan williams , who serves as chairman of epco ; ( ii ) dr. cunningham , who serves as vice chairman of epco ; and ( iii ) mr. bachmann , who serves as the president and chief executive officer of epco . ms. duncan williams and mr. bachmann also currently serve as directors of epco along with mr. fowler , who is also the executive vice president and chief administrative officer of epco . epco , together with its privately held affiliates , owned approximately 32 % of our limited partner interests at december 31 , 2017. references to “ efs midstream ” mean efs midstream llc , which we acquired in july 2015 from affiliates of pioneer natural resources company ( “ pxd ” ) and reliance industries limited ( “ reliance ” ) . see note 12 of the notes to consolidated financial statements included under part ii , item 8 of this annual report for information regarding this acquisition . references to “ offshore business ” refer to the gulf of mexico operations we sold to genesis energy , l.p. in july 2015. see note 10 of the notes to consolidated financial statements included under part ii , item 8 of this annual report for information regarding this sale . as generally used in the energy industry and in this annual report , the acronyms below have the following meanings : /d = per day mmbbls = million barrels bbtus = billion british thermal units mmbpd = million barrels per day bcf = billion cubic feet mmbtus = million british thermal units bpd = barrels per day mmcf = million cubic feet mbpd = thousand barrels per day tbtus = trillion british thermal units 64 cautionary statement regarding forward-looking information this annual report on form 10-k for the year ended december 31 , 2017 ( our “ annual report ” ) contains various forward-looking statements and information that are based on our beliefs and those of our general partner , as well as assumptions made by us and information currently available to us . when used in this document , words such as “ anticipate , ” “ project , ” “ expect , ” “ plan , ” “ seek , ” “ goal , ” “ estimate , ” “ forecast , ” “ intend , ” “ could , ” “ should , ” “ would , ” “ will , ” “ believe , ” “ may , ” “ potential ” and similar expressions and statements regarding our plans and objectives for future operations are intended to identify forward-looking statements . although we and our general partner believe that our expectations reflected in such forward-looking statements are reasonable , neither we nor our general partner can give any assurances that such expectations will prove to be correct . forward-looking statements are subject to a variety of risks , uncertainties and assumptions as described in more detail under part i , item 1a of this annual report . if one or more of these risks or uncertainties materialize , or if underlying assumptions prove incorrect , our actual results may vary materially from those anticipated , estimated , projected or expected . you should not put undue reliance on any forward-looking statements . the forward-looking statements in this annual report speak only as of the date hereof . except as required by federal and state securities laws , we undertake no obligation to publicly update or revise any forward-looking statements , whether as a result of new information , future events or any other reason . overview of business we are a publicly traded delaware limited partnership , the common units of which are listed on the new york stock exchange ( “ nyse ” ) under the ticker symbol “ epd. ” we were formed in april 1998 to own and operate certain natural gas liquids ( “ ngls ” ) related businesses of epco and are a leading north american provider of midstream energy services to producers and consumers of natural gas , ngls , crude oil , petrochemicals and refined products . our integrated midstream energy asset network links producers of natural gas , ngls and crude oil from some of the largest supply basins in the united states ( “ u.s. ” story_separator_special_tag in addition , the facility is expected to include refrigerated storage for 30,000 tons of ethylene . the project , which is underwritten by long-term contracts with customers , is expected to be completed in the first quarter of 2020. the location and final investment decisions for the terminal are subject to reaching acceptable arrangements with local taxing authorities . in april 2017 , we announced two expansion projects that will further develop our ethylene infrastructure in the houston , texas area . first , we plan to repurpose a large , high-capacity ethane storage well at our mont belvieu , texas complex into ethylene storage . following completion of this project , which is expected in the fourth quarter of 2018 , the 5.3 mmbbl cavern will be able to inject/withdraw ethylene at a rate of 210,000 pounds per hour ( or approximately 2,000 barrels per hour ) and is expandable to 420,000 pounds per hour ( or approximately 4,000 barrels per hour ) . there are eight third party ethylene pipelines within a half-mile of the ethylene storage system , providing significant connectivity opportunities for the high-capacity system . further supporting our ethylene capabilities , we also plan to build a 24-mile , 12-inch or larger diameter ethylene pipeline extending from mont belvieu to bayport , texas . the new pipeline would have the potential to connect both producing and consuming customers located south of the houston ship channel to our facility in mont belvieu . 66 enterprise to expand butane isomerization facility in january 2018 , we announced plans to expand our butane isomerization facility by up to 30 mbpd of incremental capacity . this expansion is supported by new long-term agreements , including a 20-year , 35 mbpd fee-based , tolling arrangement , to provide butane isomerization , storage and pipeline services . enterprise to expand orla natural gas processing complex in west texas in january 2018 , we announced plans to add 300 mmcf/d of incremental capacity at our cryogenic natural gas processing facility under construction near orla , texas in reeves county . the addition of a third processing train at orla ( “ orla iii ” ) would increase inlet volume capacity to 900 mmcf/d and allow us to expand our ngl extraction capabilities by an incremental 40 mbpd to 120 mbpd . orla iii is expected to begin service in the third quarter of 2019. in june 2017 , we announced plans to add a second processing train ( “ orla ii ” ) to our cryogenic natural gas processing facility currently under construction near orla , texas in reeves county . orla ii is expected to add 300 mmcf/d of incremental processing capacity to the facility and double the inlet capacity of the facility to 600 mmcf/d and increase extraction of ngls from up to 40 mbpd to up to 80 mbpd . orla ii is expected to begin service in the fourth quarter of 2018. mixed ngls extracted at the orla facility will be delivered into our fully integrated ngl system , including the recently announced shin oak ngl pipeline ( or “ shin oak ” ) . residue natural gas volumes from the facility will be transported to the waha area through our texas intrastate system . the orla facility is designed to support the continued growth in ngl-rich natural gas production from the delaware basin of west texas and southeastern new mexico and is supported by long-term customer commitments . enterprise management provides guidance with regards to distribution growth through 2018 in october 2017 , our management announced plans to recommend to the board cash distribution increases per quarter of $ 0.0025 per unit with respect to each of the six fiscal quarters beginning with the third quarter of 2017 and ending with the fourth quarter of 2018. the board declared a $ 0.4225 per common unit cash distribution to limited partners with respect to the third quarter of 2017 , which was paid on november 7 , 2017. the board declared a $ 0.425 per common unit cash distribution to limited partners with respect to the fourth quarter of 2017 , which was paid on february 7 , 2018. management currently expects to recommend to the board the following quarterly cash distributions with respect to each quarter of 2018 : $ 0.4275 , first quarter of 2018 ; $ 0.4300 , second quarter of 2018 ; $ 0.4325 , third quarter of 2018 ; and $ 0.4350 , fourth quarter of 2018. the recommended distribution growth rate should further strengthen our distribution coverage , increase our retained distributable cash flow available to fund growth capital opportunities , and reduce unitholder dilution by decreasing the amount of equity we may need to issue . management believes that moderation in the growth rate of our near-term cash distributions should enhance our ability to be self-funding for the equity portion of capital expenditures by 2019. the payment of any quarterly cash distribution is subject to board approval and management 's evaluation of our financial condition , results of operations and cash flows in connection with such payment . management will propose recommendations to the board regarding our cash distribution growth rate for 2019 as we consider future investment opportunities and alternatives for returning capital to investors . plans to build shin oak ngl pipeline in april 2017 , we announced plans to build shin oak , a 24-inch diameter pipeline , to transport growing ngl production from the permian basin to our ngl fractionation and storage complex located in mont belvieu , texas . the shin oak ngl pipeline is expected to have an initial design capacity of 250 mbpd and be expandable up to 600 mbpd . the project is supported by long-term shipper commitments and is expected to be placed into service during the second quarter of 2019 . 67 completion of azure acquisition in april 2017 , we closed on the acquisition of a midstream energy business from azure midstream partners , lp and its operating subsidiaries ( collectively , “ azure ” ) for $ 191.4 million in cash .

consolidated income statement highlights the following information highlights significant changes in our comparative income statement amounts and the primary drivers of such changes . comparison of 2017 with 2016 revenues total revenues for 2017 increased $ 6.22 billion when compared to total revenues for 2016. revenues from the marketing of crude oil , natural gas , petrochemicals , refined products and octane additives increased $ 3.98 billion year-to-year primarily due to higher sales prices , which accounted for a $ 2.75 billion increase , and higher sales volumes , which accounted for an additional $ 1.23 billion increase . revenues from the marketing of ngls increased $ 2.14 billion year-to-year primarily due to higher sales prices , which accounted for a $ 3.19 billion increase , partially offset by a $ 1.05 billion decrease due to lower sales volumes . revenues from midstream services increased a net $ 94.7 million year-to-year primarily due to the ongoing expansion of our operations . revenues increased $ 54.6 million year-to-year from our morgan 's point ethane export terminal that was placed into service in september 2016. revenues increased $ 48.7 million year-to-year primarily due to higher deficiency fees on our south texas crude pipelines . in addition , we received $ 19.1 million of business interruption insurance proceeds related to the june 2016 fire and associated downtime at our pascagoula facility . these revenue increases were partially offset by a $ 27.7 million year-to-year decrease in revenues primarily due to lower firm capacity reservation revenues on the haynesville extension pipeline and lower volumes and lower average gathering fees on our jonah gathering system .

throughout the summer months , hotel industry demand improved from its historical lows seen in the second quarter , particularly as leisure customers sought to travel to drive-to hotels and resorts that could offer more space and outdoor experiences . our monthly revenue increased slowly through october as we reopened several of our hotels and resorts between may and october . november and december had declining revenue at most of our opened hotels , except our south florida properties , as leisure demand declined and business travel did not return in a meaningful manner . our south florida properties experienced slightly increasing revenue late in the year which is consistent with the seasonal pattern for these warm weather resort properties . we anticipate leisure travel will return as vaccine distribution becomes more widely available , followed by business travel . we still anticipate group demand will be the slowest to return until there is more certainty around the health and immunity solution for the country . as of december 31 , 2020 , 37 of our hotels and resorts were open with operations of the remaining 16 hotels still temporarily suspended . we anticipate reopening additional hotels as demand returns and we determine that we would lose less money with the hotels open versus remaining closed . the covid-19 pandemic has had a significant negative impact on our operations and financial results to date and we expect that it will continue to have a significant negative impact on our results of operations , financial position and cash flow in 2021. we can not estimate when travel demand will recover . as a result of uncertainty at the beginning of the pandemic , in march 2020 , we fully drew down on our $ 650.0 million unsecured revolving credit facility , reduced the quarterly cash dividend on our common shares to one penny per share , reduced planned capital expenditures , reduced the compensation of our executive officers , trustees and employees , and , working closely with our hotel operating partners , significantly reduced our hotels ' operating expenses . on june 29 , 2020 , we amended the agreements governing our existing credit facilities , term loan facilities and senior notes . among other things , the amendments extended the maturity of a significant portion of our term loan due in november 2021 to november 2022 , waived existing financial covenants through the end of the first quarter of 2021 and provided substantially less restrictive financial covenants through the end of the second quarter of 2022. in addition , we repaid approximately $ 250.0 million on our unsecured revolving credit facility . in december 2020 , we issued $ 500.0 million of convertible notes and used the proceeds to repay an additional $ 250.0 million of our unsecured revolving credit facility and $ 200.0 million of our unsecured term loans . as of december 31 , 2020 , we had $ 40.0 million of outstanding borrowings $ 6.8 million of outstanding letters of credit and borrowing capacity of $ 603.2 million remaining on our senior unsecured credit facility . during the year ended december 31 , 2020 , other significant transactions included : sold three hotel properties for an aggregate sales price of $ 387.0 million and recognized a gain of $ 117.4 million ; recognized an impairment loss of $ 74.6 million related to two hotels and the retail component of a hotel ; and 41 cancelled ltip class b units and time-based service condition awards granted in february 2020 and incurred full compensation expense of $ 16.0 million . in february 2021 , we issued an additional $ 250.0 million of convertible notes under the same terms as the december 2020 offering . the notes were sold at a 5.5 % premium to par . in connection with the pricing of the notes , we entered into privately negotiated capped call transactions with certain of the underwriters , their respective affiliates and or other counterparties . we used the net proceeds to reduce amounts outstanding under our senior unsecured revolving credit facility , unsecured term loans , and for general corporate purposes . in february 2021 , we further amended the agreements governing our existing credit facilities , term loan facilities and senior notes to , among other items , increase the interest rate spread and waive financial covenants through the end of the first quarter of 2022 except for the minimum fixed charge coverage and minimum unsecured interest coverage ratio , which were extended through december 31 , 2021. refer to `` note 5. debt '' for additional information regarding these amendments and convertible debt . based on these amendments and expense and cash burn rate reductions , we believe that we will have sufficient liquidity to meet our obligations for the next twelve months . while we do not operate our hotel properties , both our asset management team and our executive management team monitor and work cooperatively with our hotel managers by advising and making recommendations in all aspects of our hotels ' operations , including property positioning and repositioning , revenue and expense management , operations analysis , physical design , renovation and capital improvements , guest experience and overall strategic direction . through these efforts , we seek to improve property efficiencies , lower costs , maximize revenues and enhance property operating margins , which we expect will enhance returns to our shareholders . key indicators of financial condition and operating performance we measure hotel results of operations and the operating performance of our business by evaluating financial and non-financial metrics such as room revenue per available room ( `` revpar '' ) ; total revenue per available room ( `` total revpar '' ) ; average daily rate ( `` adr '' ) ; occupancy rate ( `` occupancy '' ) ; funds from operations ( `` ffo '' ) ; earnings before interest , income taxes , depreciation and amortization ( `` ebitda '' ) ; and ebitda for real estate ( `` ebitda re `` ) . story_separator_special_tag these judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods . applying different estimates or assumptions may result in materially different amounts reported in our financial statements . 45 hotel properties investment in hotel properties estimation and judgment are required to determine the fair values of our acquired hotel properties . upon acquiring a business or hotel property , we measure and recognize the fair value of the acquired land , land improvements , building , furniture , fixtures and equipment , identifiable intangible assets or liabilities , other assets and assumed liabilities . identifiable intangible assets or liabilities typically arise from contractual arrangements assumed in connection with the transaction , including terms that are above or below market compared to an estimated market agreement at the acquisition date . we determine the acquisition-date fair values of all assets and assumed liabilities using a combination of the market , cost and income approaches . these valuation methodologies are based on significant level 2 and level 3 inputs in the fair value hierarchy , such as estimates of future income growth , capitalization rates , discount rates , capital expenditures and cash flow projections , including hotel revenues and net operating income , at the respective hotel properties . estimates of future cash flows are based on a number of factors including historical operating results , known and anticipated trends , and market and economic conditions . acquisition costs related to business combinations are expensed as incurred . hotel renovations and or replacements of assets that improve or extend the life of the asset are capitalized and depreciated over their estimated useful lives . furniture , fixtures and equipment under finance leases are carried at the present value of the minimum lease payments . repair and maintenance costs are expensed as incurred . impairment we review our investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable . events or circumstances that may cause a review include , but are not limited to , when a hotel property experiences a current or projected loss from operations , when it becomes more likely than not that a hotel property will be sold before the end of its useful life , adverse changes in the demand for lodging at the properties due to declining national or local economic conditions and or new hotel construction in markets where the hotels are located . when such conditions exist , we perform an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel exceed its carrying value . if the estimated undiscounted future cash flows are less than the carrying amount of the asset , an adjustment to reduce the carrying amount to the related hotel 's estimated fair market value is recorded and an impairment loss recognized . in the evaluation of impairment of our hotel properties , we make many assumptions and estimates including projected cash flows both from operations and eventual disposition , expected useful life and holding period , future required capital expenditures , and fair values , including consideration of capitalization rates , discount rates , and comparable selling prices . we will adjust our assumptions with respect to the remaining useful life of the hotel property when circumstances change , such as an expiring ground lease or it is more likely than not that the hotel property will be sold prior to its previously expected useful life . new accounting pronouncements not yet implemented see note 2 , “ summary of significant accounting policies , ” to our consolidated financial statements for additional information relating to recently issued accounting pronouncements . liquidity and capital resources in march 2020 , the world health organization declared covid-19 to be a global pandemic and the virus has continued to spread throughout the united states and the world . as a result of this pandemic and subsequent government mandates , health official recommendations corporate travel policy changes and individual responses , hotel demand was dramatically reduced . as of december 31 , 2020 , 37 of our hotels and resorts were open with operations of the remaining 16 hotels still temporarily suspended . this has had a material impact on the company 's liquidity . refer to the overview in item 7. , `` management 's discussion and analysis of financial condition and results of operations , '' for additional information . 46 our debt consisted of the following as of december 31 , 2020 and 2019 ( dollars in thousands ) : replace_table_token_10_th ( 1 ) borrowings bear interest at floating rates equal to , at our option , either ( i ) libor plus an applicable margin or ( ii ) an adjusted base rate ( as defined in the applicable credit agreement ) plus an applicable margin . ( 2 ) borrowings bear interest at floating rates equal to , at our option , either ( i ) libor plus an applicable margin or ( ii ) a eurocurrency rate ( as defined in the applicable credit agreement ) plus an applicable margin . ( 3 ) borrowings under the term loan facilities bear interest at floating rates equal to , at our option , either ( i ) libor plus an applicable margin or ( ii ) a base rate plus an applicable margin . as of december 31 , 2020 , approximately $ 1.4 billion of the borrowings under the term loan facilities bore an effective weighted-average fixed interest rate of 4.19 % , after taking into account interest rate swap agreements , and approximately $ 345.0 million bore a weighted-average floating interest rate of 2.46 % .

results of operations this section includes comparisons of certain 2020 financial information to the same information for 2019. year-to-year comparisons of the 2019 financial information to the same information for 2018 are contained in item 7 of the company 's annual report on form 10-k for the year ended december 31 , 2019 filed with the sec on february 20 , 2020 . 42 at december 31 , 2020 and 2019 , we had 53 and 56 wholly owned properties and leasehold interests , respectively . all properties owned during these periods have been included in our results of operations during the respective periods since their dates of acquisition or through the dates of disposition . based on when a property was acquired or disposed , operating results for certain properties are not comparable . the properties listed below are hereinafter referred to as `` non-comparable properties '' for the years ended december 31 , 2020 and 2019. all other properties are considered and referred to as `` comparable properties '' : property location disposition date the liaison capitol hill washington , d.c. february 14 , 2019 hotel palomar washington dc washington , d.c. february 22 , 2019 onyx hotel boston , ma may 29 , 2019 hotel amarano burbank burbank , ca july 16 , 2019 rouge hotel washington , d.c. september 12 , 2019 hotel madera washington , d.c. september 26 , 2019 topaz hotel washington , d.c. november 22 , 2019 intercontinental buckhead atlanta buckhead , ga march 6 , 2020 sofitel washington dc lafayette square washington , d.c. march 6 , 2020 union station hotel nashville , autograph collection nashville , tn july 29 , 2020 43 comparison of the year ended december 31 , 2020 to the year ended december 31 , 2019 revenues — total revenues decreased by $ 1,169.3 million , of which $ 105.3 million was due to the non-comparable properties and the remaining decline was due to the decline in

intangible assets are typically amortized over the estimated useful life of the assets using the straight-line method . commercial paper – during the year we issued commercial paper to finance story_separator_special_tag our subsidiaries provide tax preparation , retail banking and various business advisory and consulting services . we are the only major company offering a full range of software , online and in-office tax preparation solutions to individual tax clients . overview a summary of our fiscal year 2011 results is as follows : § revenues for the fiscal year were $ 3.8 billion , down 2.6 % from prior year results . § diluted earnings per share from continuing operations decreased 7.5 % from the prior year to $ 1.35 . § u.s. tax returns prepared by us increased 6.5 % from the prior year primarily due to strong results in our retail offices related to a free federal 1040 ez offer during the first half of the season as well as improved results during the second half . online results also improved due to enhancements to our client interface and improved traffic to our website . § revenues in our tax services segment decreased 2.1 % from the prior year , primarily due to the sale of 280 company-owned offices to franchisees and a decline in revenues from ral participations , which were partially offset by higher rac fees . § pretax income for the tax services segment decreased $ 99.9 million , or 11.5 % , due primarily to a $ 34.3 million increase in bad debt expense , goodwill impairment of $ 22.7 million and litigation charges of $ 15.0 million . § pretax income for the business services segment decreased $ 9.7 million , or 16.5 % , primarily due to lower revenues and higher litigation expenses , partially offset by a goodwill impairment charge recorded in the prior year . consolidated results of operations data ( in 000s , except per share amounts ) year ended april 30 , 2011 2010 2009 revenues : tax services $ 2,912,361 $ 2,975,252 $ 3,132,077 business services 829,794 860,349 897,809 corporate and eliminations 32,141 38,731 53,691 $ 3,774,296 $ 3,874,332 $ 4,083,577 income ( loss ) from continuing operations before taxes : tax services $ 767,498 $ 867,362 $ 927,048 business services 49,003 58,714 96,097 corporate and eliminations ( 139,476 ) ( 141,941 ) ( 183,775 ) 677,025 784,135 839,370 income taxes 257,620 295,189 326,315 net income from continuing operations 419,405 488,946 513,055 net loss of discontinued operations ( 13,295 ) ( 9,704 ) ( 27,382 ) net income $ 406,110 $ 479,242 $ 485,673 basic earnings ( loss ) per share : net income from continuing operations $ 1.35 $ 1.47 $ 1.53 net loss of discontinued operations ( 0.04 ) ( 0.03 ) ( 0.08 ) net income $ 1.31 $ 1.44 $ 1.45 diluted earnings ( loss ) per share : net income from continuing operations $ 1.35 $ 1.46 $ 1.53 net loss of discontinued operations ( 0.04 ) ( 0.03 ) ( 0.08 ) net income $ 1.31 $ 1.43 $ 1.45 18 h & r block 2011 form 10k story_separator_special_tag $ 146.2 million . interest income earned on eas increased $ 16.4 million , or 21.1 % , over the prior year primarily due to an increase in loan volume , which resulted from offering the product to a wider client base . other revenue increased $ 14.9 million , or 6.9 % , primarily due to an increase in online revenues . total expenses increased $ 37.0 million , or 1.8 % , compared to the prior year . compensation and benefits decreased $ 12.7 million , or 1.3 % , primarily due to lower commission-based wages due to conversions to franchise offices , reduced headcount and related payroll taxes . this decline was partially offset by severance costs and related payroll taxes of $ 27.4 million . occupancy costs declined $ 25.6 million , or 6.2 % , due to office closures and cost-saving initiatives . bad debt expense increased $ 34.3 million , or 32.8 % , primarily due to increased volumes on eas , as well as a decline in tax returns prepared for those clients . during the current year , we recorded a $ 22.7 million impairment of goodwill in our redgear reporting unit , as discussed in item 8 , note 9 to the consolidated financial statements . other expenses increased $ 15.7 million , or 6.0 % , primarily due to incremental litigation expenses recorded in the current year . pretax income for fiscal year 2011 decreased $ 99.9 million , or 11.5 % , from 2010. as a result of the declines in revenues and higher expenses , primarily bad debt expense and goodwill impairment , pretax margin for the segment decreased to 26.4 % from 29.2 % in fiscal year 2010. fiscal 2010 compared to fiscal 2009 – tax services ' revenues decreased $ 156.8 million , or 5.0 % , compared to fiscal year 2009. tax preparation fees decreased $ 162.8 million , or 7.6 % , due to a 10.3 % decrease in u.s. retail tax returns prepared in company-owned offices , partially offset by a 0.6 % increase in the net average fee per u.s. retail tax return . adjusting for the effect of company-owned offices sold to franchisees during fiscal year 2010 , the decline in tax returns prepared in company-owned offices was 6.7 % from fiscal 2009 to 2010. the 6.7 % decrease in u.s. retail tax returns prepared in company-owned offices is primarily due to the following factors : § tax returns filed with the irs declined 1.7 % . § lower employment levels disproportionately impacted our key client segments . fourth quarter 2009 unemployment levels ranged from 15-30 % , far in excess of national unemployment levels for key client segments . § we closed certain under-performing offices and exited offices serving clients in wal-mart locations . story_separator_special_tag litigation expenses increased $ 13.3 million from fiscal year 2009. other expenses increased $ 8.3 million primarily due to a $ 15.0 million impairment of goodwill at rsm equico , as discussed in item 8 , note 9 to the consolidated financial statements . h & r block 2011 form 10k 21 pretax income for the year ended april 30 , 2010 of $ 58.7 million compares to $ 96.1 million in fiscal year 2009. pretax margin for the segment decreased from 10.7 % in fiscal year 2009 , to 6.8 % in fiscal year 2010 , primarily due to poor results in our capital markets business and a reduction of revenue in our core businesses . corporate , eliminations and income taxes on continuing operations corporate operating losses include interest income from u.s. passive investments , interest expense on borrowings , net interest margin and gains or losses relating to mortgage loans held for investment , real estate owned , residual interests in securitizations and other corporate expenses , principally related to finance , legal and other support departments . replace_table_token_1_th fiscal year 2011 compared to fiscal year 2010 interest income earned on mortgage loans held for investment decreased $ 7.2 million , or 22.5 % , from the prior year , primarily as a result of declining rates and non-performing loans . our provision for loan losses decreased $ 12.2 million , or 25.5 % , from the prior year as a result of the continued run-off of our portfolio . income taxes on continuing operations our effective tax rate for continuing operations was 38.1 % for the fiscal year ended april 30 , 2011 , compared to 37.6 % in the prior year . this increase resulted from a decline in gains from investments in company-owned life insurance assets which are not subject to tax , an increase in the state effective tax rate and other favorable net discrete adjustments booked in the current year compared to unfavorable adjustments recorded in the prior year . fiscal year 2010 compared to fiscal year 2009 interest income earned on mortgage loans held for investment for the fiscal year ended april 30 , 2010 decreased $ 14.5 million , or 31.3 % , from fiscal year 2009 , primarily as a result of non-performing loans . interest expense decreased $ 13.0 million , or 14.0 % , due to lower funding costs related to our mortgage loan portfolio and lower corporate borrowings . our provision for loan losses decreased $ 16.1 million from fiscal year 2009. other expenses declined $ 32.3 million primarily due to gains of $ 9.0 million on residual interests in fiscal year 2010 , compared to impairments of $ 3.1 million recorded in fiscal year 2009. additionally , we transferred liabilities relating to previously retained insurance risk to a third-party , and recorded a gain of $ 9.5 million in fiscal year 2010. income taxes on continuing operations our effective tax rate for continuing operations was 37.6 % for the fiscal year ended april 30 , 2010 , compared to 38.9 % in fiscal year 2009. our effective tax rates declined from fiscal year 2009 due to a reduction in our valuation allowance related to tax-planning strategies and favorable tax benefits related to investment gains on our corporate owned life insurance investments . discontinued operations sand canyon corporation ( “scc” , previously known as option one mortgage corporation ) ceased originating mortgage loans in december of 2007 and , in april 2008 , sold its servicing assets and discontinued its remaining operations . the sale of servicing assets did not include the sale of any mortgage loans . scc retained contingent liabilities that arose from the operations of scc prior to its disposal , including certain mortgage loan repurchase obligations , contingent liabilities associated with litigation and related claims , lease commitments , and employee termination benefits . scc also retained residual interests in certain mortgage loan securitization transactions prior to cessation of its origination business . the net loss from discontinued operations totaled $ 13.3 million , $ 9.7 million and $ 27.4 million for the fiscal years ended april 30 , 2011 , 2010 and 2009 , respectively . in connection with the securitization and sale of mortgage loans , scc made certain representations and warranties . in the event that there is a breach of a representation and warranty and such breach materially and adversely affects the value of a mortgage loan , scc may be obligated to repurchase a loan or otherwise indemnify certain parties for losses incurred as a result of loan liquidation . 22 h & r block 2011 form 10k scc has recorded a liability for estimated contingent losses related to representation and warranty claims as of april 30 , 2011 , of $ 126.3 million , which represents scc 's best estimate of the probable loss that may occur . losses on valid claims totaled $ 12.2 million , $ 18.2 million and $ 36.4 million for fiscal years 2011 , 2010 and 2009 , respectively . these amounts were recorded as reductions of our loan repurchase liability . during the current year , payments totaling $ 49.8 million were made under an indemnity agreement dated april 2008 with a specific counterparty in exchange for a full and complete release of such party 's ability to assert representation and warranty claims . these payments were also recorded as a reduction in our loan repurchase liability . the indemnity agreement was given as part of obtaining the counterparty 's consent to scc 's sale of its mortgage servicing business in 2008. we have no remaining payment obligations under this indemnity agreement . while scc uses the best information available to it in estimating its liability , assessing the likelihood that claims will be asserted in the future and estimating probable losses is inherently difficult and requires considerable management judgment .

results of operations tax services this segment primarily consists of our income tax preparation businesses — retail , online and software . this segment includes our tax operations in the u.s. and its territories , canada , and australia . additionally , this segment includes the product offerings and activities of hrb bank that primarily support the tax network , racs , our prior participations in rals , and our commercial tax business , which provides tax preparation software to cpas and other tax preparers . tax services – operating statistics ( in 000s , except average fee ) year ended april 30 , 2011 2010 2009 tax returns prepared : united states : company-owned operations 9,168 9,182 10,231 franchise operations 5,588 5,064 4,936 total retail operations 14,756 14,246 15,167 software 2,201 2,193 2,309 online 3,722 2,893 2,775 free file alliance 767 810 788 total digital tax solutions 6,690 5,896 5,872 total u.s. operations 21,446 20,142 21,039 international operations ( 1 ) 3,055 3,019 2,864 24,501 23,161 23,903 net average fee per u.s. tax return prepared – retail operations ( 2 ) : company-owned operations $ 189.73 $ 197.42 $ 196.16 franchise operations 171.86 174.32 169.04 $ 182.96 $ 189.21 $ 187.36 ( 1 ) in fiscal year 2011 , the end of the canadian tax season was extended from april 30 to may 2 , 2011. tax returns prepared in our international operations in fiscal year 2011 includes 51,000 returns in both company-owned and franchise offices which were accepted by the client on may 1 or 2. the revenues related to these returns will be recognized in fiscalyear 2012 .

we may not actually achieve the plans , intentions , or expectations disclosed in our forward-looking statements , and you should not place undue reliance on our forward-looking statements . actual results or events could differ materially from the plans , intentions , and expectations disclosed in the forward-looking statements that we make . these forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements , including without limitation , the risks set forth elsewhere in this annual report on form 10-k. the forward-looking information we have provided in this annual report on form 10-k pursuant to the safe harbor established under the private securities litigation reform act of 1995 should be evaluated in the context of these factors . forward-looking statements speak only as of the date they were made , and we undertake no obligation to update or revise such statements , except as required by the federal securities laws . the following discussion should be read in conjunction with , and is qualified in its entirety by reference to , our audited consolidated financial statements , including the notes thereto . overview we are a diversified specialty consumer finance company providing a broad array of loan products primarily to customers with limited access to consumer credit from banks , thrifts , credit card companies , and other traditional lenders . we began operations in 1987 with four branches in south carolina and have expanded our branch network to 221 locations in the states of south carolina , texas , north carolina , tennessee , alabama , oklahoma , and new mexico as of december 31 , 2012. most of our loan products are secured , and each is structured on a fixed rate , fixed term basis with fully amortizing equal monthly installment payments , repayable at any time without penalty . our loans are sourced through our multiple channel platform , including in our branches , through direct mail campaigns , independent and franchise automobile dealerships , online credit application networks , furniture and appliance retailers , and our consumer website . we operate an integrated branch model in which all loans , regardless of origination channel , are serviced through our branch network , providing us with frequent in-person contact with our customers , which we believe improves our credit performance and customer loyalty . our goal is to consistently and soundly grow our finance receivables and manage our portfolio risk while providing our customers with attractive and easy-to-understand loan products that serve their varied financial needs . our diversified product offerings include : small installment loans – as of december 31 , 2012 , we had approximately 181,000 small installment loans outstanding , representing $ 190.3 million in finance receivables . large installment loans – as of december 31 , 2012 , we had approximately 19,000 large installment loans outstanding , representing $ 57.4 million in finance receivables . automobile purchase loans – as of december 31 , 2012 , we had approximately 18,000 automobile purchase loans outstanding , representing $ 159.8 million in finance receivables . furniture and appliance purchase loans – as of december 31 , 2012 , we had approximately 27,000 furniture and appliance purchase loans outstanding , representing $ 30.0 million in finance receivables . 44 insurance products – we offer our customers optional payment protection insurance options relating to many of our loan products . our primary sources of revenue are interest and fee income from our loan products , of which interest and fees relating to installment loans and automobile purchase loans have historically been the largest component . in 2009 , we introduced furniture and appliance purchase loans and expanded our automobile purchase loans to offer loans through online credit application networks . in addition to interest and fee income from loans , we derive revenue from insurance products sold to customers of our direct loan products . initial public offering our initial public offering closed on april 2 , 2012 , at which time we sold 3,150,000 shares of our common stock and received cash proceeds of approximately $ 39.8 million , net of underwriting discounts and commissions of $ 4.2 million and other offering expenses of $ 3.3 million . we used the proceeds of the offering to pay a portion of our indebtedness . we are incurring lower amounts of interest expense from the reduction of debt resulting from our initial public offering , as described in “unaudited pro forma consolidated financial information” below . factors affecting our results of operations our business is driven by several factors affecting our revenues , costs , and results of operations , including the following : growth in loan portfolio . the revenue that we derive from interest and fees from our loan products is largely driven by the number of loans that we originate . average finance receivables grew 11.9 % from $ 193.0 million in 2009 to $ 216.0 million in 2010 , grew 22.2 % to $ 264.0 million in 2011 , and grew 36.2 % to $ 359.7 million in 2012. we originated or purchased 120,900 ; 67,300 ; and 55,300 new loans during 2012 , 2011 , and 2010 , respectively . we source our loans through our branches and our live check program , as well as through automobile dealerships and furniture and appliance retailers that partner with us . our loans are made almost exclusively in geographic markets served by our network of branches . increasing the number of branches we operate allows us to increase the number of loans that we are able to service . we opened or acquired 51 , 36 , and 17 new branches in 2012 , 2011 , and 2010 , respectively . our 2013 plans include opening 35 to 45 de novo branch locations , which is a 15.8 % to 20.4 % increase in our branch network . story_separator_special_tag our insurance income consists of revenue from the sale of various optional credit insurance products and other payment protection options offered to customers who obtain loans directly from us . we do not sell insurance to non-borrowers . the type and terms of our optional credit insurance products vary from state to state based on applicable laws and regulations . we offer optional credit life insurance , credit accident and health insurance , and involuntary unemployment insurance . we require property insurance on any personal property securing loans and offer customers the option of providing proof of such insurance purchased from a third party ( such as homeowners or renters insurance ) in lieu of purchasing property insurance from us . we also require proof of liability and collision insurance for any vehicles securing loans , and we obtain property insurance on behalf of customers who permit their other insurance coverage to lapse . we issue insurance certificates as agents on behalf of an unaffiliated insurance company and then remit to the unaffiliated insurance company the premiums we collect ( net of refunds on paid out or renewed loans ) . the unaffiliated insurance company cedes life insurance premiums to our wholly-owned insurance subsidiary , rmc reinsurance , ltd. ( “ rmc reinsurance ” ) , as written and non-life premiums to rmc reinsurance as earned . as of december 31 , 2012 , we had pledged a $ 1.3 million letter of credit to the unaffiliated insurance company to secure payment of life insurance claims . we maintain a cash reserve for life insurance claims in an amount determined by the unaffiliated insurance company . the unaffiliated insurance company maintains the reserves for non-life claims . other income . our other income consists primarily of late charges assessed on customers who fail to make a payment within a specified number of days following the due date of the payment ( except in north carolina , which does not permit late charges on direct consumer loans ) . other income also includes fees for extending the due date of a loan and returned check charges . due date extensions are only available to a customer once every thirteen months , are available only to customers who are current on their loans , and must be approved by personnel at our headquarters . less than 1 % of scheduled payments were deferred in 2012. provision for credit losses . provisions for credit losses are charged to income in amounts that we judge as sufficient to maintain an allowance for credit losses at an adequate level to provide for losses on the related finance receivables portfolio . credit loss experience , contractual delinquency of finance receivables , the value of underlying collateral , and management 's judgment are factors used in assessing the overall adequacy of the allowance and the resulting provision for credit losses . our provision for credit losses fluctuates so that we maintain an adequate credit loss allowance that accurately reflects our estimates of losses in our loan portfolio . therefore , changes in our charge-off rates may result in changes to our provision for credit losses . while management uses the best information available to make its evaluation , future adjustments to the allowance may be necessary if there are significant changes in economic conditions or portfolio performance . general and administrative expenses . our general and administrative expenses are comprised of four categories : personnel , occupancy , advertising , and other . we typically measure our general and administrative expenses as a percentage of total revenue , which we refer to as our “ efficiency ratio .” our personnel expenses are the largest component of our general and administrative expenses and consist primarily of the salaries , bonuses , and benefits associated with all of our branch , field , and headquarters employees , and related payroll taxes . in connection with our initial public offering that closed in april 2012 , we granted awards of stock options to purchase an aggregate of 280,000 shares of our common stock to our executive officers and directors and stock options to purchase an aggregate of 30,000 shares to other employees , each pursuant to the regional management corp. 2011 stock incentive plan ( the “ 2011 stock plan ” ) . each stock option has an exercise price equal to the initial public offering price of $ 15.00 per share and vest in five equal annual installments beginning on the first anniversary of the grant date . deferred stock-based 47 compensation expense equal to the grant-date fair value of the stock options issued of $ 2.8 million is being recognized as compensation expense over the vesting period . our occupancy expenses consist primarily of the cost of renting our branches , all of which are leased , as well as the utility and other non-personnel costs associated with operating our branches . our advertising expenses consist primarily of costs associated with our live check direct mail campaigns ( including postage and costs associated with selecting recipients ) and maintaining our web site , as well as telephone directory advertisements and some local advertising by branches . these costs are expensed as incurred . other expenses consist primarily of various other expenses , including legal , audit , office supplies , credit bureau charges , and postage . in addition , for a discussion regarding how risks and uncertainties associated with the current regulatory environment may impact our future expenses , net income , and overall financial condition , see item 1a , “risk factors.” our general and administrative expenses have increased as a result of the additional legal , accounting , insurance , and other expenses associated with being a public company . consulting and advisory fees .

results of operations the following tables summarize key components of our results of operations for the periods indicated , both in dollars and as a percentage of total revenue : replace_table_token_15_th 49 regional management corp. selected financial data years ended december 31 , 2012 and 2011 ( unaudited ) ( dollars in thousands ) replace_table_token_16_th replace_table_token_17_th replace_table_token_18_th replace_table_token_19_th 50 replace_table_token_20_th replace_table_token_21_th ( 1 ) represents gross balance of loan originations , including unearned finance charges ( 2 ) includes the 19 branches retained following the acquisition of the assets of two consumer loan companies in the state of alabama comparison of the year ended december 31 , 2012 , versus the year ended december 31 , 2011 net income and revenue . net income increased $ 4.1 million , or 19.4 % , to $ 25.4 million in 2012 , from $ 21.2 million in 2011. total revenues increased $ 30.8 million during 2012 , a 29.3 % increase over 2011. the increase in 2012 revenues and net income is attributable to strong loan growth in existing branches , combined with the opening of 32 additional branches and the acquisition of 19 net new branches in alabama . interest and fee income . interest and fee income increased $ 27.9 million , or 30.6 % , to $ 119.2 million in 2012 , from $ 91.3 million in 2011. the increase in interest and fee income was due primarily to a 36.2 % increase in average finance receivables during the year , offset by a decrease in the average yield on loans from 34.6 % to 33.2 % .

during the year ended december 31 , 2013 , the company purchased $ 12.56 million of raw material sic crystals from cree . 10. line of credit on september 20 , 2013 , the company obtained a $ 10,000,000 revolving line of credit ( the “ line of credit ” ) from pnc bank , national association ( “ pnc bank ” story_separator_special_tag the following discussion is intended to provide a better understanding of our consolidated financial statements , including a brief discussion of our business and products , key factors that impacted our performance , and a summary of our operating results . this information should be read in conjunction with item 1a , “ risk factors ” and our consolidated financial statements and the notes thereto included in item 8 , “ financial statements and supplementary data ” of this annual report on form 10-k. historical results and percentage relationships among any amounts in the consolidated financial statements are not necessarily indicative of trends in operating results for future periods . 19 overview we manufacture , market , and distribute charles & colvard created moissanite ® jewels ( which we refer to as moissanite or moissanite jewels ) , finished jewelry featuring moissanite , and fashion jewelry for sale in the worldwide jewelry market . moissanite , also known by its chemical name of silicon carbide , or sic , is a rare mineral first discovered in a meteor crater . because naturally occurring sic crystals are too small for commercial use , larger crystals must be grown in a laboratory . leveraging our advantage of being the sole source worldwide of created moissanite jewels , our strategy is to establish charles & colvard with reputable , high-quality , and sophisticated brands and to position moissanite as an affordable , luxurious alternative to other gemstones , such as diamond . we believe this is possible due to moissanite 's exceptional brilliance , fire , luster , durability , and rarity like no other jewel available on the market . we manage our business primarily by our two distribution channels that we use to sell our product lines , loose jewels and finished jewelry . accordingly , we determined our two operating and reporting segments to be wholesale distribution transacted through our parent entity and direct-to-consumer distribution transacted through our wholly owned operating subsidiaries , moissanite.com , llc and charles & colvard direct , llc . we sell our loose moissanite jewels at wholesale to some of the largest distributors and manufacturers in the world , which mount them into fine jewelry to be sold at retail outlets and via the internet . we also sell loose moissanite jewels and finished jewelry featuring moissanite at wholesale to retailers to be sold to end consumers and , in the third quarter of 2011 , we established a direct-to-consumer e-commerce sales channel through our wholly owned operating subsidiary moissanite.com , llc that sells both loose moissanite jewels and finished jewelry featuring moissanite . additionally , in april 2012 we launched a pilot test of a direct-to-consumer home party sales channel through our wholly owned operating subsidiary charles & colvard direct , llc , or charles & colvard direct , that sells fashion and moissanite finished jewelry . we believe the expansion of our sales channels to the jewelry trade and the end consumer with branded finished moissanite jewelry creates a more compelling consumer value proposition to drive increased demand . we are continuing to focus on our core business of manufacturing and distributing the loose moissanite jewel and finished jewelry featuring moissanite through wholesale sales channels , because this is currently the primary way we reach consumers . we believe there is opportunity to grow our wholesale business and to capture a larger share of the jewelry market as we execute our strategy to increase consumer awareness of moissanite . the wholesale finished jewelry business that we launched in 2010 is currently expanding through select retailers and television shopping networks . we believe there is significant opportunity to further expand our wholesale finished jewelry business through e-commerce , television shopping , and other retailers . we also believe our finished jewelry business , including finished jewelry sold through our direct-to-consumer e-commerce and home party sales channels , allows us to have more control over the end product and enhance our relationships with consumers , as well as provide incremental sales and gross profit dollars due to the higher price points of finished jewelry containing moissanite relative to loose jewels . to that end , we focused on the following critical aspects of our strategic plan during 2013 : · developing brand strategies - our goal is to build multiple strong brands around the moissanite jewel and finished jewelry collections in attractive and desirable jewelry designs , especially those featuring larger center stones that leverage moissanite 's point of differentiation and value proposition . we believe branding will allow us to increase consumer awareness , which we expect to help drive sales and develop consumer brand recognition and loyalty . in june 2012 , we launched a moissanite jewel with optical properties that are significantly whiter than our standard vg “ classic moissanite ” grade jewels . we are marketing these whiter jewels under the forever brilliant ® trademark as a premier brand to differentiate from other grades of our moissanite as well as moissanite sold by potential competitors in the future . we expect demand for our forever brilliant ® loose jewel and finished jewelry featuring the forever brilliant ® jewel to grow , both in our wholesale channel and on our moissanite.com e-commerce website , and that forever brilliant ® will become an increasingly important brand for charles & colvard , ltd. as we execute future branding initiatives . we are also exploring additional product lines and branding strategies that will differentiate our products in the market . story_separator_special_tag as such , there can be no assurance that future results for each reporting period will exceed past results in sales , operating cash flow , and or net income due to the challenging business environment in which we operate , our changing business model , and our investment in various initiatives to support our growth strategies . however , as we execute our growth strategy and messaging initiatives , we remain committed to our current priorities of generating positive cash flow and strengthening our financial position through cost-management efforts while both monetizing our existing inventory and manufacturing our new whiter forever brilliant ® loose jewel and finished jewelry to meet sales demand . we believe the results of these efforts will propel our revenue growth and profitability and further enhance shareholder value in coming years , but we fully recognize the challenging business and economic environment in which we operate . 2013 summary the following is a summary of key financial results and certain non-financial results achieved for the year ended december 31 , 2013 : · we grew our total consolidated net sales by $ 6.04 million , or 27 % , to $ 28.49 million in 2013 from $ 22.45 million in 2012. the improvement in 2013 sales was primarily due to the ongoing execution of our growth strategies , including initiatives to increase consumer awareness of moissanite through marketing support of our customer base ; the addition of several new wholesale customers and the expansion of existing wholesale customer relationships ; the increase in sales of our new whiter forever brilliant ® moissanite jewel ; and the growth of our wholesale customers ' moissanite finished jewelry lines with styles that include both forever brilliant ® and our other grades of loose jewels . the improvement in 2013 consolidated net sales was also attributable to an over 78 % increase in sales through our direct-to-consumer businesses , moissanite.com and lulu avenue ® , which collectively increased their net sales to $ 2.91 million . · operating expenses increased by $ 3.25 million , or 27 % , to $ 15.47 million in 2013 from $ 12.22 million in 2012 primarily as a result of personnel additions and advertising , marketing , and branding initiatives incurred to position our company for future growth , especially with respect to the two wholly owned operating subsidiaries formed in 2011 for our e-commerce and home party direct sales businesses . as we grow our business , we intend to continue to closely manage our operating expenses by seeking the most cost effective and efficient solutions to our operating requirements . · net income decreased by $ 5.67 million , to a loss of $ 1.29 million in 2013 from net income of $ 4.38 million in 2012. net loss per share was a loss of $ 0.06 in 2013 compared to net income per diluted share of $ 0.22 in 2012. net income for the year ended december 31 , 2012 included a $ 4.05 million net income tax benefit , which contributed $ 0.20 per diluted share , comprised of a reduction of a valuation allowance on certain deferred tax assets based on our expectation of their future utilization and the reversal of a liability for an uncertain tax position resulting from a voluntary disclosure agreement we entered into with a taxing authority . as discussed above , sales increases in 2013 were offset by higher operating expenses as we continued the investment in our strategic initiatives . · we generated negative cash flows from operations of $ 9.31 million in 2013 compared to positive cash flows of $ 2.78 million in 2012. the primary drivers of negative cash flow were our net loss of $ 1.29 million that included $ 3.33 million of net non-cash charges , an increase in inventory of $ 9.88 million , an increase in trade accounts receivable of $ 2.83 million , and an increase in prepaid expenses and other assets of $ 261,000. these factors more than offset an increase in trade accounts payable of $ 1.56 million , and a net increase in accrued liabilities of $ 67,000 . 22 · cash and liquid government agency investments at december 31 , 2013 were $ 2.57 million compared to $ 12.37 million at december 31 , 2012. the primary reason for this decrease is the $ 9.31 million cash flow used from operations . · total inventory , including long-term and consignment inventory , was $ 42.41 million as of december 31 , 2013 , up from approximately $ 32.80 million at december 31 , 2012. this increase is primarily a result of purchases in 2013 of jewelry castings , findings , and other jewelry components ; purchases of fashion finished jewelry in support of our lulu avenue ® home party direct sales business ; and production of forever brilliant ® jewels , offset in part by higher sales . we believe we have a significant opportunity to build our cash position as we sell down our on-hand loose moissanite jewel inventory . · we continue to carry no long-term debt and believe we can fund our growth strategies for the foreseeable future from operating cash flows . critical accounting policies and estimates our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements , which we prepared in accordance with accounting principles generally accepted in the united states , or u.s. 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 and related disclosures of contingent assets and liabilities . “ critical accounting policies and estimates ” are defined as those most important to the financial statement presentation and that require the most difficult , subjective , or complex judgments .

results of operations the following table sets forth certain consolidated statements of operations data for the years ended december 31 , 2013 and 2012. replace_table_token_2_th consolidated net sales consolidated net sales for the years ended december 31 , 2013 and 2012 comprise the following : replace_table_token_3_th consolidated net sales were $ 28.49 million for the year ended december 31 , 2013 compared to $ 22.45 million for the year ended december 31 , 2012 , an increase of $ 6.04 million , or 27 % . the improvement in 2013 consolidated net sales was due primarily to an increase in loose jewel sales to our wholesale customer base resulting from the june 2012 launch of our new whiter forever brilliant ® moissanite jewel and the growth of our wholesale customers ' moissanite finished jewelry lines with styles that include both forever brilliant ® and our loose jewel standard grades . the improvement in 2013 consolidated net sales was also attributable to a significant increase in loose jewel sales to our domestic and international distributors ; and the growth of our direct-to-consumer businesses , moissanite.com and lulu avenue ® , which collectively increased 78 % to $ 2.91 million . we anticipate orders and related sales of both loose moissanite jewels and finished jewelry in both our wholesale distribution segment and direct-to-consumer distribution segment will improve as we continue to execute our growth strategies . 26 sales of loose jewels represented 65 % and 67 % of total consolidated net sales for the years ended december 31 , 2013 and 2012 , respectively . for the year ended december 31 , 2013 , loose jewel sales were $ 18.48 million compared to $ 14.99 million for the year ended december 31 , 2012 , an increase of $ 3.49 million , or 23 % .

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 ” at the beginning of this document and “ item 1a . risk factors. ” general we are a bank holding company that operates through two reportable segments : bank and investment management . through tristate capital bank , a pennsylvania chartered bank ( the “ bank ” ) , the bank seg ment provides commercial banking services to middle-market businesses and private banking services to high-net-worth individuals and trusts . the bank segment generates most of its revenue from interest on loans and investments , swap fees , loan fees , and liquidity and treasury management related fees . its primary source of funding for loans is deposits and its secondary source of funding is borrowings . the bank 's largest expenses are interest on these deposits and borrowings , and salaries and related empl oyee benefits . through chartwell investment partners , llc , an sec registered investment adviser ( “ chartwell ” ) , the investment manage ment segment provides advisory and sub-advisory investment management services primarily to institutional investors , mutual funds and individual investors . it also supports marketing efforts for chartwell 's proprietary investment products through chartwell tsc securities corp. , our registered broker/dealer subsidiary ( “ ctsc securities ” ) . the investment management segme nt generates its revenue from investment management fees earned on assets under management and its largest expenses are salaries and related employee benefits . this discussion and analysis present our financial condition and results of operations on a consolidated basis , except where significant segment disclosures are necessary to better explain the operations of each segment and related variances . in particular , the discussion and analysis of non-interest income and non-interest expense is reported by segment . we measure our performance primarily through our net income available to common shareholders , earnings per common share ( “ eps ” ) and total revenue . other salient metrics include the ratio of allowance for credit losses on loans and leases to loans ; net interest margin ; the efficiency ratio of the bank segment ; return on average assets ; return on average common equity ; regulatory leverage and risk-based capital ratios , assets under management and ebitda of the investment management segment . executive overview tristate capital holdings , inc. ( “ we , ” “ us , ” “ our , ” the “ holding company , ” the “ parent company , ” or the “ company ” ) is a bank holding company headquartered in pittsburgh , pennsylvania . the company has three wholly owned subsidiaries : the bank , chartwell , and ctsc securities . through the bank , we serve middle-market and financial services businesses in our primary markets throughout the states of pennsylvania , ohio , new jersey and new york . we also serve high-net-worth individuals and trusts on a national basis through our private banking channel . we market and distribute our products and services through a scalable , branchless banking model , which creates significant operating leverage throughout our business as we continue to grow . through chartwell , our investment management subsidiary , we provide investment management services primarily to institutional investors , mutual funds and individual investors on a national basis . ctsc securities , our broker/dealer subsidiary , supports marketing efforts for chartwell 's proprietary investment products that require sec or financial industry regulatory authority , inc. ( “ finra ” ) licensing . developments related to covid-19 in march 2020 , the world health organization declared the outbreak of the novel coronavirus ( “ covid-19 ” ) as a global pandemic . this public health crisis has resulted in unprecedented uncertainty , volatility and disruption in financial markets and in governmental , commercial and consumer activity in the united states and globally , including the markets that we serve . in response to the crisis , the board of governors of the federal reserve ( the “ federal reserve ” ) cut benchmark federal fund interest rates to near zero . in addition , in march 2020 , the coronavirus aid , relief , and economic security ( “ cares ” ) act was enacted . the cares act contains substantial tax and spending provisions intended to address the impact of the covid-19 pandemic . at the onset of the pandemic , we pro-actively conducted outreach to all commercial loan customers to understand the potential impact that covid-19 could have on their business . we implemented deferral arrangements in accordance with the cares act and bank 53 regulatory guidance . the majority of our deferrals have already resumed payment . only 13 loans representing $ 84.5 million , or 1 % of total loans had not yet resumed payment at december 31 , 2020 , which was ahead of our previous forecasts . while this crisis may have substantial impact on many businesses , we have maintained our disciplined approach of focusing on commercial lending opportunities within our four-state mid-atlantic region and financial services companies where our team has deep experience and relationships . additionally , we have worked to keep our commercial loan sizes predominately below our preferred hold level of $ 10.0 million . the bank is not a qualified lender or additional lender registered with the small business administration and is not participating in the paycheck protection program , established by the cares act . story_separator_special_tag loans and leases held-for-investment increased by $ 1.66 billion to $ 8.24 billion as of december 31 , 2020 , an increase of 25.2 % from december 31 , 2019 , as a result of growth in our commercial and private banking loan and lease portfolios . total investment securities , which were $ 842.5 million as of december 31 , 2020 , increased $ 373.4 million from the prior period , an increase of 79.6 % . total deposits increased $ 1.85 billion , or 28.0 % , to $ 8.49 billion as of december 31 , 2020 , from $ 6.63 billion as of december 31 , 2019 . we focus only on high quality loan growth and in the absence of this , we increase our assets by adding to our investment portfolio and through cash and cash equivalents as part of our strategy to build greater on balance sheet liquidity funded through our deposits . our shareholder 's equity increased $ 135.9 million , or 21.9 % primarily driven by the net proceeds from the issuance of $ 100.0 million in capital and retained earnings of our operations . our ratio of adverse-rated credits to total loans increased to 0.62 % at december 31 , 2020 , from 0.53 % at december 31 , 2019. our ratio of allowance for credit losses on loans and leases to loans increased to 0.42 % as of december 31 , 2020 , from 0.21 % as of december 31 , 2019. we recorded provision for credit losses of $ 19.4 million for the year ended december 31 , 2020 , primarily due to an increase in general reserves in response to the unprecedented speed of the economic slowdown associated with the covid-19 pandemic and an increase in specific reserves due to an addition of non-accrual loans , compared to a credit to provision of $ 968,000 for the year ended december 31 , 2019. in addition , we implemented the current expected credit losses ( “ cecl ” ) model as of january 1 , 2020 , and recorded a net decrease to retained earnings of $ 1.7 million , for the cumulative effect ( net of tax ) of adopting cecl . for more information on our adoption of cecl , refer to note 1 , summary of significant accounting policies and note 5 , allowance for credit losses on loans and leases . our book value per common share increased $ 0.57 , or 3.3 % , to $ 17.78 as of december 31 , 2020 , from $ 17.21 as of december 31 , 2019 , largely as a result of an increase in our net income available to common shareholders , partially offset by the issuance of restricted stock during year ended december 31 , 2020 . 2019 compared to 2018 operating performance for the year ended december 31 , 2019 , our net income available to common shareholders was $ 54.4 million compared to $ 52.3 million in 2018 , an increase of $ 2.1 million , or 4.1 % . this increase was primarily due to the net impact of a $ 13.7 million , or 12.0 % , increase in our net interest income ; an increase in the credit to provision for loan and lease losses of $ 763,000 ; an increase of $ 4.9 million , or 10.2 % , in non-interest income ; offset by an increase of $ 11.0 million , or 10.9 % , in our non-interest expense ; a $ 2.5 million increase in income taxes ; and an increase in preferred stock dividends of $ 3.6 million . our diluted eps was $ 1.89 for the year ended december 31 , 2019 , compared to $ 1.81 in 2018 . the increase in diluted eps was a result of the continued growth of our business lines , which was the driver of additional net income available to common shareholders . for the year ended december 31 , 2019 , net interest income and non-interest income , excluding net gains and losses on the sale of securities , combined to generate total revenue of $ 179.4 million from $ 161.4 million in 2018 , increasing $ 18.0 million , or 11.2 % , driven largely by higher net interest income and swap fees for the bank . our net interest margin was 1.97 % for the year ended december 31 , 2019 , as compared to 2.26 % in 2018 . the decrease in net interest margin for the year ended december 31 , 2019 , was driven by an increase of 41 basis points in the cost of interest-bearing liabilities , partially offset by an increase of 10 basis points in the yield on loans . our loans are predominantly variable rate loans indexed to 1-month libor and our deposits are a combination of fixed-rate time deposits and variable rate deposits , some of which are indexed or otherwise priced in reference to the effective federal funds rate . when the financial markets anticipate an interest rate cut , libor rates typically decrease in advance of action taken by the federal reserve , which compresses and can invert the historical spread between 1-month libor and the effective federal funds rate . this occurred at certain times during the year ended december 31 , 2019. in addition , we intentionally increased our liquid assets as a component of our assets and our deposits as portion of our assets for the purpose of carrying more balance sheet liquidity . this increased the level of liquid assets that were generating lower returns based on the interest rate environment and interest rate term structure curve . also , certain hedge arrangements that we had in place which provided beneficial pricing on certain liquidity expired in 2019 and could not be replicated in the 2019 interest rate environment .

results of operations net interest income net interest income represents the difference between the interest received on interest-earning assets and the interest paid on interest-bearing liabilities . net interest income is affected by changes in the volume of interest-earning assets and interest-bearing liabilities and changes in interest yields earned and interest rates paid . net interest income comprised 72.1 % , 70.8 % and 70.3 % of total revenue for the years ended december 31 , 2020 , 2019 and 2018 , respectively . the table below reflects an analysis of net interest income , on a fully taxable equivalent basis , for the periods indicated . the adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the statutory federal income tax rate of 21 % . replace_table_token_16_th ( 1 ) calculated on a fully taxable equivalent basis . 56 the following table provides information regarding the average balances and yields earned on interest-earning assets and the average balances and rates paid on interest-bearing liabilities for each of the three years ended december 31 , 2020 , 2019 and 2018. non-accrual loans are included in the calculation of average loan balances , while interest payments collected on non-accrual loans are recorded as a reduction to principal . where applicable , interest income and yield are reflected on a fully taxable equivalent basis and have been adjusted based on the statutory federal income tax rate of 21 % . replace_table_token_17_th ( 1 ) calculated on a fully taxable equivalent basis . 57 net interest income for the years ended december 31 , 2020 and 2019 . net interest income , calculated on a fully taxable equivalent basis , increased $ 10.8 million , or 8.5 % , to $ 138.0 million for the year ended december 31 , 2020 , from $ 127.2 million in 2019 . the increase in net interest income for the year ended december 31 , 2020 , was primarily attributable to a $ 2.28

critical accounting policies and estimates the company 's discussion and analysis of its financial condition and results of operations are based upon the company 's consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states . certain of the company 's accounting policies require the application of judgment in selecting the appropriate assumptions for calculating financial estimates . by their nature , these judgments are subject to an inherent degree of uncertainty . these judgments and estimates are based upon the company 's historical experience , current trends and information available from other sources 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 . the company believes the following critical accounting policies are more significant to the judgments and estimates used in the preparation of its consolidated financial statements . revisions in such estimates are recorded in the period in which the facts that give rise to the revisions become known . oil and gas property accounting the company uses the full cost method of accounting for its investment in oil and natural gas properties . under this method of accounting , all costs of acquisition , exploration and development of oil and natural gas properties ( including such costs as leasehold acquisition costs , geological expenditures , dry hole costs , tangible and intangible development costs and direct internal costs ) are capitalized as the cost of oil and natural gas properties when incurred . the full cost method requires the company to calculate quarterly , by cost center , a “ ceiling , ” or limitation on the amount of properties that can be capitalized on the balance sheet . to the extent capitalized costs of oil and natural gas properties , less accumulated depletion and related deferred taxes exceed the sum of the discounted future net revenues of proved oil and natural gas reserves , the lower of cost or estimated fair value of unproved properties subject to amortization , the cost of properties not being amortized , and the related tax amounts , such excess capitalized costs are charged to expense . beginning december 31 , 2009 , full cost companies use the unweighted arithmetic average first day of the month price for oil and natural gas for the 12-month period preceding the calculation date to calculate the future net revenues of proved reserves . prior to december 31 , 2009 , companies used the price in effect at the calculation date and had the option , under certain circumstances , to elect to use subsequent commodity prices if they increased after the calculation date . the company assesses any unproved oil and gas properties on an annual basis for possible impairment or reduction in value . the company assesses properties on an individual basis or as a group if properties are individually insignificant . the assessment includes consideration of the following factors , among others : intent to drill ; remaining lease term ; geological and geophysical evaluations ; drilling results and activity ; the assignment of proved reserves ; and the economic viability of development if proved reserves are assigned . during any period in which these factors indicate an impairment of unproved properties not subject to amortization , the associated costs incurred to date for such properties are then included in unproved properties subject to amortization . oil and gas reserves our proved oil and gas reserves are estimated by independent petroleum engineers . reserve engineering is a subjective process that is dependent upon the quality of available data and the interpretation thereof , 11 including evaluations and extrapolations of well flow rates and reservoir pressure . estimates by different engineers often vary , sometimes significantly . in addition , physical factors such as the results of drilling , testing and production subsequent to the date of an estimate , as well as economic factors such as changes in product prices , may justify revision of such estimates . because proved reserves are required to be estimated using prices at the date of the evaluation , estimated reserve quantities can be significantly impacted by changes in product prices . depreciation , depletion and amortization ( “ dd & a ” ) of producing properties is computed on the unit-of-production method based on estimated proved oil and gas reserves . while total dd & a expense for the life of a property is limited to the property 's total cost , proved reserve revisions result in a change in timing of when dd & a expense is recognized . downward revisions of proved reserves result in an acceleration of dd & a expense , while upward revisions tend to lower the rate of dd & a expense recognition . the standardized measure of discounted future net cash flows and changes in such cash flows are prepared using assumptions required by the financial accounting standards board and the securities and exchange commission . such assumptions include using year-end oil and gas prices and year-end costs for estimated future development and production expenditures . discounted future net cash flows are calculated using a 10 % rate . changes in any of these assumptions could have a significant impact on the standardized measure . accordingly , the standardized measure does not represent management 's estimated current market value of proved reserves . the company 's allowance for doubtful accounts receivable and notes receivable is based on an analysis of the risk of loss on specific accounts . the analysis places particular emphasis on past due accounts . management considers such information as the nature and age of the receivable , the payment history of the tenant , customer or other debtor and the financial condition of the tenant story_separator_special_tag critical accounting policies and estimates the company 's discussion and analysis of its financial condition and results of operations are based upon the company 's consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states . certain of the company 's accounting policies require the application of judgment in selecting the appropriate assumptions for calculating financial estimates . by their nature , these judgments are subject to an inherent degree of uncertainty . these judgments and estimates are based upon the company 's historical experience , current trends and information available from other sources 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 . the company believes the following critical accounting policies are more significant to the judgments and estimates used in the preparation of its consolidated financial statements . revisions in such estimates are recorded in the period in which the facts that give rise to the revisions become known . oil and gas property accounting the company uses the full cost method of accounting for its investment in oil and natural gas properties . under this method of accounting , all costs of acquisition , exploration and development of oil and natural gas properties ( including such costs as leasehold acquisition costs , geological expenditures , dry hole costs , tangible and intangible development costs and direct internal costs ) are capitalized as the cost of oil and natural gas properties when incurred . the full cost method requires the company to calculate quarterly , by cost center , a “ ceiling , ” or limitation on the amount of properties that can be capitalized on the balance sheet . to the extent capitalized costs of oil and natural gas properties , less accumulated depletion and related deferred taxes exceed the sum of the discounted future net revenues of proved oil and natural gas reserves , the lower of cost or estimated fair value of unproved properties subject to amortization , the cost of properties not being amortized , and the related tax amounts , such excess capitalized costs are charged to expense . beginning december 31 , 2009 , full cost companies use the unweighted arithmetic average first day of the month price for oil and natural gas for the 12-month period preceding the calculation date to calculate the future net revenues of proved reserves . prior to december 31 , 2009 , companies used the price in effect at the calculation date and had the option , under certain circumstances , to elect to use subsequent commodity prices if they increased after the calculation date . the company assesses any unproved oil and gas properties on an annual basis for possible impairment or reduction in value . the company assesses properties on an individual basis or as a group if properties are individually insignificant . the assessment includes consideration of the following factors , among others : intent to drill ; remaining lease term ; geological and geophysical evaluations ; drilling results and activity ; the assignment of proved reserves ; and the economic viability of development if proved reserves are assigned . during any period in which these factors indicate an impairment of unproved properties not subject to amortization , the associated costs incurred to date for such properties are then included in unproved properties subject to amortization . oil and gas reserves our proved oil and gas reserves are estimated by independent petroleum engineers . reserve engineering is a subjective process that is dependent upon the quality of available data and the interpretation thereof , 11 including evaluations and extrapolations of well flow rates and reservoir pressure . estimates by different engineers often vary , sometimes significantly . in addition , physical factors such as the results of drilling , testing and production subsequent to the date of an estimate , as well as economic factors such as changes in product prices , may justify revision of such estimates . because proved reserves are required to be estimated using prices at the date of the evaluation , estimated reserve quantities can be significantly impacted by changes in product prices . depreciation , depletion and amortization ( “ dd & a ” ) of producing properties is computed on the unit-of-production method based on estimated proved oil and gas reserves . while total dd & a expense for the life of a property is limited to the property 's total cost , proved reserve revisions result in a change in timing of when dd & a expense is recognized . downward revisions of proved reserves result in an acceleration of dd & a expense , while upward revisions tend to lower the rate of dd & a expense recognition . the standardized measure of discounted future net cash flows and changes in such cash flows are prepared using assumptions required by the financial accounting standards board and the securities and exchange commission . such assumptions include using year-end oil and gas prices and year-end costs for estimated future development and production expenditures . discounted future net cash flows are calculated using a 10 % rate . changes in any of these assumptions could have a significant impact on the standardized measure . accordingly , the standardized measure does not represent management 's estimated current market value of proved reserves . the company 's allowance for doubtful accounts receivable and notes receivable is based on an analysis of the risk of loss on specific accounts . the analysis places particular emphasis on past due accounts . management considers such information as the nature and age of the receivable , the payment history of the tenant , customer or other debtor and the financial condition of the tenant

results of operations fiscal 2016 as compared to 2015 revenues : total revenues from the oil & gas operation was $ 754,000 in 2016 and $ 820,000 in 2015. net revenue for our oil and gas operation decreased by $ 56,000 in 2016 as compared to 2015. included in 2016 revenue is a one time fee of $ 30,000. the drop in revenue in 2016 was principally due to a reduction in the quantity of oil and gas produced . operating expenses : operating expenses for the oil & gas operation were $ 1.2 million in 2016 and $ 1.8 million in 2015. this decrease was the result of an overall reduction in operating expenses as the company has actively reduced expenses to compensate for a slowdown in the oil and gas operation . 12 in 2015 pursuant to the requirements of the “ full cost ceiling test ” for oil & gas companies we recorded a non-cash charge to operations of $ $ 2.7 million to write down its investment in ohio and west virginia . this charge to earnings was caused by the severe drop in the market price of oil all throughout 2015. corporate expenses were $ 352,000 in 2016 and $ 605,000 in 2015. the decrease is primarily due to a reduction in wages and general operating expenses . interest income & expense : interest expense was $ 38,000 in 2016 as compared to $ 62,000 in 2015. the decrease was due to a reduction in the long term debt owed to the bank as well as previous owners of the company 's oil and gas operation in west virginia / ohio .

terms and conditions of executive severance each of our neo 's employment agreements provides for certain severance benefits . under these agreements , in the event that the executive is terminated without cause or resigns for good reason ( each as 106 defined below ) and subject to such executive executing and not revoking a general release of all claims against us , then such executive is entitled to receive ( i ) his base salary story_separator_special_tag you should read the following discussion and analysis of our financial condition and results of operations together with the section entitled “item 8. financial statements and supplementary 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 risks and uncertainties , such as our plans , objectives , expectations , intentions and beliefs . 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 under “item 1a . risk factors” or included elsewhere in this report . overview we are a biopharmaceutical company focused on the development and commercialization of highly selective , non-absorbed drugs to treat renal , cardiovascular , liver and metabolic diseases . our proprietary zirconium silicate technology allows us to create highly selective ion traps that can reduce toxic levels of specific electrolytes without disturbing the balance of other electrolytes . our initial focus is on the development of sodium zirconium cyclosilicate ( zs-9 ) , our product candidate for which we recently completed two phase iii clinical trials for the treatment of hyperkalemia , a life-threatening condition in which elevated levels of potassium in the blood ( greater than 5.0 meq/l ) increase the risk of muscle dysfunction , including cardiac arrhythmias and sudden cardiac death . we have designed our development program based on input from the united states food and drug administration , or fda , including a recent pre-nda meeting , and european medicines agency , or ema , and plan to submit our new drug application , or nda , in the united states in the second quarter of 2015 and our marketing authorization application , or maa , in europe in the second half of 2015 with the goal of obtaining approval for the treatment of acute and chronic hyperkalemia , regardless of the underlying disease state . if we receive regulatory approval , we intend to commercialize zs-9 for the treatment of hyperkalemia in the united states with our own specialty sales force targeting nephrologists and cardiologists and intend to seek one or more partners for commercialization in markets outside of the united states . as of march 1 , 2015 , we have enrolled over 1,474 patients in our clinical studies . in our ongoing long-term studies , patients have safely received once daily zs-9 for over 10 months . we have completed three , double-blind , randomized placebo controlled clinical studies with zs-9 that together enrolled 1,101 patients with hyperkalemia , including patients with chronic kidney disease ( ckd ) , heart failure ( hf ) , type 2 diabetes and those on renin-angiotensin aldosterone system ( raas ) inhibitor therapy . our first in-man study , zs002 , was completed in may 2012 and our first phase iii study , zs003 , was completed in november 2013. our second phase iii study , zs004 , was completed in september 2014. all three trials met their pre-specified primary efficacy endpoints with clinically meaningful and statistically significant results . we announced the top-line results for zs004 in september 2014 and presented detailed primary and secondary endpoint results for zs004 at the american heart association scientific sessions on november 17 , 2014. the zs004 study results were simultaneously published in the journal of the american medical association , and we announced the publication of detailed results from the zs003 study in the new england journal of medicine on november 21 , 2014. we initiated an extension to the zs004 study , or zs004e , and a long-term safety study , zs005 , in the second quarter of 2014. we expect to file our nda with the fda in the second quarter of 2015 and our maa with the ema in the second half of 2015. zs-9 was developed utilizing proprietary zirconium silicate technology , the rights to which we currently have pursuant to a 2011 license agreement with uop , which grants us an exclusive license under specified patent rights held by uop to develop and commercialize pharmaceutical products for use in the field of removing toxins from bodily fluids and the gastrointestinal ( gi ) tract of humans and animals , which includes zs-9 and any other product covered by the terms of the license agreement . under the terms of the license agreement , we will owe uop royalties equal to 5 % of worldwide net sales of zs-9 made by us or our sublicensees , and we are obligated to make a minimum annual royalty payment to uop , which commenced with payments of $ 25,000 and $ 50,000 in 2010 and 2011 , respectively , increasing to $ 100,000 for 2012 and years thereafter . 83 we have never been profitable and , as of december 31 , 2014 , had an accumulated deficit of $ 114.3 million . we incurred net losses of approximately $ 64.0 million , $ 33.6 million and $ 10.3 million in the fiscal years ended december 31 , 2014 , 2013 and 2012 , respectively . we expect to continue to incur net losses as we advance zs-9 through clinical development , seek regulatory approval , expand our manufacturing capabilities and prepare for and , if approved , proceed to commercialization . we manufacture clinical trial quantities of zs-9 in-house in two facilities from readily available starting materials using specialized equipment . we are currently in the process of increasing our manufacturing capabilities to support anticipated commercial demand . story_separator_special_tag interest income interest income consists primarily of interest received or earned on our cash , cash equivalents and short-term investments . we expect interest income to vary each reporting period depending on our average cash , cash equivalents and short-term investments balances during the period and applicable interest rates . interest expense interest expense consists of cash and noncash interest costs related to our borrowings . the noncash interest costs through october 2012 consisted of the fair value of shares issued for interest earned on convertible notes during the period the notes were outstanding , the amortization of the beneficial conversion feature of the convertible notes over the period the notes were outstanding , the amortization of the fair value of warrants that were issued in connection with our borrowings , with the initial fair value of the warrants being amortized to interest expense over the term of the governing agreements , and since november 2012 consists of the amortization of debt issuance costs , primarily legal and banker fees , and debt discount in connection with the notes issued under the midcap credit facility ( as defined in “—liquidity and capital resources” ) over the period the notes are expected to be outstanding . 85 expense to mark warrants to market expense to mark warrants to market includes gains and losses from the re-measurement of our liabilities related to our warrants to purchase shares of our series b preferred stock issued in november 2011 and october 2012 , or the series b warrants . we recorded adjustments to the estimated fair value of the convertible preferred stock warrants until such time as these instruments were exercised . at that time , the convertible preferred stock warrant liability was reclassified to additional paid- in capital , a component of stockholders ' equity ( deficit ) , and we no longer recorded any related periodic fair value adjustments . story_separator_special_tag offering expenses payable by us of approximately $ 2.3 million , our net proceeds were approximately $ 112.1 million . upon the closing of the ipo , 11,979,479 shares of preferred stock and redeemable preferred stock then outstanding automatically converted into 11,979,479 shares of our common stock . summary statement of cash flows the following table shows a summary of our cash flows for each of the years ended december 31 , 2014 , 2013 and 2012. replace_table_token_14_th cash flows from operating activities . net cash used in operating activities was $ 49.0 million for the year ended december 31 , 2014 and consisted primarily of our net loss of $ 64.0 million , less noncash charges such as stock-based compensation expense of $ 7.7 million and $ 3.1 million related to the revaluation of warrants to purchase convertible preferred stock . the significant items in the change in operating assets and liabilities include an increase in accounts payable of $ 2.5 million and a decrease in prepaid and other expenses of $ 1.1 million . net cash used in operating activities was $ 26.5 million for the year ended december 31 , 2013 and consisted primarily of our net loss of $ 33.6 million , less noncash charges such as stock-based compensation expense of $ 2.1 million and $ 1.4 million related to the revaluation of warrants to purchase convertible preferred stock . the significant items in the change in operating assets and liabilities include increases in accrued liabilities of $ 2.3 million and accounts payable of $ 0.5 million . 88 net cash used in operating activities was $ 7.2 million for the year ended december 31 , 2012 and consisted primarily of our net loss of $ 10.3 million , less noncash charges such as stock-based compensation expense of $ 0.2 million , depreciation expense and amortization of certain debt related costs of $ 1.9 million and interest expense relating to our series b preferred stock of $ 0.3 million . the significant items in the change in operating assets and liabilities include an increase in accounts payable of $ 0.5 million and an increase in accrued liabilities of $ 0.1 million . cash flows from investing activities . net cash used in investing activities for the fiscal years ended december 31 , 2014 , 2013 and 2012 was $ 62.9 million , $ 3.8 million and $ 0.7 million respectively , with the use in the year ended december 31 , 2014 consisting primarily of investment in marketable securities of $ 54.9 million and purchases of property and equipment and build-out of our production facility of $ 8.0 million . for the fiscal years ended december 31 , 2013 and 2012 net cash used in investing activities consisted primarily of purchases of property and equipment of $ 3.8 million and $ 0.7 million , respectively . cash flows from financing activities . net cash provided by financing activities for the fiscal years ended december 2014 , 2013 and 2012 was $ 150.1 million , $ 15.1 million and $ 28.6 million , respectively . for the year ended december 31 , 2014 , net cash provided by financing activities consisted mainly of proceeds of $ 112.1 million from the issuance of common stock , proceeds from the issuance of debt of $ 9.8 million , and proceeds from the issuance of series d preferred stock of $ 24.8 million . for the year ended december 31 , 2013 , net cash provided by financing activities consisted mainly of the net proceeds from the issuance of the second tranche of our series c preferred stock of $ 15.1 million . for the year ended december 31 , 2012 , net cash provided by financing activities consisted mainly of the net proceeds from the issuance of the second tranche of our convertible notes of $ 0.9 million and the net proceeds from the issuance of the first tranche of our series c preferred stock of $ 27.8 million .

results of operations comparison of the years ended december 31 , 2014 and 2013 replace_table_token_12_th * * percentage not meaningful research and development . research and development expenses increased $ 20.9 million , or 84 % , from $ 24.8 million for the year ended december 31 , 2013 to $ 45.6 million for the year ended december 31 , 2014. the increase was primarily due to increases in medical affairs activities of $ 7.2 million and clinical trial related expenses of $ 4.2 million in support of our product candidate zs-9 . in addition , personnel costs increased by $ 3.5 million , non- cash , stock-based compensation costs increased $ 3.0 million and certain other costs increased by $ 2.9 million in connection with our expanded clinical and manufacturing activities . general and administrative . general and administrative expenses increased $ 7.5 million , or 101 % , from $ 7.4 million for the year ended december 31 , 2013 to $ 14.9 million for the year ended december 31 , 2014. the increase was primarily due to $ 3.1 million of non-cash , stock-based compensation expense related to stock options granted , $ 2.3 million in legal and accounting professional fees and other miscellaneous costs associated with our increased activity and increased complexity as a public company , increases of $ 1.4 million in personnel costs as a result of an increase in headcount to support growth in our operations and $ 0.7 million in expenses related to medical education . expense to mark warrants to market . expense to mark warrants to market increased $ 1.6 million in 2014 to $ 3.1 million for the year ended december 31 , 2014 from $ 1.4 million for the year ended december 31 , 2013. the increase was due to the increased value of warrants to acquire series b preferred stock as we approached our ipo . interest expense .

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 in part i item 1a . “risk factors.” and elsewhere in this annual report on form 10-k. overview rgp is a multinational consulting firm that provides its global client base with experienced professionals specializing in accounting , finance , risk management and internal audit , corporate advisory , strategic communications and restructuring , information management , human capital , supply chain management , healthcare solutions , actuarial , and legal and regulatory services in support of client-led projects , interim needs and consulting initiatives . we assist our clients with projects requiring specialized expertise in numerous areas , including : finance and accounting services , such as financial analyses ( e.g. , product costing and margin analyses ) , carve-outs and divestitures , merger and acquisition due diligence , budgeting and forecasting , audit preparation , public-entity reporting , tax-related projects , initial public offering assistance and assistance in the preparation or restatement of financial statements ; information management services , such as financial system/enterprise resource planning implementation and post implementation optimization ; corporate advisory , strategic communications and restructuring services ; corporate governance , risk management , internal audit co-sourcing and compliance efforts under the sarbanes-oxley act of 2002 ( “sarbanes” ) or the dodd-frank wall street reform and consumer protection act ; supply chain management services , such as strategic sourcing efforts , contract negotiations , purchasing strategy and conflict minerals compliance ; actuarial services for pension and life insurance companies ; human capital services , such as change management and compensation program design and implementation ; and legal and regulatory services , such as providing attorneys , paralegals and contract managers to assist clients ( including law firms ) with project-based , secondment or peak period needs . we were founded in june 1996 by a team at deloitte , led by our executive chairman , donald b. murray , who was then a senior partner with deloitte . our founders created resources connection to capitalize on the increasing demand for high quality outsourced professional services . we operated as a part of deloitte from our inception in june 1996 until april 1999. in april 1999 , we completed a management-led buyout in partnership with several investors . in december 2000 , we completed our initial public offering of common stock and began trading on the nasdaq stock market . we currently trade on the nasdaq global select market . in january 2005 , we announced the change of our operating entity name to resources global professionals to better reflect the company 's multinational capabilities and during fiscal 2013 , we redesigned our logo and adopted the initials rgp for branding and marketing purposes . 31 we operated solely in the united states until fiscal year 2000 , when we opened our first three international offices and began to expand geographically to meet the demand for project professional services across the world . as of may 25 , 2013 , we served clients from offices in 21 countries , including 26 international offices and 47 offices in the united states . we expect to continue opportunistic domestic and multinational expansion while also investing in complementary professional services lines that we believe will augment our service offerings . we primarily charge our clients on an hourly basis for the professional services of our consultants . we recognize revenue once services have been rendered and invoice the majority of our clients on a weekly basis . our clients are contractually obligated to pay us for all hours billed . to a much lesser extent , we also earn revenue if a client hires one of our consultants . this type of contractually non-refundable revenue is recognized at the time our client completes the hiring process and represented 0.5 % of our revenue for each of the years ended may 25 , 2013 , may 26 , 2012 and may 28 , 2011. we periodically review our outstanding accounts receivable balance and determine an estimate of the amount of those receivables we believe may prove uncollectible . our provision for bad debts , if any , is included in our selling , general and administrative expenses . the costs to pay our professional consultants and all related benefit and incentive costs , including provisions for paid time off and other employee benefits , are included in direct cost of services . we pay most of our consultants on an hourly basis for all hours worked on client engagements and , therefore , direct cost of services tends to vary directly with the volume of revenue we earn . we expense the benefits we pay to our consultants as they are earned . these benefits include paid time off and holidays ; a discretionary bonus plan ; subsidized group health , dental and life insurance programs ; a matching 401 ( k ) retirement plan ; the ability to participate in the company 's espp ; and professional development and career training . in addition , we pay the related costs of employment , including state and federal payroll taxes , workers ' compensation insurance , unemployment insurance and other costs . typically , a consultant must work a threshold number of hours to be eligible for all of the benefits . we recognize direct cost of services when incurred . selling , general and administrative expenses include the payroll and related costs of our internal management as well as general and administrative , marketing and recruiting costs . our sales and marketing efforts are led by our management team who are salaried employees and earn bonuses based on operating results for the company as a whole and within each individual 's geographic market . the company 's fiscal year consists of 52 or 53 weeks , ending on the saturday in may closest to may 31. fiscal 2013 and 2012 consisted of 52 weeks each . story_separator_special_tag the company records the estimated amount of the contractual obligation to pay the employee portion of the contingent consideration as compensation expense over the service period as it is deemed probable that the growth targets will be achieved . the estimate of the amount of the employee portion of contingent consideration requires very subjective assumptions to be made of future operating results . future revisions to these assumptions could materially change our estimate of the amount of the employee portion of contingent consideration and therefore materially affect the company 's future financial results and financial condition . during the fiscal year ended may 26 , 2012 , the company determined that it was more likely than not that there will not be an employee portion of contingent consideration payment due in november 2013 , and accordingly , reduced the liability and recognized a favorable adjustment to employee portion of contingent consideration in its consolidated statement of operations for that year . as of may 25 , 2013 , the company continues to believe it is more likely than not that there will not be an employee portion of contingent consideration payment due in november 2013 and , accordingly , there is no liability recorded at that date or any adjustment recorded in the company 's consolidated statement of operations for the year ended may 25 , 2013. allowance for doubtful accounts — we maintain an allowance for doubtful accounts for estimated losses resulting from our clients failing to make required payments for services rendered . we estimate this allowance based upon our knowledge of the financial condition of our clients ( which may not include knowledge of all significant events ) , review of historical receivable and reserve trends and other pertinent information . while such losses have historically been within our expectations and the provisions established , we can not guarantee that we will continue to experience the same credit loss rates that we have in the past . a significant change in the liquidity or financial position of our clients could cause unfavorable trends in receivable collections and additional allowances may be required . these additional allowances could materially affect the company 's future financial results . income taxes — in order to prepare our consolidated financial statements , we are required to make estimates of income taxes , if applicable , in each jurisdiction in which we operate . the process incorporates an assessment of any current tax exposure together with temporary differences resulting from different treatment of transactions for tax and financial statement purposes . these differences result in deferred tax assets and liabilities that are included in our consolidated balance sheets . the recovery of deferred tax assets from future taxable income must be assessed and , to the extent recovery is not likely , we will establish a valuation allowance . an increase in the valuation allowance results in recording additional tax expense and any such adjustment may materially affect the company 's future financial result . if the ultimate tax liability differs from the amount of tax expense we have reflected in the consolidated statements of operations , an adjustment of tax expense may need to be recorded and this adjustment may materially affect the company 's future financial results and financial condition . 33 revenue recognition — we primarily charge our clients on an hourly basis for the professional services of our consultants . we recognize revenue once services have been rendered and invoice the majority of our clients in the united states on a weekly basis . some of our clients served by our international operations are billed on a monthly basis . our clients are contractually obligated to pay us for all hours billed . to a much lesser extent , we also earn revenue if a client hires one of our consultants . this type of contractually non-refundable revenue is recognized at the time our client completes the hiring process . stock-based compensation — under our 2004 performance incentive plan , officers , employees , and outside directors have received or may receive grants of restricted stock , stock units , options to purchase common stock or other stock or stock-based awards . under our espp , eligible officers and employees may purchase our common stock in accordance with the terms of the plan . the company estimates a value for employee stock options on the date of grant using an option-pricing model . we have elected to use the black-scholes option-pricing model which takes into account assumptions regarding a number of highly complex and subjective variables . these variables include the expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors . additional variables to be considered are the expected term , expected dividends and the risk-free interest rate over the expected term of our employee stock options . in addition , because stock-based compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest , it is reduced for estimated forfeitures . forfeitures must be estimated at the time of grant and revised , if necessary , in subsequent periods if actual forfeitures differ from those estimates . forfeitures are estimated based on historical experience . if facts and circumstances change and we employ different assumptions in future periods , the compensation expense recorded may differ materially from the amount recorded in the current period . the company uses its historical volatility over the expected life of the stock option award to estimate the expected volatility of the price of its common stock . the risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our employee stock options . the impact of expected dividends ( $ 0.06 per share for fiscal 2013 ) is also incorporated in determining the estimated value per share of employee stock option grants . such dividends are subject to quarterly board of director approval .

quarterly results the following table sets forth our unaudited quarterly consolidated statements of operations data for each of the eight quarters in the two-year period ended may 25 , 2013. in the opinion of management , this data has been prepared on a basis substantially consistent with our audited consolidated financial statements appearing elsewhere in this document , and includes all adjustments , consisting of normal recurring adjustments , necessary for a fair presentation of the data . the quarterly data should be read together with our consolidated financial statements and related notes appearing elsewhere in this document . the operating results are not necessarily indicative of the results to be expected in any future period . replace_table_token_12_th ( 1 ) the quarter ended november 26 , 2011 includes the reversal of $ 500,000 that was an estimate of contingent consideration potentially payable to employees related to the sitrick brincko group acquisition . ( 2 ) the quarter ended november 26 , 2011 includes a favorable adjustment of $ 33.4 million related to revised estimates of the fair value of contingent consideration based upon updates to the probability weighted assessment of various projected ebitda scenarios associated with the acquisition of sitrick brincko group . see note 3 — contingent consideration — to the consolidated financial statements . ( 3 ) net income per common share calculations for each of the quarters were based upon the weighted average number of shares outstanding for each period , and the sum of the quarters may not necessarily be equal to the full year net income per common share amount . our quarterly results have fluctuated in the past and we believe they will continue to do so in the future . certain factors that could affect our quarterly operating results are described in part i item 1a . “risk factors.” due to these and other factors , we believe that quarter-to-quarter comparisons of our results of operations are not meaningful indicators of future performance .

cash used for financing activities cash used for financing activities in 2015 declined $ 44.9 million from the prior year . of the decrease , $ 31.4 million was due to the net cash disbursed upon spin-off of the performance fibers business . additionally , dividend payments decreased $ 132.6 million compared to prior year due to the change in the dividend rate from $ 0.49 per share to $ 0.25 per share on a post-spin basis and to the third quarter 2014 special dividend payment of $ 0.50 per common share . these decreases were partially offset by lower net debt issuances of $ 18.0 million and repurchases of common stock of $ 100.0 million in 2015. restricted cash at december 31 , 2015 , the company had $ 23.5 million of proceeds from real estate sales classified as restricted cash in “ other assets , ” which were deposited with a like-kind exchange ( “ lke ” ) intermediary . these funds can be used for acquiring suitable timberland replacement property , or if the lke purchases are not completed , returned to the company after 180 days and reclassified as available cash . credit ratings both our ability to obtain financing and the related costs of borrowing are affected by our credit ratings , which are periodically reviewed by the rating agencies . as of december 31 , 2015 , our credit ratings from s & p and moody 's were “ bbb- ” and “ baa2 , ” respectively , with both services listing our outlook as “ stable. ” strategy we continuously evaluate our capital structure . our strategy is to keep our weighted-average cost of capital competitive with other timberland reits and timos , while maintaining an investment grade debt rating as well as retaining the flexibility to actively pursue capital allocation opportunities as they become available . overall , we believe we have adequate liquidity and sources of capital to run our businesses efficiently and effectively and to maximize the value of our timberland and real estate assets under management . 45 expected 2016 expenditures capital expenditures in 2016 are forecasted to be between $ 60 million and $ 65 million , excluding any strategic timberland acquisitions we may make . capital expenditures are expected to be primarily comprised of seedling planting , fertilization and other silvicultural activities , property taxes , lease payments , allocated overhead and other capitalized costs . aside from capital expenditures , we may also acquire timberland as we actively evaluate acquisition opportunities . real estate development investments are expected to be between $ 10 million and $ 15 million . our 2016 dividend payments are expected to be approximately $ 123 million assuming no change in the quarterly dividend rate of $ 0.25 per share or material changes in the number of shares outstanding . we made no discretionary pension contributions in 2015 or 2014 . we have no mandatory pension contributions in 2016 but may make discretionary contributions in the future . on an ongoing basis , cash income tax payments are expected to be minimal . during 2016 , we may repatriate approximately $ 23 million of proceeds received from the sale of our forestry assets to the new zealand jv when it was formed in 2005. if this occurs , we anticipate that cash payments for income taxes in 2016 will be approximately $ 1.7 million . performance and liquidity indicators the discussion below is presented to enhance the reader 's understanding of our operating performance , liquidity , ability to generate cash and satisfy rating agency and creditor requirements . this information includes two measures of financial results : adjusted earnings before interest , taxes , depreciation , depletion and amortization ( “ adjusted ebitda ” ) , and cash available for distribution ( “ cad ” ) . these measures are not defined by generally accepted accounting principles ( “ gaap ” ) and the discussion of adjusted ebitda and cad is not intended to conflict with or change any of the gaap disclosures described above . management considers these measures to be important to estimate the enterprise and shareholder values of the company as a whole and of its core segments , and for allocating capital resources . in addition , analysts , investors and creditors use these measures when analyzing our operating performance , financial condition and cash generating ability . management uses adjusted ebitda as a performance measure and cad as a liquidity measure . adjusted ebitda and cad as defined may not be comparable to similarly titled measures reported by other companies . adjusted ebitda is defined as earnings before interest , taxes , depreciation , depletion , amortization , the non-cash cost of land and real estate sold , costs related to shareholder litigation , costs related to the spin-off of the performance fibers business , discontinued operations , large dispositions , internal review and restatement costs and the gain related to consolidation of the new zealand joint venture . below is a reconciliation of net income to adjusted ebitda for the five years ended december 31 ( in millions of dollars ) : replace_table_token_30_th ( a ) previously reported adjusted ebitda for 2014 , 2013 and 2011 has been restated to exclude large dispositions . large dispositions are defined as transactions involving the sale of timberland that exceed $ 20 million in size and do not have any identified hbu premium relative to timberland value . ( b ) costs related to shareholder litigation include expenses incurred as a result of the securities litigation , the shareholder derivative demands and the securities and exchange commission investigation . see note 10 — contingencies . see item 6 — selected financial data for a reconciliation of adjusted ebitda to operating income by segment as well as item 7 — story_separator_special_tag style= '' line-height:120 % ; padding-top:12px ; text-align : justify ; text-indent:24px ; font-size:10pt ; '' > the story_separator_special_tag cash used for financing activities cash used for financing activities in 2015 declined $ 44.9 million from the prior year . of the decrease , $ 31.4 million was due to the net cash disbursed upon spin-off of the performance fibers business . additionally , dividend payments decreased $ 132.6 million compared to prior year due to the change in the dividend rate from $ 0.49 per share to $ 0.25 per share on a post-spin basis and to the third quarter 2014 special dividend payment of $ 0.50 per common share . these decreases were partially offset by lower net debt issuances of $ 18.0 million and repurchases of common stock of $ 100.0 million in 2015. restricted cash at december 31 , 2015 , the company had $ 23.5 million of proceeds from real estate sales classified as restricted cash in “ other assets , ” which were deposited with a like-kind exchange ( “ lke ” ) intermediary . these funds can be used for acquiring suitable timberland replacement property , or if the lke purchases are not completed , returned to the company after 180 days and reclassified as available cash . credit ratings both our ability to obtain financing and the related costs of borrowing are affected by our credit ratings , which are periodically reviewed by the rating agencies . as of december 31 , 2015 , our credit ratings from s & p and moody 's were “ bbb- ” and “ baa2 , ” respectively , with both services listing our outlook as “ stable. ” strategy we continuously evaluate our capital structure . our strategy is to keep our weighted-average cost of capital competitive with other timberland reits and timos , while maintaining an investment grade debt rating as well as retaining the flexibility to actively pursue capital allocation opportunities as they become available . overall , we believe we have adequate liquidity and sources of capital to run our businesses efficiently and effectively and to maximize the value of our timberland and real estate assets under management . 45 expected 2016 expenditures capital expenditures in 2016 are forecasted to be between $ 60 million and $ 65 million , excluding any strategic timberland acquisitions we may make . capital expenditures are expected to be primarily comprised of seedling planting , fertilization and other silvicultural activities , property taxes , lease payments , allocated overhead and other capitalized costs . aside from capital expenditures , we may also acquire timberland as we actively evaluate acquisition opportunities . real estate development investments are expected to be between $ 10 million and $ 15 million . our 2016 dividend payments are expected to be approximately $ 123 million assuming no change in the quarterly dividend rate of $ 0.25 per share or material changes in the number of shares outstanding . we made no discretionary pension contributions in 2015 or 2014 . we have no mandatory pension contributions in 2016 but may make discretionary contributions in the future . on an ongoing basis , cash income tax payments are expected to be minimal . during 2016 , we may repatriate approximately $ 23 million of proceeds received from the sale of our forestry assets to the new zealand jv when it was formed in 2005. if this occurs , we anticipate that cash payments for income taxes in 2016 will be approximately $ 1.7 million . performance and liquidity indicators the discussion below is presented to enhance the reader 's understanding of our operating performance , liquidity , ability to generate cash and satisfy rating agency and creditor requirements . this information includes two measures of financial results : adjusted earnings before interest , taxes , depreciation , depletion and amortization ( “ adjusted ebitda ” ) , and cash available for distribution ( “ cad ” ) . these measures are not defined by generally accepted accounting principles ( “ gaap ” ) and the discussion of adjusted ebitda and cad is not intended to conflict with or change any of the gaap disclosures described above . management considers these measures to be important to estimate the enterprise and shareholder values of the company as a whole and of its core segments , and for allocating capital resources . in addition , analysts , investors and creditors use these measures when analyzing our operating performance , financial condition and cash generating ability . management uses adjusted ebitda as a performance measure and cad as a liquidity measure . adjusted ebitda and cad as defined may not be comparable to similarly titled measures reported by other companies . adjusted ebitda is defined as earnings before interest , taxes , depreciation , depletion , amortization , the non-cash cost of land and real estate sold , costs related to shareholder litigation , costs related to the spin-off of the performance fibers business , discontinued operations , large dispositions , internal review and restatement costs and the gain related to consolidation of the new zealand joint venture . below is a reconciliation of net income to adjusted ebitda for the five years ended december 31 ( in millions of dollars ) : replace_table_token_30_th ( a ) previously reported adjusted ebitda for 2014 , 2013 and 2011 has been restated to exclude large dispositions . large dispositions are defined as transactions involving the sale of timberland that exceed $ 20 million in size and do not have any identified hbu premium relative to timberland value . ( b ) costs related to shareholder litigation include expenses incurred as a result of the securities litigation , the shareholder derivative demands and the securities and exchange commission investigation . see note 10 — contingencies . see item 6 — selected financial data for a reconciliation of adjusted ebitda to operating income by segment as well as item 7 — story_separator_special_tag style= '' line-height:120 % ; padding-top:12px ; text-align : justify ; text-indent:24px ; font-size:10pt ; '' > the

results of operations for an analysis of changes in adjusted ebitda from the prior year . 46 cad is a non-gaap measure of cash generated during a period which is available for dividend distribution , repurchase of the company 's common shares , debt reduction and strategic acquisitions . we define cad as cash provided by operating activities adjusted for capital spending ( excluding timberland acquisitions ) , large dispositions , cash provided by discontinued operations and working capital and other balance sheet changes . in compliance with sec requirements for non-gaap measures , we reduce cad by mandatory debt repayments which results in the measure entitled “ adjusted cad. ” adjusted cad generated in any period is not necessarily indicative of the amounts that may be generated in future periods . below is a reconciliation of cash provided by operating activities to adjusted cad for the five years ended december 31 ( in millions ) : replace_table_token_31_th replace_table_token_32_th ( a ) capital expenditures exclude timberland acquisitions of $ 98.4 million and $ 130.9 million during the years ended december 31 , 2015 and december 31 , 2014 , respectively . capital expenditures also exclude $ 139.9 million for the purchase of an additional interest in the new zealand jv and $ 20.4 million for timberland acquisitions for the year ended december 31 , 2013 . in 2012 , timberland acquisitions totaled $ 106.5

we generated revenues for 2017 , 2016 and 2015 , of $ 8,724 million , $ 9,674 million and $ 10,447 million , respectively . our portfolio of products falls into three reportable segments : ( i ) bausch + lomb/international , ( ii ) branded rx and ( iii ) u.s. diversified products . these segments are discussed in detail in note 23 , `` segment information '' to our audited consolidated financial statements . the bausch + lomb/international segment consists of : ( i ) sales in the u.s. of pharmaceutical products , otc products and medical device products , primarily comprised of bausch + lomb products , with a focus on the vision care , surgical , consumer and ophthalmology rx products and ( ii ) sales in canada , europe , asia , australia and new zealand , latin america , africa and the middle east of branded pharmaceutical products , branded generic pharmaceutical products , otc products , medical device products and bausch + lomb products . the branded rx segment consists of sales in the u.s. of : ( i ) salix products ( gastrointestinal ( “ gi ” ) products ) , ( ii ) ortho dermatologics ( dermatological products ) and ( iii ) oncology ( or dendreon ) , dentistry and women 's health products ( or sprout ) . as a result of the divestiture of the company 's equity interest in dendreon pharmaceuticals llc ( “ dendreon ” ) on june 28 , 2017 and sprout pharmaceuticals , inc. ( “ sprout ” ) on december 20 , 2017 , the company has exited the oncology and women 's health business , respectively . the u.s. diversified products segment consists of sales in the u.s. of : ( i ) pharmaceutical products , otc products and medical device products in the areas of neurology and certain other therapeutic classes , including aesthetics which includes the solta business and the obagi medical products , inc. ( “ obagi ” ) business ( the sale of the obagi business was completed on november 9 , 2017 ) and ( ii ) authorized generic ( “ ag ” ) products . we are focused on the therapeutic areas of eye-health , gastroenterology and dermatology which we believe have the potential for strong operating margins and offer growth opportunities . we identify these businesses as “ core ” , meaning that we believe we are best positioned to grow and develop them . through our output-focused r & d ( “ r & d ” ) model previously discussed in the section `` business strategy '' , we have advanced certain development programs to drive commercial growth , while creating efficiencies in our r & d efforts and expenses . these r & d projects include certain products that we have dubbed our `` significant seven '' , which are products recently launched or expected to launch in the near term pending completion of testing and receiving fda approval . our significant seven are : ( i ) vyzulta ( bausch + lomb ) , ( ii ) siliq ( psoriasis ) , ( iii ) jemdel ( psoriasis ) , ( iv ) lumify ( bausch + lomb ) , ( v ) duobrii ( psoriasis ) , ( vi ) relistor ® ( gi ) and ( vii ) the bausch + lomb ultra ® product lines ( bausch + lomb ) . as outlined later in the discussion of our transformation , although the 2017 revenues associated with our significant seven are not material , we believe the prospects for this group of products over the next five years are substantial . history following the company 's ( then named biovail corporation ) acquisition of valeant pharmaceuticals international on september 28 , 2010 , we supplemented our internal r & d efforts with strategic acquisitions to expand our portfolio offerings and geographic footprint . in 2013 , we acquired bausch & lomb holdings incorporated ( “ b & l ” ) ( the “ b & l acquisition ” ) , a global eye-health company that focuses on developing , manufacturing and marketing eye-health products , including contact lenses , contact lens care solutions , ophthalmic pharmaceuticals and ophthalmic surgical products . in 2015 , we acquired salix pharmaceuticals , ltd. ( “ salix ” ) ( the “ salix acquisition ” ) , a specialty pharmaceutical company dedicated to developing and commercializing prescription drugs and medical devices used in treatment of a variety of gi disorders with a portfolio of over 20 marketed products , including xifaxan ® , uceris ® , apriso ® , glumetza ® and relistor ® . in 2015 , we acquired the exclusive licensing rights to develop and commercialize brodalumab , an il-17 receptor monoclonal antibody for patients with moderate-to-severe 40 plaque psoriasis for which , following internal development work , on february 15 , 2017 , we received approval from the u.s. food and drug administration ( “ fda ” ) . on july 27 , 2017 , we launched this product in the u.s. , marketed as siliq . we believe the investments we have made in b & l , salix , brodalumab and other acquisitions , as well as our ongoing investments in our internal r & d efforts , are helping us to capitalize on the core geographies and therapeutic classes that have the potential for strong operating margins and offer attractive growth opportunities . while business development through acquisitions may continue to be a component of our long-term strategy , we have made minimal acquisitions since 2015 and expect the volume and size of acquisitions to be low in the foreseeable future . see note 3 , `` acquisitions '' to our audited consolidated financial statements for additional details regarding acquisitions . our transformation prior to 2016 , we had completed a series of mergers and acquisitions which were in-line with the company 's previous strategy for growth . story_separator_special_tag strategic investments in our infrastructure - in support of our core businesses we have and continue to make strategic investments in our infrastructure , with the most significant investments seen at our waterford facility in ireland and our rochester facility in new york . the investments at these facilities were made primarily in support of our biotrue ® oneday and bausch + lomb ultra ® contact lens businesses globally and our bausch + lomb aqualox ® contact lens business in japan . waterford facility expansion our bausch + lomb waterford facility is a multi-functional site , serving as one of our biggest production facilities for contact lenses and r & d facilities for the development of contact lenses with advanced development and analytical laboratories . products developed in waterford are exported globally with approximately 50 % of the lenses shipped to japan and asia ; 20 % to countries within the europe , middle east and africa ; and 30 % to north and south america . as a result , the waterford facility is regulated and audited by a number of global regulatory agencies , including the fda , the japanese ministry of health , the irish medicines board and the health products regulatory authority of ireland . in july 2017 , we placed into service a multi-year , $ 175 million strategic expansion project , which increased the size of the waterford facility by approximately 120,000 square feet and introduced new production lines that significantly increased the facility 's production capacity . the emphasis of the expansion project was to : ( i ) develop new technology to manufacture , automatically inspect and package contact lenses , ( ii ) bring that technology to full validation and ( iii ) increase the size of the waterford site to meet the forecasted demand for our new daily disposal contact lens biotrue ® oneday , which was developed and brought to market from waterford . as a result of the increased production capacity and in support of our core bausch + lomb business , we added approximately 300 production employees since the project 's inception and succeeded in increasing production , which , in 2017 , was over 30 % higher than it was in 2015 at the facility . to meet the forecasted demand for our biotrue ® oneday lenses , we continue to invest in this facility , budgeting an additional $ 30 million to bring up additional production lines , which we expect to have operational in 2018. rochester facility upgrades the rochester facility has been serving as our production site for a significant portion of our bausch + lomb planned replacement contact lens products . in connection with our new emphasis on our key seven products , we needed to create a designated production facility to meet the expected demand for our bausch + lomb ultra ® contact lens business globally and our bausch + lomb aqualox ® contact lens business in japan . in december 2017 , we completed a multi-year , $ 200 million strategic project , which provided substantial upgrades to our rochester facility and significantly increased its production capacity . the emphasis of the project was to : ( i ) update the facility 's infrastructure , manufacturing technology and equipment , ( ii ) increase the facility 's production capacity in support of our bausch + lomb ultra ® and bausch + lomb aqualox ® product lines and ( iii ) better support the production of other well established products lines , such as our purevision ® , purevision ® 2 ( svs , toric , and multifocal ) , soflens ® 38 and silsoft contact lenses . as a result of the increase in production capacity and in support of our core bausch + lomb business , we added approximately 120 production employees since the project 's inception and succeeded in increasing production at this facility . to meet the forecasted demand for our bausch + lomb ultra ® and bausch + lomb aqualox ® lenses and our other existing bausch + lomb products , we continue to invest in this facility , budgeting an additional $ 23 million to continue to enhance our production technologies and capacity at the facility , much of which we expect to bring on line in 2018. we believe the investments in our waterford and rochester facilities and related labor forces further demonstrates the growth potential we see in our bausch + lomb branded products . 42 direct r & d investment to our bausch + lomb , gi and dermatology businesses to drive growth - our r & d organization focuses on the development of products through clinical trials . currently , we have approximately 100 r & d projects in our global pipeline and we launched and or relaunched over 120 products globally during 2017. as of december 31 , 2017 , approximately 1,000 dedicated r & d and quality assurance employees in 23 r & d facilities were involved in our r & d efforts . our r & d expenses for 2017 , 2016 and 2015 , were $ 361 million , $ 421 million and $ 334 million , respectively . in 2016 , we increased our r & d expenditures as we transitioned away from the company 's previous strategy of growth by acquisition and moved toward our current strategy of organic growth supported by investment in r & d . although r & d expense in 2017 was lower when compared to 2016 by $ 60 million , r & d expense as a percentage of revenue was approximately 4 % in 2017 and 2016. the decrease in dollars spent in 2017 is attributable to year over year phasing , as we completed the r & d investment in siliq tm and other recently launched products requiring investment in 2016 , removed projects related to businesses divested in 2017 and rebalanced our portfolio to better align with our long-term plans and focus on our bausch + lomb , gi and dermatology businesses .

results of operations our operating results for each of the last three years were as follows : replace_table_token_9_th 59 2017 compared with 2016 revenues our primary sources of revenues are the sale of pharmaceutical products , otc products and medical devices . our revenue was $ 8,724 million and $ 9,674 million for 2017 and 2016 , respectively , a decrease of $ 950 million , or 10 % . the decrease was primarily driven by : ( i ) the impact of divestitures and discontinuations of $ 459 million , ( ii ) a decline in revenues of $ 403 million primarily due to lower volumes in our u.s. diversified segment as a result of the loss of exclusivity for a number of products and lower volumes in our branded rx segment as a result of challenging market dynamics , particularly in dermatology , partially offset by increased volumes in our bausch + lomb / international segment , primarily driven by the u.s. bausch + lomb consumer business and increased international pricing in our bausch + lomb / international segment and ( iii ) the unfavorable impact of foreign currencies of $ 78 million which is primarily attributable to the egyptian pound . our segment revenues and segment profits are discussed in detail in the subsequent section titled `` reportable segment revenues and profits '' . cash discounts and allowances , chargebacks and distribution fees as is customary in the pharmaceutical industry , gross product sales are subject to a variety of deductions in arriving at net product sales . provisions for these deductions are recognized concurrent with the recognition of gross product sales . these provisions include cash discounts and allowances , chargebacks and distribution fees , which are paid to direct customers , as well as rebates and returns , which can be paid to direct and indirect customers .

diluted net income ( loss ) per share is calculated by dividing net income ( loss ) during a reported period by the sum of the weighted average number of common shares outstanding 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 ” of this report and our financial statements and the related notes thereto included in this report . this discussion contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from historical results or anticipated results including those set forth in item 1a . “ risk factors ” of this report . we call your attention to the discussion of forward-looking statements on page 1 of part i of this report , which is incorporated into , and is intended to accompany , this item 7. overview stamps.com® is a leading provider of internet-based mailing and shipping solutions in the united states . under the stamps.com and endicia brands , customers use our usps only solutions to mail and ship a variety of mail pieces and packages through the usps . customers using our solutions receive discounted postage rates compared to usps.com and usps retail locations on certain mail pieces such as first class letters and domestic and international priority mail® and priority mail express® packages . stamps.com was the first ever usps-approved pc postage vendor to offer a software only mailing and shipping solution in 1999. endicia became a usps-approved pc postage vendor in 2000. under the shipstation® , shipworks® and shippingeasy tm brands , customer use our multi-carrier solutions to ship packages through multiple carriers such as the usps , ups , fedex and others . our customers include individuals , small businesses , home offices , medium-size businesses , large enterprises , e-commerce merchants and warehouse shippers . mailing and shipping business references when we refer to our “ mailing and shipping business , ” we are referring to our mailing and shipping products and services including our mailing and shipping services and integrations , mailing & shipping supplies stores , branded insurance offerings and multi-carrier services . we do not include our customized postage business when we refer to our mailing and shipping business . we have historically broken out our mailing and shipping business between core mailing and shipping and non-core mailing and shipping . we previously referred to our `` core mailing and shipping business '' as the portion of our mailing and shipping business targeting our small business , enterprise and high volume shipping customers acquired through our core mailing and shipping marketing channels which include partnerships , online advertising , direct mail , direct sales , traditional media advertising and others . we previously referred to our `` non-core mailing and shipping business '' as the portion of our mailing and shipping business that targeted a more consumer oriented customer through the online enhanced promotion marketing channel . 33 in light of the growth in our core mailing and shipping business and decline in our non-core mailing and shipping business , we concluded that the non-core mailing and shipping business was not material enough to break out separately in 2015 or subsequently , as it no longer provides investors with material additional insights into our business . when we refer to our “ mailing and shipping revenue , ” we are referring to our service , product and insurance revenue generated by all of our mailing and shipping customers . acquisitions shippingeasy on june 16 , 2016 , we entered into a definitive agreement to acquire shippingeasy for approximately $ 55.0 million . shippingeasy , an austin , texas based company , offers web-based multi-carrier shipping solutions . on july 1 , 2016 , we completed our acquisition of shippingeasy . the purchase price was subject to adjustments for changes in shippingeasy 's net working capital . the net purchase price including adjustments for net working capital totaled approximately $ 55.4 million and was funded from current cash and investment balances . in connection with the acquisition , we issued performance based inducement equity awards to katie may , who serves as the general manager of shippingeasy , and barry cox , who serves as chief technology officer of shippingeasy . these inducement awards cover an aggregate of up to 43,567 common shares each to ms. may and mr. cox if earnings targets for shippingeasy are achieved over a two and one-half year period beginning july 1 , 2016. the awards are subject to proration if at least 75 % of the applicable target is achieved and are subject to forfeiture or acceleration based on changes in employment circumstances over the performance period . the awards were a material inducement to ms. may and mr. cox entering into employment agreements with stamps.com in connection with the acquisition . we also issued inducement stock option grants for an aggregate of 62,000 shares of stamps.com common stock to 48 new employees in connection with our acquisition of shippingeasy . the stock options were granted as inducements material to the new employees entering into employment with stamps.com . endicia on march 22 , 2015 we entered into a stock purchase agreement ( the “ stock purchase agreement ” ) with psi systems , inc. , a california corporation d/b/a endicia ( “ endicia ” ) , and newell rubbermaid inc. , a delaware corporation ( “ newell ” ) . endicia , based in mountain view , california , offers mailing and shipping solutions for use with the usps . the stock purchase agreement provided for our purchase of all of the issued and outstanding shares of common stock of endicia from a wholly owned indirect subsidiary of newell for an aggregate purchase price of approximately $ 215 million in cash ( the “ transaction ” ) . story_separator_special_tag customized postage revenue increased 88 % to $ 13.6 million in 2016 from $ 7.2 million in 2015. the increase was primarily attributable to ( 1 ) an increase in photostamps high volume business orders , which increased by $ 2.9 million and ( 2 ) the addition of pictureitpostage as a result of our endicia acquisition , which added $ 4.1 million for the full year of 2016 as compared to the shorter period of 2015 for which endicia is included in our results . the increase in customized postage revenue was partially offset by a $ 0.6 million decrease in photostamps revenue from orders placed through the photostamps website . the decrease in revenue from website orders is primarily attributable to a reduction in our photostamps sales and marketing spending . cost of revenue the following table shows cost of revenues and cost of revenues as a percentage of associated revenue for the periods indicated ( in thousands except percentage ) : replace_table_token_10_th cost of service revenue principally consists of the cost of customer service , certain promotional expenses , system operating costs , credit card processing fees and customer misprints that do not qualify for reimbursement from the usps . cost of product revenue principally consists of the cost of products sold through our supplies stores and the related costs of shipping and handling . the cost of insurance revenue principally consists of parcel insurance offering costs through our third party insurance providers . cost of customized postage revenue principally consists of the face value of postage , customer service , image review costs , and printing and fulfillment costs . cost of service revenue increased 43 % to $ 40.0 million in 2016 from $ 28.0 million in 2015. the increase was primarily attributable to higher customer service costs , which increased by $ 6.0 million , to support our growing customer base and higher credit card processing fees , which increased by $ 3.0 million , associated with our higher revenue . promotional expenses were not material in 2016. cost of service revenue as a percent of service revenue declined from 16 % in 2015 to 13 % in 2016. the decline was primarily attributable to achieving scale efficiencies in areas such as customer service from our growth in revenue . cost of product revenue increased 12 % to $ 6.7 million in 2016 from $ 6.0 million in 2015. the 12 % increase in cost of product revenue was primarily attributable to the increase in product revenue over the same time period . cost of product revenue as a percent of product revenue was 33 % in 2016 which was consistent with 2015 . 38 cost of insurance revenue increased 36 % to $ 5.4 million in 2016 from $ 4.0 million in 2015. the increase in cost of insurance revenue resulted from growth in the number of insurance transactions , which was primarily attributable to our acquisitions . cost of insurance revenue as a percent of insurance revenue declined from 34 % in 2015 to 31 % in 2016. the decline was primarily attributable to the insurance offerings of our acquired companies having higher prices for parcel insurance as compared to the rest of the company . cost of customized postage revenue increased 80 % to $ 10.8 million in 2016 from $ 6.0 million in 2015. the increase in cost of customized postage revenue is primarily due to the increase in our customized postage revenue . cost of customized postage revenue as a percent of customized postage revenue declined from 83 % in 2015 to 80 % in 2016. the decline was primarily the result of the addition of endicia 's pictureitpostage revenue which has a lower cost of customized postage revenue as a percent of customized postage revenue as compared to photostamps . pictureitpostage does not have a material level of high volume business orders which typically have a higher cost of customized postage revenue as a percent of customized postage revenue as compared to consumer website orders . operating expenses the following table outlines the components of our operating expense and their respective percentages of total revenue for the periods indicated ( in thousands except percentage ) : replace_table_token_11_th sales and marketing sales and marketing expense principally consists of spending to acquire new customers and compensation and related expenses for personnel engaged in sales , marketing , and business development activities . our sales and marketing programs include direct sales , customer referral programs , customer re-marketing efforts , direct mail , online advertising , partnerships , telemarketing , and traditional advertising . sales and marketing expense increased 40 % to $ 78.8 million in 2016 from $ 56.1 million in 2015. the increase is primarily due to ( 1 ) an increase in headcount-related expenses excluding stock-based compensation expense of $ 10.4 million , ( 2 ) an increase in stock-based compensation expense of $ 2.6 million and ( 3 ) an increase in discretionary marketing spend of $ 6.5 million . the increases in headcount-related and stock-based compensation expenses were due to both the addition of headcount resulting from our endicia and shippingeasy acquisitions as well as increased headcount in the rest of the company . research and development research and development expense principally consists of compensation for personnel involved in the development of our services , depreciation of equipment and software and expenditures for consulting services and third party software . 39 research and development expense increased 70 % to $ 35.2 million in 2016 from $ 20.7 million in 2015. the increase is primarily due to ( 1 ) an increase in headcount-related expenses excluding stock-based compensation of $ 7.1 million and ( 2 ) an increase in stock-based compensation expense of $ 3.5 million . the increases in headcount-related and stock-based compensation expenses were due to both the addition of headcount resulting from our endicia and shippingeasy acquisitions as well as increased headcount in the rest of the company to support our expanded product offerings and technology infrastructure investments .

results of operations the results of our operations during the year ended december 31 , 2016 includes operations of shippingeasy for the period from july 1 , 2016 through december 31 , 2016 and the operations of endicia , shipstation , and shipworks for the full fiscal year 2016. the results of our operations during the year ended december 31 , 2015 includes operations of endicia for the period from november 18 , 2015 through december 31 , 2015 and the operations of shipstation and shipworks for the full fiscal year 2015. please see note 3 – “ acquisitions ” in our notes to consolidated financial statements for further description . accordingly , care should be used in comparing periods that include the operations of endicia and shippingeasy with those that do not include such operations . years ended december 31 , 2016 and 2015 total revenue increased 70 % to $ 364.3 million in 2016 from $ 214.0 million in 2015. mailing and shipping revenue , which includes service revenue , product revenue and insurance revenue , was $ 350.6 million in 2016 , an increase of 70 % from $ 206.7 million in 2015. customized postage revenue increased 88 % to $ 13.6 million in 2016 from $ 7.2 million in 2015 . 35 the following table sets forth the breakdown of revenue for 2016 and 2015 and the resulting percent change ( revenue in thousands ) : replace_table_token_6_th we define “ paid customers ” for the quarter as ones from whom we successfully collected service fees or otherwise earned revenue at least once during that quarter , and we define average paid customers for the year as the average of the paid customers for each of the four quarters during the year . we define average annual revenue per paid customer ( “ arpu ” ) as annual mailing and shipping revenue divided by paid customers .

million of letters of credit . the amendment reduced the borrowing availability from $ 65.0 million to $ 30.0 million . letters of credit outstanding at june 30 , 2015 totaled $ 2.9 million . as of june 30 , 2015 , the company utilized $ 10.6 million of borrowing availability under the credit facility during the year , other than the aforementioned letters of credit , leaving borrowing availability of $ 16.5 million . the credit agreement expires june 30 , 2016. at june 30 , 2015 , the company was in compliance with all of the financial covenants contained in the credit agreement . an officer of the company is a director at a bank where the company maintains an unsecured $ 10.0 million line of credit , with interest at prime minus 2 % , and where its routine banking transactions are processed . the company utilized borrowing availability during the year and $ 1.3 million was outstanding on the line of credit at june 30 , 2015. in addition , the supplemental retirement plans assets , held in a rabbi trust , of $ 3.5 million are administered by this bank 's trust department . the company receives no special services or pricing on the services performed by the bank due to the directorship of this officer . net cash provided by operating activities was $ 3.3 million and $ 16.2 million in fiscal years 2015 and 2014 , respectively . the company had net income of $ 22.3 million that included $ 5.8 million in non-cash charges in fiscal year 2015 and was offset by cash utilized for operating assets and liabilities of $ 24.8 million . non-cash charges included depreciation of $ 4.9 million . in fiscal year 2014 , the company had net income of $ 15.0 million that included $ 3.9 million in non-cash charges and was offset by cash utilized for operating assets and liabilities of $ 2.7 million . net cash used in investing activities was $ 32.6 million and $ 4.4 million in fiscal years 2015 and 2014 , respectively . in fiscal year 2015 , the company made capital expenditures of $ 37.4 million partially offset by $ 5.1 million of proceeds from life insurance policies . during fiscal year 2015 , the company invested $ 32.0 million to purchase and equip its edgerton distribution facility . the company made capital expenditures of $ 4.2 million during fiscal year 2014. net cash provided by and used in financing activities was $ 8.4 million and $ 0.6 million in fiscal years 2015 and 2014 , respectively . proceeds from short-term notes payable totaled $ 11.9 million in fiscal year 2015. payment of dividends of $ 5.1 million and $ 4.3 million , partially offset by proceeds from issuance of common stock of $ 0.8 million and $ 2.4 million and excess tax benefit from stock-based payment arrangements of $ 0.8 million and $ 1.4 million in fiscal years 2015 and 2014 , respectively . management believes that the company has adequate cash , cash flows from operations and credit arrangements to meet its operating and capital requirements for fiscal year 2016. in the opinion of management , the company 's liquidity and credit resources provide it with the ability to react to opportunities as they arise , to pay quarterly dividends to its shareholders , and to purchase productive capital assets that enhance safety and improve operations . at june 30 , 2015 , the company had no long-term debt obligations and therefore , had no interest payments related to long-term debt . the following table summarizes the company 's contractual obligations at june 30 , 2015 and the effect these obligations are expected to have on the company 's liquidity and cash flow in the future ( in thousands ) : replace_table_token_8_th the long-term portion of the contractual obligations associated with the company 's supplemental retirement plans are included in the table above under more than five years as the company can not predict when the events that trigger payment will occur . at june 30 , 2015 , the company had no capital lease obligations , and no purchase obligations for raw materials or finished goods . the purchase price on all open purchase orders was fixed and denominated in u.s. dollars . additionally , the company has excluded the uncertain tax positions from the above table , as the timing of payments , if any , can not be reasonably estimated . 11 financing arrangements see note 6 to the consolidated financial statements of this annual report on form 10-k. outlook due to existing strong order backlog and positive order trends the company expects top line growth will continue in fiscal year 2016. residential growth is expected from existing customers and products , and through expanding our product portfolio and customer base . the company believes this growth will be led by increased demand for upholstered , ready-to-assemble , and case goods products . the company anticipates sales of commercial products consistent with fiscal year 2015. the company is confident in its ability to take advantage of market opportunities . the company continues to progress on two multi-year initiatives , designed to enhance customer experience and increase shareholder value . consistent with the logistics strategy , the company began operations in april 2015 , as planned , at its edgerton distribution facility after investing $ 32.0 million . the company continues to develop its business information system requirements and expensed $ 0.6 million during the current fiscal year related to the project . the timing and level of additional investment required for these initiatives will be evaluated as the projects progress . operating capital expenditures are estimated to be $ 7 million for fiscal 2016. the company believes it has adequate working capital and borrowing capabilities to meet these requirements . the company remains committed to its core strategies , which include providing a wide range story_separator_special_tag million of letters of credit . the amendment reduced the borrowing availability from $ 65.0 million to $ 30.0 million . letters of credit outstanding at june 30 , 2015 totaled $ 2.9 million . as of june 30 , 2015 , the company utilized $ 10.6 million of borrowing availability under the credit facility during the year , other than the aforementioned letters of credit , leaving borrowing availability of $ 16.5 million . the credit agreement expires june 30 , 2016. at june 30 , 2015 , the company was in compliance with all of the financial covenants contained in the credit agreement . an officer of the company is a director at a bank where the company maintains an unsecured $ 10.0 million line of credit , with interest at prime minus 2 % , and where its routine banking transactions are processed . the company utilized borrowing availability during the year and $ 1.3 million was outstanding on the line of credit at june 30 , 2015. in addition , the supplemental retirement plans assets , held in a rabbi trust , of $ 3.5 million are administered by this bank 's trust department . the company receives no special services or pricing on the services performed by the bank due to the directorship of this officer . net cash provided by operating activities was $ 3.3 million and $ 16.2 million in fiscal years 2015 and 2014 , respectively . the company had net income of $ 22.3 million that included $ 5.8 million in non-cash charges in fiscal year 2015 and was offset by cash utilized for operating assets and liabilities of $ 24.8 million . non-cash charges included depreciation of $ 4.9 million . in fiscal year 2014 , the company had net income of $ 15.0 million that included $ 3.9 million in non-cash charges and was offset by cash utilized for operating assets and liabilities of $ 2.7 million . net cash used in investing activities was $ 32.6 million and $ 4.4 million in fiscal years 2015 and 2014 , respectively . in fiscal year 2015 , the company made capital expenditures of $ 37.4 million partially offset by $ 5.1 million of proceeds from life insurance policies . during fiscal year 2015 , the company invested $ 32.0 million to purchase and equip its edgerton distribution facility . the company made capital expenditures of $ 4.2 million during fiscal year 2014. net cash provided by and used in financing activities was $ 8.4 million and $ 0.6 million in fiscal years 2015 and 2014 , respectively . proceeds from short-term notes payable totaled $ 11.9 million in fiscal year 2015. payment of dividends of $ 5.1 million and $ 4.3 million , partially offset by proceeds from issuance of common stock of $ 0.8 million and $ 2.4 million and excess tax benefit from stock-based payment arrangements of $ 0.8 million and $ 1.4 million in fiscal years 2015 and 2014 , respectively . management believes that the company has adequate cash , cash flows from operations and credit arrangements to meet its operating and capital requirements for fiscal year 2016. in the opinion of management , the company 's liquidity and credit resources provide it with the ability to react to opportunities as they arise , to pay quarterly dividends to its shareholders , and to purchase productive capital assets that enhance safety and improve operations . at june 30 , 2015 , the company had no long-term debt obligations and therefore , had no interest payments related to long-term debt . the following table summarizes the company 's contractual obligations at june 30 , 2015 and the effect these obligations are expected to have on the company 's liquidity and cash flow in the future ( in thousands ) : replace_table_token_8_th the long-term portion of the contractual obligations associated with the company 's supplemental retirement plans are included in the table above under more than five years as the company can not predict when the events that trigger payment will occur . at june 30 , 2015 , the company had no capital lease obligations , and no purchase obligations for raw materials or finished goods . the purchase price on all open purchase orders was fixed and denominated in u.s. dollars . additionally , the company has excluded the uncertain tax positions from the above table , as the timing of payments , if any , can not be reasonably estimated . 11 financing arrangements see note 6 to the consolidated financial statements of this annual report on form 10-k. outlook due to existing strong order backlog and positive order trends the company expects top line growth will continue in fiscal year 2016. residential growth is expected from existing customers and products , and through expanding our product portfolio and customer base . the company believes this growth will be led by increased demand for upholstered , ready-to-assemble , and case goods products . the company anticipates sales of commercial products consistent with fiscal year 2015. the company is confident in its ability to take advantage of market opportunities . the company continues to progress on two multi-year initiatives , designed to enhance customer experience and increase shareholder value . consistent with the logistics strategy , the company began operations in april 2015 , as planned , at its edgerton distribution facility after investing $ 32.0 million . the company continues to develop its business information system requirements and expensed $ 0.6 million during the current fiscal year related to the project . the timing and level of additional investment required for these initiatives will be evaluated as the projects progress . operating capital expenditures are estimated to be $ 7 million for fiscal 2016. the company believes it has adequate working capital and borrowing capabilities to meet these requirements . the company remains committed to its core strategies , which include providing a wide range

results of operations the following table has been prepared as an aid in understanding the company 's results of operations on a comparative basis for the fiscal years ended june 30 , 2015 , 2014 and 2013. amounts presented are percentages of the company 's net sales . replace_table_token_7_th 9 fiscal 2015 compared to fiscal 2014 net sales for fiscal 2015 were $ 467.0 million compared to $ 438.5 million in the prior fiscal year , an increase of 6.5 % . for the fiscal year ended june 30 , 2015 , residential net sales were $ 393.1 million compared to $ 359.5 million for the year ended june 30 , 2014 , an increase of 9.3 % . the residential net sales increase of $ 33.6 million for the year ended june 30 , 2015 resulted from capturing demand for upholstered and ready-to-assemble products . commercial net sales were $ 73.8 million for the year ended june 30 , 2015 , a decrease of 6.6 % from net sales of $ 79.0 million for the year ended june 30 , 2014. gross margin for the fiscal year ended june 30 , 2015 was 23.5 % compared to 22.9 % for the prior fiscal year . the improvement in gross margin for the fiscal year is primarily driven by declining inventory write downs . selling , general and administrative expenses ( sg & a ) for the fiscal year ended june 30 , 2015 were 16.2 % of net sales compared to 16.4 % in the prior fiscal year . the company incurred approximately $ 0.6 million of legal defense costs during the current fiscal year which has been recorded in sg & a expense . the company received reimbursements of legal defense costs of approximately $ 0.2 million from insurers which has been reflected as a reduction of legal expenses in sg & a expenses for the current fiscal year .

this overview and the remainder of this management 's discussion and analysis supplements and should be read in conjunction with the consolidated financial statements of invesco ltd. and its subsidiaries ( collectively , the “ company ” or “ invesco ” ) and the notes thereto contained elsewhere in this annual report on form 10-k. global financial markets in 2018 saw a return of market volatility , and significant negative returns late in the year wiped out earlier gains in all markets . the year started much as the prior year had ended , with strong returns fueled by optimism around u.s. tax reform and positive macroeconomic data . however , increasing geopolitical uncertainty and rising global trade tensions , as well as concerns about the sustainability of global growth , came into sharper focus as the year progressed , ultimately leading markets lower . 30 in the u.s. , strong earnings growth and employment data helped to propel the markets higher to start the year , while the accelerating potential for negative trade actions between the u.s. and china and concerns that the u.s. may be late in an economic cycle dampened market enthusiasm as the year progressed . the federal reserve 's interest rate actions throughout the year and unwind of the accommodative monetary policy created further uncertainty , as they continued to raise interest rates while indicating that future pace of increases could be slowed or curtailed . the s & p 500 reached an all-time high in september before contracting sharply in the fourth quarter to finish the year down 7.0 % . european markets were similarly lifted early in the year on strong economic data and an improving growth outlook . the sentiment turned negative as the year progressed as rising geopolitical concerns ( including the upcoming uk and eu separation , italian political concerns , and the ongoing trade tensions between the u.s. and china ) and concerns around global growth intensified driving the ftse 100 down 12.4 % for the year . in japan , a positive economic outlook and weakening yen were offset by a slowdown in china 's growth , and concerns about the impact to corporate profits led markets sharply lower late in the year . the nikkei 225 finished the year down 12.1 % . bond returns for the year were mixed as strong economic indicators and rate increases implemented in the u.s. and uk drove yields higher for a majority of the year , while the desire for lower-risk assets in the fourth quarter pressured yields on government bonds . concerns around liquidity and leverage and a weakening outlook for corporate profits negatively impacted corporate investment grade and high-yield credit , driving the u.s. aggregate bond index to finish down a modest 0.2 % for the year . the table below summarizes the year ended december 31 returns based on price appreciation/ ( depreciation ) of several major market indices for 2018 , 2017 , and 2016 : replace_table_token_4_th the company 's financial results are impacted by the fluctuations in exchange rates against the u.s. dollar , as discussed in the `` foreign exchange impact on balance sheet , assets under management and results of operations '' section and the `` results of operations for the years ended december 31 , 2018 compared to december 31 , 2017 compared to december 31 , 2016 `` section below . our revenues are directly influenced by the level and composition of our aum . therefore , movements in global capital market levels , net new business inflows ( or outflows ) and changes in the mix of investment products between asset classes and geographies may materially affect our revenues from period to period . as fee rates differ across geographic locations , changes to exchange rates have an impact on the net revenue yields . invesco benefits from our long-term efforts to ensure a diversified base of aum . one of invesco 's core strengths , and a key differentiator for the company within the industry , is our broad diversification across client domiciles , asset classes and distribution channels . our geographic diversification recognizes growth opportunities in different parts of the world . this broad diversification mitigates the impact on invesco of different market cycles and enables the company to take advantage of growth opportunities in various markets and channels . the company has moved to a unified brand - invesco , while preserving the time-tested and distinctive investment perspectives , processes and approaches of our different investment teams across the globe . this effort will contribute to a more consistent client experience across multiple markets and strengthen our ability to market our comprehensive range of capabilities more effectively . as announced in october 2018 , invesco and massmutual have entered into a definitive agreement whereby invesco will acquire massmutual 's asset management affiliate , oppenheimerfunds , inc. in turn , massmutual and the oppenheimerfunds employee shareholders will receive a combination of common and preferred equity consideration , and massmutual will become a significant shareholder of invesco , with an approximate 17 % stake expected at closing . the transaction is on track to close in the second 31 quarter of 2019 ( pending necessary regulatory and other third-party approvals ) . this strategic combination of highly complementary investment and distribution capabilities will strengthen the combined organization 's ability to provide relevant investment outcomes to an expanded number of institutional and retail clients in the u.s. and around the globe . under the terms of the agreement , invesco will acquire oppenheimerfunds with consideration to massmutual and oppenheimerfunds employee shareholders consisting of 81.9 million shares of invesco common equity and $ 4 billion in perpetual , non-cumulative preferred shares with a 21-year non-call period and a fixed rate of 5.9 % . based on invesco 's stock price as of december 31 , 2018 , this represents an estimated purchase price of $ 5.4 billion . the purchase and sale agreement contain customary purchase price adjustments related to net working capital and revenue run rate changes at the closing date . story_separator_special_tag cip includes all variable and voting interest entities , as applicable , with effect from the adoption of asu 2015-02. the company 's economic risk with respect to each investment in cip is limited to its equity ownership and any uncollected management and performance fees . the company is required to consolidate certain managed funds from time-to-time , as discussed more fully in item 8 , financial statements and supplementary data , note 1 -- `` accounting policies -- basis of accounting and consolidation . '' the majority of the company 's cip balances are clo-related . the collateral assets of the clos are held solely to satisfy the obligations of the clos . the company has no right to the benefits from , nor does it bear the risks associated with , the collateral assets held by the clos , beyond the company 's direct investments in , and management and performance fees generated from , the clos . if the company were to liquidate , the collateral assets would not be available to the general creditors of the company , and as a result , the company does not consider them to be company assets . likewise , the investors in the clos have no recourse to the general credit of the company for the notes issued by the clos . the company therefore does not consider this debt to be a company liability . the impact of cip is so significant to the presentation of the company 's consolidated financial statements that the company has elected to deconsolidate these products in its non-gaap disclosures . this management 's discussion and analysis of financial condition and results of operations contains four distinct sections , which follow after the assets under management discussion : results of operations ( years ended december 31 , 2018 compared to december 31 , 2017 compared to december 31 , 2016 ) ; schedule of non-gaap information ; balance sheet discussion ; and liquidity and capital resources . to assess the impact of cip on the company 's results of operations and balance sheet discussion , refer to part ii , item 8 , financial statements , note 19 , `` consolidated investment products . '' the impact on the company 's results of operations is illustrated by a column which shows the dollar-value change in the consolidated figures , as caused by the consolidation of cip . for example , the impact of cip on operating revenues for the year ended december 31 , 2018 was a reduction of $ 28.6 million . this indicates that their consolidation reduced consolidated revenues by this amount , reflecting the elimination upon their consolidation of the operating revenues earned by invesco for managing these investment products . wherever a non-gaap measure is referenced , a disclosure will follow in the narrative or in the note referring the reader to the schedule of non-gaap information , where additional details regarding the use of the non-gaap measure by the company are disclosed , along with reconciliations of the most directly comparable u.s. gaap measures to the non-gaap measures . to further enhance the readability of the results of operations section , separate tables for each of the revenue , expense , and other income and expenses ( non-operating income/expense ) sections of the income statement introduce the narrative that follows , providing a section-by-section review of the company 's income statements for the periods presented . 33 summary operating information summary operating information for 2018 , 2017 and 2016 is presented in the table below . replace_table_token_5_th _ ( 1 ) net revenues is a non-gaap financial measure . net revenues are operating revenues plus the net revenues of our joint venture investments , less third-party distribution , service and advisory expenses , plus management and performance fees earned from cip . see `` schedule of non-gaap information '' for the reconciliation of operating revenues to net revenues . ( 2 ) adjusted operating income and adjusted operating margin are non-gaap financial measures . adjusted operating margin is adjusted operating income divided by net revenues . adjusted operating income includes operating income plus the net operating income of our joint venture investments , the operating income impact of the consolidation of investment products , transaction , integration , and restructuring adjustments , compensation expense related to market valuation changes in deferred compensation plans , and other reconciling items . see `` schedule of non-gaap information , '' for the reconciliation of operating income to adjusted operating income . ( 3 ) adjusted net income attributable to invesco ltd. and adjusted diluted eps are non-gaap financial measures . adjusted net income attributable to invesco ltd. is net income attributable to invesco ltd. adjusted to exclude the net income of cip , transaction , integration , and restructuring adjustments , the net income impact of deferred compensation plans and other reconciling items . adjustments made to net income attributable to invesco ltd. are tax-affected in arriving at adjusted net income attributable to invesco ltd. by calculation , adjusted diluted eps is adjusted net income attributable to invesco ltd. divided by the weighted average number of shares outstanding ( for diluted eps ) . see `` schedule of non-gaap information , '' for the reconciliation of net income attributable to invesco ltd. to adjusted net income attributable to invesco ltd .. investment capabilities performance overview invesco 's first strategic objective is to achieve strong investment performance over the long-term for our clients . as of december 31 , 2018 , 41 % , 54 % and 63 % of measured ranked actively managed assets performed in the top half of peer groups on a one-year , three-year and five-year basis respectively . the table below presents the one- , three- and five-year performance of our measured ranked actively managed investment products measured by the percentage of aum ahead of benchmark and aum in the top half of peer group .

resulted in an net increase to net income attributable to invesco ltd. of $ 8.8 million ( year ended december 31 , 2017 : $ 2.3 million net increase ) . the consolidation of investment products during the year ended december 31 , 2016 resulted in an increase to net income attributable to invesco ltd. of $ 3.0 million . 53 noncontrolling interests in consolidated entities represent the profit or loss amounts attributed to third party investors in cip . the impact of any gains or losses resulting from valuation changes in the investments of non-clo cip attributable to the interests of third parties are offset by resulting changes in gains and losses attributable to noncontrolling interests in consolidated entities and therefore do not have a material effect on the financial condition , operating results ( including earnings per share ) , liquidity or capital resources of the company 's common shareholders . similarly , any gains or losses resulting from valuation changes in the investments of clos attributable to the interests of third parties are offset by the calculated value of the notes issued by the clos ( offsetting in other gains/ ( losses ) of cip ) and therefore also do not have a material effect on the financial condition , operating results ( including earnings per share ) , liquidity or capital resources of the company 's common shareholders . additionally , cip represent less than 1 % of the company 's aum . therefore , the net gains or losses of cip are not indicative of the performance of the company 's aggregate aum . income before taxes total income before taxes includes income/losses of cip ; however , the company 's operating revenues earned from cip are not included in operating revenues under u.s. gaap , as such operating revenues are eliminated upon consolidation .

we prefer markets that have limited competition where we can establish a commanding presence and achieve high gross margins . we are organized into three divisions across six physical locations . our instruments division designs , manufactures and markets quality control instruments and disposable products utilized in connection with the healthcare , pharmaceutical , food and beverage , medical device , industrial hygiene , environmental air sampling and semiconductor industries . our biological indicators division manufactures and markets biological indicators and distributes chemical indicators used to assess the effectiveness of sterilization processes , including steam , hydrogen peroxide , ethylene oxide and radiation , in the hospital , dental , medical device and pharmaceutical industries . our continuous monitoring division designs , develops and markets systems which are used to monitor various environmental parameters such as temperature , humidity and differential pressure to ensure that critical storage and processing conditions are maintained in hospitals , pharmaceutical and medical device manufacturers , blood banks , pharmacies and a number of other laboratory and industrial environments . we follow a philosophy of manufacturing a high quality product and providing a high level of on-going service for those products . our revenues come from two main sources – product sales and services . product sales are dependent on several factors , including general economic conditions , both domestic and international , customer capital spending trends , competition , introduction of new products and acquisitions . biological indicator products are disposable and are used on a routine basis for quality control , thus product sales are less sensitive to general economic conditions . instrument products and continuous monitoring systems have a longer life , and their purchase by our customers is somewhat discretionary , so sales are more sensitive to general economic conditions . service demand is driven by our customers ' quality control and regulatory environments , which require periodic repair and recalibration or certification of our instrument products and continuous monitoring systems . we typically evaluate costs and pricing annually . our policy is to price our products and systems competitively and , where possible , we try to pass along cost increases in order to maintain our margins . gross profit is affected by our product mix , manufacturing efficiencies and price competition . historically , as we have integrated our acquisitions and taken advantage of manufacturing efficiencies , our gross margins for some of the products have improved . there are , however , differences in gross margins between different product lines , and ultimately the mix of sales will continue to impact our overall gross margin . selling expense is driven primarily by labor costs , including salaries and commissions . accordingly , it may vary with sales levels . labor costs and amortization of intangible assets drive the substantial majority of general and administrative expense . research and development expense is predominantly comprised of labor costs and third party consultants . year ended march 31 , 2015 acquisitions during the year ended march 31 , 2015 , we completed the following six acquisitions ( the “ 2015 acquisitions ” ) : in march 2015 , we completed the früh acquisition whereby we acquired substantially all of the assets ( other than cash and accounts receivable ) and certain liabilities of früh 's business segment associated with the distribution of our biological indicator products ; in february 2015 , we completed the cherwell acquisition whereby we acquired substantially all of the assets ( other than cash and accounts receivable ) and certain liabilities of cherwell 's business segment associated with the distribution of our biological indicator products ; in october 2014 , we completed the ati acquisition whereby we acquired substantially all of the assets ( other than cash and accounts receivable ) and certain liabilities of ati , a distributor of our biological indicator products ; in october 2014 , we completed the pcd acquisition whereby we acquired substantially all of the assets ( other than cash and accounts receivable ) and certain liabilities of pcd 's business segment associated with the sale of pcd 's which are used for quality control purposes in the field of ethylene oxide sterilization of medical devices ; page 18 in april 2014 , we completed the bgi acquisition whereby we acquired substantially all of the assets ( other than cash and accounts receivable ) and certain liabilities of bgi 's business which is focused on the sale of equipment used primarily for particulate air sampling ; and in april 2014 , we completed the amilabo acquisition whereby we acquired all of the common stock of amilabo , a distributor of our biological indicator products . year ended march 31 , 2014 acquisitions during the year ended march 31 , 2014 , we completed the following three acquisitions ( the “ 2014 acquisitions ” ) : in november 2013 , we completed the tempsys acquisition whereby we acquired all of the common stock of tempsys , a company in the business of providing continuous monitoring systems to regulated industries ; in november 2013 , we completed the amega acquisition whereby we acquired substantially all of the assets ( other than cash ) and certain liabilities of amega , a company in the business of providing continuous monitoring services to regulated industries ; and in july 2013 , we completed the suretorque acquisition whereby we acquired substantially all the assets ( other than cash ) of st acquisition 's business segment involving the design , manufacture , sale and service of its suretorque line of bottle cap torque testing instrumentation . year ended march 31 , 2013 acquisitions in may 2012 , we completed the bios acquisition whereby we acquired substantially all of the assets ( other than cash ) and certain liabilities of bios ' business involving the design , manufacture , sale and service of flow calibration equipment . general trends and outlook our strategic objectives include growth both organically and through further acquisitions . story_separator_special_tag funds from the credit facility may be used for general working capital and corporate needs , retiring existing debt , or to support acquisitions and capital expenditures . under the credit facility , indebtedness bears interest at either : ( 1 ) libor , as defined plus an applicable margin , ranging from 1.25 % to 2.00 % , or ( 2 ) the bank 's commercial bank floating rate ( “ cbfr ” ) , which is the greater of the bank 's prime rate or one month libor + 2.50 % , adjusted down , from 1.25 % to 0.50 % . in april 2014 , the credit facility was amended to include a $ 15,000,000 term loan and to extend the maturity date of the credit facility to june 30 , 2017. the term loan bears interest at libor , as defined , plus 2 % and requires 11 quarterly principal payments ( the first due date was july 15 , 2014 ) in the amount of $ 750,000 with the remaining balance of principal and accrued interest due on april 15 , 2017. the proceeds from the term loan were used to support acquisition financing and to repay amounts outstanding under the line of credit . the credit facility is secured by all of our assets and requires us to maintain a ratio of funded debt to our trailing four quarters of ebidta , as defined , of 2.5 to 1.0 , and a minimum fixed charge coverage ratio of 1.35 to 1.0. we were in compliance with these covenants at march 31 , 2015. as of may 31 , 2015 , we had $ 25,000,000 in outstanding indebtedness and unused capacity under our credit facility of $ 7,000,000. in april 2015 , the sec declared effective our universal shelf registration statement which allows us to sell , in one or more public offerings , common stock or warrants , or any combination of such securities for proceeds in an aggregate amount of up to $ 130,000,000. the terms of any offering , including the type of securities involved , would be established at the time of sale . we have no immediate plans to issue securities under this registration statement . on october 1 , 2012 , we amended our articles of incorporation to increase the number of authorized shares of common stock from 8 million to 25 million . we routinely evaluate opportunities for strategic acquisitions . future material acquisitions may require that we obtain additional capital , assume third party debt or incur other long-term obligations . we believe that we have the option to utilize both equity and debt instruments as vehicles for the long-term financing of our investment activities and acquisitions . on november 7 , 2005 , our board of directors authorized a program to repurchase up to 300,000 shares of our outstanding common stock . under the plan , the shares may be purchased from time to time in the open market at prevailing prices or in negotiated transactions off the market . shares purchased are canceled and repurchases are made with existing cash reserves . we do not maintain a set policy or schedule for our buyback program . we have purchased 162,486 shares of common stock under this program from inception through march 31 , 2015. page 24 we have been paying regular quarterly dividends since 2003. dividends per share paid by quarter were as follows : replace_table_token_10_th in april 2015 , our board of directors declared a quarterly cash dividend of $ 0.16 per share of common stock , payable on june 15 , 2015 , to shareholders of record at the close of business on may 29 , 2015. cash flow – operating , investing and financing activities were as follows ( in thousands ) : replace_table_token_11_th net cash provided by operating activities for the year ended march 31 , 2015 decreased primarily due to increases in accounts receivable and inventories resulting from the 2014 and 2015 acquisitions , decreases in unearned revenues and the payment of accrued liabilities and taxes payable , partially offset by decreases in payments of accounts payable and increases in net income and depreciation and amortization . net cash provided by operating activities for the year ended march 31 , 2014 increased primarily due to positive results from our efforts to collect long-outstanding receivables , partially offset by significant increases in inventory purchases associated with the amega and tempsys acquisitions . net cash provided by operating activities for the year ended march 31 , 2013 decreased primarily due to increases in accounts receivable due to our expanding international customer base ( which has extended payment terms ) and an increase in inventory , as we took advantage of volume discounts for raw materials . net cash used in investing activities for the year ended march 31 , 2015 resulted from $ 20,543,000 associated with the 2015 acquisitions and the purchase of $ 2,828,000 of property , plant and equipment . net cash used in investing activities for the year ended march 31 , 2014 resulted from $ 22,758,000 associated with the 2014 acquisitions and the purchase of $ 1,041,000 of property , plant and equipment , partially offset by the proceeds from the disposal of the nusonics product line of $ 661,000. net cash used in investing activities for the year ended march 31 , 2013 resulted from $ 16,660,000 for the bios acquisition and the purchase of $ 908,000 of property , plant and equipment .

results of operations the following table sets forth , for the periods indicated , condensed consolidated statements of income data . the table and the discussion below should be read in conjunction with the accompanying consolidated financial statements and the notes thereto appearing elsewhere in “ item 8. financial statements and supplementary data ” ( in thousands , except percent data ) : replace_table_token_6_th revenues the following table summarizes our revenues by source ( in thousands , except percent data ) : replace_table_token_7_th page 20 year ended march 31 , 2015 versus march 31 , 2014 biological indicators revenues increased as a result of the amilabo , ati , pcd , früh and cherwell acquisitions and organic growth of four percent which was achieved through existing customers , expansion into new markets and price increases . instruments revenues increased as a result of the bgi acquisition and organic growth of six percent in our existing product lines and the timing of the prior year acquisition of the suretorque product line , partially offset by the disposal of the nusonics product . continuous monitoring revenues increased as a result of organic growth of 52 percent and the timing of the prior year acquisition of tempsys and amega . year ended march 31 , 2014 versus march 31 , 2013 biological indicators revenues increased as a result of continued organic growth which was achieved through existing customers , expansion into new markets and price increases . instruments revenues increased primarily from organic growth in our gas flow calibration equipment , the acquisition of the suretorque product line and the timing of the bios acquisition in the prior year , partially offset by the disposal of our nusonics product line in august 2013. our other instruments product lines remained relatively unchanged . continuous monitoring revenues were negatively impacted by integration activities that commenced soon after the amega and tempsys acquisitions were completed .

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 impact of recent business environment our 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 : gross domestic product increased at an annual rate of 2.6 % during 2017 based on recent estimates . u.s. unemployment was estimated to be 4.1 % at year-end 2017. u.s. net farm income is estimated to have increased 2.7 % and farm real estate value is estimated to have increased 3.3 % during 2017 according to recent u.s. department of agriculture estimates . the u.s. 10-year treasury yield decreased during 2017 from 2.45 % at december 31 , 2016 to 2.40 % at december 31 , 2017. continued uncertainty as to actions the united states congress will take to address the national debt the pending department of labor fiduciary rule that expands the regulation of sales of insurance products used in retirement plans . see part 1 , item 1a for further discussion of this proposal . the enactment of the tax act during december 2017 may alter consumer demand for our insurance products . the low market interest rate environment continues to impact our investment yields as well as the interest we credit on our interest sensitive products . the benchmark 10-year u.s. treasury yield fluctuated during 2017 , reaching a high of 2.62 % in march and ultimately ending 2017 at 2.40 % , five basis points lower than year-end 2016. credit spreads continued to tighten during 2017. 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 . we experienced an increase in the fair value of our fixed maturity security portfolio during 2017 primarily due to a decrease in market yields . see the segment discussion and “ financial condition ” section that follows for additional information regarding the impact of low market interest rates on our business . 27 results of operations for the three years ended december 31 , 2017 replace_table_token_11_th ( 1 ) amounts are net of adjustments , as applicable , to amortization of unearned revenue reserves , 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 . ( 2 ) see note 13 to our consolidated financial statements . ( 3 ) average invested assets and annualized yield including , beginning in 2017 , investments held as securities and indebtedness of related parties ; 2016 and 2015 amounts have been adjusted for comparability . our net income increased in 2017 , compared to 2016 , primarily due to the initial impact of the tax act . net income and non-gaap operating income were positively impacted by increased earnings from an increase in the volume of business in force and the impact of unlocking , partially offset by increases in death benefits . our net income decreased in 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 non-gaap 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 . see the discussion that follows for details regarding operating income by segment . we periodically revise key assumptions used in the calculation of the amortization of deferred acquisition costs , value of insurance in force acquired , deferred sales inducements , unearned revenue reserve for participating life insurance and interest sensitive products , as well as certain reserves on interest sensitive products , as applicable , through an “ unlocking ” process . story_separator_special_tag amortization , as well as reserves held on certain interest sensitive products , was also impacted in 2017 and 2016 due to unlocking our projected investment and spread income . the impact of unlocking on pre-tax non-gaap operating income was as follows : replace_table_token_17_th ( 1 ) see note 13 to our consolidated financial statements . death benefits , net of reinsurance and reserves released , increased in 2017 , compared to 2016 , due to increases in the average size of claims and an increase in the number of claims reported . death benefits , net of reinsurance and reserves released , decreased in 2016 , compared to 2015 , due to decreases in the number of claims reported . other interest sensitive product benefits increased in 2017 , compared to 2016 , due to an increase in our universal life secondary guarantee reserves from growth in our business in force . in 2017 , we assigned a portion of our investments held in securities and indebtedness of related parties to the life insurance segment . these investments include equity interests in limited liability partnerships and corporations , accounted for under the equity method of accounting . equity income , before tax , consists of our proportionate share of gains and losses attributable to our relative ownership interest in these investments . see the equity income discussion that follows for additional information regarding these investments . results for 2017 were unfavorably impacted by the correction of an immaterial error that decreased pre-tax operating earnings by $ 3.2 million . the error arose and accumulated over several years , with no prior year significantly impacted . as a result of the correction , interest sensitive product charges decreased by $ 3.2 million and interest credited , included in interest sensitive product benefits , increased $ 0.4 million . the weighted average yield on cash and invested assets for interest sensitive life insurance products increased in 2017 , compared to 2016 , due to higher other investment-related income , partially offset by 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 decreased in 2016 , compared to 2015 , due to 32 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 . 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 increased in 2017 , compared to the prior year , due to the immaterial error mentioned above . we incurred decreases in weighted average interest crediting rates in 2017 , 2016 and 2015 due to crediting rate actions taken on various products in 2017 , 2016 and 2015 in response to the declining portfolio yield . replace_table_token_18_th replace_table_token_19_th ( 1 ) see note 13 to our consolidated financial statements . ( 2 ) average invested assets including , beginning in 2017 , investments held as securities and indebtedness of related parties ; 2016 and 2015 amounts have been adjusted for comparability . ( 3 ) includes prepayment fee income and adjustments to the amortization of premium or discounts from changes in our prepayment speed assumptions . pre-tax non-gaap operating income for the corporate and other segment increased in 2017 , compared to 2016 , primarily due to decreases in amortization of deferred acquisition costs from the impact of unlocking and market performance on our variable 33 business , partially offset by increases in death benefits , expenses and pre-tax losses on equity method investments . pre-tax non-gaap operating income increased in 2016 , compared to 2015 , primarily due to decreases in pre-tax losses on equity method investments 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 . death benefits , net of reinsurance and reserves released , increased in 2017 , compared to 2016 , due to increases in the number of claims reported , partially offset by lower average size of claims . death benefits , net of reinsurance and reserves released , increased in 2016 , compared to 2015 , due to increases in the number of claims reported and in the average size of claims . amortization of deferred acquisition costs , deferred sales inducements , and unearned revenue reserves changed in 2017 and 2016 , compared to prior periods , primarily due to the impact of unlocking and market performance on our variable business . unlocking generally reflects changes in projected separate account performance and withdrawal and mortality assumptions . amortization was also impacted in 2017 and 2016 due to unlocking our projected investment and spread income assumptions . the impact of unlocking on pre-tax non-gaap operating income for the three years was as follows : replace_table_token_20_th ( 1 ) see note 13 to our consolidated financial statements . other underwriting expenses in 2017 included $ 0.7 million in expenses associated with our routine five-year state insurance department examination . 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 . other expenses also increased $ 0.7 million in 2017 due to costs associated with expanding our wealth management offerings in the future . in 2017 , we assigned a portion of our investments held in securities and indebtedness of related parties from the corporate and other segment to the life insurance segment , resulting in a net decrease in pre-tax income in the corporate and other segment for 2017 , compared to prior periods . these investments include equity interests in limited liability partnerships and corporations , accounted for under the equity method of accounting .

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 net income determined using u.s. generally accepted accounting principles ( gaap ) , in addition to non-gaap operating income ( a measure of earnings not recognized under gaap ) , to measure our performance . non-gaap operating income is a common life insurance industry measure of performance . non-gaap 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 derivatives in the indexed contracts represent the rights of the contract holder to receive index credits over the entire period the indexed annuities are expected to be in force .

the two-class method is an earnings allocation formula that determines eps for each class of common stock and participating security according to dividends declared ( or accumulated ) and participation rights in undistributed earnings . in determining the amount of net earnings to allocate to common stockholders , earnings are allocated to both common and participating securities based on their respective weighted-average shares story_separator_special_tag executive overview in fiscal 2016 , the company evaluated all of its solutions and determined it could best assist healthcare providers in improving their revenue cycle management by providing solutions and services in the middle portion of the revenue cycle , that is , the revenue cycle operations from initial charge capture to bill drop . since that time in 2016 , the company continues to make decisions supporting our focus in the middle of the revenue cycle . in late fiscal 2017 , the company introduced a new product for the middle of the revenue cycle , evaluator . this product has significant implications to the timing and accuracy of our customers ' invoicing through rules that are created to review the accuracy of invoicing prior to the physical invoices being released . this is a notable change to existing processes of our customers . the development activities continued through the end of fiscal 2018. there are continued development efforts planned for evaluator in fiscal 2020 , generally , in the same levels as fiscal 2019 and 2018. fiscal year 2017 was the first full year of this new , more narrowly focused effort to sell solutions and services in the middle of the revenue cycle , improving healthcare providers ' coding accuracy to help them capture all of the financial reimbursement they deserve for the patient care they provide . with this focus , the company is committed to leading an industry movement to improve hospitals ' financial performance by moving mid-cycle billing interventions upstream , to improve coding accuracy before billing , enabling our clients to reduce revenue leakage , mitigate overbill risk , and reduce denials and days in accounts receivable . 20 by narrowing our focus to the middle of the revenue cycle we believe we have a more distinct and compelling value proposition that can help us attract more clients . by innovating new technologies , we have been able to expand our target markets beyond just hospitals and into outpatient centers , clinics and physician practices . our coding solutions like cdi , physician query , abstracting and evaluator are competitive in the market and enabled us to engage three significant new clients in fiscal year 2019. these three new clients are some of the largest names in healthcare as we moved upstream to clients that were more likely to change their internal processes to the pre-bill audit . the company divested its ecm assets on february 24 , 2020 ( after its fiscal year end of january 31 , 2020 ) . as discussed ( above ) , this continues the company 's efforts to focus on the middle of the revenue cycle and its pre-bill technology , evaluator . management believes that the revenue cycle technology platforms have higher growth opportunities than its legacy products , including the ecm assets . the company accounted for the sale of the ecm assets as a sale of assets . see note 14 to the audited consolidated financial statements for more information about the sale of the assets . the company has continued to implement and maintain tight cost and investment controls so that the transition to focusing our efforts in the middle of the revenue cycle has not resulted in a negative impact to our cash flows . while there have been lower revenues as a result of the company 's focus on the mid-revenue cycle products , the company 's earnings and ebitda have expanded . during fiscal 2019 , the company recorded non-recurring costs that are added back to adjusted ebitda . these costs include ; ( i ) $ 789,000 for executive transition , ( ii ) $ 631,000 of transaction costs toward the sale of the ecm assets , ( iii ) $ 388,000 for severance related to the company 's previously disclosed workforce rationalization plan , ( iv ) $ 150,000 related to the extinguishment of the wells fargo term loan and revolving credit facility , and ( v ) $ 230,000 related to the company 's correction of immaterial errors ( see note 2 to the audited consolidated financial statements ) . regardless of the state of the affordable care act , the healthcare industry continues to face sweeping changes and new standards of care that are putting greater pressure on healthcare providers to be more efficient in every aspect of their operations . we believe these changes represent ongoing opportunities for our company to work with our direct clients and partner with various resellers to provide information technology solutions to help providers meet these new requirements . as reported nationally , near the end of the company 's fiscal year ended january 31 , 2020 , an outbreak of a novel strain of coronavirus ( covid-19 ) emerged globally . additionally , there was a number of cases in the united states by the balance sheet date , january 31 , 2020. the company serves acute care hospitals throughout the united states . while the company has not been materially impacted by the “ shelter in place ” movements of local and state governments across the united states , it is not possible to reliably estimate the length or severity of the pandemic , and whether it may have an adverse financial impact on the company 's financial condition . 21 story_separator_special_tag higher volumes of revenue for audit services . the cost of maintenance and support includes compensation and benefits for client support personnel and the cost of third-party maintenance contracts . the decrease in expense for fiscal 2019 as compared with 2018 was primarily due to a decrease in personnel costs and a reduction in third-party maintenance contracts . story_separator_special_tag separately , the company incurred approximately $ 230,000 of legal and accounting cost in conjunction with the company 's immaterial correction of an error ( see note 2 to the consolidated financial statements ) . these costs were necessary to file the company 's third quarter , 10-q , for the period ended october 30 , 2019 and this was completed on january 8 , 2020. impairment of long-lived assets fiscal year 2019 to 2018 change ( in thousands ) : 2019 2018 $ % impairment of long-lived assets $ — $ 3,681 $ ( 3,681 ) ( 100 ) % the company acquired a product known as clinical analytics in its portfolio in october 2013. as a result of its focused attention in the marketplace on the middle of the revenue cycle , the company moved away from selling the product . the company identified a triggering event in the fourth quarter of fiscal 2018 for impairment of long-lived asset associated with clinical analytics . the company sole customer on clinical analytics terminated its contract . upon review , the company has determined that the market for clinical analytics and for the middle of the revenue cycle are very different , and accordingly , the company does not anticipate or forecast future sales for this product . the company has determined that intangible assets and remaining software development associated with clinical analytics were fully impaired and should be removed from its balance sheet . in the fourth quarter of fiscal 2018 , we took a charge to income of $ 3,681,000 for impairment of the long-lived intangible assets ( $ 3,226,000 ) and the remaining software development costs ( $ 455,000 ) associated with this product . the company has no other intangible assets or software development that is not associated with its core solutions in the middle of the revenue cycle . 27 loss on exit of operating lease fiscal year 2019 to 2018 change ( in thousands ) : 2019 2018 $ % loss on exit of operating lease $ — $ 1,034 $ ( 1,034 ) ( 100 ) % in an effort to reduce ongoing operating expenses , we closed our new york office in the second quarter of fiscal 2018 and subleased the office space for the remaining period of the original lease term , which ended on november 2019. as a result of vacating and subleasing the office , we recorded a $ 472,000 loss on exit of the operating lease in the second quarter of fiscal 2018 , which captures the net cash flows associated with the vacated premises , including receipts of rent from our sublessee totaling $ 384,000 , and the $ 48,000 loss incurred on the disposal of fixed assets . in addition , in the third quarter of fiscal 2018 , we assigned our then current atlanta office lease that would have expired in november 2022 and entered into a membership agreement to occupy shared office space in atlanta . as a result of assigning the office lease , we recorded a $ 562,000 loss on exit of the operating lease in fiscal 2018. refer to note 12 – commitments and contingencies in our consolidated financial statements included in part ii , item 8 for further details and development with respect to the shared office arrangement in atlanta . other expense replace_table_token_10_th interest expense consists of interest and commitment fees on the revolving credit facility and interest on the term loans , and is inclusive of deferred financing cost amortization . amortization of deferred financing cost was $ 82,000 and $ 69,000 in fiscal 2019 and 2018 , respectively . interest expense was lower in fiscal 2019 as compared with 2018 primarily due to higher amounts of interest expense that is capitalized to software development cost . the interest capitalized to software development in fiscal 2019 and 2018 was $ 191,000 and $ 69,000 , respectively . the interest capitalized to software development cost reduces the company 's interest expense recognized in the consolidated statements of operations . the company refinanced its term loan and revolving credit facility to a new bank on december 12 , 2019. upon completion of the refinancing , the company had charges to income for ( i ) the write-off of deferred finance cost on the refinanced debt and ( ii ) legal and finance cost to close out the previous indebtedness . aggregate extinguishment costs of $ 150,000 were recorded in the fourth quarter of fiscal 2019. the increase in miscellaneous expense in fiscal 2019 as compared to fiscal 2018 was primarily a result of losses from ( i ) certain failed financing cost , and ( ii ) losses from the acquisition of certain options from individuals that were about to expire , and were vacillating between in the money and out of the money . the company had a minor amount of failed financing cost that it recorded as a miscellaneous expense on certain banks that it was not successful in completing the refinance . additionally , the company purchased certain options that were close to being “ in the money ” to allow the forfeited options back into the company 's employee stock compensation plan pool . other items reported in miscellaneous expense are the valuation adjustments on the montefiore minimum royalty liability and certain foreign exchange losses . the foreign exchange losses have been extinguished in fiscal 2019 due to a conversion of a contract that was required to be settled in canadian dollars , to the contract being settled in us dollars . refer to note 12 – commitments and contingencies to our consolidated financial statements included in part ii , item 8 for further information concerning the montefiore liability . 28 provision for income taxes we recorded tax expense of $ 22,000 and zero in fiscal 2019 and 2018 , respectively . refer to note 7 - income taxes to our consolidated financial statements included in part ii , item 8 for details on the provision for income taxes .

results of operations statements of operations for the fiscal years ended january 31 ( in thousands ) : replace_table_token_1_th ( 1 ) non-gaap measure meaning net earnings ( loss ) before net interest expense , tax expense ( benefit ) , depreciation , amortization , stock-based compensation expense , transactional and other expenses that do not relate to our core operations . see “ use of non-gaap financial measures ” below for additional information and reconciliation . 22 the following table sets forth , for each fiscal year indicated , certain operating data as percentages of total revenues : statements of operations ( 1 ) replace_table_token_2_th ( 1 ) because a significant percentage of the operating costs are incurred at levels that are not necessarily correlated with revenue levels , a variation in the timing of systems sales and installations and the resulting revenue recognition can cause significant variations in operating results . as a result , period-to-period comparisons may not be meaningful with respect to the past results nor are they necessarily indicative of the future results of the company in the near or long-term . the data in the table is presented solely for the purpose of reflecting the relationship of various operating elements to revenues for the periods indicated . 23 comparison of fiscal year 2019 with 2018 revenues replace_table_token_3_th proprietary software and term licenses — proprietary software revenues recognized in fiscal 2019 were $ 936,000 , as compared to $ 1,398,000 in fiscal 2018. the decreased fiscal 2019 revenues as compared to 2018 revenues are primarily attributable to two larger perpetual license sales of our streamline health® abstracting ; one in our first quarter and one in our second quarter of fiscal 2018. these perpetual license sales have been gaining traction from a significant distributor partner to the company . the company continues to see a positive trend in the volumes with this significant distributor partner .

72 note 1 2 – earnings ( loss ) per share the following table is a calculation of the net earnings ( loss ) per basic and diluted share for the years ended december 31 , 2018 and 2017 : replace_table_token_26_th ( a ) the 2017 period excludes the shares issuable under outstanding option awards as their effect would have been antidilutive . ( b ) for the 2016 comparable period , the calculation is not applicable as the company was not a public company until february 8 , 2017 . * * * * * 73 selected quarterly financial data ( unaudited ) the following table presents selected quarterly financial data derived from the company 's unaudited interim financial statements . the following data is only a summary and should be read with the company 's historical consolidated financial statements and related notes contained in story_separator_special_tag 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 . we caution you that our actual results could differ materially from those discussed in these forward-looking statements . factors that could cause or contribute to such differences are discussed elsewhere in this annual report , particularly in the “ cautionary note regarding forward-looking statements ” and “ risk factors , ” all of which are difficult to predict . in light of these risks , uncertainties and assumptions , the forward-looking events discussed may not occur . we do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law . overview our primary source of revenue is the sale of metallurgical coal . we have a 248-million-ton reserve base of high-quality metallurgical coal and four long-lived projects under development . our plan is to complete development of our remaining projects and grow production to more than 4.0 million clean tons of metallurgical coal over the next three to four years depending on the rate at which we are able to deploy capital . we may make acquisitions of reserves or infrastructure that continue our focus on advantaged geology and lower costs . during 2018 , we sold 2.1 million tons of coal , which represents a 253 % increase from our 2017 sales volume . of this , 65 % was sold in north american markets and 35 % was sold in export markets principally to europe and asia . in 2016 and through april 2017 , we processed raw coal for third parties at our knox creek preparation plant and loading facility under arrangements that have been cancelled . beginning in late 2016 , we began purchasing coal from third parties for sale for our own account . the overall outlook of the metallurgical coal business is dependent on a variety of factors such as pricing , regulatory uncertainties and global economic conditions . coal consumption and production in the u.s. have been driven in recent periods by several market dynamics and trends , such as the global economy , a strong u.s. dollar and accelerating production cuts . in march 2018 , president trump signed a proclamation imposing a 25 % global tariff on imports of certain steel products , effective march 31 , 2018. generally , we are experiencing signs of some increase in domestic demand for metallurgical coal as a result of the proclamations . our export customers include foreign steel producers who may be negatively affected by the tariffs to the extent their production is imported into the u.s. some countries have also threatened retaliatory tariffs on u.s. products including metallurgical coal . at this time , it is too early to know the impact these tariffs will have on longer-term demand or pricing , if any . in 2018 , our capital expenditures totaled approximately $ 48 million . we completed the development and opening of one new deep mine at our elk creek mining complex . we continued to invest in infrastructure and mine equipment at our elk creek mining complex . we also continued development mining at our berwind property and continued third-party coal purchases which augment our sales . on november 5 , 2018 , one of our three raw coal storage silos that feed our elk creek plant in west virginia experienced a partial structural failure . the prep plant at our elk creek mining complex was idled for approximately three weeks due to the partial structural failure of the silo . in late november 2018 , we completed a temporary conveying system at our elk creek mining complex . the temporary conveying system allowed us to bypass the damaged raw coal storage silo , which has since been demolished , and allowed for the immediate processing and shipping of coal at approximately 80 % of the entire plant capacity , throughout december 2018. in february 2019 , we completed the fabrication of a higher capacity bypass system to provide a secondary conveyance system , which operates at greater than 80 % of processing capacity with increased reliability compared to the initial bypass system . we anticipate completion of the silo rehabilitation in the second quarter of 2019 at which point we expect the prep plant to return to full processing capacity . our insurance carrier has disputed our claim for coverage based on certain exclusions to the applicable policy . we are still evaluating whether we will be fully insured against all losses or liabilities that could arise from this incident . 46 story_separator_special_tag style= '' font-family : 'times new roman ' , times , serif ; font-size:10pt ; margin:0pt ; text-align : left ; text-indent:19.8pt ; '' > we did not recognize any income tax expense or benefit for the year ended december 31 , 2017 because tax losses incurred for the year were fully offset by a valuation allowance against deferred tax assets . story_separator_special_tag 50 non-gaap cash cost per ton sold non-gaap cash cost per ton sold is calculated as cash cost of coal sales less transportation costs , divided by tons sold . we believe cash cost per ton sold provides useful information to investors as it enables investors to compare the cash cost per ton by the company against similar measures made by other publicly-traded coal companies and more effectively monitor changes in coal cost from period to period excluding the impact of transportation costs which are beyond our control . the adjustments made to arrive at these measures are significant in understanding and assessing the company 's financial condition . cash cost per ton sold is not a measure of financial performance in accordance with u.s. gaap and therefore should not be considered as an alternative to cost of sales under u.s. gaap . the table below shows how we calculate non-gaap cash cost per ton : replace_table_token_8_th ( a ) the year ended december 31 , 2017 excludes costs of coal processing of $ 2.2 million . 201 9 sales commitments as of february 2019 , we had secured 2019 sales commitments of approximately 2.0 million tons , or about 90 % of our estimated 2019 coal sales volume , to domestic and export customers . these volumes were all metallurgical quality coal . of these committed sales , approximately 1.5 million tons , or about 75 % , are committed to domestic customers at fixed prices averaging $ 113 , approximately 100,000 tons are committed to export markets at prices averaging $ 122 and approximately 350,000 tons are committed at prices based upon an index determined near the time of shipment . liquidity and capital resources our primary source of cash is proceeds from the sale of our coal production to customers . our primary uses of cash include the cash costs of coal production , capital expenditures , royalty payments and other operating expenditures . cash flow information is as follows : replace_table_token_9_th net cash provided by operating activities in the year ended december 31 , 2018 reflects a significant increase in net income as compared to the loss incurred in the prior year . net cash used in operating activities in the year ended december 31 , 2017 reflects higher costs associated with the commencement and expansion of our operations . the cash used in operating activities in 2016 was primarily the result of net losses incurred in preparing the company for operations . net cash used in investing activities was $ 42.9 million for 2018 as compared with $ 19.8 million for 2017. our capital expenditures totaled $ 48.1 million , $ 75.0 million and $ 16.7 million in 2018 , 2017 and 2016 , respectively . in 2016 , we invested a portion of the proceeds of the issuance of our series a preferred units into investment securities , the maturity of which was timed to coincide with anticipated capital expenditures . we received proceeds from those investment securities of $ 5.2 million and $ 55.2 million in 2018 and 2017 , respectively . net cash from financing activities was $ 7.9 million for 2018 as compared with $ 29.3 million for 2017. during 2018 , we borrowed $ 16.0 million through short-term notes payable . in november of 2018 , we repaid the balance of the notes payable when we entered in the credit facility discussed in more detail below . cash provided by financing activities during 2017 was primarily driven by proceeds from equity issuances , partially offset by repayments of $ 11.3 million of debt . cash provided by financing activities during 2016 was $ 85.5 million , primarily driven by proceeds from issuances of series a preferred units . 51 indebtedness in february 2018 , we borrowed $ 6.0 million under a short-term note from an unrelated third-party lender in order to manage accounts receivable ( the “ equipment note ” ) . the equipment note was secured by a portion of our mobile mining equipment . interest accrued monthly at 8.5 % or 30-day libor plus 6.9 % , whichever was greater . the equipment note was repaid on november 5 , 2018 with proceeds from the credit facility discussed below . in may 2018 , we borrowed $ 3.0 million from ramaco coal , llc , a related party , secured by certain coal inventory ( the “ ramaco coal note ” ) . interest accrued monthly at 10.0 % . the ramaco coal note was repaid on november 5 , 2018 with proceeds from the credit facility discussed below . in june 2018 , we borrowed an additional $ 7.0 million under a short-term note from the same unrelated equipment lender in order to manage accounts receivable ( the “ additional equipment note ” ) . the additional equipment note was also secured by the same mobile mining equipment as the equipment note . interest accrued monthly at 8.5 % or 30-day libor plus 6.9 % , whichever was greater . the additional equipment note was repaid on november 5 , 2018 with proceeds from the credit facility discussed below . on november 2 , 2018 the company entered into a credit and security agreement ( the “ credit facility ” ) with keybank national association . the credit facility consists of a $ 10.0 million term loan ( the “ term loan ” ) and up to $ 30.0 million revolving line of credit , including $ 1.0 million letter of credit availability ( the “ revolving credit facility ” ) . the company used the credit facility to repay the equipment note , additional equipment note and the ramaco coal note , and provide working capital . the credit facility has a maturity date of november 2 , 2021. as of december 31 , 2018 , $ 9.6 million was outstanding under the term loan and there was no outstanding balance on the revolving credit facility .

results of operations replace_table_token_3_th our revenue producing activities for 2018 consisted of the sale of coal we produced and coal we purchased from third parties for our own account . we began commercial production of coal in january 2017. starting as new mine projects , we developed and opened four mines at our elk creek mining complex and completed construction of the preparation plant and rail load-out facility during 2017 and 2018. we also began development mining in 2017 at our berwind property , which continued during 2018. in 2016 , revenue consisted principally of the sale of purchased coal and revenue for processing coal for third parties , which processing contracts were terminated in april 2017. our first revenues commenced in mid-2016 with completion of the knox creek acquisition ( as later defined ) . before this acquisition , our activities were limited to acquiring geologically advantaged coal reserve properties and to advancing those properties toward coal production through exploration , the delineation of reserves ; assessment and mine planning ; permitting ; and the development of access for mining . direct costs associated with preparation of future mine sites for mining were capitalized . operating expenditures including certain professional fees and overhead costs are not capitalized but are expensed as incurred . year ended december 31 , 201 8 compared to year ended december 31 , 201 7 revenue . for the year ended december 31 , 2018 , we had revenue of $ 227.6 million from the sale of coal . during 2018 , we sold 2.1 million tons of coal including 0.4 million tons of purchased coal . for the year ended december 31 , 2017 , we had revenue of $ 58.8 million from the sale of coal and $ 2.2 million from the processing of coal for third parties .

rent for the savannah beach facility , the oceanside facility , and the jeffersonville facility is $ 0.3 million , $ 0.4 million and $ 0.6 million per annum , respectively ; but such rent is only $ 1 per month for the oceanside and jeffersonville facilities until the date such facilities are recertified by the u.s. department of health and human services centers for medicare and medicaid services ( “ cms ” ) or april 1 , 2017 , whichever first occurs ( the “ rent commencement date ” ) story_separator_special_tag overview the company is a self-managed real estate investment company that invests primarily in real estate purposed for long-term care and senior living . our business primarily consists of leasing and subleasing healthcare facilities to third-party tenants . as of december 31 , 2016 , the company owned , leased , or managed for third parties 29 facilities primarily in the southeast . on october 6 , 2016 , the company completed the sale of the nine arkansas facilities . the operators of the company 's facilities provide a range of health care and related services to patients and residents , including skilled nursing and assisted living services , social services , various therapy services , and other rehabilitative and healthcare services for both long-term and short-stay patients and residents . the following table provides summary information regarding the number of facilities and related operational beds/units as of december 31 , 2016 : replace_table_token_8_th the following table provides summary information regarding the number of facilities and related operational beds/units by operator affiliation as of december 31 , 2016 : replace_table_token_9_th ( 1 ) represents the number of facilities which are leased or subleased to separate tenants , which tenants are affiliates of the entity named in the table above . see “ portfolio of healthcare investments ” included in part i , item 1 , business . 38 acquisitions the company made no acquisitions during the years ended december 31 , 2016 or 2015 . divestitures for information regarding the company 's divestitures , please refer to note 11 - discontinued operations , to our consolidated financial statements included in part ii , item 8. , “ financial statements and supplementary data. ” the following table summarizes the activity of discontinued operations for the years ended december 31 , 2016 and 2015 : replace_table_token_10_th critical accounting policies we prepare our financial statements in accordance with accounting principles generally accepted in the united states of america ( `` gaap '' ) . the preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets , liabilities , revenues and expenses . on an ongoing basis we review our judgments and estimates , including , but not limited to , those related to doubtful accounts , income taxes , stock compensation , intangible assets and loss contingencies . we base our estimates on historical experience , business knowledge and on various other assumptions that we believe to be reasonable under the circumstances at the time . actual results may vary from our estimates . these estimates are evaluated by management and revised as circumstances change . we believe that the following represents our critical accounting policies . 39 revenue recognition rental revenues . the company 's triple-net leases provide for periodic and determinable increases in rent . we recognize rental revenues under these leases on a straight-line basis over the applicable lease term when collectability is reasonably assured . recognizing rental income on a straight-line basis generally results in recognized revenues during the first half of a lease term exceeding the cash amounts contractually due from our tenants , creating a straight-line rent receivable that is included in other assets on our consolidated balance sheets . rent revenues for the arkansas facilities previously leased by us and two facilities in georgia are recorded on a cash basis . ( see note 11 - discontinued operations to our consolidated financial statements included in part ii , item 8. , “ financial statements and supplementary data. ” ) management fee revenues and other revenues . we recognize management fee revenues received under various contractual agreements with third-parties as services are provided . further , we recognize interest income from lease inducements receivables and capital loans as other revenues . allowances . we assess the collectibility of rent receivables , including straight-line rent receivables . we base our assessment of the collectibility of rent receivables ( other than straight-line rent receivables ) on several factors , including payment history , the financial strength of the tenant and any guarantors , the value of the underlying collateral , and current economic conditions . if our evaluation of these factors indicates it is probable that we will be unable to receive the rent payments , we provide a reserve against the portion of the receivable that we estimate may not be recovered . if our evaluation of these factors indicates it is probable that we will be unable to receive the rent payments due in the future , we provide a reserve against the recognized straight-line rent receivable asset for the portion that we estimate may not be recovered . if we change our assumptions or estimates regarding the collectibility of future rent payments required by a lease , we may adjust our reserve to increase or reduce the rental revenue recognized in the period we make such change in our assumptions or estimates . at december 31 , 2016 , we allowed for approximately $ 7.5 million on approximately $ 8.4 million of gross patient care related receivables . allowance for patient care receivables are estimated based on an aged bucket method as well as additional analyses of remaining balances incorporating different payor types . 40 asset impairment we review the carrying value of long-lived assets that are held and used in our operations for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable . story_separator_special_tag these estimates and assumptions are based on , among other things , knowledge of operations , markets , historical trends and likely future changes and , when appropriate , the opinions of advisors with knowledge and expertise in certain fields . due to certain risks associated with our estimates and assumptions , actual results could differ . in early 2014 , the internal revenue service ( `` irs '' ) initiated an examination of the company 's income tax return for the 2011 income tax year . on may 7 , 2014 , the irs completed and closed the examination and no changes were required to the company 's 2011 income tax return . in october 2014 , the georgia department of revenue initiated an examination of our georgia income tax returns and net worth returns for the 2010 , 2011 , 2012 , and 2013 tax years , which was closed during 2016 , with no adjustments required to the filed tax returns . we are not currently under examination by any other major income tax jurisdiction . recently issued accounting pronouncements the information required by this item is provided in note 1 - summary of significant accounting policies to our consolidated financial statements included in part ii , item 8. , `` financial statements and supplementary data . '' story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > december 31 , 2015 . the decrease is primarily due to additional costs the company incurred during the year ended december 31 , 2015 . loss from discontinued operations —the loss from discontinued operations increased by $ 8.5 million or 174.5 % to $ 13.4 million for the twelve months ended december 31 , 2016 , compared with a loss of $ 4.9 million for the same period in 2015 . the increase is primarily due to increased self-insured reserve and bad debt expense . liquidity and capital resources the company continues to undertake measures to grow its operations and to streamline its cost infrastructure by : ( i ) increasing future lease revenue through acquisitions and investments in existing properties ; ( ii ) modifying the terms of existing leases ; ( iii ) refinancing or repaying debt to reduce interest costs and mandatory principal repayments ; and ( iv ) reducing general and administrative expenses . the company leases all of its properties ( excluding three managed facilities ) to third party tenants pursuant to long-term , triple net leases . rent is fixed with annual rent escalators of between 2.0 % and 3.0 % per annum and not related to the underlying patient or resident occupancy of the facilities . since january 1 , 2016 , the company has not paid any leasing commissions on its properties nor has it provided any capital for tenant improvements or reduced rent except for the peach facilities . in connection with the peach facilities , the company made certain capital investments in the oceanside and jeffersonville facilities , extended a working capital loan to the tenants and provided for reduced rent for a specific period of time . see note 7 - leases , to our consolidated financial statements included in part ii , item 8. , “ financial statements and supplementary data ” . at december 31 , 2016 , we had $ 14.0 million in cash and cash equivalents as well as restricted cash of $ 5.5 million . management anticipates access to several sources of liquidity , including cash flows from operations and cash on hand . management holds routine ongoing discussions with existing lenders and potential new lenders to refinance current debt on a longer term basis and , in recent years , has refinanced shorter term acquisition debt , including seller notes , with traditional longer term mortgage notes , 44 many of which have been executed under government guaranteed lending programs . historically , the company has raised capital through other sources of unsecured debt and junior forms of capital , including issuances of preferred stock and convertible debt . on april 13 , 2015 and june 2 , 2015 , the company issued 575,000 and 588,235 shares , respectively , of the series a preferred stock at public offering prices of $ 25.00 and $ 25.50 per share , respectively in a `` best-efforts '' underwritten registered public offerings . in connection therewith , the company received net cash proceeds of approximately $ 13.5 million and $ 14.1 million , respectively , after the payment of underwriting commissions and discounts and other offering expenses payable by the company . on july 21 , 2015 , the company entered into at market issuance sales agreements to sell , from time to time , up to 800,000 shares of the series a preferred stock through an “ at-the-market ” offering program ( “ atm ” ) . the company ceased sales under the atm in september 2016 , and subsequently terminated the sales agreements . the company will not engage in any additional sales of the series a preferred stock while any preferred share repurchase program is in effect . since the inception of the atm in july 2015 and through december 31 , 2016 , the company has sold 650,600 shares of series a preferred stock under the atm , generating net proceeds to the company of approximately $ 13.5 million . for the twelve months ended december 31 , 2016 the company had sold 336,905 shares of series a preferred stock under the atm which generated net proceeds of $ 6.8 million and sold no shares of series a preferred stock under the atm during the fourth quarter of 2016 ( see note 12 - common and preferred stock to our consolidated financial statements included in part ii , item 8. , “ financial statements and supplementary data.

results of operations year ended december 31 , 2016 and 2015 the following table sets forth , for the periods indicated , statement of operations items and the amount and percentage of change of these items . given the transition to a healthcare property holding and leasing company during 2015 , the amounts presented are not reflective of our ongoing annualized performance due to leasing activity throughout the periods . the results of operations for any particular period are not necessarily indicative of results for any future period . the following data should be read in conjunction with our consolidated financial statements and the notes thereto , which are included n part ii , item 8. , `` financial statements and supplementary data . '' 42 replace_table_token_11_th year ended december 31 , 2016 compared with year ended december 31 , 2015 : rental revenues —total rental revenue increase d by $ 9.0 million , or 52.4 % , to $ 26.3 million for the year ended december 31 , 2016 , compared with $ 17.3 million for the year ended december 31 , 2015 . the increase reflects the company 's continuing transition to a healthcare property holding and leasing company in 2015 and accordingly an increase in leasing of facilities to third-party operators . as of december 31 , 2016 , and december 31 , 2015 , we have leased or subleased all of our facilities to third-party operators .

fiscal year 2016 had 53 weeks and ended on april 2 , 2016 , fiscal years 2015 and 2014 each had 52 weeks and ended on march 28 , 2015 , and march 29 , 2014 , respectively . for purposes of presentation , we have indicated our accounting fiscal year as ending on march 31. overview we are a leading designer , manufacturer , and marketer of lightweight communications headsets , telephone headset systems , other communication endpoints , and accessories for the worldwide business and consumer markets under the plantronics brand . in addition , we manufacture and market specialty telephone products under our clarity brand , such as telephones for the hearing impaired , and other related products for people with special communication needs . our major product categories are enterprise , which includes headsets optimized for unified communications ( “ uc ” ) , other corded and cordless communication headsets , audio processors , and telephone systems ; and consumer , which includes bluetooth and corded products for mobile device applications , personal computer ( `` pc '' ) and gaming headsets , and specialty products marketed for hearing impaired individuals . compared to the prior year , net revenues decreased 0.9 % to $ 856.9 million . the decrease in net revenues was driven by lower revenues within our consumer product category , which declined 6.3 % from the prior year . this decline was partially offset by slight growth in our enterprise product category , which increased 1.2 % from the prior year . while our primary driver of revenue growth continues to be revenues from the sale of our uc products , our fiscal year 2016 consumer revenues were negatively impacted by $ 22 million due to the rapid decline of the u.s. market for mono bluetooth headsets . however , we believe we grew our market share in this category , which helped to partially offset the decline . our fiscal year 2016 revenues were also negatively impacted by fluctuations in foreign currency exchange rates . compared to the other foreign currencies in which we sell , a stronger u.s. dollar ( `` usd '' ) decreased net revenues by approximately $ 27 million , net of the effects of hedging , in our fiscal year 2016 compared to the prior year . operating profit decreased 27.5 % to $ 108.0 million , due primarily to restructuring charges taken during fiscal year 2016 , the fluctuations in foreign currency exchange rates , and the impact of a non-recurring , favorable litigation settlement in fiscal year 2015. the adverse fluctuations in foreign currency exchange rates negatively impacted our net revenues but favorably impacted our operating expenses , although to a lesser degree , for a net unfavorable impact of $ 11 million to our operating profit . these items were partially offset by a reduction in variable compensation expense due to lower profitability . we delivered $ 68.4 million in net income , representing approximately 8.0 % of our net revenues . we generate approximately 40 % to 45 % of our revenues from international sales ; therefore , the impact of currency movements on our net revenues can be significant . in addition , in some international locations where we sell in usd , we also face additional pricing pressure , discounting , and lost business as the stronger dollar negatively impacts buying decisions . unfavorable impacts from the global economy and consumer spending together with exchange rate fluctuations could continue to negatively impact our net revenues in our fiscal year 2017. we continually work to offset currency movements through hedging strategies designed to minimize the volatility of results and dampen large fluctuations . however , as our revenue hedging instruments cover a period of up to 12 months , the hedging conducted a year ago is expected to deliver little benefit to offset the stronger dollar against other major currencies in fiscal year 2017. revenues from our consumer products channel are seasonal and typically strongest in our third fiscal quarter , which includes the majority of the holiday shopping season . additionally , other factors directly impact our consumer product category performance , such as consumer preferences , changes in consumer confidence and other macroeconomic factors , product life-cycles ( including the introduction and pace of adoption of new technology ) , and the competitive retail environment . our consumer business continues to be impacted by a decline in sales volumes in our mono bluetooth products as the market for these products contracts . the unit volumes in our stereo bluetooth category increased slightly when compared to the prior fiscal year , driven primarily by our newer generation of products . we anticipate that these newer products and other planned investments in the consumer category will allow us to better compete in these consumer product categories as they continue to expand . while we have been building our stereo portfolio over the last several years , it is not yet as robust as our mono bluetooth portfolio of products . as a result of these market changes , we have reduced the amount we expect to invest in non-premium mono bluetooth portfolio while shifting that investment toward additional stereo bluetooth products . this shift toward entertainment solutions is important to our long-term brand position . 27 due to slower than anticipated growth of uc revenues , combined with the negative impact of a strengthening dollar , and a sharp decrease in the u.s. mono bluetooth market , our fiscal year 2016 revenues declined year over year , causing us to make some necessary changes to reduce our cost structure . during the third quarter of fiscal year 2016 we initiated a restructuring plan to better align expenses to our revenue and gross margin profile and position us for improved operating performance . under that plan , we reduced costs through voluntary and involuntary elimination of certain positions throughout the organization in the u.s. , mexico , china , and europe . story_separator_special_tag these decreases were partially offset by higher equity-based compensation expense resulting from the shorter vesting schedule of restricted stock grants made after may 2013 compared to restricted stock grants made prior to may 2013 , and an increase in bad debt expense related to radioshack 's bankruptcy proceedings . the increase in selling , general , and administrative expenses in fiscal year 2015 compared to fiscal year 2014 was due primarily to $ 13.5 million in higher headcount-related costs resulting from higher performance-based compensation reflecting higher net revenues and higher overall achievement against targets , including an increase to equity-based compensation resulting from the shorter vesting schedule of restricted stock grants made after may 2013 compared to restricted stock grants made prior to may 2013. we also experienced an increase of $ 3.3 million in depreciation and $ 7.1 million in higher legal expenses , driven mainly by ongoing litigation . gain from litigation settlements during the fiscal year ended march 31 , 2016 we recognized gains of approximately $ 1.2 million , net of immaterial legal contingency fees , within operating income . these gains were primarily the result of net receipts of $ 0.8 million from a competitor to dismiss litigation involving the alleged infringement of a patent assigned to us as well as miscellaneous immaterial settlements with other parties . during the fiscal year ended march 31 , 2015 we recognized gains of approximately $ 8.7 million , net of immaterial legal contingency fees , within operating income . these gains were the result of net receipts of $ 6.5 million from a competitor to dismiss litigation involving the alleged infringement of a patent assigned to us and $ 2.2 million related to the resolution of an insurance coverage dispute with one of our insurance carriers . there were no such gains for the fiscal year ended march 31 , 2014 . restructuring and other related charges replace_table_token_8_th in the third quarter of fiscal year 2016 we initiated a restructuring plan intended to streamline and focus our efforts in order to more closely align our cost structure with our projected future revenue streams , which will better position us for improved operating performance and profitability . this measure was taken as a part of a broader effort to optimize the organization around our long-term strategic initiatives while adjusting for current macroeconomic business conditions and involved the reduction of approximately 125 positions . these staff reductions were substantially complete by the end of fiscal year 2016 . 31 in connection with this plan , we have recorded pre-tax charges of approximately $ 16.2 million , consisting of severance and related benefits . these charges were offset by a reduction in our fiscal year 2016 stock-based compensation expense of $ 1.5 million attributable to stock award forfeitures resulting from the restructuring action . projected annual saving from this plan are in the range of approximately $ 15 to $ 16 million and will enable us to reduce our cost structure to better support our long-term profitability targets and maintain our competitiveness . see note 11 , restructuring and other related charges , of our notes to consolidated financial statements in this form 10-k for further information on restructuring costs . interest expense interest expense of $ 25.1 million for fiscal year 2016 , was primarily related to the 5.50 % senior notes and included $ 1.2 million in amortization of debt issuance costs . interest expense for fiscal years 2015 and 2014 was immaterial and did not include such costs . income tax expense replace_table_token_9_th the effective tax rate for fiscal year 2016 is lower than that in the previous year due primarily to domestic interest expense on new debt and tax benefits associated with the unwind of prior cost-sharing of stock based compensation for the engineering function . a retroactive and permanent reinstatement of the federal research credit was signed into law on december 18 , 2015. as such , our effective tax rate for fiscal year 2016 includes the benefit of one quarter of credits for fiscal year 2015 plus the tax benefit for the fiscal year 2016 tax credit . the effective tax rate for fiscal year 2015 is higher than the previous year due primarily to the absence of several one-time , discrete items that benefited the tax rate in the previous year , such as the generation of a foreign tax credit carryover , changes in mexican tax law that resulted in the reversal of a valuation allowance , and a deduction for qualifying domestic production activities . these factors were offset by a higher proportion of income earned in foreign jurisdictions that is taxed at lower rates and by an increase in the benefit from the u.s. federal research tax credit . our fiscal year 2015 included four quarters of benefit from the u.s. federal research tax credit because the credit expired on december 31 , 2014 but was retroactively reinstated in january 2015. in contrast , during our fiscal year 2014 , the credit was only available for three quarters as the credit expired december 31 , 2013 and was not renewed . our effective tax rate for fiscal years 2016 , 2015 , and 2014 differs from the statutory rate due to the impact of foreign operations taxed at different statutory rates , income tax credits , state taxes , and other factors . our future tax rate could be impacted by a shift in the mix of domestic and foreign income , tax treaties with foreign jurisdictions , changes in tax laws in the u.s. or internationally , or a change in estimate of future taxable income , which could result in a valuation allowance being required . we had $ 12.7 million of unrecognized tax benefits as of march 31 , 2016 compared to $ 12.8 million and $ 12.6 million as of march 31 , 2015 and 2014 , respectively . the unrecognized tax benefits as of the end of fiscal year 2016 would favorably impact the effective tax rate in future periods , if recognized .

results of operations the following tables set forth , for the periods indicated , the consolidated statements of operations data . the financial information and the ensuing discussion should be read in conjunction with the accompanying consolidated financial statements and notes thereto . net revenues replace_table_token_3_th enterprise products represent our largest source of revenues , while consumer products represent our largest unit volumes . net revenues may vary due to seasonality , the timing of new product introductions and discontinuation of existing products , discounts and other incentives , and channel mix . net revenues derived from sales of consumer products into the retail channel typically account for a seasonal increase in net revenues in the third quarter of our fiscal year . our net revenues decreased in fiscal year 2016 compared to fiscal year 2015 due largely to a decline in consumer revenues , which was mainly attributable to the shrinking mono bluetooth market . this decline was partially offset by slight growth in our enterprise revenues driven by an increase in demand for uc products resulting from continued adoption of uc voice solutions in the marketplace , partially offset by a slight decline in core enterprise ( non-uc products ) . 28 a stronger u.s. dollar ( `` usd '' ) compared to the other foreign currencies in which we sell decreased net revenues by approximately $ 27 million , net of the effects of hedging , in fiscal year 2016 compared to fiscal year 2015. we generate approximately 44 % of our revenues from international sales ; therefore , the impact of currency movements on our net revenues can be significant . in fiscal year 2017 , our revenues may continue to be affected by uncertainty surrounding exchange rate fluctuations as well as the global economy and consumer spending .

maxlinear 's customers include electronics distributors , module makers , original equipment manufacturers , or oems , and original design manufacturers , or odms , who incorporate the company 's products in a wide range of electronic devices , including cable docsis broadband modems and gateways , wireline connectivity devices for in-home networking applications , rf transceivers and modems for wireless carrier access and backhaul infrastructure , fiber-optic modules for data center , metro , and long-haul transport networks , video set-top boxes and gateways , hybrid analog and digital televisions , direct broadcast satellite outdoor and indoor units , and power management and interface products used in these and a range of other markets . the company is a fabless integrated circuit design company whose products integrate all or a substantial portion of a broadband communication system . basis of presentation and principles of consolidation the consolidated financial statements include the accounts of maxlinear , inc. and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the united states of america , or gaap . all intercompany transactions and investments have been eliminated in consolidation . certain prior period amounts have been reclassified to conform with the current period presentation . such reclassifications include the separate presentation of long-term lease liabilities and movement of certain tax-related receivables to prepaid expenses and other current assets on the consolidated balance sheets . the functional currency of certain foreign subsidiaries is the local currency . accordingly , assets and liabilities of these foreign story_separator_special_tag forward-looking statements the following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report . this discussion contains forward-looking statements that involve risks and uncertainties . our actual results could differ materially from those discussed below . factors that could cause or contribute to such differences include , but are not limited to , those identified below , and those discussed in the section titled “ risk factors ” included elsewhere in this report . overview we are a provider of radio-frequency , or rf , high-performance analog , and mixed-signal communications systems-on-chip solutions for the connected home , wired and wireless infrastructure , and industrial and multi-market applications . we are a fabless integrated circuit design company whose products integrate all or substantial portions of a broadband communication system . in most cases , these products are designed on a single silicon-die , using standard digital cmos processes and conventional packaging technologies . we believe this enables our solutions to achieve superior power , performance , and cost advantages relative to our industry competition . our customers include electronics distributors , module makers , original equipment manufacturers ( oems ) , and original design manufacturers ( odms ) , who incorporate our products in a wide range of electronic devices . examples of such end market electronic devices incorporating our products include cable docsis broadband modems and gateways ; wireline connectivity devices for in-home networking applications ; rf transceivers and modems for wireless carrier access and backhaul infrastructure ; fiber-optic modules for data center , metro , and long-haul transport networks ; video set-top boxes and gateways ; hybrid analog and digital televisions , direct broadcast satellite outdoor and indoor units ; and power management and interface products used in these and a range of other markets . we combine our high-performance rf and mixed-signal semiconductor design skills with our expertise in digital communications systems , software , high-performance analog , and embedded systems to provide highly integrated semiconductor devices and platform-level solutions that are manufactured using a range of semiconductor manufacturing processes , including low-cost complementary metal oxide semiconductor , or cmos , process technology , silicon germanium , gallium arsenide , bicmos and indium phosphide process technologies . our ability to design analog and mixed-signal circuits in cmos allows us to efficiently combine analog and digital signal processing functionality in the same integrated circuit . as a result , our solutions have high levels of functional integration and performance , small silicon die size , and low power consumption . moreover , we are uniquely positioned to offer customers a combination of proprietary cmos-based radio system architectures that provide the benefits of superior rf system performance , along with high-performance analog interface and power management solutions that enable shorter design cycles , significant design flexibility , and low system cost across a wide range of broadband communications , wired and wireless infrastructure , and industrial and multi-market applications . in fiscal 2019 , our net revenue was derived primarily from sales of rf receivers and rf receiver systems-on-chip and connectivity solutions into broadband operator voice and data modems and gateways and connectivity adapters , global analog and digital rf receiver products for analog and digital pay-tv applications , radio and modem solutions into wireless carrier access and backhaul infrastructure platforms , high-speed optical interconnect solutions sold into optical modules for data-center , metro and long-haul networks , and high-performance interface and power management solutions into a broad range of communications , industrial , automotive and multi-market applications . our ability to achieve revenue growth in the future will depend , among other factors , on our ability to further penetrate existing markets ; our ability to expand our target addressable markets by developing new and innovative products ; changes in government trade policies ; and our ability to obtain design 42 wins with device manufacturers , in particular manufacturers of set-top boxes , data modems , and gateways for the broadband service provider and pay-tv industries , manufacturers selling into the smartphone market , storage networking market , cable infrastructure market , industrial and automotive markets , and optical module and telecommunications infrastructure markets . story_separator_special_tag as a result of the adoption of asc 606 as of january 1 , 2018 using the modified retrospective method , prior period amounts were not adjusted to reflect the change in revenue recognition for such distributor sales . substantially all of our revenue is generated from sales of our integrated circuits to electronics distributors , module makers , oems , and odms under individual customer purchase orders , some of which have underlying master sales agreements that specify terms governing the product sales . effective january 1 , 2018 , we adopted asc 606 and recognize revenue at the point in time when control of the products is transferred to the customer at the estimated net consideration for which collection is probable , taking into account our customer 's rights to price protection , other pricing credits , unit rebates , and rights to return unsold product . transfer of control occurs either when products are shipped to or received by the distributor or direct customer , based on the terms of the specific agreement with the customer , if we have a present right to payment and transfer of legal title and the risks and rewards of ownership to the customer has occurred . for most of our product sales , transfer of control occurs upon shipment to our distributor or direct customer . in assessing whether collection of consideration from a customer is probable , we consider the customer 's ability and intention to pay that amount of consideration when it is due . payment of invoices is due as specified in the underlying customer agreement , typically 30 days from the invoice date , which occurs on the date of transfer of control of the products to the customer . since payment terms are less than a year , we have elected the practical expedient and do not assess whether a customer contract has a significant financing component . a five-step approach is applied in the recognition of revenue under asc 606 : ( 1 ) identify the contract with a customer , ( 2 ) identify the performance obligations in the contract , ( 3 ) determine the transaction price , ( 4 ) allocate the transaction price to the performance obligations in the contract , and ( 5 ) recognize revenue when we satisfy a performance obligation . we applied asc 606 to our customer contracts that were not completed before the january 1 , 2018 adoption date . customer purchase orders plus the underlying master sales agreements are considered to be contracts with the customer for purposes of applying the five-step approach under asc 606. pricing adjustments and estimates of returns under contractual stock rotation rights are treated as variable consideration for purposes of determining the transaction price , and are estimated at the time control transfers using the expected value method based on our analysis of actual price adjustment claims by distributors and product and historical return rates , and then reassessed at the end of each reporting period . we also consider whether any variable consideration is constrained , since such amounts for which it is probable that a significant reversal will occur when the contingency is subsequently resolved are required to be excluded from revenues . price adjustments are finalized at the time the products are sold through to the end customer and the distributor or end customer submits a claim to reduce the sale price to a pre-approved net price . stock rotation allowances are capped at a fixed percentage of our sales to a distributor for a period of time , up to six months , as specified in the individual distributor contract . if our current estimates of such credits and rights are materially inaccurate , it may result in adjustments that affect future revenues and gross profits . returns under our general assurance warranty of products for a period of one to three years have not been material and warranty-related services are not considered a separate performance obligation under the customer contracts . most of our customers resell our product as part of their product and thus are tax-exempt , however to the extent we collect and remit taxes on product sales from customers , we have elected to exclude from the measurement of transaction price such taxes . each distinct promise to transfer products is considered to be an identified performance obligation for which revenue is recognized upon transfer of control of the products to the customer . although customers may place orders for products to be delivered on multiple dates that may be in different quarterly reporting periods , all of the orders are scheduled within one year from the order date . we have opted to not disclose the portion of revenues allocated to partially unsatisfied performance obligations , which represent products to be shipped within 12 months under open customer purchase orders , at the end of the current reporting period as allowed under asc 606. we have also elected to record sales commissions when incurred , pursuant to the practical expedient under asc 340 , as the period over which the sales commission asset that would have been recognized is less than one year . customer contract liabilities consist of obligations to deliver rebates to customers in the form of units of products , which are included in accrued expenses and other current liabilities in the consolidated balance sheets . other obligations to customers consist of estimates of price protection rights offered to our end customers , which are included in accrued price protection liability in the consolidated balance sheets , as well as price adjustments expected to be claimed by the distributor upon sell-through of the products to their customers , and amounts expected to be returned by distributors under stock rotation rights , which are included in accrued expenses and other current liabilities in the consolidated balance sheets .

results of operations the following describes the line items set forth in our consolidated statements of operations . a discussion of changes in our results of operations during the year ended december 31 , 2018 compared to the year ended december 31 , 2017 has been omitted from this annual report on form 10-k , but may be found in “ item 7. management 's discussion and analysis of financial condition and results of operations ” in our annual report on form 10-k for the year ended december 31 , 2018 , filed with the sec on february 5 , 2019 , which discussion is incorporated herein by reference and which is available free of charge on the sec 's website at www.sec.gov . net revenue . net revenue is generated from sales of radio-frequency , analog and mixed-signal integrated circuits for the connected home , wired and wireless infrastructure , and industrial and multi-market applications . a significant portion of our sales are to distributors , which then resell our products . cost of net revenue . cost of net revenue includes the cost of finished silicon wafers processed by third-party foundries ; costs associated with our outsourced packaging and assembly , test and shipping ; costs of personnel , including stock-based compensation , and equipment associated with manufacturing support , logistics and quality assurance ; amortization of acquired developed technology intangible assets and inventory step-ups to fair value ; amortization of certain production mask costs ; cost of production load boards and sockets ; and an allocated portion of our occupancy costs . research and development . research and development expense includes personnel-related expenses , including stock-based compensation , new product engineering mask costs , prototype integrated circuit packaging and test costs , computer-aided design software license costs , intellectual property license costs , reference design development costs , development testing and evaluation costs , depreciation expense and allocated occupancy costs .

on november 24 , 2014 , a jury in the united states district court for the eastern district of texas rejected raytheon 's claims and determined that 27 of the alleged trade secrets were not in fact trade secrets and that neither of the flir parties infringed any of the trade secrets claimed and awarded raytheon no damages . on march 31 , 2016 the united states district court for the eastern district of texas issued a final judgment denying raytheon 's claims and awarding flir court costs and denying each of raytheon 's and flir 's renewed motions for judgment story_separator_special_tag overview we are 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 and other sensing products and 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 wide range of customers – we sell off-the-shelf products to many markets and also 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 . this management 's discussion and analysis of financial condition and results of operations is prepared and reported based on our reporting structure of six operating segments . for a more detailed description of our segments , see `` business segments '' within item 1. international revenue accounted for approximately 46 percent , 47 percent and 49 percent of our revenue in 2016 , 2015 and 2014 , 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 kronor 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 in 2016 . 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 macroeconomic factors , including reduced spending by united states government agencies and economic weaknesses in certain geographic markets , will continue to 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 , allowance for doubtful accounts , 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 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 . revenue is recognized when persuasive evidence of an arrangement exists , upon delivery of the product to the customer at a fixed or determinable price with a reasonable assurance of collection , passage of title and risk of loss to the customer as indicated by the contractual terms and fulfillment of all significant obligations . 34 we design , market and sell our products primarily as commercial , off-the-shelf products . story_separator_special_tag our policy is to record warranty liabilities at levels that represent our estimate of the costs that will be incurred to fulfill those 35 warranty requirements at the time that revenue is recognized . we believe that our recorded liability of $ 20.8 million at december 31 , 2016 is adequate to cover our future cost of materials , labor and overhead for the servicing of our products sold through that date . if actual product failures or material or service delivery costs differ from our estimates , our warranty liability would need to be revised accordingly . contingencies . we are subject to the possibility of loss contingencies arising in the normal course of business . we consider the likelihood of loss or impairment of an asset or the incurrence of a liability , as well as our ability to reasonably estimate the amount of loss in determining loss contingencies . an estimated loss is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount can be reasonably estimated . we regularly evaluate current information available to us to determine whether such accruals and disclosures should be adjusted . income taxes . we account for income taxes using the asset and liability method , which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of the assets and liabilities measured using the enacted tax rates in effect in the years in which the differences are expected to reverse . valuation allowances against deferred tax assets are recorded when a determination is made that the deferred tax assets are not more likely than not to be realized in the future . in making that determination , on a jurisdiction by jurisdiction basis , we estimate our future taxable income based upon historical operating results and external market data . future levels of taxable income are dependent upon , but not limited to , general economic conditions , competitive pressures and other factors beyond our control . as of december 31 , 2016 , we have determined that a valuation allowance against our deferred tax assets of $ 2.9 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 . we are subject to income taxes in the united states and in numerous foreign jurisdictions , and in the ordinary course of business , there are many transactions and calculations where the ultimate tax determination is uncertain . while we believe the positions we have taken are appropriate , we have reserves for taxes to address potential exposures involving tax positions that are being challenged or that could be challenged by the tax authorities . we record a benefit on a tax position when we determine that it is more likely than not that the position is sustainable upon examination , including resolution of any related appeals or litigation processes , based on the technical merits of the position . for tax positions that are more likely than not to be sustained , we measure the tax position at the largest amount of benefit that has a greater than 50 percent likelihood of being realized when it is effectively settled , using information that is available at the reporting date . we review the tax reserves as circumstances warrant and adjust the reserves as changes in available facts arise that affect our potential liability for additional taxes . 36 story_separator_special_tag restructuring expenses recorded in 2014 , $ 16.4 million was recorded in operating expenses and $ 0.6 million was recorded in costs of goods sold . in the fourth quarter of 2013 , we initiated a realignment plan that included closing six not-to-scale sites in the united states and europe and a transfer of those operations to larger facilities . we also consolidated our optics and laser manufacturing businesses to better realize the benefits of vertical integration in these areas . the benefits from these actions are reflected in our operating results . as of december 31 , 2016 , we have completed the majority of the actions in our realignment plan . interest expense . interest expense totaled $ 18.1 million , $ 14.1 million and $ 14.6 million for the years ended december 31 , 2016 , 2015 and 2014 , respectively . interest expense for the year was primarily associated with the $ 250 million aggregate principal amount of our 3.75 percent senior unsecured notes that were repaid in july 2016 , the $ 425 million aggregate principal amount of 3.125 percent senior unsecured notes that were issued in june 2016 , and amounts drawn under our credit facility . the increase in interest expense in 2016 compared to 2015 is primarily due to the increased amount of interest bearing debt as well as a $ 1.3 million loss on the extinguishment of the $ 250 million unsecured notes that were repaid in july 2016. other expense ( income ) , net . other expense totaled $ 3.1 million for the year ended december 31 , 2016. other income totaled $ 12.6 million and $ 3.5 million for the years ended december 31 , 2015 and 2014 , respectively . the change in other expenses ( income ) , net in 2016 compared to 2015 is primarily attributed to the gain on the sale of our cost-basis investment in a private technology company during the year ended december 31 , 2015. income taxes . our income tax provision was $ 109.3 million , $ 63.8 million and $ 49.3 million in 2016 , 2015 and 2014 , respectively . the effective tax rates for 2016 , 2015 and 2014 were 39.6 percent , 20.9 percent and 19.7 percent , respectively .

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 2016 , 2015 and 2014 . 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 . 37 revenue . revenue for 2016 totaled $ 1,662.2 million , an increase of 6.7 percent from 2015 revenue of $ 1,557.1 million . year over year revenue growth was primarily due to increases in our oem & emerging , surveillance , and security segments , partially offset by a decline in our instruments segment . acquisitions made during the year ended december 31 , 2016 constitute approximately 2.1 % of consolidated revenue . revenue for 2015 totaled $ 1,557.1 million , an increase of 1.7 percent over 2014 revenue of $ 1,530.7 million . year over year revenue growth was primarily due to increases in our security and detection segments , partially offset by declines in our surveillance , instruments , oem & emerging markets , and maritime segments . the revenue increase was negatively impacted by year over year changes in foreign currency rates , particularly in our instruments and maritime segments . international revenue in 2016 totaled $ 758.6 million , representing 45.6 percent of revenue .

the company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated statements of operations . accrued interest and penalties are included within the related tax liability line story_separator_special_tag story_separator_special_tag style= '' padding-left:0px ; text-indent:0px ; line-height : normal ; padding-top:10px ; '' > replace_table_token_5_th replace_table_token_6_th ( a ) acquisition purchase accounting adjustments include fair market value adjustments associated with inventory and advance customer payments . financial metrics we utilize several financial measures and metrics to evaluate the performance and assess the future direction of our business . these key financial measures and metrics include net revenues , gross profit margin , end-of-period backlog , book-to-bill ratio , and inventory turnover . gross profit margin is gross profit shown as a percentage of net revenues . gross profit is generally net revenues less costs of products sold , but could also include certain other period costs . gross profit margin is clearly a function of net revenues , but also reflects our cost-cutting programs and our ability to contain fixed costs . end-of-period backlog is one indicator of potential future sales . we include in our backlog only open orders that have been released by the customer for shipment in the next twelve months . if demand falls below customers ' forecasts , or if customers do not control their inventory effectively , they may cancel or reschedule the shipments that are included in our backlog , in many instances without the payment of any penalty . therefore , the backlog is not necessarily indicative of the results to be expected for future periods . another important indicator of demand in our industry is the book-to-bill ratio , which is the ratio of the amount of product ordered during a period compared with the product that we ship during that period . a book-to-bill ratio that is greater than one indicates that demand is higher than current revenues and manufacturing capacities , and it indicates that we may generate increasing revenues - 27 - in future periods . conversely , a book-to-bill ratio that is less than one is an indicator of lower demand compared to existing revenues and current capacities and may foretell declining sales . we focus on our inventory turnover as a measure of how well we are managing our inventory . we define inventory turnover for a financial reporting period as our costs of products sold for the four fiscal quarters ending on the last day of the reporting period divided by our average inventory ( computed using each quarter-end balance ) for this same period . a higher level of inventory turnover reflects more efficient use of our capital . the quarter-to-quarter trends in these financial metrics can also be an important indicator of the likely direction of our business . the following table shows net revenues , gross profit margin , the end-of-period backlog , the book-to-bill ratio , and the inventory turnover for our business as a whole during the five quarters beginning with the fourth quarter of 2014 and through the fourth quarter of 2015 ( dollars in thousands ) : replace_table_token_7_th replace_table_token_8_th - 28 - net revenues for the fourth quarter of 2015 increased 3 % from the net revenues reported in the third quarter of 2015 , and decreased 2.2 % from $ 60.2 million of net revenues for the comparable prior year period . higher net revenues in the force sensors and weighing and control systems segments were due to higher volumes in each segment , partially offset by a decrease in net revenues in our foil technology products segment , where we experienced lower volume . net revenues for the fourth quarter of 2015 were negatively impacted by the effect of foreign exchange rates of $ 3.6 million as compared to the fourth quarter of 2014. exchange rates had minimal impact on net revenues from the third quarter of 2015 to the fourth quarter of 2015. the gross profit margin in the fourth quarter of 2015 increased 1.2 % as compared to the fourth quarter of 2014. higher gross profit margin in the weighing and control systems segment was partially offset by declines in the gross profit margins in the foil technology products and force sensors segments . the gross profit margin in the fourth quarter of 2015 decreased 2.3 % from the third quarter of 2015. higher gross profit margin in the weighing and control systems segment was offset by declines in the gross profit margins in the foil technology products and force sensors segments . the foil technology products segment revenues were $ 26.2 million in the fourth quarter of 2015 , down 0.6 % from $ 26.4 million in the fourth quarter last year , and down 2.8 % from $ 27.0 million in the third quarter of 2015. the decrease was mainly due to lower volume from the test and measurement market sector coming mainly from the americas and europe . the gross profit margin decreased from the comparable prior year period primarily due to negative effects of exchange rates . the sequential gross profit margin decrease was due to lower volume and additional costs for expansion of our advanced sensor platform . the force sensors segment net revenues of $ 15.6 million improved 6.9 % compared to revenues of $ 14.6 million in the prior quarter due to higher volume across all regions , predominantly in the precision weighing market sector . revenues in the fourth quarter of 2015 were down 10.5 % compared to $ 17.4 million in the fourth quarter last year . decreased year-over-year revenues are attributable primarily to lower volume . the gross profit margin for the quarter decreased from the comparable prior year period primarily due to lower volume . despite an increase in revenues , the sequential gross profit margin decreased due to reduction of inventory . story_separator_special_tag we have begun to realize the benefits of our restructuring through lower labor costs and other operating expenses , and expect to continue reaping these benefits in future periods . however , these programs to improve our profitability also involve certain risks which could materially impact our future operating results , as further detailed in part i , item 1a “ risk factors ” of this annual report on form 10-k. the company recorded restructuring costs of $ 4.5 million , $ 0.7 million , and $ 0.5 million during the years ended december 31 , 2015 , 2014 , and 2013 , respectively . restructuring costs were comprised of employee termination costs , including severance and statutory retirement allowances , and were incurred in connection with various cost reduction programs . we are evaluating plans to further reduce our costs by consolidating additional manufacturing operations . these plans may require us to incur restructuring and severance costs in future periods . while streamlining and reducing fixed overhead , we are exercising caution so that we will not negatively impact our customer service , or our ability to further develop products and processes . foreign currency we are exposed to foreign currency exchange rate risks , particularly due to transactions in currencies other than the functional currencies of certain subsidiaries . u.s. gaap requires that entities identify the “ functional currency ” of each of their subsidiaries and measure all elements of the financial statements in that functional currency . a subsidiary 's functional currency is the currency of the primary economic environment in which it operates . in cases where a subsidiary is relatively self-contained within a particular country , the local currency is generally deemed to be the functional currency . however , a foreign subsidiary that is a direct and integral component or extension of the parent company 's operations generally would have the parent company 's currency as its functional currency . we have subsidiaries that fall into each of these categories . foreign subsidiaries which use the local currency as the functional currency our operations in europe , canada , and certain locations in asia primarily generate and expend cash using local currencies , and accordingly , these subsidiaries utilize the local currency as their functional currency . for those subsidiaries where the local currency is the functional currency , assets and liabilities in the consolidated balance sheets have been translated at the rate of exchange as of the balance sheet date . translation adjustments do not impact the results of operations and are reported as a separate component of equity . - 30 - for those subsidiaries where the local currency is the functional currency , revenues and expenses are translated at the average exchange rate for the year . while the translation of revenues and expenses into u.s. dollars does not directly impact the consolidated statements of operations , the translation effectively increases or decreases the u.s. dollar equivalent of revenues generated and expenses incurred in those foreign currencies . foreign subsidiaries which use the u.s. dollar as the functional currency our operations in israel and certain locations in asia primarily generate cash in u.s. dollars , and accordingly , these subsidiaries utilize the u.s. dollar as their functional currency . for those foreign subsidiaries where the u.s. dollar is the functional currency , all foreign currency financial statement amounts are remeasured into u.s. dollars . exchange gains and losses arising from remeasurement of foreign currency-denominated monetary assets and liabilities are included in the results of operations . while these subsidiaries transact most business in u.s. dollars , they may have significant costs , particularly related to payroll , which are incurred in the local currency . effects of foreign exchange rate on operations for the year ended december 31 , 2015 , exchange rate impacts reduced net revenues by $ 17.5 million , and reduced costs of products sold and selling , general , and administrative expenses by $ 16.4 million , when compared to the prior year . for the year ended december 31 , 2014 , exchange rate impacts reduced net revenues by $ 0.8 million , and costs of products sold and selling , general , and administrative expenses by $ 1.2 million , when compared to the prior year . for the year ended december 31 , 2013 , exchange rate impacts reduced net revenues by $ 2.1 million , and costs of products sold and selling , general , and administrative expenses by $ 0.6 million , when compared to the prior year . off-balance sheet arrangements as of december 31 , 2015 and 2014 , we did not have any off-balance sheet arrangements . critical accounting policies and estimates our significant accounting policies are summarized in note 1 to our consolidated financial statements . we identify here a number of policies that entail significant judgments or estimates by management . revenue recognition we recognize revenue on product sales during the period when the sales process is complete . this generally occurs when products are shipped to the customer in accordance with terms of an agreement of sale , title and risk of loss have been transferred , collectability is reasonably assured , and pricing is fixed or determinable . for a small percentage of sales where title and risk of loss pass at the point of delivery , we recognize revenue upon delivery to the customer , assuming all other criteria for revenue recognition are met . some of our larger systems products have post-shipment obligations , such as customer acceptance , training , or installation . in such circumstances , revenue is deferred until the obligation has been completed , unless such obligation is deemed inconsequential and perfunctory . given the specialized nature of our products , we generally do not allow product returns . accounts receivable our receivables represent a significant portion of our current assets . we are required to estimate the collectability of our receivables and to establish allowances for the amount of receivables that will prove uncollectible .

overview vpg is an internationally recognized designer , manufacturer and marketer of sensors , and sensor-based measurement systems , as well as specialty resistors and strain gages based upon our proprietary technology . we provide precision products and solutions , many of which are “ designed-in ” by our customers , specializing in the growing markets of stress , force , weight , pressure , and current measurements . a significant portion of our products and solutions are primarily based upon our proprietary foil technology and are produced as part of our vertically integrated structure . we believe this strategy results in higher quality , more cost effective and focused solutions for our customers . our products are marketed under a variety of brand names that we believe are characterized as having a very high level of precision and quality . our global operations enable us to produce a wide variety of products in strategically effective geographic locations that also optimize our resources for specific technologies , sensors , assemblies , and systems . the company also has a long heritage of innovation in precision foil resistors , foil strain gages , and sensors that convert mechanical inputs into an electronic signal for display , processing , interpretation , or control by our instrumentation and systems products . our advanced sensor product line continues this heritage by offering high-quality foil strain gages produced in a proprietary , highly automated environment . precision sensors are essential to the accurate measurement , resolution and display of force , weight , pressure , torque , tilt , motion , or acceleration , especially in the legal-for-trade , commercial , and industrial marketplaces . this expertise served as a foundation for our expansion into strain gage instrumentation , load cells , transducers , weighing modules , and complete systems for process control and on-board weighing . although our products are typically used in the industrial market , we believe our advanced sensors may find application outside the industrial market .

these local-currency-denominated accounting records are translated at exchange rates that fluctuate up or down from period to period and consequently affect our consolidated results of story_separator_special_tag cautionary factors that may affect future results this annual report on form 10-k contains forward-looking statements that involve risks and uncertainties , as well as assumptions that , if they never materialize or prove incorrect , could cause our results to differ materially from those expressed or implied by such forward-looking statements . you can identify these statements by the fact that they do not relate strictly to historical or current facts and use words such as “ anticipate , ” “ estimate , ” “ expect , ” `` will , '' `` are expected , '' “ project , ” “ intend , ” “ plan , ” “ believe , ” “ appear , ” “ assume ” and other words and terms of similar meaning . such forward-looking statements include any statements regarding expectations of earnings , revenues , bookings , gross margins , operating and non-operating expenses , tax rates , net income , foreign currency rates , payment of dividends , or other financial items , as well as backlog , order levels and activity of our company as a whole or in particular markets ; any statements of the plans , strategies and objectives of management for future operations , restructuring and corporate reorganization ; any statements of factors that may affect our 2013 operating results ; any statements concerning proposed new products , services , developments , changes to our restructuring reserves , our competitive position , hiring levels , sales and bookings or anticipated performance of products or services ; any statements related to acquisitions of other companies ; any statements related to future capital expenditures ; any statements related to the needs or expected growth or spending of our target markets ; any statements concerning our effective tax rates , the resolution of any tax positions or use of tax assets ; any statements concerning the effect of new accounting pronouncements on our financial position , results of operations or cash flows ; any statements regarding future economic conditions or performance ; any statements of belief ; any statements of assumptions underlying any of the foregoing ; and any statements made under the heading “ outlook for 2013 . ” from time to time , we also may provide oral or written forward-looking statements in other materials we release to the public . the risks , uncertainties and assumptions referred to above include , but are not limited to , those discussed here and the risks discussed from time to time in our other public filings . all forward-looking statements included in this annual report on form 10-k are based on information available to us as of the date of this report , and we assume no obligation to update these forward-looking statements . you are advised , however , to consult any further disclosures we make on related subjects in our forms 10-q and 8-k filed with , or furnished to , the sec . you also should read the section entitled “ risk factors ” included in part i , item 1a . of this annual report on form 10-k for factors that we believe could cause our actual results to differ materially from expected and historical results . other factors could also adversely affect us . summary of products and segments we are a leading supplier of scientific instruments for nanoscale applications and solutions for industry and science . we report our revenue based on a market-focused organization : the electronics market segment , the materials science market segment , the life sciences market segment and the service and components market segment . beginning with the first quarter of 2013 , we intend to change our reporting segments as previously disclosed in an 8-k filed with the sec on january 14 , 2013. our products include transmission electron microscopes , or tems ; scanning electron microscopes , or sems ; dualbeam tm systems which combine a sem and a focused ion beam system , or fib , on a single platform ; stand-alone fibs ; and high-performance optical microscopes . tems provide the highest resolution images of samples and their internal structure , down to the atomic level . sems provide detailed images of the surface and shape of samples . optical microscopes provide a wider field of view than sems and tems . dualbeams and fibs image , manipulate , mill and deposit material for a variety of purposes , including preparation of samples for tems . substantially all of these product categories are sold into all of our market segments . individual models of our products are increasingly designed to provide specific solutions and applications in each of our market segments . our dualbeam systems include models that have wafer handling capability and are purchased by semiconductor equipment manufacturers ( “ wafer-level dualbeam systems ” ) and models that have small stages and are sold to customers in several markets ( “ small-stage dualbeam systems ” ) . we have research and development and manufacturing operations in hillsboro , oregon ; eindhoven , the netherlands ; brno , czech republic ; munich , germany ; and delmont , pennsylvania , and software development in bordeaux , france and brisbane , australia . our sales and service operations are conducted in the united states ( u.s. ) and approximately 50 other countries around the world . we also sell our products through independent agents , distributors and representatives in additional countries . the electronics market segment consists of customers in semiconductor integrated circuit manufacturing and related industries such as manufacturers of data storage equipment and other technologies . for the semiconductor market , our growth is driven by shrinking line widths and process nodes of 45 nanometers and smaller , increasing complexity in their materials such as high-k metal gates and low-k dielectrics and increasing device complexity such as 3d transistor architectures . story_separator_special_tag 25 our service and components business grows mostly with the expansion of our installed base and is expected to continue that growth in 2013. gross margin increased by 210 basis points from 2011 to 2012 , and we expect continued gross margin improvement in 2013. in addition to increasing our proportion of newer , higher-margin products and application-specific products , we expect lower costs from increased production volume in the czech republic and continued sourcing improvements , including the full-year impact of termination of a manufacturing services agreement in hillsboro . operating expenses are expected to increase in 2013 due to acquisitions , the increase in staff in customer-facing parts of the company to manage our growth and increased spending for research and development . we expect to continue to report a net expense for other income ( expense ) , net , due to low market interest earned on our investments and the impact of currency costs . global foreign exchange rates could have a significant impact on our results . in general , a stronger u.s. dollar compared with the euro will reduce our revenue growth rate and improve our operating income , while a weaker dollar has the opposite effect . in addition , a weaker yen compared to the dollar could reduce our margins modestly . we expect our overall effective tax rate to stabilize and we are estimating that it will be around 20 % for 2013. in recent years , our sales to customers in china have grown and will continue to be an area of focus for us in 2013. please see the risk factors listed in part i , item 1a . of this annual report on form 10-k for the risk factors that could cause our results to vary from this outlook for 2013. story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > , decrease , in life sciences sales in 2012 compared to 2011 was primarily due to a decrease in the number of high-end tem units sold during the period . the life sciences market is heavily dependent on government funding for research grants and this funding has been under pressure , resulting in fewer large awards for fei class of tools . historically , we have seen significant volatility in the sale of high-end tems for life sciences and that may continue . additionally , currency fluctuations decreased life sciences sales by $ 3.0 million in 2012 compared to 2011 . the $ 28.2 million , or 37.9 % , increase in life sciences sales in 2011 compared to 2010 was primarily due to an increase in the number of high-end tem units sold during the period due in part to increased penetration in electron microscopy in life sciences research . currency fluctuations increased life sciences sales by $ 4.1 million in 2011 compared to 2010 . 27 service and components the $ 28.4 million , or 16.5 % , increase in service and components sales in 2012 compared to 2011 was due primarily to a larger install base and the inclusion of service revenue for our aspex product line as well as service revenue from our korean subsidiary resulting from the acquisition of certain assets of ap tech , which occurred on july 9 , 2012. this was partially offset by currency fluctuations which decreased service and components sales by $ 4.8 million in 2012 compared to 2011 . the $ 17.4 million , or 11.3 % , increase in service and components sales in 2011 compared to 2010 was due primarily to a larger install base and improved market conditions in the semiconductor industry , which contributed to an increase in service contracts . currency fluctuations increased service and components sales by $ 5.2 million in 2011 compared to 2010 . net sales by geographic region a significant portion of our net sales has been derived from customers outside of the u.s. , which we expect to continue . the following table shows our net sales by geographic region ( dollars in thousands ) : replace_table_token_8_th u.s. and canada the $ 34.5 million , or 13.4 % , increase in sales to the u.s. and canada in 2012 compared to 2011 was primarily due to an increase in shipments to semiconductor customers , growth in sales to our natural resources customers , and an increase in service revenues driven by continued organic growth , expansion of our install base and the inclusion of service revenue for our aspex product line . the $ 53.2 million , or 26.1 % , increase in sales to the u.s. and canada in 2011 compared to 2010 was primarily due to continued strong semiconductor capital equipment spending and an increase in life sciences sales related to an increase in high-end tem units sold . europe our european region also includes central america , south america , africa ( excluding south africa ) , the middle east and russia . the $ 16.6 million , or 6.3 % , decrease in sales to europe in 2012 compared to 2011 was primarily due to a shift in the mix of semiconductor sales away from european customers to asian customers , as well as a decrease in the number of high-end tem units sold in our life sciences segment . currency fluctuations also decreased sales to europe by $ 19.0 million in 2012 compared to 2011 . the $ 53.9 million , or 26.0 % , increase in sales to europe in 2011 compared to 2010 was primarily due to increased semiconductor capital equipment spending and continued improvement in spending by research institutions . currency fluctuations increased sales to europe by $ 10.4 million in 2011 compared to 2010 .

results of operations the following table sets forth our statement of operations data ( in thousands ) : replace_table_token_5_th the following table sets forth our statement of operations data as a percentage ( 1 ) of consolidated net sales : replace_table_token_6_th ( 1 ) percentages may not add due to rounding . 26 net sales increased $ 65.3 million , or 7.9 % , to $ 891.7 million in 2012 compared to $ 826.4 million in 2011 and increased $ 192.2 million , or 30.3 % , in 2011 compared to $ 634.2 million in 2010 . the factors affecting net sales are discussed in more detail in the net sales by segment discussion below . currency fluctuations decreased net sales by $ 18.6 million in 2012 compared to 2011 and decreased net sales by approximately $ 22.4 million in 2011 compared to 2010 as approximately 67 % of our net sales were denominated in foreign currencies that fluctuated against the u.s. dollar . strengthening of the u.s. dollar against these foreign currencies generally has the effect of decreasing net sales and backlog . see also `` foreign currency exchange rate risk '' included in item 7a . of this annual report on form 10-k for further discussion of currency impact on our results of operations . net sales by segment net sales by market segment ( in thousands ) and as a percentage of net sales were as follows : replace_table_token_7_th electronics the $ 33.4 million , or 12.9 % , increase in electronics sales in 2012 compared to 2011 was primarily due to increased demand for certain products as the industry shifts to smaller semiconductor manufacturing process nodes . as our customers migrate from sem-based to more tem-based lab analysis , we realize increases in unit sales of our tem products as well as our small dualbeam products , both of which have higher average selling prices than sem products .

the adjustments to reconcile from the applicable gaap financial measures to the non-gaap financial measures are presented in the following schedules . the company considers these adjustments to be relevant to ongoing operating results and provide a meaningful base for period-to-period and company-to-company comparisons . these non-gaap financial measures are used by management to assess the performance and financial position of the company and for presentations of company performance to investors . the company further believes that presenting these non-gaap financial measures will permit investors to assess the performance of the company on the same basis as that applied by management . non-gaap financial measures have inherent limitations , and are not required to be uniformly applied by individual entities . although non-gaap financial measures are frequently used by stakeholders to evaluate a company , they have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of results reported under gaap . the following are the non-gaap financial measures presented in this form 10-k and a discussion of why management uses these non-gaap measures : return on average tangible common equity – this schedule also includes “ net earnings applicable to common shareholders , excluding the effects of the adjustments , net of tax ” and “ average tangible common equity. ” return on average tangible common equity is a non-gaap financial measure that management believes provides useful information about the company 's use of shareholders ' equity . management believes the use of ratios that utilize tangible equity provides additional useful information because they present measures of those assets that can generate income . tangible equity ratio , tangible common equity ratio , and tangible book value per common share – this schedule also includes “ tangible equity , ” “ tangible common equity , ” and “ tangible assets. ” tangible equity ratio , tangible common equity ratio , and tangible book value per common share are non-gaap financial measures that management believes provides additional useful information about the levels of tangible assets and tangible equity between each other and in relation to outstanding shares of common stock . management believes the use of ratios that utilize tangible equity provides additional useful information because they present measures of those assets that can generate income . efficiency ratio – this schedule also includes “ adjusted noninterest expense , ” “ taxable-equivalent net interest income , ” “ adjusted taxable-equivalent revenue , ” “ pre-provision net revenue ( “ ppnr ” ) , ” and “ adjusted ppnr. ” the methodology of determining the efficiency ratio may differ among companies . management makes adjustments to exclude certain items as identified in the subsequent schedule which it believes allows for more consistent comparability among periods . management believes the efficiency ratio provides useful information regarding the cost of generating revenue . adjusted noninterest expense provides a measure as to how well the company is managing its expenses , and adjusted ppnr enables management and others to assess the company 's ability to generate capital to cover credit losses through a credit cycle . taxable-equivalent net interest income allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources . the efficiency ratio and adjusted noninterest expense are the key metrics to which the company announced it would hold itself accountable in its june 1 , 2015 efficiency initiative , and to which executive compensation is tied . 29 schedule 1 return on average tangible common equity ( non-gaap ) – annual replace_table_token_5_th schedule 2 tangible equity ( non-gaap ) , tangible common equity ( non-gaap ) , and tangible book value per common share ( non-gaap ) replace_table_token_6_th 30 schedule 3 efficiency ratio replace_table_token_7_th company overview zions bancorporation ( “ the parent ” ) and its subsidiaries ( collectively “ the company , ” “ zions , ” “ we , ” “ our , ” “ us ” ) together comprise a $ 66 billion financial holding company headquartered in salt lake city , utah . as of december 31 , 2017 , the company was the 19th largest domestic bank holding company in terms of deposits and is included in the standard and poor 's ( “ s & p ” ) 500 and nasdaq financial 100 indices . at december 31 , 2017 , the company had banking operations through 433 domestic branches in eleven western states . additionally , the company currently has , and continues to develop its digital delivery capabilities . revenues and profits are primarily derived from commercial customers and the company also emphasizes mortgage banking , wealth management , municipal finance , and brokerage services . the company is consistently ranked among the best banks in the country to work with by its small and middle-market customers , as measured by the greenwich associates annual survey . since the awards inception in 2009 , only three other u.s. banks have consistently received as many greenwich excellence awards as zions bancorporation . the company consistently wins awards for the best bank within its geography . examples include the best bank awards given by local newspapers , business journals , or similar publications in nevada , arizona , and california : orange county ( four consecutive years ) and san diego county ( seven consecutive years ) . the long-term strategy of the company is driven by key factors that include : ◦ continuing to execute on our community bank business model by doing business on a “ local ” basis , with significant local decision making for customer-facing elements of our business including product offerings , marketing , and pricing . we believe this provides a meaningful competitive advantage and an opportunity for growth over larger national banks whose loan and deposit products are often homogeneous . we are actively 31 engaged in community events and charitable efforts designed to give back to the people within our communities . story_separator_special_tag these increases were partially offset by a $ 64 million increase in noninterest expense performance relative to previously announced initiatives efficiency initiatives in june 2015 we announced several initiatives to improve operational and financial performance along with some key financial targets . our initiatives are designed to improve customer experience , to simplify the corporate structure and operations , and to make the company a more efficient organization . following is a brief discussion regarding our performance against these key financial targets : achieve an efficiency ratio in the low 60 % range for fiscal year 2017 . our efficiency ratio for 2017 was 62.3 % , which met our goal for the year , compared with 65.8 % for 2016 , representing a 351 bps improvement . improvements in interest income from securities and loans , partially offset by an increase in adjusted noninterest expense , drove the significant improvement . see “ gaap to non-gaap reconciliations ” on page 29 for more information regarding the calculation of the adjusted efficiency ratio and why management uses this non-gaap measure . maintain adjusted noninterest expense at less than $ 1.58 billion in 2016 , with a modest increase of 2-3 % in 2017 . we met our target for fiscal year 2016 , keeping adjusted noninterest expense to $ 1.579 billion . in 2017 , total adjusted noninterest expense was $ 1.640 billion . zions made a $ 12 million contribution to a charitable foundation in the fourth quarter of 2017 , which was related in part to the tax cuts and jobs act . excluding the impact of this one-time accelerated contribution , adjusted noninterest expense increased $ 49 million , or 3 % , which was in line with our expectations . adjusted noninterest expense excludes those same expense items excluded in arriving at the efficiency ratio ( see “ gaap to non-gaap reconciliations ” on page 29 for more information regarding the calculation of the efficiency ratio ) . increase returns on tangible common equity to more than ten percent . returns were 9.0 % , 7.1 % , and 4.6 % for 2017 , 2016 , and 2015 , respectively . adjusting for the estimated net dta write-off of $ 47 million through income tax expense associated with the decrease in the federal income tax rate from the passage of new legislation ( see “ income taxes ” on page 45 for more information ) , and the $ 12 million charitable contribution , return on tangible common equity for 2017 would have been 9.9 % . these year-over-year increases demonstrate our commitment to improving profitability , as we continue to work towards achieving this goal . see “ gaap to non-gaap reconciliations ” on page 29 for more information regarding the calculation of the adjusted efficiency ratio and why management uses this non-gaap measure . 33 achieve cumulative gross pretax cost savings of $ 120 million from operational expense initiatives by fiscal year 2017 . savings from technology initiatives , the consolidation of legal charters , and improved operational efficiency across the company helped us achieve this goal by the end of 2017. highlights in 2017 net interest income , which is more than three-quarters of our revenue , improved by $ 198 million to $ 2.1 billion compared with 2016 . the average balance of our investment securities portfolio grew $ 5.4 billion , and the average rate on those securities expanded 9 bps due in part to a change in asset mix . our average lending portfolio also grew by 3 % or $ 1.4 billion ; the average yield on the loan portfolio increased 14 bps , reflecting in part several increases in short-term benchmark rates . although there was a decrease in the average balance of long-term debt in 2017 of $ 286 million , this was offset by increased average federal home loan bank ( “ fhlb ” ) and other short-term borrowings , which rose by $ 3.6 billion . interest expense increased $ 40 million compared with 2016 , almost entirely driven by the increase in wholesale funding . interest expense on deposits increased only $ 10 million on more than $ 52 billion of average deposits . some of the same factors that led to an increase in net interest income also resulted in net interest margin ( “ nim ” ) expansion in 2017 relative to 2016 , which was 3.45 % and 3.37 % , respectively . adjusted ppnr of $ 992 million in 2017 was up $ 172 million from 2016. this increase reflects operating leverage improvement resulting from loan growth and a more profitable average earning assets mix . adjusted noninterest expense increased to $ 1.640 billion ( or $ 1.628 billion , if excluding the charitable foundation contribution related to the tax cuts and jobs act ) from $ 1.579 billion in 2017 , however , this was more than offset by improved revenue . ppnr improvements during 2017 have driven an improvement in the company 's efficiency ratio from 65.8 % in 2016 to 62.3 % in 2017. our lending portfolio grew $ 2.1 billion based on year-end balances , or 5 % during 2017. we have seen widespread growth across most products and geographies , with particular strength in 1-4 family residential , commercial and industrial , and municipal lending . we saw a small decline in our national real estate ( “ nre ” ) portfolio , and we actively managed decreases in our oil and gas-related and cre term portfolios . we are currently comfortable with the concentrations in both the oil and gas-related and cre term portfolios and we do not expect the attrition trend to continue . asset quality has been very favorable during 2017. credit quality in the oil and gas-related portfolio continues to strengthen and it has remained strong in the rest of the lending portfolio . overall criticized , classified , and nonaccrual loans declined by $ 292 million , $ 444 million , and $ 127 million , respectively .

business segment results following the close of business on december 31 , 2015 , we completed the merger of our subsidiary banks with zions first national bank . subsequently , zions first national bank changed its legal name to zb , national association . we continue to manage our banking operations under our existing brand names and business segments , including zions bank , amegy bank , california bank & trust , national bank of arizona , nevada state bank , vectra bank colorado , and the commerce bank of washington . performance assessment and resource allocation are based upon this geographical structure . as discussed in the “ executive summary ” on page 33 , most of the lending and other decisions affecting customers are made at the local level . the accounting policies of the individual segments are the same as those of the company . we allocate the cost of centrally provided services to the business segments based upon estimated or actual usage of those services . due to the charter consolidation , we have moved to an internal funds transfer pricing allocation system to report results of operations for business segments . this process continues to be refined . the operating segment identified as “ other ” includes the parent , certain nonbank financial service subsidiaries , centralized back-office functions , and eliminations of transactions between segments . the parent 's operations are significant to the other segment . see note 20 of the notes to consolidated financial statements contains for more information on the other segment . the company 's net interest income is substantially affected by the parent 's interest expense on long-term debt . the parent 's financial statements in note 22 of the notes to consolidated financial statements provide more information about the parent 's activities . we have announced our intention to merge the parent company into zb , n.a .

when indicators of possible impairment are identified , the company evaluates the recoverability of the carrying value of its long-lived assets based on the criteria established in asc topic no . 360 , property , plant and equipment . the company considers historical performance and anticipated future results in its evaluation of potential impairment . the company evaluates the carrying value of those assets in relation to the operating performance of the business and undiscounted cash flows expected to result from the use of those assets . impairment losses are recognized when carrying value exceeds the undiscounted cash flows , in which case management must determine the fair value of the underlying asset . no such impairment losses have been recognized to date . f-1 3 2. summary of significant accounting policies ( continued ) revenue recognition effective january 1 , 2018 , the company adopted fasb asc topic 606 , revenue from contracts with customers ( “ asc topic 606 ” ) . the company did not generate any product related revenue prior to january 1 , 2020 , and therefore the adoption of asc topic 606 did not have an impact in the company 's financial statements for any prior periods . in accordance with asc topic 606 , the company recognizes revenue when the customer obtains control of a promised good or service , in an amount that reflects the consideration that the company expects to receive in exchange for the good or service . the reported results for the year ended december 31 , 2020 reflect the application of asc topic 606. to determine revenue story_separator_special_tag the following discussion of the financial condition and results of our operations should be read in conjunction with the financial statements and the notes to those statements appearing elsewhere in this annual report on form 10-k. some of the information contained in this discussion and analysis or set forth elsewhere in this report , including information with respect to our plans and strategy for our business , includes forward-looking statements that involve risks and uncertainties . you should read the risk factors set forth in item 1a of this annual report on form 10-k 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 contained in the following discussion and analysis . overview we are a biopharmaceutical company focused on the discovery , clinical development and commercialization of innovative , small molecule drugs that address underserved medical needs primarily in neuropsychiatric and neurological disorders by targeting intracellular signaling mechanisms within the central nervous system , or cns . in december 2019 caplyta ( lumateperone ) was approved by the fda for the treatment of schizophrenia in adults ( 42mg/day ) and we initiated the commercial launch of caplyta in late march 2020. in support of our commercialization efforts , we employ a national sales force consisting of approximately 240 sales representatives . as used in this report , “ caplyta ” refers to lumateperone approved by the fda for the treatment of schizophrenia in adults , and “ lumateperone ” refers to , where applicable , caplyta as well as lumateperone for the treatment of indications beyond schizophrenia . lumateperone is also in phase 3 clinical development as a novel treatment for bipolar depression . our lumateperone bipolar depression clinical program consists of three monotherapy studies and one adjunctive study . in september 2020 , we announced positive topline results from study 402 , conducted globally , evaluating lumateperone as adjunctive therapy to lithium or valproate in the treatment of major depressive episodes associated with bipolar i or bipolar ii disorder . in study 402 , once daily lumateperone 42 mg met the primary endpoint for improvement in depression as measured by change from baseline versus placebo on the montgomery-åsberg depression rating scale , or madrs , total score ( p=0.0206 ; effect size = 0.27 ) . lumateperone 42 mg also met the key secondary endpoint , the clinical global impression scale for bipolar for severity of illness , or cgi-bp-s , depression score ( p=0.0082 ; effect size = 0.31 ) . the lower lumateperone dose , 28 mg , showed a trend for a dose-related improvement in symptoms of depression but the results did not reach statistical significance . in the first quarter of 2020 , we initiated our third monotherapy phase 3 study , study 403 , evaluating lumateperone as monotherapy in the treatment of major depressive episodes associated with bipolar i or bipolar ii disorder . following the positive results in study 402 , we amended study 403 to evaluate major depressive episodes with mixed features in bipolar disorder in patients with bipolar i or bipolar ii disorder and mixed features in patients with major depressive disorder , or mdd . we expect to complete study 403 in the second half of 2022 and following completion we intend to discuss the results with the fda to determine whether study 403 , as amended , will provide supportive data for a potential future regulatory filing for this indication . in july 2019 , we announced topline results from our first monotherapy study , study 401 , conducted in the united states , and our second monotherapy study , study 404 , conducted globally , evaluating lumateperone as monotherapy in the treatment of major depressive episodes associated with bipolar i or bipolar ii disorder . in study 404 , lumateperone 42 mg met the primary endpoint for improvement in depression as measured by change from baseline versus placebo on the madrs total score ( p < 0.0001 ; effect size = 0.56 ) . these benefits were statistically significant in both bipolar i and bipolar ii patients . study 404 also met its key secondary endpoint , clinical global impression scale for bipolar for severity of illness ( cgi-bp-s ) total score ( p < 0.001 ; effect size = 0.46 ) . study 401 tested two doses of lumateperone , 42 mg and 28mg along with placebo . story_separator_special_tag we plan to initiate a phase 2 clinical trial with iti-214 for parkinson 's disease in 2021. in addition , in the second quarter of 2020 , we announced topline results from study iti-214-104 , a phase 1/2 translational study of single ascending doses of iti-214 in patients with chronic systolic heart failure with reduced ejection fraction . in this study , iti-214 improved cardiac output by increasing heart contractility and decreasing vascular resistance . agents that both increase heart contractility ( inotropism ) and decrease vascular resistance ( vasodilation ) are called inodilators . inodilators in current clinical use are associated with the development of arrhythmias , which are abnormal heart rhythms that when serious can impair heart function and lead to mortality . iti-214 , which acts through a novel mechanism of action , was not associated with arrhythmias in this study and was generally well-tolerated in all patients . we also have a development program with our iti-333 compound as a potential treatment for substance use disorders , pain and psychiatric comorbidities including depression and anxiety . there is a pressing need to develop new drugs to treat opioid addiction and safe , effective , non-addictive treatments to manage pain . iti-333 is a novel compound that uniquely combines activity as an antagonist at serotonin 5-ht2a receptors and a partial agonist at µ-opioid receptors . these combined actions support the potential utility of iti-333 in the treatment of opioid use disorder and associated comorbidities ( e.g. , depression , anxiety , sleep disorders ) without opioid-like safety and tolerability concerns . in december 2020 , we initiated a phase 1 single ascending dose study evaluating the safety , tolerability and pharmacokinetics of iti-333 in healthy volunteers . we have received a grant from the national institute on drug abuse under the helping to end addiction long-term initiative , or nih heal initiative , that we expect will fund a significant portion of the early stage clinical development costs associated with this program . we have assembled a management team with significant industry experience to lead the discovery , development and potential commercialization of our product candidates . we complement our management team with a group of scientific and clinical advisors that includes recognized experts in the fields of schizophrenia and other cns disorders . covid-19 in december 2019 , a novel strain of coronavirus , sars-cov-2 , which causes coronavirus disease 2019 ( covid-19 ) , surfaced in wuhan , china . since then , sars-cov-2 and covid-19 have spread to multiple countries , including the united states . the covid-19 pandemic is evolving , and to date has led to the implementation of various responses , including government-imposed quarantines , travel restrictions and other public health safety measures . in response to the spread of sars-cov-2 and covid-19 , we have instructed the majority of our office-based employees to work from home . in connection with our commercial launch of caplyta , which is approved by fda for the treatment of schizophrenia in adults , our commercial organization and sales force and medical organization are having significantly reduced personal interactions with physicians and customers and increasingly conduct promotional activities virtually , and elected to cease in-person interactions with physicians and customers entirely for some period of time in the interest of employee and community safety . even though certain of our sales force and medical organization have begun to have personal interactions with physicians and customers , we may have to cease such personal interactions depending on the covid-19 situation . in addition , the covid-19 situation has resulted in a decrease in the number of patient visits to healthcare providers . as a result of the covid-19 pandemic , or similar pandemics , we may experience disruptions that could severely impact our business , including our ability to successfully 60 commercialize our only commercial product , caplyta , in the united states , and these disruptions could negatively impact our sales of caplyta . business interruptions from the current or future pandemics may also adversely impact the third parties we rely on to sufficiently manufacture caplyta and to produce our product candidates in quantities we require , which may impair the commercialization and our research and development activities . we are currently conducting clinical trials for our product candidates in many countries , including the united states , europe and russia and may expand to other geographies . timely enrollment of , completion of and reporting on our clinical trials is dependent upon these global clinical trial sites which are , or in the future may be , adversely affected by the covid-19 pandemic or other pandemics . some factors from the covid-19 pandemic that have or may adversely affect the timing and conduct of our clinical trials and adversely impact our business generally , include but are not limited to delays or difficulties in clinical site initiation , patient enrollment , diversion of healthcare resources away from clinical trials to pandemic concerns , limitations on travel , regulatory delays and supply chain disruptions . in response to the covid-19 pandemic , on march 10 , 2020 , the fda announced its intention to temporarily postpone most inspections of foreign manufacturing facilities and products . on march 18 , 2020 , the fda announced its intention to temporarily postpone routine surveillance inspections of domestic manufacturing facilities and provided guidance regarding the conduct of clinical trials , which has since been further updated . as of june 23 , 2020 , the fda noted it was continuing to ensure timely reviews of applications for medical products during the covid-19 pandemic in line with its user fee performance goals and conducting mission critical domestic and foreign inspections to ensure compliance of manufacturing facilities with fda quality standards .

results of operations the following discussion summarizes the key factors our management believes are necessary for an understanding of our financial statements . revenues net revenues from product sales consist of sales of caplyta , which was approved by the fda on december 2019. we initiated the commercial launch of caplyta in late march 2020 and generated 61 approximately $ 22.5 million in net revenue from product sales for the year ended december 31 , 2020. during this product launch year , 2020 net sales increased steadily from approximately $ 883,000 in the first quarter of 2020 to approximately $ 12.4 million in the fourth quarter . in addition , we had approximately $ 0.3 million of grant revenues for the year ended december 31 , 2020 , compared to approximately $ 0.06 million of grant revenues for the year ended december 31 , 2019. we have received and may continue to receive grants from u.s. government agencies and foundations . we do not expect any revenues that we may generate in the next several years to be significant enough to completely fund our operations . expenses the process of researching , developing and commercializing drugs for human use is lengthy , unpredictable and subject to many risks . we are unable with certainty to estimate either the costs or the timelines in which those costs will be incurred . the costs associated with the commercialization of caplyta will be substantial and will be incurred prior to our generating sufficient revenue to offset these costs . costs for the clinical development of lumateperone for the treatment of bipolar depression consumes and , together with our anticipated clinical development programs for depressive disorders and iti-214 , will continue to consume a large portion of our current , as well as projected , resources .

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 late-stage , clinical biopharmaceutical company dedicated to developing and commercializing first-in-class , oral enzyme therapeutics to treat patients with rare and severe metabolic and kidney disorders . we are focused on metabolic disorders that result in excess accumulation of certain metabolites that can cause kidney stones , damage the kidney , and potentially lead to chronic kidney disease , or ckd , and end-stage renal disease , or esrd . our lead product candidate , reloxaliase ( formerly known as alln-177 ) , is a first-in-class , oral enzyme therapeutic that we are developing for the treatment of enteric hyperoxaluria , a metabolic disorder characterized by markedly elevated urinary oxalate , or uox , levels and commonly associated with kidney stones , ckd and esrd . we have conducted a robust clinical development program of reloxaliase , including three phase 2 clinical trials and the first of two planned phase 3 clinical trials , which demonstrated significant reductions of uox excretion in patients with enteric hyperoxaluria . reloxaliase has also been well tolerated in clinical trials to date . there are currently no approved therapies for the treatment of enteric hyperoxaluria . in march 2018 , we initiated urirox-1 tm ( urirox-1 ) ( formerly study 301 ) , the first of our two phase 3 clinical trials in support of our planned biologic license application , or bla , for reloxaliase in patients with enteric hyperoxaluria . in november 2019 , we reported that the primary endpoint in the urirox-1 study had been met , with a mean reduction of 22.6 % in average 24-hour uox excretion measured during weeks 1-4 among patients treated with reloxaliase , compared to a mean reduction of 9.7 % in the placebo group ( least square , or ls , mean treatment difference of -14.3 % , p=0.004 ) . in the fourth quarter of 2018 , we initiated urirox-2 tm ( urirox-2 ) ( formerly study 302 ) , our second pivotal phase 3 trial of reloxaliase in patients with enteric hyperoxaluria . in february 2020 , following engagement with the u.s. food and drug administration , or fda , we announced that we reached agreement with the fda on a streamlined design for urirox-2 , based on the high rate of on-study kidney stone events and the uox results observed in the completed urirox-1 trial , which enrolled essentially the same patient population as urirox-2 . in march 2020 , we submitted a protocol amendment and associated study documents for the revised trial design to the fda . the revised trial design became effective following the 30-day review period and has been implemented in urirox-2 . the execution and enrollment progress of the trial have been adversely affected by the covid-19 pandemic . we currently expect to report interim analysis of the data from this study in the second or third quarter of 2022 and topline data to support a potential bla submission in the fourth quarter of 2022 or first quarter of 2023. the fda has advised us that it agrees that , if positive , biomarker data on 24-hour uox excretion in urirox-1 and urirox-2 would be used for a bla submission for reloxaliase using the accelerated approval regulatory pathway . for the long-term follow-up phase of the trial , subjects would continue in urirox-2 for a minimum treatment period of two years to confirm clinical benefit post-approval , including the ability of reloxaliase to reduce the incidence and severity of kidney stone disease and renal impairment . in addition to our phase 3 program of reloxaliase for enteric hyperoxaluria , we also evaluated reloxaliase in study 206 , a phase 2 basket trial in adults and adolescents with primary hyperoxaluria or enteric hyperoxaluria with advanced ckd and elevated plasma oxalate levels ( hyperoxalemia ) , which we initiated in march 2018. the data from this study have been published in nephrology dialysis transplantation ( pfau 2021 ) . based on the substantial reductions from baseline to weeks 4 to 12 in both uox and plasma oxalate , or pox , observed in subjects with enteric hyperoxaluria and advanced ckd , we obtained feedback from the fda on potential expedited approval pathways for reloxaliase in this patient population . the fda recognized that the high oxalate burden in these patients represents a serious , life-threatening condition , which is a requirement for considering an expedited approval pathway . however , the fda advised us that reloxaliase would not currently qualify for breakthrough designation in this patient population based on the lack of placebo-controlled data from open-label study 206. in this setting , and given our current financial resources , we remain focused on executing urirox-2 and plan to evaluate potential clinical development of reloxaliase in patients with enteric hyperoxaluria and advanced ckd in the future . in addition , we have designed our second product candidate , alln-346 , an orally administered , novel , urate degrading enzyme , for patients with hyperuricemia and gout in the setting of advanced ckd . hyperuricemia , or elevated levels of uric 107 acid in the blood , results from overproduction or insufficient excretion of urate , or often a combination of the two . we have conducted two preclinical proof-of-concept studies that support the potential of alln-346 as an oral therapy for the treatment of hyperuricemia in patients with gout and associated ckd . story_separator_special_tag we do not expect to generate revenue from product sales unless and until we successfully complete development and obtain regulatory approval for a product candidate . additionally , we currently use contract research organizations , or cros , and contract manufacturing organizations , or cmos , to carry out our preclinical and clinical development activities . we do not yet have a sales organization . if we obtain regulatory approval for our product candidates , we expect to incur significant commercialization expenses related to product sales , marketing , manufacturing and distribution . accordingly , we may seek to fund our operations through public or private equity or debt financings or other sources , including strategic collaborations . we may , however , be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all . our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our current product candidates , or any additional product candidates , if developed . financial operations overview revenue to date , we have not generated any revenue from product sales or any other source and do not expect to generate any revenue from the sale of products for the foreseeable future . if our development efforts for reloxaliase , alln-346 or other product candidates that we may develop in the future are successful and result in marketing approval or collaboration or license agreements with third parties , we may generate revenue in the future from a combination of product sales or payments from such collaboration or license agreements . research and development expenses research and development expenses consist primarily of costs incurred for our research activities , including our drug discovery efforts and the development of our product candidates , which include : employee-related expenses , including salaries , benefits and stock-based compensation expense ; costs incurred under agreements with third parties , including cros , that conduct research and development , preclinical studies and clinical trials on our behalf ; costs related to production of preclinical and clinical materials , including fees paid to cmos ; consulting , licensing and professional fees related to research and development activities ; costs of purchasing laboratory supplies and non-capital equipment used in our research and development activities ; costs related to compliance with clinical regulatory requirements ; and facility costs and other allocated expenses , which include expenses for rent and maintenance of facilities , insurance , depreciation and other supplies . we expense research and development costs as incurred . we recognize costs for certain development activities , such as clinical trials , based on an evaluation of the progress to completion of specific tasks using data such as clinical site activations , patient enrollment , or information provided to us by our vendors and our clinical investigative sites . payments for these activities are based on the terms of the individual agreements , which may differ from the pattern of costs incurred , and may be reflected in our consolidated financial statements as prepaid or accrued research and development expenses . nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized , even when there is no alternative future use for the research and development . the capitalized amounts are expensed as the related goods are delivered or the services are performed . the following summarizes our most advanced current research and development programs : reloxaliase is our lead product candidate which we are developing for the treatment of enteric hyperoxaluria . a substantial majority of our research and development costs to date have been used to fund this program . 109 alln-346 is our second product candidate which we are developing for patients with hyperuricemia and ckd . we began incurring external research and development costs for this program in 2016. we typically use our employee and infrastructure resources across our development programs . we track outsourced development costs by product candidate or development program , but we do not allocate personnel costs and other internal costs to specific product candidates or development programs . the following table summarizes our research and development expenses by program ( in thousands ) : replace_table_token_0_th research and development activities are central to our business model . product candidates in later stages of clinical development generally have higher development costs than those in earlier stages , primarily due to the increased size and duration of later-stage clinical trials . since inception , we have incurred $ 91.8 million of external research and development costs for reloxaliase and $ 10.5 million of external research and development costs for alln-346 . we expect that our research and development costs will continue to increase for the foreseeable future as we initiate additional clinical trials of reloxaliase , scale our manufacturing processes and advance development and initiate additional clinical trials of alln-346 . the successful development of reloxaliase , alln-346 and other potential future product candidates is highly uncertain . accordingly , 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 development of these product candidates . we are also unable to predict when , if ever , we will generate revenue and material net cash inflows from the commercialization and sale of any of our product candidates for which we may obtain marketing approval . we may never succeed in achieving regulatory approval for any of our product candidates .

results of operations comparison of 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_3_th 113 research and development expenses research and development expense decreased by $ 16.9 million from $ 37.2 million for the year ended december 31 , 2019 to $ 20.4 million for the year ended december 31 , 2020. the following table summarizes our research and development expenses for the years ended december 31 , 2020 and 2019 ( in thousands ) : replace_table_token_4_th the $ 16.9 million decrease in research and development expense was primarily attributable to the following : our clinical development external costs decreased by $ 7.4 million from $ 14.7 million for the year ended december 31 , 2019 to $ 7.2 million for the year ended december 31 , 2020 : our urirox-1 costs decreased $ 4.5 million from $ 5.0 million for the year ended december 31 , 2019 to $ 0.5 million for the year ended december 31 , 2020. this study was completed in the fourth quarter of 2019 and we released top-line data in november 2019. the costs incurred during the year ended december 31 , 2020 were related to closeout activities ; our urirox-2 costs decreased $ 1.6 million from $ 7.0 million for the year ended december 31 , 2019 to $ 5.4 million for the year ended december 31 , 2020. during the first half of 2020 , we limited the opening of new trial sites for the ongoing urirox-2 trial while we assessed revisions to the study design and sought additional funds to support the development of reloxaliase . a significant portion of the proceeds from sales of our common stock during 2020 are being used to activate additional clinical trial sites and increase investment in the urirox-2 trial .

entities are required to record an impairment charge based on the excess of a story_separator_special_tag overview format of presentation management 's discussion and analysis of our financial condition and results of operations ( “ md & a ” ) should be read in conjunction with the consolidated financial statements and related footnotes contained in item 8 of this annual report on form 10-k. our primary business provides media and entertainment services via broadcast and digital delivery , including our networks businesses , through our audio segment . we also operate businesses that provide audio and media services through our audio and media services segment , including our full-service media representation business , katz media group ( “ katz media ” ) and our provider of scheduling and broadcast software and services , radio computing services ( `` rcs '' ) . following the separation , we ceased to operate the outdoor business , which prior to the separation was presented as our americas outdoor segment and our international outdoor segment . the historical results of the outdoor business have been reclassified as results from discontinued operations . on may 1 , 2019 , we consummated the separation and reorganization , resulting in a substantial reduction in our long-term indebtedness and corresponding cash interest expenses , and significantly extending the maturities of our outstanding indebtedness , as more fully described under “ liquidity and capital resources ” below . over the past ten years , we have transitioned our audio business from a single platform radio broadcast operator to a company with multiple platforms including podcasting , networks and live events . we have also invested in numerous technologies and businesses to increase the competitiveness of our inventory with our advertisers and our audience . we believe that our ability to generate free cash flow from these business initiatives coupled with the significant reduction in our indebtedness and our continued efforts to lower interest rates by refinancing our indebtedness will enable us to generate sufficient cash flows to operate our businesses and de-lever our balance sheet over time . certain prior period amounts have been reclassified to conform to the 2019 presentation . our business our audio strategy centers on delivering entertaining and informative content across multiple platforms , including broadcast , digital and live events . our primary source of revenue is derived from selling local and national advertising time on our radio stations , with contracts typically less than one year in duration . the programming formats of our radio stations are designed to reach audiences with targeted demographic characteristics . we work closely with our advertising and marketing partners to develop tools and leverage data to enable advertisers to effectively reach their desired audiences . we continue to expand the choices for listeners and we deliver our content and sell advertising across multiple distribution channels , including digitally via our iheartradio mobile application and other digital platforms which reach national , regional and local audiences . we also generate revenues from network syndication , our nationally recognized live events , our station websites and other miscellaneous transactions . management monitors average advertising rates and cost per mille , the cost of every 1,000 advertisement impressions ( “ cpm ” ) , which are principally based on the length of the spot and how many people in a targeted audience listen to our stations , as measured by an independent ratings service . in addition , our advertising rates are influenced by the time of day the advertisement airs , with morning and evening drive-time hours typically priced the highest . our price and yield information systems enable our station managers and sales teams to adjust commercial inventory and pricing based on local market demand , as well as to manage and monitor different commercial durations in order to provide more effective advertising for our customers at what we believe are optimal prices given market conditions . yield is measured by management in a variety of ways , including revenue earned divided by minutes of advertising sold . management looks at our audio operations ' overall revenue as well as the revenue from each type of advertising , including local advertising , which is sold predominately in a station 's local market , and national advertising , which is sold across multiple markets . local advertising is sold by each radio station 's sales staff while national advertising is sold by our national sales team . local advertising , which is our largest source of advertising revenue , and national advertising revenues are tracked separately because these revenue streams have different sales teams and respond differently to changes in the economic environment . we periodically review and refine our selling structures in all regions and markets in an effort to maximize the value of our offering to advertisers and , therefore , our revenue . 31 management also looks at audio 's revenue by region and market size . typically , larger markets can reach larger audiences with wider demographics than smaller markets . additionally , management reviews our share of audio advertising revenues in markets where such information is available , as well as our share of target demographics listening in an average quarter hour . this metric gauges how well our formats are attracting and retaining listeners . management also monitors revenue generated through our programmatic ad-buying platform , soundpoint , and our data analytics advertising product , smartaudio , to measure the success of our enhanced marketing optimization tools . we have made significant investments so we can provide the same ad-buying experience that once was only available from digital-only companies and enable our clients to better understand how our assets can successfully reach their target audiences . a portion of our audio segment 's expenses vary in connection with changes in revenue . these variable expenses primarily relate to costs in our sales department , such as commissions , and bad debt . story_separator_special_tag this increase was partially offset by lower employee benefit costs and lower amortization of retention bonuses related to the bankruptcy for which amortization ceased on the effective date . depreciation and amortization depreciation and amortization increased $ 90.5 million during 2019 compared to 2018 , primarily as a result of the application of fresh start accounting , which resulted in significantly higher values of our tangible and intangible long-lived assets . impairment charges we perform our annual impairment test on our goodwill , federal communication commission ( `` fcc '' ) licenses and other intangible assets as of july 1 of each year . no impairment charges were recorded in the third quarter of 2019 in connection with our annual impairment test . in addition , we test for impairment of intangible assets whenever events and circumstances indicate that such assets might be impaired . we recognized non-cash impairment charges of $ 91.4 million in the first quarter of 2019 on our indefinite-lived fcc licenses as a result of an increase in the weighted average cost of capital . during 2018 we recorded impairment charges of $ 33.2 million related primarily to several of our audio markets . see note 7 , property , plant and equipment , intangible assets and goodwill to the consolidated financial statements located in item 8 of this annual report on form 10-k for a further description of the impairment charges . other operating expense , net other operating expense , net of $ 8.2 million in 2019 was primarily related to net losses recognized on the disposal of assets . other operating expense , net of $ 9.3 million in 2018 was primarily related to net losses recognized on the disposal of assets . interest expense , net interest expense , net decreased $ 68.5 million during 2019 compared to 2018 as a result of the interest recognized in the period from january 1 , 2018 to the march 14 , 2018 petition date on our pre-petition debt exceeding the interest recognized in the period from may 2 , 2019 to december 31 , 2019 on our new debt issued in connection with our emergence from the chapter 11 cases . during the period from march 14 , 2018 to may 1 , 2019 , while the company was a debtor-in-possession , no interest expense was recognized on pre-petition debt . loss on investments , net during the year ended december 31 , 2019 , we recognized a loss of $ 31.2 million , primarily in connection with other-than-temporary declines in the values of certain of our investments . equity in loss of nonconsolidated affiliates during the year ended december 31 , 2019 we recognized a net loss of $ 0.3 million related to equity-method investments . during the year ended december 31 , 2018 , we recognized net earnings of $ 0.1 million related to equity-method investments . other expense , net other expense , net was $ 18.2 million for the year ended december 31 , 2019 , which related primarily to professional fees incurred in connection with the chapter 11 cases in the successor period . such expenses were included within reorganization items , net in the predecessor period while the company was a debtor-in-possession . other expense , net was $ 23.0 million for the year ended december 31 , 2018 , which related primarily to professional fees incurred directly in connection with the chapter 11 cases before the march 14 , 2018 petition date . such expenses were included within reorganization items , net in the post-petition period while the company was a debtor-in-possession . 36 reorganization items , net during 2019 , we recognized reorganization items , net of $ 9,461.8 million related to our emergence from the chapter 11 cases , which consisted primarily of the net gain from the consummation of the plan of reorganization and the related settlement of liabilities . in addition , reorganization items , net included professional fees recognized between the march 14 , 2018 petition date and the may 1 , 2019 effective date in connection with the chapter 11 cases . see note 3 to our consolidated financial statements included in item 8 of this annual report on form 10-k. income tax expense ( benefit ) the successor company 's effective tax rate for the period from may 2 , 2019 through december 31 , 2019 is 15.1 % . the effective tax rate for the successor period was primarily impacted by deferred tax benefits recorded for changes in estimates related to the carryforward tax attributes that are expected to survive the emergence from bankruptcy and deferred tax adjustments associated with the filing of the company 's 2018 tax returns during the fourth quarter of 2019. the primary change to the 2018 tax return filings , when compared to the provision estimates , was the company 's decision to elect out of the first-year bonus depreciation rules for the 2018 year for all qualified capital expenditures . this resulted in less tax depreciation deductions for tax purposes for the 2018 year and higher adjusted tax basis for our fixed assets as of the effective date . the predecessor company 's effective tax rate for the period from january 1 , 2019 through may 1 , 2019 is 0.4 % . the income tax expense for the period from january 1 , 2019 through may 1 , 2019 ( predecessor ) primarily consists of the income tax impacts from reorganization and fresh start adjustments , including adjustments to our valuation allowance .

executive summary the key developments in our business for the year ended december 31 , 2019 are summarized below : our plan of reorganization became effective may 1 , 2019 resulting in the separation of the outdoor business and emerging from the chapter 11 cases with a significantly de-leveraged capital structure . as a result of our emergence from the chapter 11 cases , we reduced our long-term debt from approximately $ 16 billion to approximately $ 5.8 billion . revenue of $ 3,683.5 million increased $ 72.2 million during 2019 compared to 2018 . operating income of $ 506.7 million was down from $ 690.1 million in 2018 , primarily as a result of higher depreciation and amortization due to the application of fresh start accounting and higher non-cash impairment charges . net income of $ 11.3 billion in 2019 including the $ 9.5 billion net gain from the reorganization and the $ 1.7 billion gain on the separation of ccoh . adjusted ebitda ( 1 ) of $ 1,000.7 million , was up 2.5 % year-over-year . cash flows provided by operating activities from continuing operations of $ 461.4 million decreased $ 279.8 million or 37.8 % compared to 2018 driven by higher cash interest payments as a result of the timing of our chapter 11 bankruptcy petition and emergence . free cash flow ( 2 ) of $ 349.2 million decreased $ 306.8 million or 46.8 % compared to 2018 driven by higher cash interest payments as a result of the timing of our chapter 11 bankruptcy petition and emergence . iheartcommunications issued $ 750.0 million of new 5.25 % senior secured notes due 2027. proceeds from the new notes , together with cash on hand , were used to prepay at par $ 740.0 million of borrowings outstanding under our $ 3.5 billion aggregate principal amount of senior term loans ( the `` term loan facility '' ) .

our lead drug candidates include rindopepimut ( cdx-110 ) , a targeted immunotherapeutic in a pivotal phase 3 study for the treatment of front-line glioblastoma and a phase 2 study for the treatment of recurrent glioblastoma and cdx-011 , an antibody-drug conjugate which recently completed a randomized phase 2b study for the treatment of advanced breast cancer . in addition , we have a number of earlier stage candidates in clinical development , including cdx-1135 , a molecule that inhibits a part of the immune system called the complement system , cdx-1127 , a therapeutic fully human monoclonal antibody for cancer indications , cdx-301 , an immune cell mobilizing agent and dendritic cell growth factor and cdx-1401 , an apc targeting technology™ program for cancer indications . our drug candidates address market opportunities for which we believe current therapies are inadequate or non-existent . we are building a fully integrated , commercial-stage biopharmaceutical company that develops important therapies for patients with unmet medical needs . our program assets provide us with the strategic options to either retain full economic rights to our innovative therapies or seek favorable economic terms through advantageous commercial partnerships . this approach allows us to maximize the overall value of our technology and product portfolio while best ensuring the expeditious development of each individual product . the following table includes the programs that we currently believe are significant to our business : replace_table_token_12_th the expenditures that will be necessary to execute our business plan are subject to numerous uncertainties . completion of clinical trials may take several years or more , and the length of time generally varies substantially according to the type , complexity , novelty and intended use of a product candidate . it is not unusual for the clinical development of these types of product candidates to each take five years or more , and for total development costs to exceed $ 100 million for each product 40 candidate . our estimates that clinical trials of the type we generally conduct are typically completed over the following timelines : clinical phase estimated completion period phase 1 1 - 2 years phase 2 1 - 5 years phase 3 1 - 5 years the duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during the clinical trial protocol , including , among others , the following : the number of patients that ultimately participate in the trial ; the duration of patient follow-up that seems appropriate in view of results ; the number of clinical sites included in the trials ; the length of time required to enroll suitable patient subjects ; and the efficacy and safety profile of the product candidate . we test potential product candidates in numerous preclinical studies for safety , toxicology and immunogenicity . we may then conduct multiple clinical trials for each product candidate . as we obtain results from trials , we may elect to discontinue or delay clinical trials for certain product candidates in order to focus our resources on more promising product candidates . an element of our business strategy is to pursue the research and development of a broad portfolio of product candidates . this is intended to allow us to diversify the risks associated with our research and development expenditures . as a result , we believe our future capital requirements and our future financial success are not substantially dependent on any one product candidate . to the extent we are unable to maintain a broad range of product candidates , our dependence on the success of one or a few product candidates increases . regulatory approval is required before we can market our product candidates as therapeutic products . in order to proceed to subsequent clinical trial stages and to ultimately achieve regulatory approval , the regulatory agency must conclude that our clinical data is safe and effective . historically , the results from preclinical testing and early clinical trials ( through phase 2 ) have often not been predictive of results obtained in later clinical trials . a number of new drugs and biologics have shown promising results in early clinical trials , but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals . furthermore , our business strategy includes the option of entering into collaborative arrangements with third parties to complete the development and commercialization of our product candidates . in the event that third parties take over the clinical trial process for one of our product candidates , the estimated completion date would largely be under control of that third party rather than us . we can not forecast with any degree of certainty which proprietary products , if any , will be subject to future collaborative arrangements , in whole or in part , and how such arrangements would affect our development plan or capital requirements . our programs may also benefit from subsidies , grants , contracts or government or agency-sponsored studies that could reduce our development costs . as a result of the uncertainties discussed above , among others , it is difficult to accurately estimate the duration and completion costs of our research and development projects or when , if ever , and to what extent we will receive cash inflows from the commercialization and sale of a product . our inability to complete our research and development projects in a timely manner or our failure to enter into collaborative agreements , when appropriate , could significantly increase our capital requirements and 41 could adversely impact our liquidity . these uncertainties could force us to seek additional , external sources of financing from time to time in order to continue with our business strategy . our inability to raise additional capital , or to do so on terms reasonably acceptable to us , would jeopardize the future success of our business . during the past five years through december 31 , 2012 , we incurred an aggregate of $ 156.3 million in research and development expenses . story_separator_special_tag klh is a component of rindopepimut and was selected due to its ability to generate a similar injection site reaction to that observed with rindopepimut . act iv will enroll up to 440 patients at over 150 centers worldwide to recruit approximately 374 patients with gtr to be included in the primary analysis . we expect to complete patient accrual by the end of 2013 and anticipate receiving data 18 to 24 months after completing accrual . we anticipate act iv to cost over $ 60 million during its duration . in december 2011 , we also initiated react , a phase 2 study of rindopepimut in combination with avastin® in patients with recurrent egfrviii-positive gb . react will enroll approximately 95 patients in a first or second relapse of gb following receipt of standard therapy and will be conducted at approximately 20 sites across the united states . approximately 70 patients who have yet to receive avastin will be randomized to receive either rindopepimut and avastin or a control injection of klh and avastin in a blinded fashion . another 25 patients who are refractory to avastin having received avastin in either the frontline or recurrent setting with subsequent progression will receive rindopepimut plus avastin in a single treatment arm . we expect data from this study to be available in the second half of 2013. in addition , researchers at stanford university are conducting an investigator sponsored , pilot trial of rindopepimut in pediatric patients with pontine glioma . patient enrollment is ongoing for this trial . glembatumumab vedotin ( cdx-011 ) cdx-011 is an antibody-drug conjugate , or adc , that consists of a fully-human monoclonal antibody , cr011 , linked to a potent cell-killing drug , monomethyl-auristatin e , or mmae . the cr011 antibody specifically targets glycoprotein nmb , referred to as gpnmb , that is expressed in a variety of human cancers including breast cancer and melanoma . the adc technology , comprised of mmae and a stable linker system for attaching it to cr011 , was licensed from seattle genetics , inc. the adc is designed to be stable in the bloodstream . following intravenous administration , cdx-011 targets and binds to gpnmb and upon internalization into the targeted cell , cdx-011 is designed to release mmae from cr011 to produce a cell-killing effect . the fda has granted fast track designation to cdx-011 for the treatment of advanced , refractory/resistant gpnmb-expressing breast cancer . treatment of breast cancer : in june 2008 , an open-label , multi-center phase 1/2 study was initiated of cdx-011 administered intravenously once every three weeks to patients with locally advanced or metastatic breast cancer who had received prior therapy ( median of seven prior regimens ) . the study began with a bridging phase to confirm the maximum tolerated dose , or mtd , and then expanded into a phase 2 open-label , multi-center study . the study confirmed the safety of cdx-011 at the pre-defined maximum dose level ( 1.88 mg/kg ) in 6 patients . an additional 28 patients were enrolled in an expanded phase 2 cohort ( for a total of 34 treated patients at 1.88 mg/kg , the phase 2 dose ) to evaluate the pfs rate at 12 weeks . as previously seen in melanoma patients , the 1.88 mg/kg dose was well tolerated in this patient population with the most common adverse events of rash , alopecia , and fatigue . the primary activity endpoint , which called 44 for at least 5 of 25 ( 20 % ) patients in the phase 2 study portion to be progression-free at 12 weeks , was met as 9 of 26 ( 35 % ) evaluable patients were progression-free at 12 weeks . for all patients treated at the maximum dose level , tumor shrinkage was seen in 62 % ( 16/26 ) and median pfs was 9.1 weeks . a subset of 10 patients had `` triple negative disease , '' a more aggressive breast cancer subtype that carries a high risk of relapse and reduced survival as well as limited therapeutic options due to lack of over-expression of her2/neu , estrogen and progesterone receptors . in these patients , 78 % ( 7/9 ) had some tumor shrinkage , 12-week pfs rate was 70 % ( 7/10 ) , and median pfs was 17.9 weeks . tumor samples from a subset of patients across all dose groups were analyzed for gpnmb expression . the tumor samples from most patients showed evidence of stromal and or tumor cell expression of gpnmb . in december 2011 , we completed enrollment of emerge , a randomized , multi-center phase 2b study of cdx-011 in 122 patients with heavily pre-treated , advanced , gpnmb positive breast cancer . patients were randomized ( 2:1 ) to receive either cdx-011 or single-agent investigator 's choice , or ic , chemotherapy . patients randomized to receive ic were allowed to cross over to receive cdx-011 following disease progression . activity endpoints include response rate , pfs and os . in december 2012 , we announced final results , as shown below , from the emerge study which suggested that cdx-011 induces significant response rates compared to currently available therapies in patient subsets with advanced , refractory breast cancers with gpnmb over-expression ( expression in greater than 25 % of tumor cells ) and in patients with triple negative breast cancer . the overall survival , or os , and progression free survival , or pfs , of patients treated with cdx-011 was also observed to be greatest in patients with triple negative breast cancer who also over-express gpnmb and all patients with gpnmb over-expression . emerge : overall response rate and disease control data replace_table_token_16_th responses per recist 1.1 ; ic = investigator 's choice ; cdx-011 arm includes 15 patients who crossed over to receive cdx-011 treatment after progression on ic .

results of operations year ended december 31 , 2012 compared with year ended december 31 , 2011 replace_table_token_18_th net loss the $ 14.3 million increase in net loss for the year ended december 31 , 2012 compared to the year ended december 31 , 2011 was primarily the result of an increase in research and development and general and administrative expenses , partially offset by a decrease in amortization expense on acquired intangible assets . revenue the $ 0.2 million increase in contracts and grants revenue for the year ended december 31 , 2012 compared to the year ended december 31 , 2011 was due to an apc targeting technology-based hiv vaccine being funded through a small business innovation research , or sbir , grant in collaboration with rockefeller university . the $ 1.7 million increase in product royalty revenue for the year ended december 31 , 2012 compared to the year ended december 31 , 2011 was related to our retained interests in rotarix net royalties which were not sold to prf and which is equal to the amount payable to cch and recognized in royalty expense by us . we expect that royalty revenue related to the glaxo agreement will end during the year ending december 31 , 2013. in december 2012 , a u.s. patent for our rotavirus strain that we licensed to glaxo expired . the glaxo agreement terminates automatically upon the expiration , lapse or invalidation of the last relevant patent right ( patent or patent application ) covered by the glaxo agreement . the only remaining relevant patent right is a patent application in mexico with a projected final expiry date in may 2013 which is under appeal . the prf agreement provided for a normal expiry of the prf agreement on december 12 , 2012 except that the prf agreement provides for an exclusive 120-day right of negotiation for extension in certain circumstances .

in october 2018 , the fasb issued asu 2018-17 , consolidation ( topic 810 ) : targeted improvements to related party guidance for variable interest entities ( `` vie `` ) . the amendments in this asu for determining whether a decision-making fee is a variable interest require reporting entities to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety ( as currently required by gaap ) . these amendments will create alignment between determining whether a decision-making fee is a variable interest and determining whether a reporting entity within a related party group is the primary beneficiary of a vie . the standard is effective for annual periods , including interim periods within those annual periods , beginning after december 15 , 2019 for public companies . early adoption is permitted . the company adopted this story_separator_special_tag introduction the following discussion should be read in conjunction with the other sections of this report , including the financial statements and supplementary data , contained in part ii , item 8 of this annual report on form 10-k. in addition to historical information , the following discussion contains forward-looking statements that involve risks , uncertainties and assumptions that could cause actual results to differ materially from management 's expectations . factors that could cause such differences are discussed in part i , “ cautionary note regarding forward-looking statements ” and part i , item 1a. “ risk factors. ” we assume no obligation to update any of these forward-looking statements . overview we earn revenue by deploying professionals to provide services to our clients , including project management , construction management facilities management and related consulting . these services are primarily delivered on a “ cost plus ” or “ time and materials ” ( `` t & m '' ) basis in which we bill negotiated hourly or monthly rates or a negotiated multiple of the direct cost of these professionals , plus actual out-of-pocket expenses . our direct expenses are the actual cost of these professionals , including most payroll and benefits , except for paid time-off , which is recorded in selling , general and administrative expenses ( `` sg & a '' ) . we also provide services under fixed price contracts and t & m contracts with a cap . 19 our revenue consists of two components : cfr and reimbursable expenses . the professionals we deploy are occasionally subcontractors . we generally bill the actual cost of these subcontractors and recognize this cost as both revenue ( reimbursable expenses ) and direct expense . cfr refers to our revenue excluding amounts paid or due to subcontractors . we believe cfr is an important measure because it represents the revenue on which we earn gross profit , whereas total revenue includes the costs for subcontractors on which we generally pass through and earn minimal or no gross profit . we compete for business based on a variety of factors such as technical capability , global resources , price , reputation and past experience , including client requirements for substantial experience in similar projects . we have developed significant long-standing relationships , which bring us repeat business and would be very difficult to replicate . we believe we have an excellent reputation for attracting and retaining professionals . in addition , we believe there are high barriers to entry for new competitors especially in the project management market . sg & a expenses consist primarily of personnel costs that are not billable and corporate or regional costs such as sales , business development , proposals , operations , finance , human resources , legal , marketing , management and administration . the company operates in a single reporting segment , known as the project management group which provides fee-based project , construction and facilities management services to our clients . our experienced professionals are capable of managing all phases of the construction process from concept through completion , including cost and budget controls , scheduling , estimating , expediting , inspection , contract administration and management of contractors , subcontractors and suppliers . impact of covid-19 on our business in december 2019 , covid-19 was identified in wuhan , china . in march 2020 , the world health organization declared covid-19 a global pandemic as a result of the further spread of the virus into all regions of the world , including those regions where our primary operations occur . we instituted a work-from-home policy for all offices and employees globally in late march 2020 , except for field-based employees who normally work on-site at our client 's facilities . these field-based employees are complying with our respective clients ' policies . the majority of our field employees are located in the regions where they deliver their services , so travel restrictions enacted by various government authorities did not impair their ability to continue to perform services for our clients . employees have been returning to their assigned offices , on a modified basis , as their city , state and country reopens , consistent with the applicable requirements of local law . most of the projects to which we provide services have been classified as essential services by the relevant governmental authority and as such have continued despite restrictions on the operation of `` non-essential '' businesses by certain governmental authorities . the majority of our billable employees have continued to provide billable services to our clients , either on-site or remotely at the same or at a slightly reduced volume as in effect prior to the spread of covid-19 . we estimate that covid-19 resulted in loss of cfr of approximately $ 25,000 for the twelve months ended december 31 , 2020 , inclusive of delayed projects awards and cancellations brought on by the virus . nearly all our employees had company laptop computers and the ability to work remotely prior to the institution of our work-at-home policy . story_separator_special_tag we only include consideration on contract renegotiations to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved . if we continue to work and are uncertain that a contract change order will be processed , the variable consideration will be constrained until it is probable that the contract will be renegotiated . we are only entitled to consideration for the work we have performed , and the cap value is not a guaranteed contract value . 21 fixed price contracts under fixed price contracts , our clients pay an agreed amount negotiated in advance for a specified scope of work . we are guaranteed to receive the consideration to the extent that we deliver under the contract . we recognize revenue over a period of time on fixed price contracts using the input method based upon direct costs incurred to date , which are compared to total projected direct costs . costs are the most relevant measure to determine the transfer of the service to the client . we assess contracts quarterly and will recognize any expected future loss before actually incurring the loss . when we expect to reach the total consideration under the contract , we begin to negotiate a change order . change orders and claims change orders are modifications of an original contract that effectively change the provisions of the contract without adding new provisions . either we or our client may initiate change orders . they may include changes in specifications or design , manner of performance , facilities , equipment , materials , sites and period of completion of the work . management evaluates when a change order is probable based upon its experience in negotiating change orders , the client 's written approval of such changes or separate documentation of change order costs that are identifiable . change orders may take time to be formally documented and terms of such change orders are agreed with the client before the work is performed . sometimes circumstances require that work progresses before an agreement is reached with the client . if we are having difficulties in renegotiating the change order , we will stop work if possible , record all costs incurred to date , and determine , on a project by project basis , the appropriate final revenue recognition . claims are amounts in excess of the agreed contract price that we seek to collect from clients or others for client-caused delays , errors in specifications and designs , contract terminations , change orders that are either in dispute or are unapproved as to both scope and price , or other causes of unanticipated additional contract costs . costs related to change orders and claims are recognized when they are incurred . allowance for doubtful accounts we make ongoing estimates relating to the collectability of our accounts receivable and maintain an allowance for estimated losses resulting from the inability of our clients to make required payments . estimates used in determining accounts receivable allowances are based on our evaluation of specific client accounts and contracts involved and the financial condition of our clients . the factors we consider in our evaluations include , but are not limited to , client type ( u.s. federal and other national governments , state and local governments or private sector ) , historical contract performance , historical collection and delinquency trends , client credit worthiness , and general economic and political conditions . at december 31 , 2020 and 2019 , the allowance for doubtful accounts was $ 53,450 and $ 59,131 , respectively . the allowance for doubtful accounts balance included approximately $ 33,242 and $ 32,864 related to our receivables in libya at december 31 , 2020 and 2019 , respectively . contingencies estimates are inherent in the assessment of our exposure to insurance claims that fall below policy deductibles and to litigation and other legal claims and contingencies , as well as in determining our liabilities for incurred but not reported insurance claims . significant judgments by us and reliance on third-party experts are utilized in determining probable and or reasonably estimable amounts to be recorded or disclosed in our financial statements . the results of any changes in accounting estimates are reflected in the financial statements of the period in which the changes are determined . we do not believe that material changes to these estimates are reasonably likely to occur . 22 2020 business overview story_separator_special_tag roman ' , sans-serif ; font-size:10pt ; font-weight:700 ; line-height:120 % '' > foreign currency exchange loss foreign currency exchange losses were approximately $ 1,800 greater for the twelve months ended december 31 , 2020 compared to the same period in 2019. the currency exchange losses were primarily caused by an 18 % weakening of the brazilian real against the euro prior to declaring bankruptcy of our brazilian subsidiary and a 12 % strengthening of the egyptian pound against the euro in 2019 compared to a 4 % weakening during the same period in 2020. interest and related financing fees , net interest and related financing fees , net , include interest expense of $ 5,357 , net of $ 133 in interest income , and interest expense of $ 6,082 , net of $ 287 in interest income for the years ended december 31 , 2020 and 2019 , respectively , which decreased as a result of higher weighted-average interest rates billed to us on our secured credit facilities with société générale throughout the year ended december 31 , 2019. income taxes the effective income tax rates for 2020 , and 2019 were ( 1636.2 ) % and ( 8.4 ) % respectively .

consolidated results ( in thousands ) replace_table_token_5_th results of operations year ended december 31 , 2020 compared to year ended december 31 , 2019 total revenue : replace_table_token_6_th consulting fee revenue : replace_table_token_7_th total revenue decreased approximately $ 7,913 for the twelve months ended december 31 , 2020 when compared to the same time period in the prior year . cfr was $ 296,615 and $ 308,620 of the total revenue for the twelve months ended december 31 , 2020 and 2019 , respectively , which was approximately 80.5 % and 82.0 % of total revenues , respectively . the decrease in total revenue and the corresponding decrease in cfr for the twelve months ended december 31 , 2020 compared to the same period in 2019 was primarily due to delayed project starts and project suspensions due to the covid-19 pandemic . 23 gross profit : replace_table_token_8_th the change in gross margin as a percentage of cfr for the twelve months ended december 31 , 2020 compared to the same period in 2019 was primarily due to the following : americas : the increase in gross margin as a percentage of cfr in the region is primarily due to a $ 1,700 decrease in direct benefit expenses as a result of the suspension of the employers 401 ( k ) match during the second half of 2020. this match has been reinstated for 2021. middle east/asia/pacific : the decrease in gross margin as a percentage of cfr in the region is primarily due to work on a large project in qatar which started during the second half of 2019 with lower than average margin , an increase in expense related to the liquidation of a bond and a reduction in the revenue of an ongoing project related to updated cost projections . a settlement on a project in kuwait , which terminated during 2020 , also contributed to the decrease in gross margin .

the company 's products are sold globally , primarily in the replacement tire market to independent tire dealers , wholesale distributors , regional and national retail tire chains , large retail chains that sell tires as well as other automotive products , mass merchandisers and digital channels . the company faces both general industry and company-specific challenges . these include volatile raw material costs , increasing product complexity and pressure from competitors who , in some cases , are larger companies with greater financial resources . to address these challenges and position the company for future success , the company continues to execute towards strategic imperatives , namely building a sustainable cost competitive position , driving top-line profitable growth and building organizational capabilities and enablers to support strategic goals . the company has operations in what are considered lower-cost countries . this includes the cooper kunshan tire manufacturing operation , as well as a joint venture tbr manufacturing operation , in the prc , the coocsa manufacturing facility in mexico and a manufacturing facility in serbia . on january 24 , 2020 , the company acquired the remaining 42 percent noncontrolling ownership interest in its mexican joint venture manufacturing operations , making it a wholly-owned subsidiary . products from these operations provide a lower-cost source of tires for global markets . through a variety of other projects , the company also has improved the competitiveness of its manufacturing operations in the united states . on april 5 , 2019 , cooper vietnam and sailun vietnam established a joint venture in vietnam , actr , which began commercially producing tbr tires in 2020. on january 17 , 2019 , cooper tire europe committed to a plan to cease substantially all light vehicle tire production at its melksham , u.k facility . the phasing out of light vehicle tire production was substantially completed in the third quarter of 2019. approximately 300 roles were eliminated at the site . cooper tire europe now obtains light vehicle tires to meet customer needs from other production sites within the company 's global production network . approximately 400 roles remain in melksham to support the functions that continue there , including motorsports and motorcycle tire production , the materials business , cooper tire europe headquarters , sales and marketing , and the europe technical center . the following discussion of financial condition and results of operations should be read together with “ selected financial data , ” the company 's consolidated financial statements and the notes to those statements and other financial information included elsewhere in this report . this management 's discussion and analysis of financial condition and results of operations ( “ md & a ” ) presents information related to the consolidated results of the operations of the company , a discussion of past results of the company 's segments , future outlook for the company and information concerning the liquidity , capital resources and critical accounting policies of the company . the company 's future results may differ materially from those indicated in the forward-looking statements , including for the reasons noted in the risk factors in item 1a . the md & a generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. discussion of 2018 items and the results of december 31 , 2019 as compared to december 31 , 2018 can be found in item 7 , management 's discussion and analysis of financial condition and results of operations , included in the company 's annual report on form 10-k for the year ended december 31 , 2019 as filed with the sec . the merger on february 22 , 2021 , the company entered into the merger agreement , pursuant to which , subject to the satisfaction or ( to the extent permissible ) waiver of the conditions set forth therein , goodyear will acquire the company by way of the merger of merger sub with and into the company , with the company surviving such merger as a wholly owned subsidiary of goodyear . under the terms of the merger agreement , at the effective time of the merger , the company 's stockholders will be entitled to receive $ 41.75 per share in cash and a fixed exchange ratio of 0.907 shares of goodyear common stock per share of the company 's common stock they own at the effective time . upon completion of the proposed merger , it is expected that the company 's stockholders will own approximately 16 percent and goodyear stockholders will own approximately 84 percent of the combined company on a fully diluted basis . -27- the completion of the merger is subject to the receipt of antitrust clearance in the united states . under the hart-scott-rodino antitrust improvements act of 1976 , as amended ( “ hsr act ” ) , and the rules promulgated thereunder , the merger may not be completed until the company and goodyear have each filed notification and report forms with the united states federal trade commission ( “ ftc ” ) , and the antitrust division of the united states department of justice ( “ doj ” ) , and the applicable waiting period ( or any extension thereof ) has expired or been terminated . the completion of the merger is also subject to a number of foreign regulatory filings that will need to be completed . the company expects to complete the merger in the second half of 2021 , subject to the satisfaction of customary closing conditions , including receipt of required regulatory approvals and the approval of the company 's stockholders . consolidated statements of income replace_table_token_4_th covid-19 update with the global outbreak of covid-19 and the declaration of a pandemic by the world health organization on march 11 , 2020 , the company temporarily shut down its china , u.s. , europe , and mexico manufacturing plants for various periods of time through the first half of 2020. by the end of the second quarter , each of the company 's facilities were reopened . story_separator_special_tag substantially all u.s. inventories have been valued using the lifo method of inventory costing , which accelerates the impact to cost of goods sold from changes to raw material prices . the company strives to assure raw material and energy supply and to obtain the most favorable pricing possible . for natural rubber , natural gas and certain principal materials , procurement is managed through a combination of buying forward of production requirements and utilizing the spot market . for other principal materials , procurement arrangements include supply agreements that may contain formula-based pricing based on commodity indices , multi-year agreements or spot purchase contracts . while the company uses these arrangements to satisfy normal manufacturing demands , the pricing volatility in these commodities contributes to the difficulty in managing the costs of raw materials . -29- as part of its regular review of product liability , the company monitors trends that may affect its ultimate liability and analyzes developments and variables likely to affect pending and anticipated claims against the company and the reserves for such claims . the company utilizes claims experience , as well as trends and developments in the litigation climate , in estimating its required accrual . based on the company 's review completed in 2020 , the company recorded a benefit of $ 49 million . this benefit reflects a reduction in the company 's estimate of the volume of anticipated product liability claims , as well as adjustments to existing reserves based upon settled claims history . in 2019 , a similar review was performed , and the company recognized a benefit of $ 4 million . aside from the regular review , product liability expense related to normal claim activity increased $ 1 million in 2020 compared to 2019 , while insurance premium costs increased $ 1 million in 2020 compared to 2019. legal costs related to product liability claims decreased $ 1 million in 2020 compared to 2019. additional information related to the company 's accounting for product liability costs appears in the notes to the consolidated financial statements . selling , general , and administrative expenses were $ 245 million in 2020 ( 9.7 percent of net sales ) and $ 250 million in 2019 ( 9.1 percent of net sales ) . this decrease in selling , general and administrative expenses was driven primarily by reduced advertising and promotional spending and lower administrative costs as a result of actions implemented in response to covid-19 , partially offset by an increase in mark to market costs of stock-based liabilities and higher incentive compensation costs . during 2020 , the company recorded $ 11 million of restructuring expense in the americas tire operations segment related to the company 's acquisition of the remaining noncontrolling ownership interest in coocsa , and $ 1 million related to a u.s. reduction in force . in 2019 , the company recorded restructuring expense associated with the cessation of substantially all light vehicle tire production at the melksham facility of $ 9 million . additional information related to the company 's accounting for restructuring costs appears in the notes to the consolidated financial statements . interest expense was $ 23 million in 2020 as compared to $ 31 million in 2019. the decreased expense is the result of a lower interest rate on the company 's term loan a outstanding in 2020 , which replaced higher interest rate unsecured notes in december 2019. additional borrowings on the company 's revolving credit facility and accounts receivable securitization for a portion of 2020 partially offset this decrease . interest income of $ 4 million in 2020 was a decrease from $ 9 million during 2019. the decrease is due to interest rate declines in 2020 compared to 2019 , which offset the impact of the company 's higher cash balance in 2020. for the year ended 2020 , other pension and postretirement benefit expense was $ 25 million as compared to $ 42 million in 2019. this decrease is primarily the result of the company 's improved funded status at december 31 , 2019 , as a result of favorable returns on plan assets in 2019 , which improved the company 's funding position and lowered the actuarially determined expense for 2020 as compared to 2019. the company incurred non-cash settlement charges of $ 4 million in both 2020 and 2019 as a result of the volume of the lump-sum distributions out of cooper tire europe 's u.k. pension plan in 2020 and 2019 , respectively . other non-operating income improved $ 6 million in 2020 as compared to 2019. this improvement was primarily due to equity earnings from the company 's investment in actr , which began commercially producing tires in 2020. for the year ended december 31 , 2020 , the company recorded income tax expense of $ 47 million ( effective tax rate of 24.6 percent ) compared to $ 11 million ( effective tax rate of 10.4 percent ) for 2019. the 2020 effective tax rate is driven primarily by the mix of earnings in international jurisdictions with differing tax rates and earnings in the u.s .. the 2019 effective tax rate included the benefit of $ 19 million from planning actions involving the company 's european tax structure which were executed in the fourth quarter of 2019. the effects of inflation did not have a material effect on the results of operations of the company in 2020. story_separator_special_tag is the combination of the europe and asia operating segments . the european operations include manufacturing operations in the u.k. and serbia . the u.k. entity primarily manufactures and markets motorcycle and racing tires and tire retread material for domestic and global markets . the serbian entity manufactures passenger car and light truck tires primarily for the european markets and for export to the north american segment . the asian operations are located in the prc and vietnam .

segment operating results the company has four segments under asc 280 : north america , composed of the company 's operations in the u.s. and canada ; latin america , composed of the company 's operations in mexico , central america and south america ; europe ; and asia . north america and latin america meet the criteria for aggregation in accordance with asc 280 , as they are similar in their production and distribution processes and exhibit similar economic characteristics . the aggregated north america and latin america segments are presented as “ americas tire operations ” in the segment disclosure . both the europe and asia segments have been determined to be individually immaterial , as they do not meet the quantitative requirements for segment disclosure under asc 280. in accordance with asc 280 , information about operating segments that are not reportable shall be combined and disclosed in an all other category separate from other reconciling items . as a result , these -30- two segments have been combined in the segment operating results discussion . the results of the combined europe and asia segments are presented as “ international tire operations ” in the segment disclosure . americas tire operations segment replace_table_token_5_th the source of this information is the united states tire manufactures association ( `` ustma '' ) and internal sources . overview the americas tire operations segment manufactures and markets passenger car and light truck tires , primarily for sale in the u.s. replacement market . the segment also has a manufacturing operation in mexico , coocsa , which supplies passenger car and light truck tires to the mexican , north american , central american and south american markets . on january 24 , 2020 , the company acquired the remaining noncontrolling ownership interest in coocsa , making coocsa a wholly-owned subsidiary . the segment also markets and distributes racing , tbr and motorcycle tires .

the following table summarizes our real estate investment portfolio as of december 31 , 2013 ( dollar amounts in thousands ) : replace_table_token_12_th ( 1 ) includes interest income from mortgage loans . ( 2 ) includes rental income and interest income from mortgage loans . ( 3 ) we have investments in 30 states leased or mortgaged to 40 different operators . ( 4 ) see item 2. properties for discussion of bed/unit count . ( 5 ) includes a mortgage and construction loan secured by a currently operating skilled nursing property and parcel of land upon which a 106-bed replacement property is being constructed . ( 6 ) includes three mc developments with a total of 168 units , a combination alf and mc development with 81 units , and a snf development with 143 beds . ( 7 ) includes two school properties and four parcels of land held-for-use . as of december 31 , 2013 we had $ 884.4 million in carrying value of net real estate investment , consisting of $ 718.9 million or 81.3 % invested in owned and leased properties and $ 165.4 million or 18.7 % invested in mortgage loans secured by first mortgages . for the year ended december 31 , 2013 , rental income and interest income from mortgage loans represented 93.5 % and 6.0 % , respectively , of total gross revenues . in most instances , our lease structure contains fixed or estimable annual rental escalations , which are generally recognized on a straight-line basis over the minimum lease period . certain leases have annual rental escalations that are contingent upon changes in the consumer price index and or changes in the gross operating revenues of the property . this revenue is not recognized until the appropriate contingencies have been resolved . for the years ended december 31 , 2013 , 2012 and 2011 we recorded $ 4.0 million , $ 3.3 million and $ 3.7 million , respectively , in straight-line rental income . also during 2013 , 2012 and 2011 we recorded $ 37,000 , $ 38,000 and $ 46,000 , respectively , of straight-line rent receivable reserve . during the fourth quarter of 2013 , we wrote-off a $ 0.9 million straight-line rent receivable balance related to the transition of four assisted living properties to a new lessee . for the remaining leases in place at december 31 , 2013 , assuming no modification or replacement of existing leases and no new leased investments are added to our portfolio , we currently expect that straight-line rental income will decrease from $ 3.9 million in 2013 to $ 2.2 million for projected annual 2014 and , conversely , our cash 33 rental income is projected to increase from $ 96.0 million in 2013 to $ 97.5 million for projected annual 2014. during the year ended december 31 , 2013 , we received $ 96.0 million of cash rental revenue and recorded $ 0.7 million of lease inducement costs . at december 31 , 2013 and 2012 , the straight-line rent receivable balance , net of reserves , on the consolidated balance sheet was $ 29.8 million and $ 26.8 million , respectively . many of our existing leases contain renewal options that could , in the future , renew above or below current rent rates . for the year ended december 31 , 2013 , we renewed five leases at rates similar to existing rates by either i ) amending the lease to extend the term and assign the lease to a new operator , ii ) combining individual leases into a master lease with no change to the term , iii ) combing an individual lease into a master lease and extending the term , iv ) amending a lease to extend the term or v ) combining two master leases into one master lease with no change to the term . our primary objectives are to create , sustain and enhance stockholder equity value and provide current income for distribution to stockholders through real estate investments in senior housing and long term care properties managed by experienced operators . to meet these objectives , we attempt to invest in properties that provide opportunity for additional value and current returns to our stockholders and diversify our investment portfolio by geographic location , operator , property type and form of investment . we opportunistically consider investments in health care facilities in related businesses where the business model is similar to our existing model and the opportunity provides an attractive expected return . consistent with this strategy , we pursue , from time to time , opportunities for potential acquisitions and investments , with due diligence and negotiations often at different stages of development at any particular time . with respect to skilled nursing properties , we attempt to invest in properties that do not have to rely on a high percentage of private-pay patients . we prefer to invest in a property that has significant market presence in its community and where state certificate of need and or licensing procedures limit the entry of competing properties . for assisted living and independent living investments we have attempted to diversify our portfolio both geographically and across product levels . memory care facilities offer specialized options for seniors with alzheimer 's disease and other forms of dementia . purpose built , free-standing memory care facilities offer an attractive alternative for private-pay residents affected by memory loss in comparison to other accommodations that typically have been provided within a secured unit of an assisted living or skilled nursing facility . these facilities offer dedicated care and specialized programming for various conditions relating to memory loss in a secured environment that is typically smaller in scale and more residential in nature than traditional assisted living facilities . residents require a higher level of care and more assistance with activities of daily living than in assisted living facilities . therefore , these facilities have staff available 24 hours a day to respond to the unique needs of their residents . story_separator_special_tag during 2013 , we funded a $ 124.4 million mortgage loan with a third-party operator , prestige healthcare , secured by 15 properties with a total of 2,092 skilled nursing beds in michigan . the loan is for a term of 30 years and bears interest at 9.53 % for five years , escalating annually thereafter by 2.25 % . payments are interest-only for three years , after which the borrower will make interest payments along with annual principal payments of $ 1.0 million . the loan agreement provides for additional forward commitments of $ 12.0 million for capital improvements at 9.41 % for the first twelve months . the loan agreement also provides , under certain conditions and based on certain operating metrics and valuation thresholds achieved and sustained within the first twelve years of the term , for additional loan proceeds of up to $ 40.0 million with such proceeds limited to $ 10.0 million per twelve months . the borrower has a one-time option between the third and twelfth years to prepay up to 50 % of the then outstanding loan balance without penalty . exclusively for the purposes of this option , the properties collateralizing the loan have been separated by us into two pools of assets . if and when the option is exercised , we will identify which of the two pools we will release for prepayment and removal from portfolio of properties securing the loan . if the prepayment option is exercised and timely concluded , the borrower forfeits its opportunity to access any additional loan proceeds . additionally , under certain circumstances , including a change in regulatory environment , we have the option to purchase the properties . senior unsecured notes . during 2013 , we sold $ 70.0 million aggregate principal amount of 3.99 % senior unsecured notes due november 20 , 2021 to affiliates and managed accounts of prudential investment management , inc. ( individually and collectively , `` prudential '' ) . the notes bear interest at an annual fixed rate of 3.99 % and mature in 8 years with interest-only payments in the first two years and annual principal amortization thereafter . we used a portion of the proceeds to pay down our unsecured revolving line of credit . equity . during 2013 , we sold 4,025,000 shares of common stock at a price of $ 44.50 per share , before fees and costs of $ 7.7 million , in a public offering . the net proceeds of $ 171.4 million were used to pay down amounts outstanding under our unsecured revolving line of credit , to fund acquisitions and our current development commitments and general corporate purposes . key performance indicators , trends and uncertainties we utilize several key performance indicators to evaluate the various aspects of our business . these indicators are discussed below and relate to concentration risk and credit strength . management uses these key performance indicators to facilitate internal and external comparisons to our historical operating results in making operating decisions and for budget planning purposes . concentration risk . we evaluate by gross investment our concentration risk in terms of asset mix , investment mix , operator mix and geographic mix . concentration risk is valuable to understand what portion of our investments could be at risk if certain sectors were to experience downturns . asset mix measures the portion of our investments that are real property or mortgage loans . in order to qualify as an equity reit , at least 75 percent of our total assets must be represented by real estate assets , cash , cash items and government securities . investment mix measures the portion of our investments that relate to our various property types . operator mix measures the portion of our investments that relate to our top five operators . geographic mix measures the portion of our investment that relate to our top five states . 36 the following table reflects our recent historical trends of concentration risk ( gross investment , in thousands ) : replace_table_token_13_th ( 1 ) during 2013 , we completed the construction of a 60-unit memory care property , a 120-bed skilled nursing property and a combination assisted living and memory care property with 77 units . accordingly , these properties were reclassified from `` under development '' to either `` skilled nursing property '' or `` assisted living property , '' depending on the property type , for all periods presented . ( 2 ) includes two school properties and four parcels of land held-for-use . ( 3 ) during the three months ended december 31 , 2013 , we funded a $ 124,387 mortgage loan with prestige healthcare secured by 15 skilled nursing properties with a total of 2,092 beds in michigan . ( 4 ) during 2013 , we entered into an amended and restated master lease agreement with senior care centers , llc ( or senior care ) to include four skilled nursing properties which were previously operated by and subleased to senior care but was not included in senior care 's operator mix . accordingly , the four skilled nursing properties were reclassified from `` remaining operators '' to `` senior care center , llc '' operator mix for all periods presented . ( 5 ) during the three months ended december 31 , 2013 , we purchased four parcels of land located in michigan . these parcels of land are located adjacent to properties securing the prestige healthcare mortgage loan and are managed by prestige healthcare . ( 6 ) decrease due to the sale of six skilled nursing properties with a total of 230 beds . ( 7 ) during the fourth quarter of december 31 , 2013 , we purchased a 120-bed skilled nursing property in florida for $ 14,402. in january 2014 , we announced that we will not be renewing leases that will expire on december 31 , 2014 with extendicare and alc covering 37 assisted living properties .

operating results year ended december 31 , 2013 compared to year ended december 31 , 2012 ( in thousands ) replace_table_token_16_th ( 1 ) increased due to acquisitions and completed development projects . ( 2 ) increased primarily due to origination of a $ 124,387 mortgage loan and $ 4,971 funding under a mortgage and construction loan partially offset by normal amortization of existing mortgage loans . ( 3 ) decreased primarily due to the redemption of the skilled healthcare group senior subordinated notes and a lower bankruptcy settlement distribution from sunwest in 2013 than in 2012 . ( 4 ) increased primarily due to the sale of senior unsecured notes to fund investments . ( 5 ) increased due to acquisitions , developments and capital improvement investments . ( 6 ) increased primarily due to the one-time severance and accelerated restricted stock vesting charges related to the retirement of our former senior vice president , marketing and strategic planning and higher salaries and benefits reflective of increased staffing levels . ( 7 ) includes the financial results from properties sold during 2013 and 2012 . ( 8 ) during 2013 , we sold seven skilled nursing properties with a total of 277 beds for $ 11,001. during 2012 , we sold a 140-bed skilled nursing property for $ 1,248 . ( 9 ) decreased due to the conversion of all 112,588 limited partnership units during 2012 . 40 year ended december 31 , 2012 compared to year ended december 31 , 2011 ( in thousands ) replace_table_token_17_th ( 1 ) increased due to acquisitions . ( 2 ) decreased primarily due to payoffs and normal amortization of existing mortgage loans partially offset by origination of two mortgage loans totaling $ 7,719 . ( 3 ) decreased primarily due to the redemption of the skilled healthcare group senior subordinated notes . ( 4 ) increased primarily due to an increase in bank borrowing and the sale of senior unsecured notes to fund investments .

in some cases , you can identify forward-looking statements by terminology such as “ may , ” “ will , ” “ should , ” “ could ” , “ intend , ” “ consider , ” “ expect , ” “ plan , ” “ anticipate , ” “ believe , ” “ estimate , ” “ predict ” or “ continue ” or the negative of such terms or other comparable terminology . forward-looking statements by their nature address matters that are , to different degrees , uncertain . our business has been undergoing substantial change , which has magnified such risks and uncertainties . you should bear these factors in mind when considering forward-looking statements and should not place undue reliance on such statements . forward-looking statements involve a number of assumptions , risks and uncertainties that could cause actual results to differ materially from those suggested by such statements . in the past , actual results have differed from those suggested by forward-looking statements and this may happen again . you should consider all uncertainties and risks discussed or referenced in this report , including those under “ forward-looking statements ” and item 1a , risk factors , as well as those discussed in any subsequent sec filings . overview we are a financial services company that services and originates loans . the majority of our revenues are generated from our residential mortgage servicing business . as of december 31 , 2018 , our residential mortgage servicing portfolio consisted of 1,562,238 loans with a upb of $ 256.0 billion . in our lending business , we originate , purchase , sell and securitize conventional and government-insured forward and reverse mortgage loans . our forward lending business is focused on the retail channel , primarily through servicing portfolio recapture . during 2018 , our lending business originated or purchased forward and reverse mortgage loans with a upb of $ 870.3 million and $ 593.7 million , respectively . on october 4 , 2018 , we completed our acquisition of phh . phh 's servicing portfolio consisted of 537,225 residential mortgage loans with a upb of $ 119.3 billion on the date of acquisition . phh originated $ 109.9 million of upb in residential mortgage loans in the forward lending retail channel during the post-acquisition period through december 31 , 2018. we believe this acquisition will enable us to achieve the following key strategic and financial benefits : accelerate ocwen 's transition to black knight msp ; reduce fixed costs , on a combined basis , through reductions in corporate overhead and other costs ; improve economies of scale ; and , provide a foundation to enable the combined business to resume new business and growth activities that will , at a minimum , offset portfolio runoff . we recognized a bargain purchase gain , net of tax , of $ 64.0 million in connection with the acquisition of phh . the bargain purchase gain results from the fair value of phh 's net assets exceeding the purchase price we paid . the purchase price we negotiated contemplated that phh would incur losses after the acquisition date . phh net losses from continuing operations of $ 24.8 million are included in our consolidated statements of operations from the date of acquisition through december 31 , 2018 . the transaction was initially cash and book value accretive , with phh having an opening cash balance of $ 423.1 million , $ 64.7 million more than the purchase price . there can be no assurances that the desired strategic and financial benefits of the acquisition will be realized . 47 the approval of ny dfs for the acquisition imposed certain post-closing requirements on ocwen , including certain reporting obligations and certain record retention and other requirements relating to the planned transfer of new york loans onto black knight msp as well as certain requirements with respect to the management of pmc , a licensed subsidiary of phh . importantly , the ny dfs also eased its restrictions on ocwen 's ability to acquire msrs to allow certain acquisitions of msrs that are boarded onto the black knight msp servicing system subject to annual portfolio growth limitations until such time as the ny dfs determines that all loans have been successfully migrated to black knight msp and that ocwen has developed a satisfactory infrastructure to board sizeable portfolios of msrs . we have established a set of initiatives to achieve our objective of returning to growth and profitability . first , we must successfully execute on the integration of phh 's business with ours , including a smooth transition onto the black knight msp servicing system which includes loan boarding , payment processing , escrow administration , and default management , among other functions . second , we must re-engineer our cost structure to go beyond eliminating redundant costs . third , we must fulfill our regulatory commitments and resolve our remaining legal and regulatory matters on satisfactory terms . fourth , we must replenish our servicing portfolio through expanding our lending business and making permissible msr acquisitions that are prudent and well-executed within appropriate financial return targets . finally , we must ensure that we continue to manage our balance sheet to provide a solid platform for executing on our growth and other initiatives . while we strengthened our cash position through amendments to our agreements with nrz and the phh acquisition , until we return to sustainable profitability , continuing losses will erode our available liquidity which could negatively impact our ability to invest in growth and investment opportunities , including our ability to acquire msrs . our business , operating results and financial condition have been significantly impacted by regulatory actions against us and by significant litigation matters . story_separator_special_tag advertising costs were $ 3.5 million higher in 2017 , primarily related to our lending segment . interest expense for 2017 declined $ 49.3 million , or 12 % , as compared to the prior year primarily due to a $ 20.1 million reduction in interest related to our senior secured term loan ( sstl ) facility and a $ 19.3 million reduction in interest on match funded liabilities . in 2016 , in connection with entering into an amended and restated sstl facility , we recognized previously unamortized debt issuance costs related to the prior sstl facility as well as discount related to the new sstl facility . lower interest expense on our match funded advance financing facilities is consistent with the decline in servicing advances and the effect of the higher amortization of facility costs in 2016. the decline in interest expense is also due to a $ 6.3 million decline in interest related to financing liabilities primarily because 2016 included $ 10.5 million of additional payments to nrz , which are recognized as interest expense , to compensate nrz for certain increased costs associated with a 2015 downgrade of our s & p servicer rating . interest expense on the nrz financing liabilities increased by $ 1.9 million primarily due to changes in the fair value of nrz financing liabilities due to 52 valuation and assumption updates which increased the value of the nrz financing liabilities by $ 83.3 million and which was recognized as interest expense . this more than offset the reduction in interest expense on the nrz financing liabilities driven by declines in the value of the nrz financing liability because of the decline in the average upb of the nrz servicing portfolio due to runoff , and the $ 42.0 million reduction in fair value of the nrz financing liability recognized in connection with the transfer of legal title to msrs ( including $ 37.6 million recognized at the time of the initial transfer ) . this reduction was primarily driven by the characteristics of rights to msrs with a upb of $ 15.9 billion that were converted to fully-owned msrs during the year , relative to the $ 54.6 million lump sum payment received from nrz . for the rights to msrs that were converted on september 1 , 2017 , the characteristics of the underlying msrs did not correspond to the weighted average loan characteristics used to determine the lump sum payment , resulting in a decline in the fair value of the financing liability primarily due to the transferred msrs having a contractual servicing fee rate of 33.4 bps as compared to the weighted average of 47.1 bps used to develop the lump sum payment schedule . other , net for 2017 declined $ 17.9 million primarily because 2016 includes $ 14.8 million received in connection with the execution of clean-up call rights related to five small-balance commercial mortgage securitization trusts . although the pre-tax loss for 2017 declined by $ 62.4 million , or 30 % to $ 144.0 million , the income tax benefit increased $ 8.5 million , or 122 % , to $ 15.5 million . this is primarily due to the income tax benefit recognized on the reversal of the liability for a portion of our uncertain tax positions upon the expiration of the statute of limitations in september 2017. the change is also due to the mix of earnings among different tax jurisdictions with different statutory tax rates , which impacts the amount of the tax benefit or expense recorded . the overall effective tax rate for 2017 was 10.8 % , compared to 3.4 % for 2016. this rate change primarily resulted from the tax benefit recognized on the reversal of uncertain tax positions during 2017 , as compared to additional income tax expense recognized during 2016 related to uncertain tax positions , offset in part by a decrease in tax benefits resulting from our inability to carry back current losses that are being generated in the u.s. and usvi tax jurisdictions . 53 financial condition summary replace_table_token_7_th changes in the composition and balance of our assets and liabilities during 2018 are principally attributable to the acquisition of phh and the impact of our ongoing reverse mortgage securitization activity , which are accounted for as secured financings , increasing loans held for investment and hmbs-related borrowings . on october 4 , 2018 , we acquired assets with an aggregate fair value of $ 1.2 billion , including $ 325.0 million of phh cash used to fund the acquisition , consisting primarily of msrs , advances and loans . we also assumed liabilities with a fair value of $ 769.7 million , including an msr financing liability and senior unsecured notes . see note 2 — business acquisition to the consolidated financial statements for additional information . match funded liabilities declined during 2018 consistent with lower advances and match funded advances consistent with our declining servicing portfolio . total equity increased $ 82.0 million during 2018 as a result of the effect of our fair value election for msrs previously accounted for using the amortization method , less the net loss recognized 54 for the year . the net loss for the year included a bargain purchase gain of $ 64.0 million in connection with the phh acquisition . the bargain purchase gain represents the excess of the fair value of the assets acquired and liabilities assumed over the purchase price . segment results of operations servicing we earn contractual monthly servicing fees pursuant to servicing agreements , which are typically payable as a percentage of upb , as well as ancillary fees , including late fees , modification incentive fees , reo referral commissions , float earnings and speedpay fees . we also earn fees under both subservicing and special servicing arrangements with banks and other institutions that own the msrs . subservicing and special servicing fees are earned either as a percentage of upb or on a per-loan basis . per-loan fees typically vary based on delinquency status .

operations summary replace_table_token_5_th 49 our 2018 results include the post-acquisition results of phh . the following table provides details of the phh results by segment : replace_table_token_6_th year ended december 31 , 2018 versus 2017 servicing and subservicing fees for 2018 were $ 55.0 million , or 6 % , lower than 2017 , primarily due to portfolio runoff and a decline in completed modifications , offset in part by the increase in the portfolio resulting from the acquisition of phh . servicing and subservicing fee revenue earned on the acquired phh portfolio during the post-acquisition period was $ 67.9 million . the number of completed modifications declined in 2018 compared to 2017 primarily because of the expiration of the hamp program on december 31 , 2016. revenue recognized in connection with loan modifications was $ 59.4 million for 2018 as compared to $ 97.2 million in 2017. the $ 25.7 million , or 25 % decline in gains on loans held for sale , net in 2018 is largely due to a decrease in total loan production offset in part by higher margins , primarily due to operating in the higher margin forward lending retail channel exclusively in 2018. forward lending originations declined as a result of our exit from the forward lending correspondent and wholesale channels in 2017 and rising interest rates which reduced refinance volume , offset in part by retail channel volume generated by phh during the post-acquisition period . changes to the fha hecm program for originations after october 1 , 2017 have negatively impacted reverse lending origination volume across all channels .

asc 606 requires an entity to recognize revenue only when it satisfies a performance obligation by transferring a promised good or service to a customer . a good or service is considered to be transferred when the customer obtains control . as the non-exclusive research license and research and development services represent one performance obligation , the company has determined that it will satisfy its performance obligation over a period of time as services are performed and gbt receives the benefit of the services , as the overall purpose of the arrangement is for the company to perform the services . the company will recognize revenue associated with the performance obligation as the research and development services are provided using an input method , according to the story_separator_special_tag of financial condition and results of operations the following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited financial statements and related notes appearing elsewhere in this annual report on form 10-k. some of the information contained in this discussion and analysis and 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 . you should review the section titled “ risk factors ” in part i , item 1a 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 contained in the following discussion and analysis . overview we are a biopharmaceutical company seeking to redefine the power of small molecules to control the expression of genes . based on our unique ability to elucidate regulatory regions of the genome , we aim to develop medicines that provide a profound benefit for patients with diseases that have eluded other genomics-based approaches . we are currently focused on developing treatments for cancer and diseases resulting from mutations of a single gene , also known as monogenic diseases , and building a pipeline of gene control medicines . our lead product candidates are : sy-1425 , a selective retinoic acid receptor alpha , or rarα , agonist that is currently being evaluated in combination with azacitidine , a hypomethylating agent frequently used to treat acute myeloid leukemia , or aml , patients in a phase 2 clinical trial in a genomically defined subset of patients with aml ; and sy-5609 , a highly selective and potent oral inhibitor of cyclin-dependent kinase 7 , or cdk7 , that is currently being evaluated in the dose escalation portion of a phase 1 clinical trial in patients with select advanced solid tumors . in october 2019 , we announced a decision to prioritize the development of sy-5609 and to discontinue further development of sy-1365 , our intravenously administered cdk7 inhibitor for which we are conducting a phase 1 clinical trial in patients with advanced solid tumors . we also have multiple preclinical and discovery programs in oncology and monogenic diseases such as sickle cell disease and myotonic dystrophy type 1. we expect to nominate our next development candidate to enter investigational new drug application , or ind , enabling preclinical studies by the end of 2021. in december 2019 , we entered into a collaboration with global blood therapeutics , inc. , or gbt , to discover , develop and commercialize novel therapies for sickle cell disease and beta thalassemia . we also use our gene control platform in collaboration with third parties to identify and validate targets in diseases beyond our current areas of focus . to this end , we entered into a target discovery , research collaboration and option agreement with incyte corporation , or incyte , in january 2018 under which we are using our platform to identify novel therapeutic targets with a focus on myeloproliferative neoplasms . our ongoing phase 2 clinical trial is assessing the safety and efficacy of sy-1425 in combination with azacitidine in approximately 25 newly diagnosed aml patients who are “ unfit , ” meaning that they are not suitable candidates for standard intensive chemotherapy , who have been prospectively selected using our proprietary rara or irf8 biomarkers , as well as in approximately 25 newly diagnosed unfit aml patients who are biomarker-negative . the biomarker-negative patients are being enrolled to support the development of a commercial companion diagnostic test for sy-1425 . in addition , we are evaluating the safety and efficacy of sy-1425 in combination with azacitidine in approximately 25 relapsed or refractory aml patients who are being prospectively selected using the rara biomarker . at the european school of haemotology international conference on aml held in october 2019 , or esh 2019 , we reported data from the newly diagnosed unfit aml cohorts of the phase 2 clinical trial as of an august 22 , 2019 data cut-off . enrollment in the newly diagnosed unfit aml cohorts of the trial is complete and we continue to follow patients in the trial . as of the data cut-off , 40 newly diagnosed unfit aml patients had been enrolled in the trial and were eligible for the safety analysis . we reported at esh 2019 that sy-1425 in combination with azacitidine had been generally well-tolerated , with no evidence of increased toxicities due to the combination , and that adverse events had been consistent with what has previously been seen with sy-1425 and azacitidine as single agents in aml . across all grades and causalities , the most commonly reported adverse events in these cohorts of the trial were nausea , decreased appetite , constipation , fatigue and peripheral edema , the majority of which were low grade . of the 17 biomarker-positive patients evaluable for response , 13 were rara-positive and four were irf8-positive . story_separator_special_tag based on preclinical and clinical data generated to date , we believe that sustaining the level of cdk7 target coverage needed to enhance clinical activity with sy-1365 would require more frequent dosing , or a higher dose that would necessitate lengthening the infusion time to manage tolerability . we believe that either approach could create an overly burdensome dosing regimen for patients that could be better addressed with an oral agent like sy-5609 . this belief , coupled with the superior preclinical data generated with sy-5609 relative to sy-1365 and a competitive landscape in oncology increasingly focused on oral agents , led us to make a portfolio decision to discontinue further development of sy-1365 and prioritize the development of sy-5609 . 86 recent developments in february 2020 , we into a loan and security agreement , or loan agreement , with oxford finance llc , or oxford , pursuant to which a term loan of up to an aggregate principal amount of $ 60.0 million was made available to us . a $ 20.0 million term loan was funded at closing , and two additional term loan advances of $ 20.0 million each will be available under the loan agreement after the closing date , subject to certain terms and conditions , including the achievement of certain milestones . in connection with entry into the loan agreement , we issued oxford warrants to purchase 27,548 shares of our common stock at an exercise price per share of $ 7.26. these warrants will be exercisable for five years from the date of issuance . the term loans bear interest at an annual rate equal to the greater of ( i ) 7.75 % and ( ii ) the sum of 5.98 % and the greater of ( a ) one-month libor and ( b ) 1.77 % . the loan agreement provides for interest-only payments until march 1 , 2023 , and repayment of the aggregate outstanding principal balance of the term loan in monthly installments starting on march 1 , 2023 and continuing through february 1 , 2025. we paid a facility fee of $ 100,000 at closing and are obligated to pay a facility fees upon the closing of the subsequent tranches . we may elect to prepay the loans subject to the payment of a prepayment fee . in connection with the loan agreement , we granted oxford a security interest in all of our personal property now owned or hereafter acquired , excluding intellectual property ( but including the right to payments and proceeds of intellectual property ) , and a negative pledge on intellectual property . the loan agreement also contains certain events of default , representations , warranties and non-financial covenants . financial operations overview revenue to date , we have not generated any revenue from product sales and do not expect to generate any revenue from product sales for the foreseeable future . for the years ended december 31 , 2019 and 2018 , we recognized approximately $ 2.0 million and $ 2.1 million of revenue , respectively , all of which is attributable to our collaboration agreement with incyte . for the year ended december 31 , 2017 , we recognized $ 1.1 million of revenue , all of which was attributable to a research agreement with a multinational pharmaceutical company that expired in march 2017 in accordance with its terms . expenses research and development expenses research and development expenses consist primarily of costs incurred for our research activities , including development of our gene control platform and the development of product candidates , which include : employee-related expenses , including salaries and benefits ; stock-based compensation expense ; external costs of funding activities performed by third parties that conduct research and development on our behalf and of purchasing supplies used in designing , developing and manufacturing preclinical study and clinical trial materials ; consulting , licensing and professional fees related to research and development activities ; and facilities costs , depreciation and amortization and other expenses , which include direct and allocated expenses for rent and maintenance of facilities , insurance and other operating costs . research and development costs are expensed as incurred . nonrefundable advance payments made to vendors for goods or services that will be received in the future for use in research and development activities are deferred and capitalized , even when there is no alternative future use for the research and development , until related goods or services are provided . we typically use our employee , consultant and infrastructure resources across our research and development programs . we track outsourced development costs by product candidate or development program , but we do not allocate personnel costs , other internal costs or certain external consultant costs to specific product candidates or development programs . 87 the following table summarizes our external research and development expenses by program , as well as expenses not allocated to programs , for the years ended december 31 , 2019 , 2018 and 2017 ( in thousands ) : replace_table_token_3_th ( 1 ) the results for the year ended december 31 , 2019 include credits of $ 1.9 million and $ 1.2 million for our sy-1425 and sy-1365 clinical trials , respectively , due to a change in estimate of costs incurred over the life of these clinical trials through march 31 , 2019. we expect our research and development expenses will increase for the foreseeable future as we seek to advance our programs . at this time , we can not reasonably estimate or know the nature , timing and estimated costs of the efforts that will be necessary to complete the development of our product candidates . we are also unable to predict when , if ever , material net cash inflows will commence from sales of our product candidates .

results of operations comparison of years ended december 31 , 2019 and 2018 the following table summarizes our results of operations for the years ended december 31 , 2019 and 2018 , together with the changes in those items in dollars ( in thousands ) : replace_table_token_5_th revenue for the year ended december 31 , 2019 and 2018 , we recognized approximately $ 2.0 million and $ 2.1 million of revenue , all of which was attributable to our target discovery collaboration with incyte . research and development expense research and development expense increased by approximately $ 8.0 million , or 16 % , from $ 50.2 million for the year ended december 31 , 2018 to $ 58.2 million for the year ended december 31 , 2019. the following table summarizes our research and development expenses for the years ended december 31 , 2019 and 2018 , together with the changes to those items in dollars ( in thousands ) : replace_table_token_6_th the change in research and development expense was primarily attributable to research and development activities associated with advancing our lead clinical and preclinical programs and enhancing our internal capabilities , and included the following : an increase of approximately $ 4.0 million , or 35 % , for increased employee-related expenses , including increased salary and benefits primarily due to our increased headcount ; an increase of approximately $ 1.1 million , or 44 % , for stock-based compensation , also primarily due to our increased headcount ; an increase of approximately $ 1.7 million , or 90 % , consulting , licensing and professional fees increased professional fees in support of our sy-1425 , sy-1365 and sy-5609 clinical trials and our other preclinical programs ; and an increase of approximately $ 1.4 million , or 35 % , in facilities and other expenses primarily due to the rent expense related to the lease for our new headquarters , over which we took possession for accounting purposes in may 2019 .

49 in september 2009 the company issued , through a public offering , $ 57.5 million aggregate principal amount of 5.5 % convertible senior notes , which were to mature on october 1 , 2014. under the terms of the offering , the note holders could convert each $ 1,000 principal amount of notes to approximately 197 shares of common stock ( equivalent to an initial conversion price of $ 5.08 per share of common stock ) on , or before , september 30 , 2014. the conversion rate is subject to adjustment upon the occurrence of certain events which are described in the indenture dated september 16 , 2009. the company is not required to redeem the notes prior to their maturity . the net proceeds of this offering were approximately $ 54.9 million , which were used to reduce amounts outstanding under the company 's credit facility . as discussed above , $ 35.4 million aggregate principal amount of these notes were acquired by the company during fiscal 2011. in addition , in december 2013 the company entered story_separator_special_tag results of operations for the years ended november 3 , 2013 , october 28 , 2012 and october 30 , 2011 overview the company sells substantially all of its photomasks to semiconductor designers and manufacturers , and manufacturers of fpds . photomask technology is also being applied to the fabrication of other higher performance electronic products such as photonics , micro-electronic mechanical systems and certain nanotechnology applications . thus , the company 's selling cycle is tightly interwoven with the development and release of new semiconductor designs and flat panel applications , particularly as it relates to the semiconductor industry 's migration to more advanced design methodologies and fabrication processes . the company believes that the demand for photomasks primarily depends on design activity rather than sales volumes from products manufactured using photomask technologies . consequently , an increase in semiconductor or fpd sales does not necessarily result in a corresponding increase in photomask sales . however , the reduced use of customized ics , reductions in design complexity , other changes in the technology or methods of manufacturing or designing semiconductors , or a slowdown in the introduction of new semiconductor or fpd designs could reduce demand for photomasks even if demand for semiconductors and fpds increases . advances in semiconductor , fpd and photomask design and semiconductor and fpd production methods could also reduce the demand for photomasks . historically , the semiconductor industry has been volatile , with sharp periodic downturns and slowdowns . these downturns have been characterized by , among other things , diminished product demand , excess production capacity and accelerated erosion of selling prices . 17 the global semiconductor industry , including mobile display devices , is driven by end markets which have been closely tied to consumer driven applications of high performance semiconductor devices including , but not limited to , mobile communications and computing solutions . the company is typically required to fulfill its customer orders within a short period of time , sometimes within 24 hours . this results in the company having a minimal level of backlog orders , typically one to two weeks for ic photomasks and two to three weeks for fpd photomasks . the company can not predict the timing of the industry 's transition to volume production of next generation technology nodes or the timing of up and down cycles with precise accuracy , but believes that such transitions and cycles will continue into the future , beneficially and adversely affecting its business , financial condition and operating results in the near term . the company believes its ability to remain successful in these environments is dependent upon its achieving its goals of being a service and technology leader and efficient solutions supplier , which it believes should enable it to continually reinvest in its global infrastructure . the company is focused on improving its competitiveness by advancing its technology and reducing costs and , in connection therewith , has invested in manufacturing equipment to serve the high-end market . as the company continues to face challenges in the current and near term that require it to continue to make significant improvements in its competitiveness , it continues to evaluate further cost reduction initiatives . as of december 2013 state-of-the-art production for semiconductor masks is considered to be 45 nanometer and lower for ics and generation 8 and above and amoled display based process technologies for fpds . however , 65 nanometer and above geometries for semiconductors and generation 7 and below , excluding amoled , process technologies for fpds constitute the majority of designs currently being fabricated in volume . at these geometries , the company can produce full lines of photomasks and there is no significant technology employed by the company 's competitors that is not available to the company . the company expects 45 nanometer and below designs to continue to move to wafer fabrication throughout fiscal 2014 , and believes it is well positioned to service an increasing volume of this business as a result of its investments in manufacturing processes and technology in the global regions where its customers are located . the photomask industry has been , and is expected to continue to be , characterized by technological change and evolving industry standards . in order to remain competitive , the company will be required to continually anticipate , respond to , and utilize changing technologies . in particular , the company believes that , as semiconductor geometries continue to become smaller , it will be required to manufacture even more complex optically-enhanced reticles , including optical proximity correction and phase-shift photomasks . additionally , demand for photomasks has been , and could in the future be , adversely affected by changes in semiconductor and high performance electronics fabrication methods that affect the type or quantity of photomasks used , such as changes in semiconductor demand that favor field-programmable gate arrays and other semiconductor designs that replace application-specific ics . story_separator_special_tag of $ 0.6 million ( quarterly payments commenced in june 2012 and were based on a ten year repayment period ) . the company repaid the $ 21.3 million balance of this term loan that was outstanding at november 3 , 2013 , in the first quarter of fiscal 2014. the credit facility bore interest ( 2.69 % at november 3 , 2013 ) , based on the company 's total leverage ratio , at libor plus a spread , as defined in the credit facility . in the first quarter of fiscal 2012 the company ceased the manufacture of photomasks at its singapore facility . this action , which was substantially completed in fiscal 2012 , resulted in the company recording restructuring charges of $ 1.4 million in fiscal 2012. in 2012 the board of directors of psmc authorized psmc to repurchase additional shares of its outstanding common stock for retirement . these repurchase programs resulted in 35.9 million shares being purchased for $ 15.6 million in the fiscal year ended october 28 , 2012. psmc 's repurchase of these shares increased the company 's ownership percentage in psmc from 62.25 % at october 30 , 2011 to 72.09 % as of october 28 , 2012. in 2011 the board of directors of psmc authorized psmc to repurchase shares of its outstanding common stock for retirement . these repurchase programs resulted in 21.6 million shares being purchased for $ 9.9 million . psmc 's repurchase of these shares increased the company 's ownership percentage in psmc from 57.53 % at october 31 , 2010 to 62.25 % as of october 30 , 2011 . 19 in the second quarter of fiscal 2011 the company issued , through a private offering pursuant to rule 144a under the securities act of 1933 , as amended , $ 115 million aggregate principal amount of 3.25 % convertible senior notes . the notes mature on april 1 , 2016 , and note holders may convert each $ 1,000 principal amount of notes to 96.3879 shares of common stock ( equivalent to an initial conversion price of $ 10.37 per share of common stock ) at any time prior to the close of business on the second scheduled trading day immediately preceding april 1 , 2016. the conversion rate is subject to adjustment upon the occurrence of certain events , which are described in the indenture dated march 28 , 2011. the company is not required to redeem the notes prior to their maturity date . interest on the notes accrues in arrears , and is paid semiannually through the notes ' maturity date . interest payments on the notes commenced on october 1 , 2011. the net proceeds of the notes were approximately $ 110.7 million , which were used , in part , to repurchase $ 35.4 million of the company 's 5.5 % convertible senior notes , which were to mature in october 2014 , and to pay , in full , its then outstanding obligations under capital leases of $ 19.8 million . in the second and third quarters of fiscal 2011 the company , in two separate transactions , acquired $ 35.4 million of its 5.5 % convertible senior notes in exchange for 5.2 million shares of its common stock , with a fair value of $ 45.7 million , and cash of $ 22.9 million ( the note holders received 147.529 shares and cash of $ 647 for each $ 1,000 note ) . the company , in connection with these transactions , recorded extinguishment losses of $ 35.1 million , which included the write-off of deferred financing fees of $ 2.0 million . the losses are included in other income ( expense ) in the company 's consolidated statements of income . as discussed above , in the first quarter of fiscal 2014 the company entered into an amended five year $ 50 million credit facility . the company intends to repay its remaining 5.5 % convertible senior notes with borrowings against the amended credit facility and , therefore , has classified as long-term the entire $ 22.1 million of those notes that was outstanding as of november 3 , 2013. story_separator_special_tag roman '' , times , serif ; font-size : 10pt '' > interest expense increased slightly in 2013 as compared to 2012 , primarily as a result of an additional capital lease commencing in 2013 related to the purchase of high-end equipment . interest and other income ( expense ) , net increased in 2013 as compared to 2012 , primarily as a result of increased foreign currency exchange gains . interest expense increased slightly in 2012 as compared to 2011 , primarily as a result of the term loan entered into in the second quarter of 2012. interest and other income ( expense ) , net increased in 2012 as compared to 2011 , primarily as a result of increased interest income on the company 's higher cash balances in 2012. in the second and third quarters of fiscal 2011 , the company acquired $ 35.4 million aggregate principal amount of its 5.5 % convertible senior notes by delivering $ 22.9 million in cash and 5.2 million shares of its common stock , with a fair value of $ 45.7 million . in connection with these 2011 acquisitions the company recorded total debt extinguishment losses of $ 35.1 million , which included the write-off of $ 2.0 million of deferred financing fees . a portion of the net proceeds of the company 's march 28 , 2011 , 3.25 % convertible senior notes offering was used to repurchase these notes . income tax provision replace_table_token_9_th the effective tax rate differs from the u.s. statutory rate of 35 % in fiscal years 2013 and 2012 primarily due to a higher level of earnings being taxed at lower statutory rates in foreign jurisdictions , combined with the benefit of various investment credits in the foreign jurisdictions .

results of operations the following table presents selected operating information expressed as a percentage of net sales : replace_table_token_3_th note : all the following tabular comparisons , unless otherwise indicated , are for the fiscal years ended november 3 , 2013 ( 2013 ) , october 28 , 2012 ( 2012 ) and october 30 , 2011 ( 2011 ) , in millions of dollars . 20 net sales replace_table_token_4_th net sales for 2013 decreased 6.3 % to $ 422.2 million as compared to $ 450.4 million for 2012 , primarily related to reduced high-end ic sales of $ 30 million as compared to the prior year . the reduced high-end ic revenue was primarily attributable to an asian foundry customer for which the company was not qualified as a result of a node migration , and to a lesser extent , reduced average selling prices ( asps ) . total ic sales decreased by $ 29.5 million or 8.4 % in 2013 as compared to 2012 , primarily due to reduced high-end ic sales discussed previously , and mainstream ic sales were essentially flat . total fpd sales increased by $ 1.3 million or 1.3 % in 2013 as compared to 2012 , primarily due to increased high-end fpd sales , which was partially offset by a $ 4 million decrease in mainstream fpd sales . total revenues attributable to high-end products decreased by $ 24 million to $ 149 million in 2013 , as high-end revenues for ic decreased by $ 30 million to $ 80 million , which were partially offset by a $ 6 million increase in high-end fpd revenues to $ 69 million . high-end photomask applications , which typically have higher asps , include photomask sets for ic products using 45 nanometer and below technologies , and for fpd products using generation 8 and above and amoled technologies . by geographic area , net sales in 2013 as compared to 2012 decreased by $ 26.9 million or 16.7 % in korea , decreased by $ 8.1 million or 6.0

some of the information contained in this discussion and analysis or set forth elsewhere in this filing , including information with respect to our plans and strategy for our business , includes forward-looking statements that involve risks and uncertainties . you should read the “ risk factors ” section of this filing for a discussion of important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements contained in the following discussion and analysis . overview castlight is a pioneer in a new category of cloud-based software that enables enterprises to understand and manage health care spending as a strategic business investment , and help employees and their families make more informed medical decisions based on factors such as cost , quality and patient experience . our enterprise healthcare cloud allows our customers to conquer the complexity of the existing health care system by providing personalized , actionable information to their employees , implementing technology-enabled benefit designs and integrating disparate systems and applications . our comprehensive technology offering aggregates complex , large-scale data and applies sophisticated analytics to make health care data transparent and useful . we deploy consumer-oriented applications that deliver strong employee engagement and enable employers to integrate disparate benefit programs into one platform available to employees and their families . since our inception in 2008 , we have been committed to improving the efficiency of the u.s. healthcare industry . from 2008 to 2010 , we focused our efforts on research and development to build our consumer healthcare database , our analytic capabilities and the initial version of our cloud-based application , castlight medical . after its release in 2010 , we have continued to enhance that application , as well as release castlight pharmacy , castlight rewards , castlight reference based benefits and castlight dental . these applications are delivered to our customers , and their employees and families , via our cloud-based offering and leverage consumer-oriented design principles that drive engagement and ease of use . 34 we market and sell our enterprise healthcare cloud offering to self-insured companies in a broad range of industries and governmental entities . as of december 31 , 2014 , we had 168 signed customers , of which 115 customers have implemented our offering , which we refer to as launched customers . in comparison , we had 106 signed customers , including 48 launched customers , as of december 31 , 2013 . our customers as of december 31 , 2014 included 45 fortune 500 companies and collectively represent millions of eligible employees and their adult dependents . we sell our offering solely in the united states , and we market to our customers and potential customers primarily through our direct sales force . we generate revenue from sales of subscriptions , including support , and professional services primarily related to the implementation of our offering , including extensive communications support to drive adoption by our customers ' employees and their families . historically , we have derived a substantial majority of our subscription revenue from castlight medical . our subscription fees are based on the number of employees and adult dependents that employers identify as eligible to use our offering , which typically includes all of our customers ' u.s. employees and adult dependents that receive health benefits . our agreements with customers generally have terms of three years . our costs to implement our offering mainly include personnel-related costs for deployment of our applications that are expensed as incurred . however , the related revenue is deferred until our applications are ready for use by the customer . revenue is then recognized ratably over the related contract term . as a result , for a typical customer , we generate negative gross margin during the implementation phase and positive gross margin thereafter . accordingly , during periods of rapid growth , when the proportion of customers that we are implementing is high , we incur significant gross losses related to professional services . we expect overall gross margin to be positive and improve over time as the number of our launched customers grows in relation to the number of customers in the implementation phase . we intend to continue to invest aggressively in the success of our customers , expand our commercial operations and further develop our offering . we also expect to incur significant additional expenditures as a public company . as a result of these and other factors , we expect to continue to incur operating losses for the foreseeable future and may need to raise additional capital through equity and debt financings in order to fund our operations . key factors affecting our performance sale of additional applications . our revenue growth rate and long-term profitability are affected by our ability to sell additional applications to our customer base . to date , a substantial majority of our revenue has come from sales of subscriptions of castlight medical . we believe that there is a significant opportunity to sell subscriptions to other applications as our customers become more familiar with our offering and seek to address additional needs . annual net dollar retention rate and average annual revenue . we believe that our ability to retain our customers and expand their subscription revenue growth over time will be an indicator of the stability of our revenue base and the long-term value of our customer relationships . because we typically enter into long-term contracts with our customers , only a small percentage of our customer agreements have reached the end of their original terms and , as a result , we have not observed a large enough sample of renewals to derive meaningful conclusions . based on our limited experience , we observed an annual net dollar retention rate of 103 % for our signed customer base , for the year ended december 31 , 2014 . story_separator_special_tag the time and costs of our customer implementations vary based on the source and condition of the data we receive from third parties , the configurations that we agree to provide and the size of the customer . 36 our cost of revenue is expensed as we incur the costs . however , the related revenue is deferred until our applications are ready for use by the customer and then recognized as revenue ratably over the related contract term . therefore , we expense the cost incurred to provide our applications and services prior to the recognition of the corresponding revenue . gross profit consists of total revenue , less cost of revenue . gross margin is the percentage of gross profit to revenue . sales and marketing . sales and marketing expenses consist primarily of employee-related expenses ( including salaries , sales commissions and bonuses , benefits and stock-based compensation ) , travel-related expenses and marketing programs . commissions earned by our sales force that can be associated specifically with the non-cancellable portion of a subscription contract are deferred and amortized over the non-cancellable period . accordingly , commission expense can be materially impacted by changes in the termination provisions of customer contracts that we execute in a given period compared with previous periods . research and development . research and development expenses consist primarily of employee-related expenses ( including salaries , bonuses , benefits and stock-based compensation ) and costs associated with subcontractors . general and administrative . general and administrative expenses consist primarily of employee-related expenses ( including salaries and bonuses , benefits and stock-based compensation ) for finance and accounting , legal , human resources and management information systems personnel , legal costs , professional fees and other corporate expenses . story_separator_special_tag style= '' line-height:120 % ; padding-top:24px ; text-align : center ; font-size:10pt ; '' > liquidity and capital resources replace_table_token_11_th 40 as of december 31 , 2014 , our principal sources of liquidity were cash , cash equivalents and marketable securities totaling $ 198.7 million , which were held for working capital purposes . our cash , cash equivalents and marketable securities are comprised primarily of u.s. agency obligations , u.s. treasury securities and money market funds . since our inception , we have financed our operations primarily through sales of equity securities and to a lesser extent , payments from our customers . we believe that our existing cash , cash equivalents and marketable securities will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months . our future capital requirements will depend on many factors including our growth rate , subscription renewal activity , the timing and extent of spending to support development efforts , our expansion of sales and marketing activities , the introduction of new and enhanced services offerings and the continuing market acceptance of our cloud-based applications . we may in the future enter into arrangements to acquire or invest in complementary businesses , services and technologies and intellectual property rights . we may be required to seek additional equity or debt financing . in the event that additional financing is required from outside sources , we may not be able to raise it on terms acceptable to us or at all . if we are unable to raise additional capital when desired , our business , operating results and financial condition would be adversely affected . operating activities for the year ended december 31 , 2014 , cash used in operating activities was $ 54.6 million . the negative cash flows resulted primarily from our net loss of $ 85.9 million , adjusted for $ 23.8 million in non-cash expenses that primarily included stock-based compensation of $ 14.2 million , warrant expense of $ 2.6 million and amortization of deferred commissions of $ 4.1 million . working capital uses of cash included an increase in accounts receivable of $ 6.0 million primarily as a result of overall growth of our business and in part related to the timing of billings and collections . deferred commissions also increased by $ 4.9 million pertaining to the non-cancellable portion of contracts signed in the year , as we increased our customer base from 106 in 2013 to 168 at the end of 2014. these increases were offset by an increase in deferred revenue of $ 15.9 million , as a result of contracts signed in the period with associated upfront fees . for the year ended december 31 , 2013 , cash used in operating activities was $ 50.1 million . the negative cash flows resulted primarily from our net loss of $ 62.2 million , adjusted for $ 6.5 million in non-cash expenses that primarily included stock-based compensation of $ 2.4 million and amortization of deferred commissions of $ 2.5 million . working capital uses of cash included an increase in deferred commissions of $ 5.0 million , pertaining to the non-cancellable portion of contracts signed in the year , as we increased our customer base from 47 in 2012 to 106 at the end of 2013. these increases were offset by an increase in deferred revenue of $ 7.3 million , as a result of contracts signed in the period with associated upfront fees . for the year ended december 31 , 2012 , cash used in operating activities was $ 29.3 million . the negative cash flows resulted primarily from our net loss of $ 35.0 million , adjusted for $ 2.1 million in non-cash expenses that primarily included stock-based compensation of $ 1.3 million . working capital uses of cash included an increase in deferred commissions of $ 3.0 million , pertaining to the non-cancellable portion of contracts signed in the year . these increases were offset by an increase in deferred revenue of $ 3.3 million and increase in accrued compensation of $ 4.6 million . the increase in deferred revenue was as a result of contracts signed in the period with associated upfront fees .

results of operations the following tables set forth selected consolidated statements of operations data and such data as a percentage of total revenue for each of the periods indicated : replace_table_token_5_th 37 revenue replace_table_token_6_th 2014 compared to 2013 total revenue for the year ended december 31 , 2014 , increased $ 32.6 million , or 252 % . the increase in total revenue was primarily attributable to revenue from customers launched during the year as well as incremental revenue from customers launched in the prior year . we had 115 launched customers at the end of 2014 compared with 48 launched customers at the end of 2013. c ustomers launched in 2014 and 2013 contributed to 48 % and 55 % , of total revenue in the respective years . increase in annual bookings also contributed to the increase in revenue . annual bookings , which is defined as the estimated total billings from contract execution through one year after launch for all sales to new and existing customers during a calendar year , was $ 44.3 million for the year ended december 31 , 2014 compared to $ 32.4 million for the year ended december 31 , 2013 . 2013 compared to 2012 total revenue for the year ended december 31 , 2013 , increased $ 8.8 million , or 212 % . the increase in total revenue was primarily attributable to revenue from customers launched during 2013 as well as incremental revenue from customers launched in 2012. we had 48 launched customers at the end of 2013 compared with 15 launched customers at the end of 2012. customers launched in 2013 and 2012 contributed to 55 % and 52 % of total revenue in the respective years .

business description we are a full service real estate company with extensive experience developing , building , owning and managing high-quality , institutional-grade office , retail and multifamily properties in attractive markets throughout the mid-atlantic and southeastern united states . as of december 31 , 2016 , our operating property portfolio was comprised of 37 retail properties , six office properties and five multifamily properties . in addition to our operating property portfolio , we had two retail properties , two office properties , two one multifamily properties and one mixed-use property in various states of development and stabilization as of december 31 , 2016. as of december 31 , 2016 , we owned 100 % of the interests in all of the properties in our operating property portfolio . substantially all of our assets are held by , and all of our operations are conducted through , our operating partnership . we are the sole general partner of our operating partnership and , as of december 31 , 2016 , we owned , through a combination of direct and indirect interests , 68.1 % of the outstanding op units in our operating partnership . we elected to be taxed as a reit for u.s. federal income tax purposes commencing with the taxable year ended december 31 , 2013. our principal executive office is located at 222 central park avenue , suite 2100 , virginia beach , virginia 23462 in the armada hoffler tower at the virginia beach town center . in addition , we have construction offices located at 249 central park avenue , suite 300 , virginia beach , virginia 23462 and 1300 thames street , suite 30 , baltimore , maryland 21231. the telephone number for our principal executive office is ( 757 ) 366-4000. we maintain a website at www.armadahoffler.com . the information on , or accessible through , our website is not incorporated into and does not constitute a part of this report . 49 critical accounting policies and estimates our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements that have been prepared in accordance with gaap . the preparation of these financial statements requires us to exercise our best judgment in making estimates that affect the reported amounts of assets , liabilities , revenues and expenses . we base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances . we evaluate our estimates on an ongoing basis , based upon current available information . actual results could differ from these estimates . we believe the following accounting policies and estimates are the most critical to understanding our reported financial results as their effect on our financial condition and results of operations is material . revenue recognition rental revenues we lease our properties under operating leases and recognize base rents on a straight-line basis over the lease term . we also recognize revenue from tenant recoveries , through which tenants reimburse us for expenses paid by us such as utilities , janitorial , repairs and maintenance , security and alarm , parking lot and grounds , general and administrative , management fees , insurance and real estate taxes , on an accrual basis . our rental revenues are reduced by the amount of any leasing incentives on a straight-line basis over the term of the applicable lease . we include a renewal period in the lease term only if it appears at lease inception that the renewal is reasonably assured . we begin recognizing rental revenue when the tenant has the right to take possession of or controls the physical use of the property under lease . we maintain control of the physical use of the property under lease if we serve as the general contractor for the tenant . rental revenue is recognized subject to management 's evaluation of tenant credit risk . the extended collection period for accrued straight-line rental revenue along with our evaluation of tenant credit risk may result in the non-recognition of all or a portion of straight-line rental revenue until the collection of such revenue is reasonably assured . general contracting and real estate services revenues we recognize revenue on construction contracts using the percentage-of-completion method . using this method , we recognize revenue and an estimated profit as construction contract costs are incurred based on the proportion of incurred costs to total estimated costs under the contract . provisions for estimated losses on uncompleted contracts are recognized immediately in the period in which such losses are determined . changes in job performance , job conditions , and estimated profitability , including those arising from contract penalty provisions and final contract settlements , may result in revisions to costs and income and are recognized in the period in which they are determined . we include profit incentives in revenues when their realization is probable and the amount can be reasonably estimated . general contracting and real estate services revenue is recognized subject to management 's evaluation of customer credit risk . operating property acquisitions in connection with operating property acquisitions , we identify and recognize all assets acquired and liabilities assumed at their estimated fair values as of the acquisition date . the purchase price allocations to tangible assets , such as land , site improvements and buildings and improvements are presented within income producing property in the consolidated balance sheets and depreciated over their estimated useful lives . acquired lease intangibles are presented within other assets and liabilities in the consolidated balance sheets and amortized over their respective lease terms . the company amortizes in-place lease assets as depreciation and amortization expense on a straight-line basis over the remaining term of the related leases . we amortize above-market lease assets as reductions to rental revenues on a straight-line basis over the remaining term of the related leases . we amortize below-market lease liabilities as increases to rental revenues on a straight-line basis over the remaining term of the related leases . story_separator_special_tag noi is not a measure of operating income or cash flows from operating activities as measured by gaap and is not indicative of cash available to fund cash needs . as a result , noi should not be considered an alternative to cash flows as a measure of liquidity . not all companies calculate noi in the same manner . we consider noi to be an appropriate supplemental measure to net income because it assists both investors and management in understanding the core operations of our real estate and construction businesses . see note 3 to our consolidated financial statements in item 8 of this annual report on form 10-k for a reconciliation of noi to net income . we define same store properties as those that we owned and operated and that were stabilized for the entirety of both periods compared . same store properties exclude those that were in lease-up during the periods compared . we generally consider a property to be in lease-up until the earlier of : ( i ) the quarter after the property reaches 80 % occupancy or ( ii ) the thirteenth quarter after the property receives its certificate of occupancy . office segment data replace_table_token_13_th ( 1 ) stabilized properties as of the end of the periods presented . rental revenues for the year ended december 31 , 2016 decreased $ 10.6 million compared to the year ended december 31 , 2015 . noi for the year ended december 31 , 2016 decreased $ 8.3 million compared to the year ended december 31 , 2015 . the decreases in rental revenues and noi resulted from the dispositions of richmond tower and oyster point , which occurred in the first quarter and third quarter of 2016 , respectively . rental revenues for the year ended december 31 , 2015 increased $ 3.7 million compared to the year ended december 31 , 2014 . noi for the year ended december 31 , 2015 increased $ 2.5 million compared to the year ended december 31 , 2014 . the increases in rental revenues and noi resulted from the full year operation of 4525 main street and our delivery of three new build-to-suit buildings for oceaneering international and the commonwealth of virginia . these increases were partially offset by property dispositions – the sentara williamsburg medical office building that we sold in the first quarter of 2015 and the virginia natural gas office building that we sold in the fourth quarter of 2014 . 52 office same store results office same store rental revenues , property expenses and noi for the comparative years ended december 31 , 2016 and 2015 and december 31 , 2015 and 2014 were as follows : replace_table_token_14_th ( 1 ) same store excludes 4525 main street , the richmond tower building , the oyster point building , the oceaneering international building and the sentara williamsburg medical office building . ( 2 ) same store excludes 4525 main street , the two commonwealth of virginia buildings , the oceaneering international building , the sentara williamsburg medical office building and the virginia natural gas office building . same store rental revenues for the year ended december 31 , 2016 decreased slightly compared to the year ended december 31 , 2015 because of lower occupancy at one columbus and armada hoffler tower in the town center of virginia beach . the decrease in rental revenues was more than offset by decreases in property expenses , specifically utilities , which were lower due to lower usage in 2016. same store rental revenues and noi for the year ended december 31 , 2015 increased compared to the year ended december 31 , 2014 because of higher occupancy at two columbus and armada hoffler tower in the town center of virginia beach . retail segment data replace_table_token_15_th ( 1 ) stabilized properties as of the end of the periods presented . rental revenues for the year ended december 31 , 2016 increased $ 24.4 million compared to the year ended december 31 , 2015 . noi for the year ended december 31 , 2016 increased $ 18.8 million compared to the year ended december 31 , 2015 . the increases in rental revenues and noi resulted primarily from property acquisitions and new real estate placed into service . during the year ended december 31 , 2016 , we acquired the 11-property retail portfolio , southgate square , southshore shops , columbus village ii and renaissance square and placed into service brooks crossing and lightfoot marketplace . rental revenues for the year ended december 31 , 2015 increased $ 8.1 million compared to the year ended december 31 , 2014 . noi for the year ended december 31 , 2015 increased $ 6.4 million compared to the year ended december 31 , 2014 . the increases in rental revenues and noi resulted primarily from property acquisitions and new real estate 53 placed into service . during the year ended december 31 , 2015 , we acquired perry hall marketplace , stone house square , socastee commons , columbus village and providence plaza and placed into service sandbridge commons . story_separator_special_tag e:10pt ; '' > 56 consolidated results of operations the following table summarizes our results of operations for each of the three years ended december 31 , 2016 : replace_table_token_21_th rental revenues . rental revenues by segment for each of the three years ended december 31 , 2016 were as follows : replace_table_token_22_th rental revenues increased $ 18.2 million during the year ended december 31 , 2016 compared to the year ended december 31 , 2015 . the decrease in office rental revenues resulted primarily from the dispositions of richmond tower and oyster point , which we sold in the first and third quarters of 2016 , respectively . the increase in retail rental revenues resulted primarily from property acquisitions and new real estate placed into service .

retail same store results retail same store rental revenues , property expenses and noi for the comparative years ended december 31 , 2016 and 2015 and december 31 , 2015 and 2014 were as follows : replace_table_token_16_th ( 1 ) same store excludes the 11-property retail portfolio , brooks crossing , columbus village , columbus village ii , greentree shopping center , lightfoot marketplace , providence plaza , perry hall marketplace , renaissance square , sandbridge commons , socastee commons , southgate square , southshore shops and stone house square . ( 2 ) same store excludes columbus village , dimmock square , greentree shopping center , providence plaza , perry hall marketplace , sandbridge commons , socastee commons and stone house square . same store rental revenues and noi for the year ended december 31 , 2016 increased compared to the year ended december 31 , 2015 primarily because of higher occupancy at broad creek , hanbury village , north point , parkway marketplace and fountain plaza . these increases were partially offset somewhat by lower occupancy at 249 central park . same store rental revenues and noi for the year ended december 31 , 2015 increased compared to the year ended december 31 , 2014 primarily because of higher occupancy at south retail in the town center of virginia beach and the redeveloped ground floor space at dick 's at town center . multifamily segment data replace_table_token_17_th ( 1 ) stabilized properties as of the end of the periods presented . rental revenues for the year ended december 31 , 2016 increased $ 4.3 million compared to the year ended december 31 , 2015 . noi increased $ 3.1 million compared to the year ended december 31 , 2015 .

we also provide education and training programs to the healthcare industry and retained search services for physicians and healthcare executives . we report three business segments : ( 1 ) nurse and allied staffing , ( 2 ) physician staffing , and ( 3 ) other human capital management services . our operations reflect a diversified revenue mix across healthcare customers . for the full year 2013 , our revenue from continuing operations was $ 438.3 million . our nurse and allied staffing business segment was 63 % of revenue and is comprised of travel nurse , travel allied and branch based local nurse and allied staffing . our locum tenens business segment 24 was 28 % of our revenue and consists of physician staffing services with placements across multiple specialties . our other human capital management services business segment was 9 % of our revenue and consists of education and training , as well as retained search services related primarily to physicians and healthcare executives . in february 2013 , we sold our clinical trial services business so that we could focus on our core business of providing flexible workforce solutions to the healthcare market . accordingly , our former clinical trials business segment is reflected as discontinued operations on our consolidated financial statements contained in this report . for additional information , see footnote 3 - assets held for sale and discontinued operations contained elsewhere in this report . in december 2013 , we acquired the assets of on assignment , inc. 's allied healthcare staffing division for $ 28.7 million . we believe this acquisition complements our current operations by : ( 1 ) adding new skillsets to our traditional staffing offerings , ( 2 ) expanding our local branch network , which will allow us to expand our local market presence and our msp business , ( 3 ) diversifying our customer base into the local ambulatory care and retail market , which provides more balance between our large volume based customers and our small local customers , and ( 4 ) better positioning us to take additional market share at our msp accounts . certain transitional services , including , but not limited to , billing and payroll , are being provided post-acquisition by on assignment , inc. to our allied health group until we completely transition that business to our systems . we anticipate having the transition substantially completed by the end of the second quarter of 2014. this business has been included in the presentation of our financial statements contained in this report . for more information on this acquisition , see footnote 5 - acquisitions to the consolidated financial statements contained elsewhere in this report . for the year ended december 31 , 2013 , our revenue from continuing operations was $ 438.3 million , and we had a net loss from continuing operations of $ 54.3 million , or a $ 1.75 loss per diluted share . our net loss from continuing operations in the year ended december 31 , 2013 was entirely due to a deferred tax valuation allowance and a trade names impairment charge recorded in the fourth quarter of 2013. see footnote 12 - income taxes , to the consolidated financial statements . during 2013 , we generated $ 8.7 million in cash flow from operations and received net cash of $ 45.7 million from the sale of our clinical trial services business , which was used , in part , to reduce our total debt by $ 25.3 million and to invest in the acquisition of the assets of on assignment 's allied healthcare staffing division . we ended the year with total debt of $ 8.6 million and $ 8.1 million of cash , resulting in a ratio of debt , net of cash , to total capitalization of 0.3 % . in general , we evaluate our financial condition and operating results by revenue , contribution income ( see segment information ) , and net ( loss ) income . we also use measurement of our cash flow generation and operating and leverage ratios to help us assess our financial condition . in addition , we monitor several key volume and profitability indicators such as number of orders , contract bookings , number of ftes , days filled and price . nurse and allied staffing our nurse and allied staffing segment provides traditional staffing , including temporary and permanent placement of travel nurses and allied professionals , and branch based local nurses and allied staffing . we provide flexible workforce solutions to the healthcare market through diversified offerings meeting the special needs of each client . our services include : msp , workforce assessment , internal resource pool consulting and development , emr transition staffing , recruitment process outsourcing services , and traditional staffing . our clients include : public and private acute-care and non-acute care hospitals , government facilities , schools , outpatient clinics , ambulatory care facilities , retailers , and many other healthcare providers . the majority of our revenue is generated from staffing rns on long-term contract assignments ( typically 13-weeks in length ) at hospitals and health systems using the following brands : cross country travcorps , novapro travel , medstaff travel , cru48 travel , and assignment america . the cru48 travel brand is used to identify and staff travel professionals on assignment who are pre-qualified and ready to begin assignments within one to two weeks ( as opposed to the typical lead time of four or five weeks for travel healthcare professionals ) at a hospital client which has an urgent need . additionally , we offer a short-term staffing solution of rns , licensed practical nurses , and certified nurse assistants on per diem and short-term assignments through our national network of local branch offices . story_separator_special_tag our ratio of contract bookings as a percentage of working nurses was 102 % in the fourth quarter of 2013 and is running at 104 % in our first quarter of 2014. we expect that staffing related to emr technology implementations as well as msp programs will continue to be growth drivers in our nurse and allied staffing segment in 2014. physician staffing our physician staffing business is headquartered in berkeley lake , georgia and offers multi-specialty locum tenens ( temporary physician staffing ) services to the healthcare industry in all 50 states . we provide physicians as independent 26 contractors on temporary assignments at various healthcare facilities , such as acute and non-acute care facilities , medical group practices , government facilities , and managed care organizations . our physician staffing business revenue and earnings are impacted by the demand for temporary physician staffing services and the supply of qualified physicians . when there are not enough physicians to fill the number of vacancies at hospitals , practice groups or other healthcare facilities , demand increases for our services . in general , we believe that in periods when physicians are looking for more flexibility , have concerns with cost and availability of malpractice insurance , or want to avoid managing a practice , supply increases . in periods where the physicians are looking for more stability , supply decreases . demand and supply constraints may vary based on the specialty of the physician . we monitor several key volume and profitability indicators for each specialty area of this business , such as physician staffing days filled and revenue per days filled . in addition , we monitor this segment 's revenue , contribution income and contribution income as a percentage of revenue . during 2013 , we experienced a decrease in demand which , we believe was in part due to , what we believe is an increase in the number of physicians willing to accept permanent opportunities . we believe physicians have been seeking employment with hospitals at higher rates in the past few years due to : the difficulty of transitioning private practices to emr , traversing the maze of insurance company requirements , financial strains on private practices from repeated threatened pay cuts based on medicare 's sustainable growth rate formulas , and the uncertain future of healthcare associated with aca . becoming hospital staff provides financial certainty and the ability to focus more on practicing medicine . we believe this shift in employment provides opportunity for the locum tenens industry , because hospitals will still need to fill open positions when these staff physicians take vacation time , take leaves of absence or sabbaticals , and attend continuing education seminars . while we expect this trend to continue in the short-term , we believe the future outlook for the physician staffing industry is positive as demand for physicians is projected to increase by 2025 due to the demographics of a growing and aging population along with healthcare reform that is expected to be directionally favorable to our business . the needs will be particularly strong in the primary care specialties due to recent decreases in medical school graduates entering the primary care field . locum tenens should benefit from these shortage trends and demands particularly with an ever increasing aging population and the anticipated increase in utilization of healthcare services . we believe our physician staffing services business is well positioned to respond to the current and future needs of its healthcare customers . other human capital management services education and training services our cross country education ( cce ) subsidiary , headquartered in brentwood , tennessee , offers “ in person ” one-day seminars , conferences and e-learning through various independent contractors who are experts in their field on topics pertaining to their profession . cce is an approved provider of continuing education with more than 35 professional healthcare associations , and also works with national and state boards and associations . cce is expanding its online presence and intends to continue to move toward a greater offering of blended learning opportunities for a professional that combines live seminar offerings with audio and e-learning products . cce trains professionals in the fields of physical and occupational therapy , behavioral health , nursing , long-term care , coding and billing , regulatory compliance , dentistry , health information and healthcare administration . in 2013 , cce held 4,679 seminars and conferences that were attended by more than 120,000 registrants in the u.s. we extend these educational services to our field employees on favorable terms as a recruitment and retention tool . in 2013 , cce 's live seminar attendance decreased approximately 11 % from the prior year due to what we believe are several factors . first , significant budget cuts to both non-medicaid and medicaid-based mental health services negatively impacted employment for public mental health programs . we believe this reduced demand for our programs as these professionals may have obtained to a greater degree continuing education credits via e-learning offerings . second , the education industry is increasingly offering live webcasting and rebroadcasting of seminars . to address this shift , cce has significantly expanded its offerings in this area while continuing to provide thousands of live seminars each year . cce is also expanding its online presence and will continue to move toward a greater offering of blended learning opportunities for professionals that combine live seminar offerings with audio and e-learning products . cce is also focusing greater efforts on developing strategic partnerships with provider organizations that can extend our learning programs to their licensed employees . retained search cejka has been a leading physician , executive , advanced practice and allied health search firm for more than thirty years , recruiting top healthcare talent for organizations nationwide through a team of experienced professionals , advanced use of recruitment technology and commitment to service excellence .

results of operations the following table summarizes , for the periods indicated , selected consolidated statements of operations data expressed as a percentage of revenue . our historical results of operations are not necessarily indicative of future operating results . replace_table_token_3_th segment information in accordance with the segment reporting topic of the fasb asc , we report three business segments – nurse and allied staffing , physician staffing , and other human capital management services , described below . nurse and allied staffing - the nurse and allied staffing business segment provides travel nurse and allied staffing services and per diem nurse services primarily to acute care hospitals . nurse and allied staffing services are marketed to public and private healthcare and for-profit and not-for-profit facilities throughout the u.s. we aggregate our cross country staffing and allied health group brands that we market to our customers in this business segment . physician staffing – the physician staffing business segment provides multi-specialty locum tenens services to the healthcare industry throughout the u.s. other human capital management services - the other human capital management services business segment includes the combined results of our education and training and retained search businesses that both have operations within the u.s. 30 information on operating segments and reconciliation to ( loss ) income from operations for the periods indicated are as follows : replace_table_token_4_th _ ( a ) we define contribution income as ( loss ) income from operations before depreciation , amortization , acquisition costs , restructuring costs , legal settlement charges , impairment charges , and other corporate expenses not specifically identified to a reporting segment . contribution income is a measure used by management to assess operations and is provided in accordance with the segment reporting topic of the fasb asc .

the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date . the company regularly review historical and anticipated future pre-tax results of operations to determine whether we will be able to realize the benefit of deferred tax assets . a valuation allowance is required to reduce the deferred tax asset when it is more-likely-than-not that all or some portion of the deferred tax asset will not be realized due to the lack of sufficient taxable income . the company establishes reserves for uncertain tax positions that reflect its best estimate of deductions and credits that may not be sustained on a more-likely-than-not basis . as of story_separator_special_tag you should read the following discussion in conjunction with our financial statements and the accompanying 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 the results discussed in or implied by any of the forward-looking statements as a result of various factors , including those listed elsewhere in this annual report on form 10-k. see “ risk factors ” and “ forward-looking statements ” above . reverse recapitalization on june 10 , 2014 , the company entered into a definitive transaction agreement with the owners of jbgl builder finance llc and its consolidated subsidiaries and affiliated companies ( collectively “ builder finance ” ) , and jbgl capital companies ( “ capital ” ) , a combined group of commonly managed limited liability companies and partnerships ( collectively with builder finance “ jbgl ” ) , which provided that we would acquire jbgl for $ 275 million , payable in cash and shares of our common stock ( the “ transaction ” ) . jbgl is a real estate operator involved in the purchase and development of land for residential use , construction lending and home building operations . the transaction was completed on october 27 , 2014 ( “ transaction date ” ) . pursuant to the terms of the transaction , we paid the $ 275 million purchase price with approximately $ 191.8 million in cash and the remainder in 11,108,500 shares of our common stock valued at approximately $ 7.49 per share . the cash portion of the purchase price was primarily funded from the proceeds of a $ 70.0 million rights offering conducted by the company ( the $ 70.0 million includes proceeds from purchases of shares of common stock by certain funds and accounts managed by greenlight capital , inc. and its affiliates ( “ greenlight ” ) and third point llc and its affiliates ( “ third point ” ) ) and $ 150.0 million of debt financing provided by greenlight pursuant to a loan agreement , with the lenders from time to time party thereto ( the “ loan agreement ” ) . the $ 70.0 million rights offering included a registered offering by the company of transferable rights to the public holders of its common stock , as of september 15 , 2014 ( the “ rights offering ” ) to purchase additional shares of common stock . each right permitted the holder to purchase , at a rights price ultimately equal to $ 5.00 per share of common stock , 2.2445 shares of common stock . 4,843,384 shares of common stock were purchased in the public rights offering for aggregate gross proceeds of approximately $ 24.2 million . in addition to the rights offering , greenlight and third point participated in a private rights offering to purchase additional shares of common stock pursuant to commitment letters . pursuant to its commitment letter , third point agreed to participate in the private rights offering for its full basic subscription privilege in the rights offering and to purchase , simultaneously with the consummation of the rights offering to the public , all of the available shares not otherwise sold in the rights offering following the exercise of all other public holders ' basic subscription privileges . pursuant to such commitment letters , greenlight purchased 4,957,618 shares of common stock for aggregate gross proceeds of approximately $ 24.8 million and third point purchased 4,198,998 shares of common stock for aggregate gross proceeds of approximately $ 21.0 million . as described above , at the time the transaction was completed , biofuel energy corp. ( “ biofuel ” ) was a non-operating public shell corporation with nominal operations and assets consisting of cash , deferred tax assets , and nominal other nonoperating assets . as a result of the transaction the owners and management of jbgl gained effective operating control of the combined company . accordingly , for financial reporting purposes , the transaction was deemed to be a capital transaction in substance and recorded as a reverse recapitalization of jbgl whereby jbgl is deemed to be the continuing , surviving entity for accounting purposes , but through reorganization , has deemed to have adopted the capital structure of biofuel . because the acquisition was considered a reverse recapitalization for accounting purposes , the combined historical financial statements of jbgl became our historical financial statements and , from the completion of the acquisition on october 27 , 2014 , the financial statements have been prepared on a consolidated basis . the assets and liabilities of biofuel have been brought forward at their book value and no goodwill has been recognized in connection with the transaction . as a result of the transaction , green brick changed its business direction and is now in the real estate industry . the financial statements set forth in this annual report on form 10-k for all periods prior to the reverse recapitalization are the historical financial statements of jbgl , and have been retroactively restated to give effect to the transaction . 30 overview of the business we are a real estate operator involved in the purchase and development of land for residential use , construction lending and home building operations . story_separator_special_tag our operating results for the year ended december 31 , 2014 are not necessarily indicative of the results that may be expected for any future periods . the consolidated financial statements and notes thereto include the accounts of the company and its subsidiaries . all intercompany accounts and transactions have been eliminated in consolidation . story_separator_special_tag was more-likely-than-not that all of our net deferred tax assets will be realized in accordance with u.s. gaap , except for state income tax net operating loss carryforwards , for which a valuation allowance in the amount of $ 1.2 million has been recorded . except for the valuation allowance pertaining to the state net operating losses , the valuation allowance previously recorded by biofuel was reversed into additional paid-in-capital as of october 27 , 2014. the valuation allowance reversal of approximating $ 63.9 million was recorded as part of the reverse recapitalization and had no effect on income tax expense . immediately prior to the transaction , jbgl consisted of entities that filed individual partnership tax returns for federal income tax purposes . several of the underlying entities were wholly-owned limited liability corporations ( “ llc 's ” ) , and thus disregarded for federal income tax purposes , while several other entities had non-controlled interests , causing these llc entities to be treated as regarded entities that filed partnership tax returns for federal income tax purposes . the transaction resulted in the ownership of jbgl by green brick , a corporate entity . effectively , jbgl and its wholly-owned llc interests became disregarded for federal purposes , taxable as a branch of the corporate entity . as such , the transaction resulted in a change in tax status of the partnerships . the company recognized a $ 26.6 million income tax benefit relating to the change in tax status of the jbgl entities , relating primarily to the tax attributes that arose from the transaction . 33 consolidated financial data the consolidated historical financial data presented below reflect our land development and builder operations segments , and are not necessarily indicative of the results to be expected for any future period . as described in note 3 to our consolidated financial statements included elsewhere in this annual report on form 10-k , biofuel acquired jbgl on october 27 , 2014 . the accounting treatment of the transaction is reflected as a “ reverse recapitalization , ” whereby jbgl is the surviving accounting entity for financial reporting purposes . therefore , our historical results for periods prior to the transaction are the same as jbgl 's historical results . replace_table_token_11_th matters affecting the comparability of financial results our key operating metrics improved substantially during the year ended december 31 , 2013 as compared to the prior period due to the acquisition of cb jeni in april 2012 and the inclusion of a full year of operations for cb jeni in 2013 following the acquisition . 34 year ended december 31 , 2014 compared to the year ended december 31 , 2013 net new home orders and backlog the table below represents new home orders and backlog related to our builder operations segment . replace_table_token_12_th net new home orders for the year ended december 31 , 2014 decreased by 43 homes , or 6.7 % , from 644 for the year ended december 31 , 2013 to 601 for the year ended december 31 , 2014 . overall absorption rate for the year ended december 31 , 2014 was an average of 20.0 per selling community ( 1.7 monthly ) , compared to an average of 22.2 per selling community ( 1.9 monthly ) for the year ended december 31 , 2013 . our monthly absorption rate and number of net new home orders decreased in part due to the timing of the opening of new communities and the closing out of existing communities . our cancellation rate was approximately 15.0 % for the year ended december 31 , 2014 , compared to 14.8 % for the year ended december 31 , 2013 . management believes a cancellation rate in the range of 15 % to 20 % is representative of an industry average cancellation rate . backlog units increased by 27 homes , or 14.8 % , to 209 as of december 31 , 2014 , from 182 as of december 31 , 2013 . the dollar value of backlog units increased $ 19.9 million , or 34.0 % , to $ 78.6 million as of december 31 , 2014 from $ 58.6 million as of december 31 , 2013 . the increase in value of backlog units reflects an increase in the number of homes in backlog , as a result of an increase in the average selling community count to 30 for the year ended december 31 , 2014 compared to 29 for the year ended december 31 , 2013 and longer building cycle , and an increase in the average sales price of homes in backlog . our average sales price of homes in backlog increased $ 53,682 , or 16.7 % , to $ 375,847 for the year ended december 31 , 2014 , compared to $ 322,165 for the year ended december 31 , 2013 . the increase in the average sales price of homes in backlog is the result of changes in product mix related to higher priced single family homes over lower priced townhomes contracted for sale during the period and local market appreciation . the average sales price of homes may fluctuate depending on the mix of typical homes delivered and sold during a period . the change in the average sales price of homes is part of our natural business cycle . new homes delivered and home sales revenue the table below represents home sales revenue and new homes delivered related to our builder operations segment .

results of operations land development during the year ended december 31 , 2014 , our land development segment revenue increased $ 11.7 million , or 34.7 % , to $ 45.5 million from $ 33.7 million for the year ended december 31 , 2013 . the increase was comprised of $ 6.9 million due to a 20.7 % increase in finished inventory lots delivered to 449 for the year ended december 31 , 2014 , from 372 for the year ended december 31 , 2013 , and an increase of $ 4.8 million related to an increase in the average sales price per lot of $ 101,229 per lot for the year ended december 31 , 2014 from $ 90,591 per lot for the year ended december 31 , 2013 . builder operations during the year ended december 31 , 2014 , our builder operations segment delivered 587 homes , with an average sales price of $ 341,823 . during the same period , our builder operations segment generated approximately $ 200.7 million in revenue . for the year ended december 31 , 2014 , net new home orders totaled 601 , a 6.7 % decrease from the same period in 2013 . at december 31 , 2014 , our builder operations segment had a backlog of 209 sold but unclosed homes , a 14.8 % increase from the same period in 2013 , with a total value of approximately $ 78.6 million , an increase of $ 19.9 million , or 34.0 % , from december 31 , 2013 .

overview our company , founded in 1980 , has recently transitioned from its former business as a skin health company to a company , focused on real estate development and asset management , concentrating primarily on investments in , and the management and development of , income producing real estate assets . until the sale of our consumer products division , we were a global skin health company providing integrated disease management and aesthetic solutions to dermatologists , professional aestheticians and consumers . starting in 2014 , we began to sell off certain business units and product lines and on january 23 , 2017 , we sold our last remaining major product line , our consumer products division ( see note 2 discontinued operations , to our consolidated financial statements ) . following this transaction , we had only minimal operations and assets remaining of immaterial value to our company . in 2018 , we sold certain of those assets , remaining inventory and assets of this business line , and now no longer operate within the skin health business . our focus is now to build our company into a leading real estate , asset management and development company concentrated primarily on investments in high yield income producing assets and other opportunistic commercial properties via direct property ownership and or asset management . our objective is to generate long term net asset value growth while adhering to institutional best practices and a deep research process for all investments . for income producing properties , we intend to acquire assets that provide recurring income with the potential for income growth over the long-term . we believe there can be an attractive risk/reward profile to such properties based on the location and the underlying creditworthiness of the tenants . we intend to use such income generation to fund additional acquisitions and development opportunities and general corporate purposes . in addition , we intend to invest in land assets that can be developed into income generating properties . we believe that our size and scale provide an opportunity to take advantage of smaller-tier assets that most traditional investors do not focus on due to size limitations , thus creating unique investment opportunities . in particular , we intend to target assets in secondary and tertiary markets with assets that require minimal capital expenditures but generate initial unlevered cash flow yields that are higher than those in primary markets . a second component of our investment strategy will revolve around sourcing asset management opportunities for which we would operate as an asset manager of real estate properties . we are not structured as a reit , thus we have the ability to retain all earnings and to operate in real estate asset management , development , and peripheral real estate activities , items limited by reit requirements . we will look to utilize our existing infrastructure to provide economies of scale to owners of real estate assets as it grows its portfolio over time . contribution transaction on march 31 , 2017 , we entered into the contribution agreement with fcop , fcreit , and fc global realty operating partnership , llc , our wholly-owned subsidiary , which was amended on august 3 , 2017 , october 11 , 2017 and december 22 , 2017. pursuant to the contribution agreement , as amended , fcop contributed certain real estate assets to us . in exchange , fcop received shares of our common stock and then newly designated series a convertible preferred stock . this contribution transaction closed on may 17 , 2017. on the closing date , fcop transferred assets totaling agreed upon value of $ 10 million to us , consisting of the following : ● three unoccupied land sites intended for development as gas stations located in northern california , ● a 75 % interest in a limited liability company that owns an unoccupied land site intended for development as a gas station , located in northern california ; and ● a 100 % interest in a limited liability company which owns a 17.9133 % interest in a limited liability company called avalon jubilee llc that owns property located in los lunas , new mexico being developed as a single family residential development . 25 in exchange for these assets , we issued to fcop 879,234 shares of common stock , which represented approximately 19.9 % of our issued and outstanding common stock immediately prior to the closing date , at a per share value of $ 2.5183 , or $ 2,214,175 in the aggregate . we issued the remaining $ 7,785,825 of the approximately $ 10 million agreed upon consideration to fcop in the form of 123,668 shares of newly designated non-voting series a convertible preferred stock . each share of the series a convertible preferred stock was originally convertible into 25 shares of common stock , subject to the satisfaction of certain conditions , including stockholder approval of such conversion , which was obtained on october 12 , 2017. these shares were subsequently converted into common stock . the contribution agreement contemplated that additional contributions would be made prior to december 31 , 2017 if fcop completed its purchase of additional properties ; however , fcop failed to acquire those additional properties before the december 31 , 2017 deadline and , therefore , only the closing described above was completed . we elected to early adopt asu 2017-01 , business combinations ( topic 805 ) clarifying the definition of a business . accordingly , the determination of whether the transaction represents a business combination was evaluated by applying asu 2017-01 guidance . we have determined that the group of assets assumed do not include ( and also , none of them on a stand-alone basis ) include , an input and a substantive process that together significantly contribute to the ability to create output and thus it was determined that the contribution represents an acquisition of assets rather than a business combination . accordingly , the total sum of the fair value of consideration given ( i.e . story_separator_special_tag the judgments regarding the existence of indicators of impairment are based on the operating performance , market conditions , as well as our ability to hold and our intent with regard to each property . during the year ended december 31 , 2018 , based on management 's most recent analyses , impairment losses have been identified related to our investment properties amounting to $ 326 thousand . impairment of investment in other company . we evaluate investments in other company for impairment whenever events or changes in circumstances indicate that the carrying amount of an investment may not be recoverable in accordance with asc 320 `` investments - debt and equity securities '' . the judgments regarding declines in value are based on operating performance , market conditions and our ability and intent to hold as well as our ability to influence significant decisions of the venture . during the year ended december 31 , 2017 , based on management 's then most recent analyses , prepared based on the property management 's ability to execute full development of the property , an impairment loss had been identified related to our investment in other company amounting to $ 1.4 million . in early 2019 , we evaluated the other company 's draft 2018 financial statements , had discussions with the property manager ( and majority shareholder ) regarding the property 's development status and lack of potential funding for the continued development of the project . based on these discussions and our inability to influence any decisions made on the project 's development , we had an updated analysis completed , by a third-party appraiser , to the current fair value of the investment . as a result , an impairment loss was identified related to our investment in other company of approximately $ 1.5 million . revaluation of option to purchase redeemable convertible preferred stock . for the year ended december 31 , 2018 , the revaluation of the option to purchase redeemable convertible preferred stock decreased by approximately $ 3.3 million due to the decrease in the share closing price of the underlying redeemable convertible preferred stock , which caused the fair value of the instrument to decrease . for the year ended december 31 , 2017 , the revaluation of the option to purchase redeemable convertible preferred stock increased to approximately $ 3.0 million due to excess of the initial value of the option liability over the proceeds received , net with the changes in the fair value of the option at december 31 , 2017. extinguishment of option to purchase redeemable convertible preferred stock . for the year ended december 31 , 2018 , we recorded an extinguishment of the option to purchase redeemable convertible preferred stock of $ 0.44 million due to the cancellation of the redeemable convertible preferred stock as of september 24 , 2018. revaluation of asset contribution related financial instruments , net . for the year ended december 31 , 2017 , we recorded a revaluation of asset contribution was approximately $ 1.39 million due to the re-measurement of the asset contribution that resulted in a loss due to the reduced fair value of the asset contribution related to the financial instruments . interest and other financing income ( expense ) , net . net interest and other financing income of $ 3 thousand for the year ended december 31 , 2018 related to notes payable which was offset by currency conversion income in israel . for the year ended december 31 , 2017 net interest and other financing expense was approximately $ 0.27 million . loss from discontinued operations . for the year ended december 31 , 2018 , we recognized a loss of approximately $ 0.17 million related to the discontinued operations as a result of the sale of residual inventory to third parties , offset by historical tax assessments and adjustments . we recognized a net loss from discontinued operations of approximately $ 2.46 million , including the loss on the sale of the discontinued operations , in the year ended december 31 , 2017 , which represents the difference between the adjusted net purchase price and the carrying value of the disposal group . net loss . the factors discussed above resulted in net loss , including discontinued operations , of approximately $ 2.04 million during the year ended december 31 , 2018 , as compared to net loss of approximately $ 19.38 million of which approximately $ 2.46 million was attributable to discontinued operations during the year ended december 31 , 2017 , with us primarily becoming a real estate asset management and development company . 28 liquidity and capital resources as of december 31 , 2018 , we had a deficit approximately $ 139.7 million and cash and cash equivalents of approximately $ 1.8 million . to date , and subsequent to the recent sale of our last significant business unit , we have dedicated most of our financial resources to general and administrative expenses . we have historically financed our activities with cash from operations , the private placement of equity and debt securities , borrowings under lines of credit and , in the most recent periods , with sale of certain assets and business units . we will be required to obtain additional liquidity resources in order to support our operations . at this time , there is no guarantee that we will be able to obtain an adequate level of financial resources required for the short and long-term support of our operations or that we will be able to obtain additional financing as needed , or meet the conditions of such financing , or that the costs of such financing may not be prohibitive . story_separator_special_tag messrs. rafaeli , mcgrath , and ben-dror , respectively . these cash payments are consideration for certain consulting services provided by the note holders specified in the stock grant agreement .

summary of cash flows the following table provides detailed information about our net cash flow for all financial statement periods presented in this report : cash flow ( in thousands ) replace_table_token_3_th net cash used in operating activities was approximately $ 2.9 million for the year ended december 31 , 2018 compared to approximately $ 9.3 million for the year ended december 31 , 2017. the primary reason for the change is the continual wind-down of the former business operations ahead of the acquisition of income-producing real estate properties . net cash used in investing activities was approximately $ 0.3 million for the year ended december 31 , 2018 compared to net cash provided by investing activities of approximately $ 6.8 million for the year ended december 31 , 2017. the primary reason for the change was the cash received from the sale of the consumer division to ictv for the year ended december 31 , 2017. net cash provided by financing activities was approximately $ 4.1 million for the year ended december 31 , 2018 compared to approximately $ 0.9 million for the year ended december 31 , 2017. the increase was due to the additional funding received from opportunity fund i-ss , llc , or ofi , during 2018. private placement on december 22 , 2017 , we entered into a securities purchase agreement with ofi , under which ofi could invest up to $ 15 million in us in a series of closings , in exchange for which ofi would receive shares of series b preferred stock at a purchase price of $ 1.00 per share . on december 22 , 2017 , we completed the first closing , pursuant to which ofi provided $ 1.5 million to us in exchange for 1,500,000 shares of series b preferred stock .

gross water sales comprise 89.2 % of total operating revenues for the year ended december 31 , 2014. our profitability is also attributed to the various contract operations , water and sewer service line protection plans and other services we provide . water sales are subject to seasonal fluctuations , particularly during summer when water demand may vary with rainfall and temperature . in the event temperatures during the typically warmer months are cooler than expected , or rainfall is greater than expected , the demand for water may decrease and our revenues may be adversely affected . we believe the effects of weather are short term and do not materially affect the execution of our strategic initiatives . our contract operations , service line protection plans and other services provide a revenue stream that is not affected by changes in weather patterns . while water sales revenues are our primary source of revenues , we continue to seek growth opportunities to provide wastewater service in delaware and the surrounding areas . we also continue to explore and develop relationships with developers and municipalities in order to increase revenues from contract water and wastewater operations , wastewater management services , design , construction and engineering services . we plan to continue developing and expanding our contract operations and other services in a manner that complements our growth in water service to new customers . our anticipated growth in these areas is subject to changes in residential and commercial construction , which may be affected by interest rates , inflation and general housing and economic market conditions . we anticipate continued growth in our non-regulated division due to our water and sewer service line protection plans . water division overview artesian water , artesian water maryland and artesian water pennsylvania provide water service to residential , commercial , industrial , governmental , municipal and utility customers . increases in the number of customers contribute to increases , or help to offset any intermittent decreases in our operating revenue . the town of middletown , which is one of our municipal customers and is located in southern new castle county , delaware , has nearly doubled in population since 2001 , and population growth in this area is expected to continue for some time as a result of ongoing and future residential , commercial and industrial construction . as population growth continues in middletown and other areas in delaware , we believe that the demand for water will increase , thereby contributing to an increase in our operating revenues . as of december 31 , 2014 , we had approximately 80,600 metered water customers in delaware , an increase of approximately 900 compared to december 31 , 2013. the number of metered water customers in maryland totaled 2,300 as of december 31 , 2014 , an increase of approximately 60 compared to 2013. the number of metered water customers in pennsylvania totaled 40 , which remained consistent with 2013. for the year ended december 31 , 2014 , approximately 7.6 billion gallons of water were distributed in our delaware systems and approximately 123 million gallons of water were distributed in our maryland systems . wastewater division overview artesian wastewater owns wastewater infrastructure and began providing wastewater services in delaware in july 2005. artesian wastewater maryland , which was incorporated on june 3 , 2008 , is able to provide regulated wastewater services in maryland . our wastewater customers are billed a flat monthly fee , which contributes to providing a revenue stream unaffected by weather . non-regulated division overview artesian utility provides contract water and wastewater operation services to private , municipal and governmental institutions . artesian utility currently operates wastewater treatment facilities for the town of middletown , in southern new castle county , or middletown , under a 20-year contract that expires in july 2022. the facilities include two wastewater treatment stations with capacities of up to approximately 2.5 mgd and 250,000 gallons per day , respectively . we also operate a wastewater disposal facility in middletown in order to support the 2.5 mgd wastewater facility . artesian utility has operated the wslp plan and the sslp plan since 2012. artesian resources initiated the wslp plan in march 2005. the wslp plan covers all parts , material and labor required to repair or replace participating customers ' leaking water service lines up to an annual limit . the wslp plan was expanded in the second quarter of 2008 to include maintenance or repair to customers ' sewer lines . the sslp plan covers all parts , material and labor required to repair or replace participating customers ' leaking or clogged sewer lines up to an annual limit . also , in the second quarter of 2010 , the wslp plan and sslp plan were extended to include non-utility customers of artesian resource s. as of december 31 , 2014 , approximately 18,800 , or 27.1 % , of our eligible water customers signed up for the wslp plan , approximately 14,000 , or 20.2 % , of our eligible customers signed up for the sslp plan and approximately 1,000 non-customer participants signed up for either the wslp plan or sslp plan . 23 artesian development is a real estate holding company that owns properties , including land zoned for office buildings , a water treatment plant and wastewater facility , as well as property for current operations , including an office facility in sussex county , delaware . the facility consists of approximately 10,000 square feet of office space along with nearly 10,000 square feet of warehouse space . this facility allows all of our sussex county , delaware operations to be housed in one central location . artesian consulting engineers no longer offers development and architectural services to outside third parties . artesian will continue to provide design and engineering contract services through our artesian utility subsidiary . story_separator_special_tag maintenance , repairs , and replacement of minor items of plant are charged to expense as incurred . we record water service revenue , including amounts billed to customers on a cycle basis and unbilled amounts , based upon estimated usage from the date of the last meter reading to the end of the accounting period . as actual usage amounts are received , adjustments are made to the unbilled estimates in the next billing cycle based on the actual results . estimates are made on an individual customer basis , based on one of three methods ( the previous year 's consumption in the same period , the previous billing period 's consumption , or averaging ) and are adjusted to reflect current changes in water demand on a system-wide basis . while actual usage for individual customers may differ materially from the estimate , we believe the overall total estimate of consumption and revenue for the fiscal period will not differ materially from actual billed consumption , as the overall estimate has been adjusted to reflect any change in overall demand on the system for the period . we record accounts receivable at the invoiced amounts . the reserve for bad debts is adjusted based on the provision for bad debts , which is calculated as a percentage of total water sales . the company reviews the bad debt provision expense and the reserve for bad debts on a quarterly basis . account balances are written off against the reserve when it is probable the receivable will not be recovered . our regulated utilities record deferred regulatory assets under financial accounting standards board , or fasb , accounting standards codification , or asc , topic 980 , which are costs that may be recovered over various lengths of time as prescribed by the depsc , mdpsc and papuc . as the utility incurs certain costs , such as expenses related to rate case applications , a deferred regulatory asset is created . adjustments to these deferred regulatory assets are made when the depsc , mdpsc or papuc determines whether the expense is recoverable in rates , the length of time over which an expense is recoverable , or , because of changes in circumstances , whether a remaining balance of deferred expense is recoverable in rates charged to customers . adjustments to reflect changes in recoverability of certain deferred regulatory assets may have a significant effect on our financial results . our long-lived assets consist primarily of utility plant in service and regulatory assets . we review for impairment of our long-lived assets , including utility plant in service , in accordance with the requirements of fasb asc topic 360. we review regulatory assets for the continued application of fasb asc topic 980. our review determines whether there have been changes in circumstances or events that have occurred that require adjustments to the carrying value of these assets . adjustments to the carrying value of these assets would be made in instances where changes in circumstances or events indicate the carrying value of the asset may not be recoverabl e. the company believes there are no impairments in the carrying amounts of its long-lived assets or regulatory assets at december 31 , 2014 . 25 story_separator_special_tag purchased under contract from the chester water authority , which is partially offset by an increase in rate case expense of $ 0.2 million . non-utility expenses increased approximately $ 0.1 million , or 3.3 % , primarily the result of an increase in slp plan repairs . the increased repair costs are a result of increased slp plan participation . replace_table_token_6_th property and other taxes increased by $ 0.2 million , or 4.0 % , compared to the same period in 2013 , reflecting increases in tax rates charged for public schools in various areas where artesian holds property and an increase in utility plant subject to taxation . property taxes are assessed on land , buildings and certain utility plant , which include the footage and size of pipe , hydrants and wells primarily owned by artesian water . 27 the ratio of operating expense , excluding depreciation and income taxes , to total operating revenues was 57.1 % for the year ended december 31 , 2014 , compared to 59.0 % for the year ended december 31 , 2013. depreciation and amortization expense increased $ 0.4 million , or 5.1 % , primarily due to continued investment in utility plant in service providing supply , treatment , storage and distribution of water . federal and state income tax expense increased $ 0.8 million , primarily due to higher pre-tax income for the year ended december 31 , 2014 , compared to the year ended december 31 , 2013. our total effective income tax rate , or etr , for 2014 and 2013 was 40.1 % and 40.2 % , respectively . other income , net miscellaneous income decreased $ 24,000 , primarily due to a refund of assessment payments previously paid to the delaware public service commission , or depsc , received in 2013. each year public utility companies , like artesian water , are required to fund the depsc 's operations by paying an assessment based on their estimated annual gross revenues . after periodic review by the depsc , excess funds above those necessary to operate the depsc are refunded to the respective public utility company . the amount refunded to artesian in 2013 reflected an assessment that covers 2011. there were no amounts refunded to artesian in 2014. refunds from the depsc related to excess fund payments are not typical and we can make no assurances that refunds for excess payments will be issued in the future . the decrease in miscellaneous income is partially offset by an increase in the amount of the annual cobank investment patronage distribution .

results of operations 2014 compared to 2013 operating revenues revenues totaled $ 72.5 million for the year ended december 31 , 2014 , $ 3.4 million , or 4.9 % , above revenues for the year ended december 31 , 2013 of $ 69.1 million . water sales revenues increased $ 2.8 million , or 4.6 % , for the year ended december 31 , 2014 from the corresponding period in 2013 , a result of temporary rate increases of 3.98 % and 7.17 % placed into effect on june 10 , 2014 and november 13 , 2014 , respectively , as permitted under delaware law , until permanent rates are determined by the depsc . a portion of the second step of temporary increases was held in reserve based on an estimated outcome . the increase in water sales revenue is partially offset by a decrease in the distribution system improvement charge , or dsic , revenue , as the dsic was reset to zero upon the implementation of the first step of temporary rate increases . we realized 89.2 % of our total operating revenue for the year ended december 31 , 2014 from the sale of water as compared to 89.5 % for the year ended december 31 , 2013. other utility operating revenue increased approximately $ 395,000 , or 12.1 % , for the year ended december 31 , 2014 compared to the year ended december 31 , 2013. the increase is primarily due to an increase in service and finance charges and an increase in wastewater revenue . wastewater revenue increased primarily due to an increase in rates that were fully implemented in 2014 and an increase in the number of wastewater customers .

factors that may cause differences between actual results and those contemplated by forward-looking statements include , but are not limited to , those discussed in `` risk factors '' in part i , item 1a , of this annual report . we undertake no obligation to publicly update or revise any forward-looking statements , including any changes that might result from any facts , events , or circumstances after the date hereof that may bear upon forward-looking statements . furthermore , we can not guarantee future results , events , levels of activity , performance , or achievements . this md & a is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition . as used in this md & a , the words , `` gtt '' , `` we '' , `` our '' , and `` us '' refer to gtt communications , inc. and its consolidated subsidiaries . this md & a should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this annual report . company overview gtt communications , inc. is redefining global communications to serve a cloud-based future , with a powerful purpose of connecting people across organizations , around the world , and to every application in the cloud . we serve large enterprise and carrier clients with complex national and global networking needs , and differentiate ourselves from the competition by providing an outstanding service experience built on our core values of simplicity , speed and agility . a fortune future 50 company , we operate a global tier 1 internet network ranked among the largest in the industry , and own a fiber network that includes an expansive pan-european footprint and subsea cables . our global network includes over 600 pops spanning six continents , and we provide services in more than 140 countries . our comprehensive portfolio of cloud networking services includes : wide area networking , including sd-wan , mpls and vpls ; transport & infrastructure services , including wavelength , ethernet , colocation , dark fiber and video transport ; internet services , including ip transit , dedicated internet access , and broadband internet ; managed services , including managed equipment , managed security , and managed hosting ; and voice services , including sip trunking and hosted pbx . we deliver the following primary service offerings to our clients : wide area networking we provide a variety of wide area networking solutions to meet the growing needs of our clients , including sd-wan , mpls , vpls , and ethernet . we design and implement custom private , public , and hybrid cloud network solutions for our customers , offering bandwidth speeds from 10 mbps to 100 gbps per port with burstable and aggregate bandwidth capabilities . through gtt 's wide area networking services , clients can securely connect to cloud service providers in data centers and exchanges around the world . our cloud connect feature provides private , secure , pre-established connectivity to leading cloud service providers . using gtt 's global network , clients can connect any office location in the world to any application in the cloud . sd-wan is an enterprise networking technology in the early stages of market adoption with high growth potential . the software-based network intelligence in sd-wan enables more efficient delivery of traffic across a mix of access types , accelerates the speed of service deployments , and improves application visibility and performance . gtt 's sd-wan delivers managed global connectivity , enhanced application performance and control , and secure access to cloud-based services and applications . our service leverages gtt 's global , tier 1 ip network , securely connecting client locations to any destination on the internet or to any cloud service provider . we offer the widest range of access options with bundled network security , making it simple and cost-effective to integrate new locations and add network bandwidth as needed . transport & infrastructure services we provide a full suite of transport and infrastructure services over our global network , enabling cloud-based applications and the transport of high volume data between data centers , large enterprise office locations , and media hubs . our service is 20 differentiated based on an expansive pan-european fiber footprint and subsea cable infrastructure , network diversity , and low latency connections between major financial and commercial centers in north america and europe . our clients for these services include internet-based technology companies and otts , large banks , and other service providers requiring network infrastructure . all services are available on a protected basis with the ability to specify pre-configured alternate routes to minimize the impact of any network disruption . gtt 's wavelength service is designed to deliver scalable high-performance optical connectivity over a state-of-the-art dense wave division multiplexing platform . we offer low latency services between the major financial centers and exchanges , tailored to meet the requirements of proprietary trading firms for the fastest connections . in particular , gtt 's express transatlantic cable offers industry leading lowest latency between north america and europe . we also offer dark fiber and duct services across our fiber network . gtt 's ethernet service enables clients to design a network environment best suited to their needs , with point-to-point and point-to-multipoint topology options , and dynamic or fixed routing . gtt 's ethernet direct service provides enhanced performance capabilities for clients seeking guaranteed routes and latency slas between key financial markets , data centers and carrier hotels over a service-specific platform . this service is particularly suited for the financial industry , including trading firms that may require a lower-bandwidth alternative to wavelength services . financial organizations can also leverage our low-latency network to access over 60 unique routes and more than 130 financial exchanges . we offer colocation services in over 50 facilities in europe and north america . story_separator_special_tag interoute in february 2018 , we entered into an agreement for the sale and purchase of interoute communications holdings s.a. ( `` interoute '' ) , a luxembourg public limited liability company ( the “ interoute purchase agreement ” ) for 1,915.2 million in cash consideration , or $ 2,335.0 million using the exchange rate in effect on the date we entered into the interoute purchase agreement . in february 2018 , we also entered into a deal-contingent foreign currency hedge arrangement with a total notional amount of 1.260 billion at a spot rate of $ 1.23 to 1.00 to fix a portion of the purchase price . fees associated with this arrangement were payable upon closing of the acquisition based on a pre-defined schedule in the hedge agreement . on may 31 , 2018 , we closed on the transaction and acquired interoute . we paid the 1,915.2 million , or $ 2,239.3 million in cash consideration using the exchange rate in effect at closing ( which at $ 1.17 to 1.00 was lower than at announcement ) of which $ 66.1 million was net cash acquired , and assumed $ 27.7 million in debt . concurrent with closing of the acquisition , and as a result of the decline in exchange rate , we settled the deal-contingent foreign currency hedge arrangement for $ 105.8 million , inclusive of fees . the $ 105.8 million has been recorded as a loss in the statement of operations within other expense . 22 the combination of the consideration paid at closing plus the settlement of the hedge were consistent with the total expected price of the transaction as announced in february 2018. the results of interoute have been included from june 1 , 2018. the acquisition was considered a stock purchase for tax purposes . we partially funded the purchase price though the issuance of of 9,589,094 shares of common stock to a group of institutional investors for proceeds of $ 425.0 million substantially concurrently with the closing of the interoute acquisition . we also entered into a credit agreement to fund the remainder of the purchase price . accelerated connections in march 2018 , we acquired accelerated connections , inc. ( `` accelerated connections '' ) . we paid $ 35.0 million cash consideration , of which $ 0.8 million was net cash acquired , and issued 79,930 unregistered shares of our common stock valued at $ 4.2 million at closing . the results of accelerated connections have been included from march 1 , 2018. the acquisition was considered a stock purchase for tax purposes . custom connect in december 2017 , we acquired custom connect international b.v. ( `` custom connect '' ) . we paid $ 28.9 million in cash consideration , of which $ 0.6 million was net cash acquired , and issued 49,941 unregistered shares of our common stock valued at $ 2.2 million at closing . the results of custom connect have been included from december 31 , 2017. the acquisition was considered a stock purchase for tax purposes . transbeam in october 2017 , we acquired transbeam , inc. ( `` transbeam '' ) . we paid $ 26.4 million , of which $ 0.8 million was net cash acquired , and $ 2.0 million was deferred as holdback consideration for a 12-month period , subject to reduction for any indemnification claims made by us prior to such date . as of december 31 , 2018 , the remaining holdback consideration to be paid was $ 0.2 million . the results of transbeam have been included from october 1 , 2017. the acquisition was considered a stock purchase for tax purposes . global capacity in september 2017 , we acquired global capacity for $ 104.0 million in cash consideration , of which $ 4.0 million was net cash acquired , and issued 1,850,000 unregistered shares of our common stock valued at $ 53.6 million at closing . the results of global capacity have been included from september 15 , 2017. the acquisition was considered an asset purchase for tax purposes . perseus in june 2017 , we acquired perseus telecom ( `` perseus '' ) . we paid $ 37.5 million in cash consideration , of which $ 0.1 million was net cash acquired , and assumed $ 1.9 million in capital leases . the results of perseus have been included from june 1 , 2017. the acquisition was considered a stock purchase for tax purposes . hibernia in january 2017 , we acquired hibernia networks ( `` hibernia '' ) for $ 529.6 million in cash consideration , of which $ 14.6 million was net cash acquired , and issued 3,329,872 unregistered shares of our common stock , initially valued at $ 75.0 million on the date of announcement , and ultimately valued at $ 86.1 million at closing . the results of hibernia have been included from january 1 , 2017. the acquisition was considered an asset purchase for tax purposes . telnes in february 2016 , we completed the acquisition of telnes broadband ( `` telnes '' ) . we paid $ 15.5 million in cash and issued 178,202 unregistered shares of our common stock valued at $ 2.0 million . the results of telnes have been included from february 1 , 2016. the acquisition was considered an asset purchase for tax purposes . the acquisition of access point , interoute , and accelerated connections are collectively referred to as `` 2018 acquisitions , '' the acquisitions of custom connect , transbeam , global capacity , perseus , and hibernia are collectively referred to as `` 2017 23 acquisitions , '' and the acquisition of telnes is referred to as the `` 2016 acquisition '' for purposes of explaining our results of operations . asset purchases periodically we acquire customer contracts that we account for as an asset purchase and record a corresponding intangible asset that is amortized over its assumed useful life . during 2018 , we did not acquire any such customer contracts .

results of operations of the company year ended december 31 , 2018 compared to years ended december 31 , 2017 and 2016 overview . the information presented in the tables below is comprised of the consolidated financial information for the years ended december 31 , 2018 , 2017 , and 2016 ( amounts in millions ) : replace_table_token_7_th * not meaningful year ended december 31 , 2018 compared to year ended december 31 , 2017 revenue our revenue increased by $ 662.9 million , or 80.1 % , from $ 827.9 million for the year ended december 31 , 2017 to $ 1,490.8 million for the year ended december 31 , 2018 . recurring revenue was approximately 93 % and 94 % of total revenue for the year ended december 31 , 2018 and 2017 , respectively . the increase in revenue was primarily due to the 2017 acquisitions and 2018 acquisitions . on a constant currency basis using the average exchange rates in effect during the year ended december 31 , 2017 , revenue would have been lower by $ 24.1 million for the year ended december 31 , 2018 . cost of telecommunications services cost of telecommunications services increased by $ 387.3 million , or 89.6 % , from $ 432.1 million for the year ended december 31 , 2017 to $ 819.4 million for the year ended december 31 , 2018 . recurring cost of telecommunications services was approximately 94 % and 95 % of total cost of telecommunications services for the year ended december 31 , 2018 and 2017 , respectively . consistent 27 with our increase in revenue , the increase in cost of telecommunications services was principally driven by the 2017 acquisitions and 2018 acquisitions . on a constant currency basis using the average exchange rates in effect during the year ended december 31 , 2017 , cost of telecommunications services would have been lower by $ 12.2 million for the year ended december 31 , 2018 .

- 71 - in april 2012 , we redeemed $ 27.2 million aggregate principal amount of 6.25 % senior notes that remained outstanding following the cash tender offer and consent solicitation . we also have $ 150 million in aggregate principal amount outstanding of 8.25 % senior notes maturing march 15 , 2018 ( the “ 8.25 % senior notes ” ) . the 6.5 % senior notes and 8.25 % senior notes ( collectively , the “ senior notes ” ) are unsecured and impose certain restrictive covenants , which we are story_separator_special_tag this item 7 , including but not limited to the sections on “ liquidity and capital resources , ” contains forward-looking statements . see “ forward-looking statements ” at the beginning of part i and item 1a . `` risk factors . '' in this document , the words “ we , ” “ our , ” “ ours ” and “ us ” refer to hep and its consolidated subsidiaries or to hep or an individual subsidiary and not to any other person . overview hep is a delaware limited partnership . we own and operate petroleum product and crude oil pipelines and terminal , tankage and loading rack facilities that support the refining and marketing operations of hfc in the mid-continent , southwest and rocky mountain regions of the united states . at december 31 , 2012 , hfc owned a 44 % interest in us including the 2 % general partnership interest . we also own and operate refined product pipelines and terminals , located primarily in texas , that service alon 's refinery in big spring , texas . additionally , we own a 75 % interest in unev , the owner of a pipeline running from utah to las vegas , nevada and related products terminals and a 25 % joint venture interest in the slc pipeline , a 95-mile intrastate crude oil pipeline system that serves refineries in the salt lake city area . we generate revenues by charging tariffs for transporting petroleum products and crude oil through our pipelines , by charging fees for terminalling and storing refined products and other hydrocarbons and providing other services at our storage tanks and terminals . we do not take ownership of products that we transport , terminal or store , and therefore we are not directly exposed to changes in commodity prices . on november 29 , 2012 , we announced a two-for-one unit split , payable in the form of a common unit distribution for each issued and outstanding common unit . the unit distribution was paid january 16 , 2013 to all unitholders of record on january 7 , 2013. all references to unit and per unit amounts in this document and related disclosures have been adjusted to reflect the effect of the unit split for all periods presented . unev pipeline interest acquisition on july 12 , 2012 , we acquired hfc 's 75 % interest in unev . we paid consideration consisting of $ 260.9 million in cash and 2,059,800 of our common units ( adjusted to reflect the unit split ) . as a result of the common units issued to hfc , hfc 's ownership interest in us increased from 42 % to 44 % ( including the 2 % general partner interest ) . also under the terms of the transaction , we issued to hfc a class b unit comprising an equity interest in a wholly-owned subsidiary that entitles hfc to an interest in our share of annual unev earnings before interest , income taxes , depreciation , and amortization above $ 30 million beginning july 1 , 2016 and ending in june 2032 , subject to certain limitations . contemporaneously with this transaction , hfc ( our general partner ) agreed to forego its right to incentive distributions of up to $ 1.25 million per quarter over the next twelve consecutive quarterly periods and up to an additional four quarters in certain circumstances . legacy frontier pipeline and tankage asset transaction on november 9 , 2011 , we acquired from hfc certain tankage , loading rack and crude receiving assets located at hfc 's el dorado and cheyenne refineries . we paid non-cash consideration consisting of promissory notes with an aggregate principal amount of $ 150 million and 7,615,230 of our common units . in connection with the transaction , we entered into 15-year throughput agreements with hfc containing minimum annual revenue commitments to us of $ 48.3 million . agreements with hfc and alon we serve hfc 's refineries under long-term pipeline and terminal , tankage and throughput agreements expiring from 2019 to 2026. under these agreements , hfc agreed to transport , store and throughput volumes of refined product and crude oil on our pipelines and terminal , tankage and loading rack facilities that result in minimum annual payments to us . these minimum annual payments or revenues are subject to annual tariff rate adjustments on july 1 , based on the ppi or ferc index . as of december 31 , 2012 , these agreements with hfc will result in minimum annualized payments to us of $ 217.2 million . if hfc fails to meet its minimum volume commitments under the agreements in any quarter , it will be required to pay us in cash the amount of any shortfall by the last day of the month following the end of the quarter . under certain of the agreements , a shortfall payment may be applied as a credit in the following four quarters after minimum obligations are met . we also have a pipelines and terminals agreement with alon expiring in 2020 under which alon has agreed to transport on our pipelines and throughput through our terminals volumes of refined products that result in a minimum level of annual revenue that also is subject to annual tariff rate adjustments . story_separator_special_tag this is due principally to an overall increase in pipeline shipments , revenues attributable to our november 2011 asset acquisitions , a $ 4 million increase in previously deferred revenue realized under our guaranteed shipping contracts , the effect of annual tariff increases and the hfc crude pipeline revenue settlement . overall pipeline volumes were up 10 % compared to the year ended december 31 , 2010 . certain related-party pipeline volumes were down during 2011 as a result of downtime at hfc 's navajo refinery following a plant-wide power outage in late january 2011 and the subsequent delay in restoring production to planned levels . revenues from our refined product pipelines were $ 84.9 million , an increase of $ 8.4 million compared to the year ended december 31 , 2010 . this is due to a $ 4.3 million increase in previously deferred revenue realized under our guaranteed shipping contracts and an increase in third-party refined product pipeline shipments . volumes shipped on our refined product pipelines averaged 143.1 mbpd compared to 135.0 mbpd for the same period in 2010. revenues from our intermediate pipelines were $ 21.9 million , an increase of $ 1.0 million compared to the year ended december 31 , 2010 . this includes $ 0.8 million in revenues attributable to the tulsa interconnect pipelines , and a $ 0.3 million decrease in previously deferred revenue realized under our guaranteed shipping contracts . volumes shipped on our intermediate pipelines averaged 93.4 mbpd compared to 84.3 mbpd for the same period in 2010. revenues from our crude pipelines were $ 47.5 million , an increase of $ 8.6 million compared to the year ended december 31 , 2010 . this includes $ 5.5 million in revenues attributable to a crude pipeline revenue settlement with hfc . volumes shipped on our crude pipelines increased to an average of 161.8 mbpd compared to 144.0 mbpd for the same period in 2010. revenues from terminal , tankage and loading rack fees were $ 59.9 million , an increase of $ 14.1 million compared to the year ended december 31 , 2010 . this increase is due principally to $ 7.1 million in revenues attributable to our terminal , tankage and loading racks serving hfc 's el dorado and cheyenne refineries . refined products terminalled in our facilities increased to an average of 238.1 mbpd compared to 218.5 mbpd for the same period last year . operations expense operations expense for the year ended december 31 , 2011 increased by $ 9.6 million compared to the year ended december 31 , 2010 . this increase is due principally to operating costs of $ 2.0 million and $ 3.8 million attributable to our recently acquired unev pipeline and assets serving hfc 's el dorado and cheyenne refineries , respectively , as well as year-over-year increases in maintenance services and payroll costs . additionally , in the year ended december 31 , 2010 , we recognized a charge for environmental remediation of $ 1.7 million . depreciation and amortization depreciation and amortization for the year ended december 31 , 2011 increased by $ 5.6 million compared to the year ended december 31 , 2010 . this increase is due principally to depreciation attributable to our acquisitions from hfc and capital projects . general and administrative general and administrative costs for the year ended december 31 , 2011 decreased by $ 1.1 million compared to the year ended december 31 , 2010 due to lower professional fees and services . equity in earnings of slc pipeline our equity in earnings of the slc pipeline was $ 2.6 million and $ 2.4 million for the years ended december 31 , 2011 and 2010 . interest expense interest expense for the year ended december 31 , 2011 totaled $ 36.0 million , an increase of $ 2.0 million compared to the year ended december 31 , 2010 . this increase reflects interest on increased debt levels during 2011 , partially offset by prior year costs of $ 1.1 million that relate to the partial settlement of an interest rate swap . excluding the effects of fair value adjustments to this swap in 2010 , our aggregate effective interest rate was 6.7 % for the year ended december 31 , 2011 compared to 6.8 % for 2010. state income tax we recorded state income taxes of $ 234,000 and $ 296,000 for the years ended december 31 , 2011 and 2010 , respectively , which are solely attributable to the texas margin tax . - 44 - ril 19 , liquidity and capital resources overview in june 2012 , we amended the credit agreement increasing the size of the credit facility from $ 375 million to $ 550 million . our $ 550 million senior secured revolving credit facility expires in june 2017 and is available to fund capital expenditures , investments , acquisitions , distribution payments and working capital and for general partnership purposes . it also is available to fund letters of credit up to a $ 50 million sub-limit and to fund distributions to unitholders up to a $ 60 million sub-limit . in february 2012 we amended our credit agreement increasing the size of the credit facility from $ 275 million to $ 375 million . during the year ended december 31 , 2012 , we received advances totaling $ 587.0 million and repaid $ 366.0 million , resulting in net advances of $ 221.0 million under the credit agreement and an outstanding balance of $ 421.0 million at december 31 , 2012 . if any particular lender under the credit agreement could not honor its commitment , we believe the unused capacity that would be available from the remaining lenders would be sufficient to meet our borrowing needs . additionally , we review publicly available information on the lenders in order to monitor their financial stability and assess their ongoing ability to honor their commitments under the credit agreement .

summary net income attributable to hep for the year ended december 31 , 2012 was $ 94.2 million , a $ 14.4 million increase compared to the year ended december 31 , 2011 . this increase in earnings is due principally to increased pipeline shipments , earnings attributable to our november 2011 acquisition and annual tariff increases . these factors were offset partially by increased operating costs and expenses , higher interest expense and a loss on the early extinguishment of debt . although net income attributable to hep increased , limited partners ' per unit interest in earnings decreased from $ 1.38 per unit in 2011 to $ 1.29 per unit in 2012. the principal factors causing the decrease in limited partners ' per unit interest , relative to the overall net income attributable to hep increase , were higher incentive distributions to the general partner and the unev acquisition not yet being accretive to earnings , although it was accretive to distributable cash flow . revenues for the year ended december 31 , 2012 include the recognition of $ 4.0 million of prior shortfalls billed to shippers in 2011. deficiency payments of $ 7.8 million associated with certain guaranteed shipping contracts were deferred during the year ended december 31 , 2012 . such deferred revenue will be recognized in earnings either as payment for shipments in excess of guaranteed levels , if and to the extent the pipeline system will not have necessary capacity to provide for shipments in excess of guaranteed levels , or when shipping rights expire unused . revenues total revenues for the year ended december 31 , 2012 were $ 292.6 million , a $ 78.3 million increase compared to the year ended december 31 , 2011 .

overview pennsylvania real estate investment trust , a pennsylvania business trust founded in 1960 and one of the first equity real estate investment trusts ( “ reits ” ) in the united states , has a primary investment focus on retail shopping malls located in the eastern half of the united states , primarily in the mid-atlantic region . we currently own interests in 42 retail properties , of which 38 are operating properties and four are development properties . the 38 operating properties include 32 shopping malls and six other retail properties , have a total of 28.6 million square feet and are located in 11 states . we and partnerships in which we own an interest own 21.9 million square feet at these properties ( excluding space owned by anchors ) . there are 31 operating retail properties in our portfolio that we consolidate for financial reporting purposes . these consolidated properties have a total of 23.2 million square feet , of which we own 17.9 million square feet . the seven operating retail properties that are owned by unconsolidated partnerships with third parties have a total of 5.4 million square feet , of which 4.0 million square feet are owned by such partnerships . the development portion of our portfolio contains four properties in three states , with two classified as “ mixed use ” ( a combination of retail and other uses ) , one classified as “ retail ” ( outlet ) and one classified as “ other. ” our primary business is owning and operating retail shopping malls , which we do primarily through our operating partnership , preit associates , l.p. ( “ preit associates ” or the “ operating partnership ” ) . we provide management , leasing and real estate development services through preit services , llc ( “ preit services ” ) , which generally develops and manages properties that we consolidate for financial reporting purposes , and preit-rubin , inc. ( “ pri ” ) , which generally develops and manages properties that we do not consolidate for financial reporting purposes , including properties we own interests in through partnerships with third parties and properties that are owned by third parties in which we do not have an interest . pri is a taxable reit subsidiary , as defined by federal tax laws , which means that it is able to offer additional services to tenants without jeopardizing our continuing qualification as a reit under federal tax law . our revenue consists primarily of fixed rental income , additional rent in the form of expense reimbursements , and percentage rent ( rent that is based on a percentage of our tenants ' sales or a percentage of sales in excess of thresholds that are specified in the leases ) derived from our income producing properties . we also receive income from our real estate partnership investments and from the management and leasing services pri provides . our net income decreased by $ 51.5 million to a net loss of $ 14.3 million for 2014 from net income of $ 37.2 million for the year ended december 31 , 2013 . the change in our 2014 results of operations from the prior year was primarily due to $ 78.5 million of gains on sales of discontinued operations recorded in 2013 , compared to aggregate gains on sales on interests in real estate and gains on sales of non operating real estate of $ 14.5 million in 2014. we evaluate operating results and allocate resources on a property-by-property basis , and do not distinguish or evaluate our consolidated operations on a geographic basis . due to the nature of our operating properties , which involve retail shopping , we have concluded that our individual properties have similar economic characteristics and meet all other aggregation criteria . accordingly , we have aggregated our individual properties into one reportable segment . in addition , no single tenant accounts for 10 % or more of our consolidated revenue , and none of our properties are located outside the united states . we hold our interest in our portfolio of properties through the operating partnership . we are the sole general partner of the operating partnership and , as of december 31 , 2014 , held a 97.0 % controlling interest in the operating partnership , and consolidated it for reporting purposes . we hold our investments in seven of the 38 operating retail properties and two of the four development properties in our portfolio through unconsolidated partnerships with third parties in which we own a 25 % to 50 % interest . we hold a non-controlling interest in each unconsolidated partnership , and account for such partnerships using the equity method of accounting . we do not control any of these equity method investees for the following reasons : except for three properties that we co-manage with our partner , all of the other entities are managed on a day-to-day basis by one of our other partners as the managing general partner in each of the respective partnerships . in the case of the co-managed properties , all decisions in the ordinary course of business are made jointly . the managing general partner is responsible for establishing the operating and capital decisions of the partnership , including budgets , in the ordinary course of business . 44 all major decisions of each partnership , such as the sale , refinancing , expansion or rehabilitation of the property , require the approval of all partners . voting rights and the sharing of profits and losses are generally in proportion to the ownership percentages of each partner . we record the earnings from the unconsolidated partnerships using the equity method of accounting under the statements of operations caption entitled “ equity in income of partnerships , ” rather than consolidating the results of the unconsolidated partnerships with our results . changes in our investments in these entities are recorded in the balance sheet caption entitled “ investment in partnerships , at equity. story_separator_special_tag accordingly , the financial statements for springfield town center during the period of renovation are not reflective of springfield town center 's historical or expected future performance . current economic conditions and our near term capital needs the conditions in the economy have caused relatively slow job growth and have caused fluctuations and variations in retail sales , business and consumer confidence and consumer spending on retail goods . as a result , the sales and profit performance of certain retailers has fluctuated , and in some cases , has led to bankruptcy filings . we continue to adjust our plans and actions to take into account the current environment . in particular , we continue to contemplate ways to maintain or reduce our leverage through a variety of means available to us , subject to and in accordance with the terms of our credit agreements . these steps might include ( i ) obtaining capital from joint ventures or other partnerships or arrangements involving our contribution of assets with institutional investors , private equity investors or other reits , or through sales of properties or interests in properties with values in excess of their mortgage loans and application of the excess proceeds to debt reduction , and ( ii ) obtaining equity capital , including through the issuance of common or preferred equity securities if market conditions are favorable , or through other actions . capital improvement projects and development at our operating properties , we might engage in various types of capital improvement projects . such projects vary in cost and complexity , and can include building out new or existing space for individual tenants , upgrading common areas or exterior areas such as parking lots , or redeveloping the entire property , among other projects . project costs are accumulated in “ construction in progress ” on our consolidated balance sheet until the asset is placed into service , and amounted to $ 60.5 million as of december 31 , 2014 . at our development properties , we are also engaged in several types of projects . however , we do not expect to make any significant investment in these projects in the short term . as of december 31 , 2014 , we had incurred $ 54.0 million of costs , net of impairment charges recorded in prior years , related to our activity at our consolidated development properties . as of december 31 , 2014 , we had unaccrued contractual and other commitments related to our capital improvement projects and development projects at our consolidated properties of $ 11.0 million in the form of tenant allowances and contracts with general service providers and other professional service providers . acquisitions and dispositions see note 2 to our consolidated financial statements for a description of our dispositions and acquisition in 2014 , 2013 and 2012 . critical accounting policies critical accounting policies are those that require the application of management 's most difficult , subjective , or complex judgments , often because of the need to make estimates about the effect of matters that are inherently uncertain and that might change in subsequent periods . in preparing the consolidated financial statements , management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements , and the reported amounts of revenue and expenses during the reporting periods . in preparing the consolidated financial statements , management has utilized available information , including our past history , industry standards and the current economic environment , among other factors , in forming its estimates and judgments , giving due consideration to materiality . management has also considered events and changes in property , market and economic conditions , estimated future cash flows from property operations and the risk of loss on specific accounts or amounts in determining its estimates and judgments . actual results may differ from these estimates . in addition , other companies may utilize different estimates , which may affect comparability of our results of operations to those of companies in a similar business . the estimates and assumptions made by management in applying critical accounting policies have not changed materially during 2014 , 2013 and 2012 , except as otherwise noted , and none of these estimates or assumptions have proven to be materially incorrect or resulted in our recording any significant adjustments relating to prior periods . we will continue to monitor the key factors underlying our estimates and judgments , but no change is currently expected . 46 set forth below is a summary of the accounting policy that management believes is critical to the preparation of the consolidated financial statements . this summary should be read in conjunction with the more complete discussion of our accounting policies included in note 1 to our consolidated financial statements . asset impairment real estate investments and related intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the property might not be recoverable . a property to be held and used is considered impaired only if management 's estimate of the aggregate future cash flows , less estimated capital expenditures , to be generated by the property , undiscounted and without interest charges , are less than the carrying value of the property . this estimate takes into consideration factors such as expected future operating income , trends and prospects , as well as the effects of demand , competition and other factors . the determination of undiscounted cash flows requires significant estimates by management , including the expected course of action at the balance sheet date that would lead to such cash flows . subsequent changes in estimated undiscounted cash flows arising from changes in the anticipated action to be taken with respect to the property could impact the determination of whether an impairment exists and whether the effects could materially affect our net income .

results of operations overview net loss for the year ended december 31 , 2014 was $ 14.3 million , compared to net income for the year ended december 31 , 2013 of $ 37.2 million . our 2014 and 2013 results of operations were primarily affected by the following : gains on sales of discontinued operations of $ 78.5 million in 2013 resulting from our sales of christiana center , paxton towne centre , commons at magnolia and orlando fashion square ; a decrease in non same store noi ( presented using the “ proportionate consolidation method ; ” see “ —net operating income ” ) of $ 13.4 million primarily due to properties or interests in properties sold in 2014 ; partially offset by gains on sales of interests in real estate of $ 12.4 million in 2014 resulting from the sale of our interest in whitehall mall in allentown , pennsylvania ( “ whitehall mall ” ) ; impairment of assets of $ 19.7 million in 2014 compared to impairment of assets of $ 30.0 million in 2013 ; 48 a decrease of $ 16.6 million in interest expense ( including the effects of loss on hedge ineffectiveness ) primarily due to lower overall debt balances and lower average interest rates ; and an increase of $ 7.8 million in same store noi . net income for the year ended december 31 , 2013 was $ 37.2 million , compared to a net loss for the year ended december 31 , 2012 of $ 42.6 million .

the estimated lives used in determining depreciation are as follows : estimated useful life ( years ) network equipment , computers and software 3-5 buildings 30 leasehold improvements 3-8 office furniture and equipment 3-7 motor vehicles 2-5 ( i ) business combinations , goodwill and other intangible assets asc topic 805 , “business combinations” ( story_separator_special_tag you should read the following discussion in connection with our consolidated financial statements and the related notes included elsewhere in this annual report on form 10-k. some of the statements in the following discussion are forward looking statements . see “—forward looking statements.” forward looking statements this annual report on form 10-k , and oral statements made from time to time by our representatives , may contain forward looking statements . you should not place undue reliance on these statements because they are subject to numerous uncertainties and factors relating to our operations and business environment , all of which are difficult to predict and many of which are beyond our control . forward looking statements include information concerning our possible or assumed future results of operations and the impact of the termination of the services agreement with travelers . these statements may also include those with words such as “may , ” “will , ” “should , ” “believe , ” “expect , ” “anticipate , ” “intend , ” “plan , ” “estimate” or similar expressions . these statements are based on assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends , current conditions , expected future developments and other factors we believe are appropriate under the circumstances . as you read and consider this annual report on form 10-k , you should understand that these statements are not guarantees of performance or results . they involve known and unknown risks , uncertainties and assumptions . although we believe that these forward looking statements are based on reasonable assumptions , you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward looking statements . these factors include but are not limited to : our dependence on a limited number of clients in a limited number of industries ; uncertainty regarding the impact of the termination of the services agreement with travelers ; worldwide political , economic or business conditions ; negative public reaction in the u.s. or elsewhere to offshore outsourcing ; fluctuations in our earnings ; our ability to attract and retain clients ; our ability to successfully consummate or integrate strategic acquisitions ; restrictions on immigration ; our ability to hire and retain enough sufficiently trained employees to support our operations ; our ability to grow our business or effectively manage growth and international operations ; increasing competition in our industry ; telecommunications or technology disruptions ; regulatory , legislative and judicial developments , including changes to or the withdrawal of governmental fiscal incentives ; technological innovation ; political or economic instability in the geographies in which we operate ; unauthorized disclosure of sensitive or confidential client and customer data ; and adverse outcome of our disputes with the indian tax authorities . these and other factors are more fully discussed elsewhere in this annual report on form 10-k. these and other risks could cause actual results to differ materially from those implied by forward looking statements in this annual report on form 10-k. 41 the forward looking statements made by us in this annual report on form 10-k , or elsewhere , speaks only as of the date on which they were made . new risks and uncertainties come up from time to time , and it is impossible for us to predict these events or how they may affect us . we have no obligation to update any forward looking statements in this annual report on form 10-k after the date of this annual report on form 10-k , except as required by federal securities laws . executive overview we are a leading provider of business process solutions , utilizing operations management , analytics and technology . we use our focused industry and process expertise to create a positive business impact on our clients ' operations . we customize our services to improve the economics of our clients ' business performance and transform organizations to be leaner and more flexible . we break our business into two segments : outsourcing and transformation services . our outsourcing services provide front- , middle- and back-office processing for our clients , who are primarily global 1000 companies . we also offer a number of transformation services including decision analytics , finance transformation and operations consulting services . our global delivery network , comprising of highly trained industry and process specialists across the united states , europe and asia , is a key asset . we operate sixteen operations centers in india , six operations centers in the u.s. , three operations centers in the philippines and one operations center in each of bulgaria , romania , malaysia and the czech republic . revenues for the year ended december 31 , 2013 , we had total revenues of $ 478.5 million compared to total revenues of $ 442.9 million for the year ended december 31 , 2012 , an increase of $ 35.6 million or 8.0 % . story_separator_special_tag in addition , we have also observed that prospective larger clients are entering into multi-vendor relationships with regard to their outsourcing needs . we believe that the trend toward multi-vendor relationships will continue . a multi-vendor relationship allows a client to seek more favorable pricing and other contract terms from each vendor , which can result in significantly reduced operating margins from the provision of services to such client for each vendor . to the extent our large clients expand their use of multi-vendor relationships and are able to extract more favorable contract terms from other vendors , our operating margins and revenues may be reduced with regard to such clients if we are required to modify the terms of our relationships with such clients . within our outsourcing services , we also offer platform technology services by use of our proprietary technology tools and platforms to provide increasingly complex services for our insurance and healthcare clients . we have added these capabilities through acquisitions over the last few years . key platform technology offerings include careradius ® and maxmc ® ( each of which are healthcare management software platforms for health 43 insurers and providers ) , lifepro ® ( an insurance policy administration platform ) and subrosource ™ ( a subrogation services platform for property and casualty insurers ) . depending on the platform , the fees derived from our platform technologies may be based on licenses , installation , support and maintenance , and or recoveries from claims . we believe our proprietary platform technology will be an important source of growth in the future as clients choose to transfer certain business functions to a third-party-owned technology provider . as we increase our capabilities utilizing technology service platforms and other software-based services , we expect that revenues from such services will continue to grow in proportion to our total revenues . revenues from annual maintenance and support contracts for our software platforms provide us with a relatively predictable revenue base and are generally recognized ratably over the terms of the contracts . new license sales and implementation projects have a long selling cycle and it is difficult to predict the timing of when such new contracts will be signed , which may lead to fluctuations in our revenues over short term . we anticipate that revenues from our outsourcing services will grow as we expand our service offerings and client base , both organically and through acquisitions . transformation services : our transformation services offer positive business change for our clients . by utilizing sophisticated tools and techniques and highly trained analysts we ( i ) provide insight into our clients ' current and future financial and operational results using analytics , ( ii ) improve clients ' operating environments through cost reduction and increased efficiency and productivity initiatives and ( iii ) enhance the risk and control environments within our clients ' operations , whether or not those operations are outsourced to us . our key areas of transformation services are decision analytics , finance transformation and operations and process excellence consulting . our transformation services consist of both recurring and specific projects with contract terms generally not exceeding one to three years . these contracts also usually contain provisions permitting termination of the contract after a short notice period . the short-term nature and specificity of these projects could lead to further material fluctuations and uncertainties in the revenues generated from these businesses . our transformation services can be significantly affected by variations in business cycles . we have experienced a significant increase in demand for our annuity-based transformation services , which are engagements that are contracted for one- to three-year terms . expenses cost of revenues our cost of revenues primarily consists of : employee costs , which include salary , bonus and other compensation expenses ; recruitment and training costs ; employee insurance ; transport and meals ; rewards and recognition for certain employees ; and non-cash stock compensation expense ; and costs relating to our facilities and communications network , which include telecommunication and it costs ; facilities and customer management support ; operational expenses for our outsourcing centers ; rent expenses ; and travel and other billable costs to our clients . the most significant components of our cost of revenues are employee compensation , recruitment , training , transport , meals , rewards and recognition and employee insurance . salary levels , employee turnover rates and our ability to efficiently manage and utilize our employees significantly affect our cost of revenues . salary increases for most of our operations personnel are generally awarded each year effective april 1. accordingly , employee costs are generally lower in the first quarter of each year compared to the rest of the year . we make every effort to manage employee and capacity utilization and continuously monitor service levels and staffing requirements . although we generally have been able to reallocate our employees as client demand has fluctuated , a contract termination or significant reduction in work assigned to us by a major client could cause us to 44 experience a higher-than-expected number of unassigned employees , which would increase our cost of revenues as a percentage of revenues until we are able to reduce or reallocate our headcount . a significant increase in the turnover rate among our employees , particularly among the highly skilled workforce needed to execute certain services , would increase our recruiting and training costs and decrease our operating efficiency , productivity and profit margins . in addition , cost of revenues also includes a non-cash amortization of stock compensation expense relating to our issuance of equity awards to employees directly involved in providing services to our clients . we expect our cost of revenues to continue to increase as we continue to add professionals in our operating centers globally to service additional business and as wages continue to increase globally .

results of operations the following table summarizes our results of operations for the years ended december 31 , 2013 , 2012 and 2011 : replace_table_token_4_th 51 year ended december 31 , 2013 compared to year ended december 31 , 2012 revenues . replace_table_token_5_th the increase in revenues from outsourcing services of $ 28.2 million was primarily driven by increased revenues of $ 17.2 million from the landacorp acquisition in 2012 and net volume increases from existing and new clients aggregating to $ 22.8 million . these increases were partially offset by a decrease in revenues of $ 11.4 million , primarily due to the depreciation of the indian rupee against the u.s. dollar during the year ended december 31 , 2013 compared to the year ended december 31 , 2012 and $ 0.4 million due to reimbursement to travelers for certain of their expenses incurred in connection with the termination . the increase in revenues from transformation services was primarily due to combination of increased revenues in recurring or annuity decision analytics services and an increase in project-based engagements both in our decision analytics and finance transformation services . revenues from new clients for transformation services were $ 3.0 million and $ 9.4 million during the year ended december 31 , 2013 and 2012 , respectively . cost of revenues . replace_table_token_6_th the increase in cost of revenues was primarily due to an increase in employee-related costs of $ 30.8 million as a result of an increase in the number of our personnel directly involved in providing services to our clients , including $ 5.9 million of employee-related costs related to the landacorp acquisition . we also experienced an increase in facilities , technology and other operating expenses of $ 6.4 million ( primarily due to the landacorp acquisition and new operations centers to support business growth ) .

we continue to make investments in all of our operating facilities to give us the production capacity , capabilities and logistical advantages to continue to win new business . the following information should be read in conjunction with the consolidated financial statements included herein and with item 1a , risk factors included as part of this filing . our mission is to provide our customers with superior manufacturing and engineering services at the lowest total cost for the highest quality products , and create long-term mutually beneficial business relationships by employing our “ trust , commitment , results ” philosophy . executive summary during fiscal 2017 , our revenue and margins were impacted by declining demand from some longstanding customers , which was not yet offset by the continued ramp in revenue from our new programs . while the ems business is very competitive , we continued to win new business during the year , including two new programs involving gaming and seismic monitoring devices awarded in the fourth quarter , bringing the total number of significant program wins to nine for the fiscal year . net sales of $ 467.8 million for fiscal year 2017 decreased by 3.5 percent as compared to net sales of $ 485.0 million in fiscal year 2016 . the decrease in net sales was primarily driven by a decrease in net sales from the former longstanding customer and closure of our harrodsburg , kentucky facility which has been discussed in prior quarters , partially offset by an increase in new program wins . throughout fiscal 2017 , we made significant investments in improving our customer support organization and expanding our smt , sheet metal and plastic molding capabilities in preparation for future growth . moving into fiscal 2018 , we continue to see a strong pipeline of potential new business and our new programs continue to ramp . we believe we 're well positioned to see growth in revenue and increasing profitability in the second half of the year for the first quarter of fiscal year 2018 , the company expects to report revenue in the range of $ 110 million to $ 115 million . future results will depend on actual levels of customers ' orders , the timing of the start-up of production of new product programs and the potential impact of the geopolitical uncertainty . we believe that we are well positioned in the ems industry to continue expansion of our customer base and continue long-term growth . we continue to diversify our customer base by adding additional programs and customers . our current customer relationships involve a variety of products , including consumer electronics , electronic storage devices , plastics , household products , gaming devices , specialty printers , telecommunications , industrial equipment , military supplies , computer accessories , medical , educational , irrigation , automotive , transportation management , robotics , rfid , power supply , off-road vehicle equipment , fitness equipment , hvac controls , consumer products , home building products , material handling systems and lighting equipment . gross profit as a percent of net sales was 8.2 percent in fiscal year 2017 compared to 8.0 percent for the prior fiscal year . the increase in gross profit as a percentage of net sales was primarily related to a decrease in material related costs partially offset by an increase in certain overhead costs . the level of gross margin is impacted by product mix , timing of the startup of new programs , facility utilization , pricing within the electronics industry and material costs , which can fluctuate significantly from quarter to quarter and year to year . operating income as a percentage of net sales for fiscal year 2017 was 2.0 percent compared to 2.1 percent for fiscal year 2016 . the decrease in operating income as a percentage of net sales was primarily due to an increase in selling , general and administrative expenses . this increase in sg & a expenses is primarily related to an increase in legal fees . net income for fiscal year 2017 was $ 5.6 million or $ 0.51 per diluted share , as compared to net income of $ 6.5 million or $ 0.58 per diluted share for fiscal year 2016 . the decrease in net income for fiscal year 2017 as compared to fiscal year 2016 was primarily driven by the decrease in net revenue as described above . 19 we maintain a strong balance sheet with a current ratio of 2.3 and a debt to equity ratio of 0.37 . total cash provided by operating activities as defined on our cash flow statement was $ 9.4 million during fiscal year 2017 . we maintain sufficient liquidity for our expected future operations . as of july 1 , 2017 , we had $ 18.3 million outstanding on our revolving line of credit with wells fargo bank , n.a . as a result , $ 26.3 million remained available to borrow as of july 1 , 2017 . we believe cash flow from operations , our borrowing capacity , our accounts receivable sale program , and equipment financing should provide adequate capital for planned growth over the long term . story_separator_special_tag style= '' line-height:120 % ; font-size:10pt ; padding-left:23px ; '' > key tronic computer peripherals ( shanghai ) co. , ltd. leases two facilities with smt , assembly , global purchasing and warehouse capabilities in shanghai , china , which began operations in 1999. its primary function is to provide ems services for export . foreign sales ( based on shipping instructions ) from our worldwide operations , including domestic exports , were $ 105.9 million and $ 137.4 million in fiscal years 2017 and 2016 , respectively . products and manufacturing services provided by our subsidiary operations are often shipped to customers directly by the parent company . story_separator_special_tag income tax provision we had an income tax expense of $ 1.6 million during fiscal year 2016 as compared to an income tax expense of $ 1.0 million in fiscal year 2015. the income tax expense recognized during both fiscal years 2016 and 2015 , was primarily a function of u.s. , federal , state and foreign taxes recognized at the statutory rates offset by the net benefit associated with federal research and development tax credits and changes in potential foreign tax credits . we continually review our requirements for liquidity domestically to fund current operations , revenue growth and to look for potential future acquisitions . we anticipate repatriating a portion of our unremitted foreign earnings . the estimated taxes and associated foreign tax credits are included in the income tax calculation . for further information on taxes please review footnote 6 of the “ notes to consolidated financial statements. ” capital resources and liquidity operating cash flow net cash provided by operating activities for fiscal year 2017 was $ 9.4 million compared to net cash provided by operating activities of $ 4.6 million and $ 7.7 million in fiscal years 2016 and 2015 , respectively . the $ 9.4 million of net cash provided by operating activities during fiscal year 2017 is primarily related to $ 5.6 million of net income , $ 7.2 million of depreciation and amortization and a $ 4.9 million decrease in inventory , partially offset by a $ 3.5 million increase in accounts receivable and a $ 5.9 million decrease in accounts payable . the $ 4.6 million of net cash provided by operating activities during fiscal year 2016 was primarily due to $ 6.5 million of net income , $ 6.2 million of depreciation and amortization and an $ 11.1 million decrease in accounts receivable offset by a $ 16.2 million increase in inventory and a $ 2.6 million decrease in accounts payable . the $ 7.7 million of cash provided by operating activities during fiscal year 2015 was primarily due to $ 4.3 million of net income , $ 5.9 million of depreciation and amortization and an $ 18.0 million increase in accounts payable partially offset by a $ 14.7 million increase in inventory , a $ 2.1 million increase in accounts receivable and a $ 4.2 million increase in other assets . accounts receivable fluctuates based on the timing of shipments , terms offered and collections . in addition , accounts receivable will fluctuate based upon the amount of accounts receivable sold under our trade accounts receivable purchase program . during fiscal years 2017 , 2016 and 2015 , we factored receivables of $ 86.5 million , $ 78.0 million and $ 12.1 million , respectively , from accounts receivable sold to financial institutions , which are not included on our consolidated balance sheets . we purchase inventory based on customer forecasts and orders , and when those forecasts and orders change , the amount of inventory may also fluctuate . accounts payable fluctuates with changes in inventory levels , volume of inventory purchases , negotiated supplier terms , and taking advantage of early pay discounts . investing cash flow cash flows used in investing activities were $ 8.5 million , $ 5.7 million , and $ 48.1 million in fiscal years 2017 , 2016 and 2015 , respectively . our primary investing activity during fiscal year 2017 was purchasing equipment to support increased production levels for new programs . our primary investing activities during fiscal year 2016 was the purchase of equipment to support increased production levels for new programs as well as the sale and leaseback of equipment . our primary investing activities during fiscal year 2015 was the acquisitions of ayrshire as discussed in further detail in footnote 14 of the “ notes to consolidated financial statements. ” operating and capital leases are often utilized when potential technical obsolescence and funding requirement advantages outweigh the benefits of equipment ownership . capital expenditures and periodic lease payments are expected to be financed with internally generated funds and available borrowing capacities . during fiscal years 2017 , 2016 , and 2015 , we received $ 0.6 million , $ 13.3 million , and $ 8.8 million of cash resulting from the sale and leaseback of equipment under operating leases , respectively . 24 financing cash flow cash flows used in financing activities were $ 1.6 million in fiscal year 2017 as compared to cash flows provided by financing activities of $ 1.7 million and $ 35.0 million in fiscal years 2016 and 2015 , respectively . our primary financing activities during fiscal year 2017 was the funding of a $ 3.9 million equipment term loan , repayments on our term loans of $ 5.4 million as well as borrowings and repayments under our revolving line of credit facility . our primary financing activities during fiscal year 2016 were repayments on our term loan of $ 5.0 million as well as borrowings and repayments under our revolving line of credit facility . our primary financing activities during fiscal year 2015 were borrowings on our term loan of $ 31.3 million , net of repayments related to the ayrshire acquisition , borrowings and repayments under our revolving line of credit facility and net repayments of $ 7.9 million related to the accounts receivable transfer program with wells fargo bank n.a . as of july 1 , 2017 , the company had an outstanding balance on the line of credit of $ 18.3 million . we had availability to borrow an additional $ 26.3 million under the wells fargo line of credit and we were in compliance with our loan covenants . our cash requirements are affected by the level of current operations and new ems programs . we believe that projected cash from operations , funds available under the revolving credit facility and fixed asset financing will be sufficient to meet our working and fixed capital requirements for the foreseeable future .

results of operations comparison of the fiscal year ended july 1 , 2017 with the fiscal year ended july 2 , 2016 the following table sets forth for the periods indicated certain items of the consolidated statements of income expressed as a percentage of net sales . the financial information and discussion below should be read in conjunction with the consolidated financial statements and notes contained in this annual report . replace_table_token_5_th net sales the decrease in net sales of $ 17.2 million from prior year was primarily driven by a decrease in net sales from the former longstanding customer which has been discussed in prior quarters , partially offset by an increase in new program wins . the following table shows the revenue by industry sectors as a percentage of revenue for fiscal years 2017 and 2016 : replace_table_token_6_th we provide services to customers in a number of industries and produce a variety of products for our customers in each industry . key tronic does not target any particular industry , but rather seeks to find programs that strategically fit our vertical manufacturing capabilities . as we continue to diversify our customer base and win new customers , we will continue to see a change in the industry concentrations of our revenue . sales to foreign locations represented 22.6 percent and 28.3 percent of our total net sales in fiscal years 2017 and 2016 , respectively . 20 cost of sales total cost of sales as a percentage of net sales was 91.8 percent and 92.0 percent in fiscal years 2017 and 2016 , respectively . total cost of materials as a percentage of net sales was approximately 61.7 percent and 63.9 percent in fiscal years 2017 and 2016 , respectively .

in this section , we discuss the results of our operations for the year ended january 3 , 2021 compared to the year ended december 29 , 2019. for a discussion of the year ended december 29 , 2019 compared to the year ended december 30 , 2018 , please refer to part ii , item 7 , “ management 's discussion and analysis of financial condition and results of operations ” in our annual report on form 10-k for the year ended december 29 , 2019. description of the business domino 's is the largest pizza company in the world based on global retail sales , with more than 17,600 locations in over 90 markets around the world . founded in 1960 , our roots are in convenient pizza delivery , while a significant amount of our sales also come from carryout customers . although we are a highly-recognized global brand , we focus on serving neighborhoods locally through our large network of franchise owners and company-owned stores . our business model is straightforward : domino 's stores handcraft and serve quality food at a competitive price , with easy ordering access and efficient service , enhanced by our technological innovations . our hand-tossed dough is made fresh and distributed to stores around the world by us and our franchisees . domino 's generates revenues and earnings by charging royalties and fees to our independent franchisees . we also generate revenues and earnings by selling food , equipment and supplies to franchisees primarily in the u.s. and canada , and by operating a number of company-owned stores in the u.s. franchisees profit by selling pizza and other complementary items to their local customers . in our international markets , we generally grant geographical rights to the domino 's pizza brand to master franchisees . these master franchisees are charged with developing their geographical area , and they can profit by sub-franchising and selling food and equipment to those sub-franchisees , as well as by running pizza stores directly . everyone in the system can benefit , including the end consumer , who can feed their family conveniently and economically . our financial results are driven largely by retail sales at our franchise and company-owned stores . changes in retail sales are driven by changes in same store sales and store counts . we monitor both of these metrics very closely , as they directly impact our revenues and profits , and we strive to consistently increase both metrics . retail sales drive royalty payments from franchisees , as well as company-owned store and supply chain revenues . retail sales are primarily impacted by the strength of the domino 's pizza ® brand , the results of our extensive advertising through various media channels , the impact of technological innovation and digital ordering , our ability to execute our strong and proven business model and the overall global economic environment . our business model can yield strong returns for our franchise owners and our company-owned stores . it can also yield significant cash flow to us , through a consistent franchise royalty payment and supply chain revenue stream , with moderate capital expenditures . we have historically returned cash to shareholders through dividend payments and share repurchases since becoming a publicly-traded company in 2004. these factors emphasize our focus on our stakeholders , including our customers , team members , franchisees , communities and shareholders . 27 critical accounting policies and estimates the following discussion and analysis of financial condition and results of operations is based on our consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states . the preparation of these financial statements requires our management to make estimates and judgments that affect the reported amounts of assets , liabilities , revenues and expenses and related disclosures of contingent assets and liabilities . on an ongoing basis , our management evaluates its estimates , including those related to revenue recognition , long-lived assets , insurance and legal matters , share-based payments and income taxes . we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . actual results may differ from those estimates . changes in our accounting policies and estimates could materially impact our results of operations and financial condition for any particular period . we believe that our most critical accounting policies and estimates are : revenue recognition . we earn revenues through our network of u.s. company-owned and franchised stores , dough manufacturing and supply chain centers and international operations . retail sales from franchised stores are reported to us by our franchisees and are not included in our revenues . retail sales from company-owned stores and royalty revenues resulting from the retail sales from franchised stores are recognized as revenues when the items are delivered to or carried out by customers . retail sales are generally reported , and the related royalties paid to us based on a percentage of retail sales , as specified in the related standard franchise agreement ( generally 5.5 % of u.s. franchise retail sales and were on average , 2.9 % of international franchise retail sales in 2020 ) . u.s. and international franchise fee revenue primarily relates to per-transaction technology fees that are recognized as the related sales occur . we also generate revenues from u.s. franchise advertising contributions to dnaf , our consolidated not-for-profit advertising fund ( generally 6.0 % of u.s. franchise retail sales ) . story_separator_special_tag the grant date fair value of each restricted stock and performance-based restricted stock award is equal to the market price of our stock on the date of grant . the grant date fair value of each stock option award is estimated using the black-scholes option pricing model . the pricing model requires assumptions , including the expected life of the stock option , the risk-free interest rate , the expected dividend yield and expected volatility of our stock over the expected life , which significantly impact the assumed fair value . we account for forfeitures as they occur . additionally , our stock option , restricted stock and performance-based restricted stock arrangements provide for accelerated vesting and the ability to exercise during the remainder of the ten-year stock option life upon the retirement of individuals holding the awards who have achieved specified service and age requirements . management believes that the methods and various assumptions used to determine compensation expense related to these arrangements are reasonable , but if the assumptions change significantly for future grants , share-based compensation expense will fluctuate in future years . income taxes . we recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities . we measure deferred tax assets and liabilities using current enacted tax rates that will apply in the years in which we expect the temporary differences to be recovered or paid . judgment is required in determining the provision for income taxes , related reserves and deferred tax assets and liabilities . these include establishing a valuation allowance related to the ability to realize certain deferred tax assets , if necessary . on an ongoing basis , management will assess whether it remains more likely than not that the deferred tax assets will be realized . our accounting for deferred tax assets and liabilities represents our best estimate of future events . our deferred tax assets assume that we will generate sufficient taxable income in specific tax jurisdictions , based on our estimates and assumptions . changes in our current estimates due to unanticipated events could have a material impact on our financial condition and results of operations . story_separator_special_tag `` times new roman '' ; font-size : 10pt ; letter-spacing : 0px ; top : 0px ; ; display : inline ; ' > income statement data ( tabular amounts in millions , except percentages ) replace_table_token_6_th 31 2020 compared to 2019 ( tabular amounts in millions , except percentages ) revenues replace_table_token_7_th revenues primarily consist of retail sales from our company-owned stores , advertising contributions , royalties and fees from our u.s. franchised stores , royalties and fees from our international franchised stores and sales of food , equipment and supplies from our supply chain centers to substantially all of our u.s. franchised stores and certain international franchised stores . company-owned store and franchised store revenues may vary from period to period due to changes in store count mix . supply chain revenues may vary significantly as a result of fluctuations in commodity prices as well as the mix of products we sell . consolidated revenues increased $ 498.6 million , or 13.8 % , in 2020 , due primarily to higher u.s. retail sales , which resulted in higher supply chain and u.s. franchise revenues . the inclusion of the 53 rd week in 2020 also positively impacted revenues by an estimated $ 88.4 million . u.s. company-owned stores revenues increased in 2020 due to same store sales growth , but were partially offset by lower revenues due to the sale of 59 company-owned stores to certain of our existing u.s. franchisees during the second quarter of 2019 ( the “ 2019 store sale ” ) . these changes in revenues are described in more detail below . u.s. stores revenues replace_table_token_8_th u.s. company-owned stores revenues from u.s. company-owned store operations increased $ 32.0 million , or 7.1 % , in 2020 , due primarily to same store sales growth , as well as an estimated $ 10.6 million impact of the 53 rd week . the increase in revenues was partially offset by lower revenues resulting from the 2019 store sale . u.s. company-owned same store sales increased 11.0 % in 2020 and increased 2.8 % in 2019. u.s. franchise royalties and fees revenues from u.s. franchise royalties and fees increased $ 74.7 million , or 17.4 % , in 2020 , due primarily to higher same store sales and an increase in the average number of u.s. franchised stores open during the period resulting from net store growth , as well as an estimated $ 11.4 million impact of the 53 rd week . u.s. franchise royalties were negatively impacted by approximately $ 3.0 million related to funding we provided to our franchisees for an effort to donate 10 million slices of pizza to people and organizations at the frontlines of the covid-19 pandemic in the franchisees ' local communities . u.s. franchise same store sales increased 11.5 % in 2020 and increased 3.2 % in 2019. u.s. franchise royalties and fees further benefited from an increase in revenues from fees paid by franchisees for the use of our technology platforms . u.s. franchise advertising revenues from u.s. franchise advertising increased $ 71.4 million , or 18.3 % , in 2020 , due primarily to higher same store sales and an increase in the average number of u.s. franchised stores open during the year resulting from net store growth , as well as an estimated $ 10.4 million impact of the 53 rd week . 32 supply chain supply chain revenues increased $ 311.8 million , or 14.8 % , in 2020 , due primarily to higher volumes from increased orders resulting from u.s. franchise retail sales growth , as well as an estimated $ 49.6 million impact of the 53 rd week . our market basket pricing to stores increased 2.2 % during 2020 , which resulted in an estimated $ 42.5 million increase in supply chain revenues .

fiscal 2020 highlights global retail sales , excluding foreign currency impact ( which includes total retail sales at company-owned and franchised stores worldwide ) increased 13.2 % as compared to 2019. u.s. retail sales increased 17.6 % and international retail sales , excluding foreign currency impact , increased 8.8 % as compared to 2019. same store sales increased 11.5 % in our u.s. stores and increased 4.4 % in our international stores . our revenues increased 13.8 % . our income from operations increased 15.3 % . our net income increased 22.6 % . our diluted earnings per share increased 29.6 % . the inclusion of the 53 rd week in 2020 positively impacted our results . during 2020 , we experienced global retail sales growth and u.s. and international same store sales growth . we believe our commitment to value , convenience , quality and new products continues to keep consumers engaged with the brand . we launched three new products in the u.s. , including new and improved chicken wings and the new chicken taco and cheeseburger specialty pizzas , each of which has been positively received by consumers . 29 we also continued our strong u.s. and international same store sales performance with 39 straight quarters of positive u.s. same store sales and 108 straight quarters of positive international same store sales . beginning at the end of the first quarter of 2020 , changes in consumer ordering behavior due to the covid-19 pandemic resulted in a significant increase in u.s. same store sales . we did not experience significant temporary closures in our u.s. business . additionally , our u.s. supply chain experienced higher volumes from the increases in u.s. store sales .

to achieve these objectives , management has established the following strategies : first , mattel is focused on embracing brand building , creativity , and innovation , and management will put a premium on speed and personal accountability . management is focused on putting mattel back on track for growth and improved profitability . additionally , mattel is organizing around the following six strategic priorities : exploiting the franchise strength of its core brands ; re-establishing toy leadership ; strengthening its global supply chain ; achieving distinctiveness and excellence in its commercial organization ; rapidly expanding into emerging markets ; and continuously driving cost improvement . 2015 overview mattel 's 2015 results were encouraging , with significant and continuing progress being made against the six strategic priorities and cultural transformation that the company began executing against in the prior year . the business was stabilized as net sales increased over prior year in constant currency . critical core brands like barbie and fisher-price were revitalized , and core brands like hot wheels and thomas maintained their strong momentum , with positive trends in both consumer takeaway and shipping . barbie in particular was successfully revamped in 2015 , with fourth quarter results reflecting double digit growth in north america and positive numbers in international . investments in emerging markets began to pay off , with significant growth in china and russia . though results continued to be impacted by strong foreign exchange headwinds , these losses were partially offset by the successful implementation of cost savings initiatives in the current year . mattel 's 2015 financial highlights include the following : gross sales in 2015 were up 1 % in constant currency , and down 6 % as reported , compared to 2014. net sales in 2015 were up 2 % in constant currency , and down 5 % as reported , compared to 2014. adjusted gross margin in 2015 was 49.2 % , a decrease of 90 basis points from adjusted gross margin in 2014. gross margin , as reported , in 2015 was 49.2 % , a decrease of 60 basis points from 2014. adjusted operating income in 2015 was $ 640.3 million , as compared to adjusted operating income of $ 765.3 million in 2014. operating income , as reported , in 2015 was $ 540.9 million compared to operating income of $ 653.7 million in 2014. adjusted earnings per share , including discrete tax items , in 2015 was $ 1.31 , as compared to adjusted earnings per share , including discrete tax items , of $ 1.71 in 2014. earnings per share , as reported , in 2015 was $ 1.08 compared to earnings per share of $ 1.45 in 2014 . 2016 and beyond though significant progress was made in 2015 , mattel continues to face many challenges in 2016 and beyond , including the impact of the loss of the disney princess license , further declines in monster high , recent softness in american girl , and continued foreign exchange headwinds . in 2016 , mattel intends to address revenue headwinds by building upon the current momentum in core brands , as well as pursuing new initiatives to support monster high and strengthening american girl . further supporting this effort is a strong licensed entertainment slate and expected continued growth from emerging markets . 22 finally , mattel is currently on track to deliver at the high-end of the funding our future two-year savings target of $ 250 million to $ 300 million , helping to maintain gross margins despite challenges to revenues . results of operations 2015 compared to 2014 story_separator_special_tag style= '' page-break-after : always '' / > american girl segment the following table provides a summary of mattel 's gross sales by brand for the american girl segment for 2015 and 2014 : replace_table_token_10_th gross sales for the american girl segment were $ 596.2 million in 2015 , a decrease of $ 49.1 million or 8 % as reported , and 7 % in constant currency , compared to 2014. of the 7 % decrease in american girl brands gross sales in constant currency , 4 % was due to lower sales of the 2015 girl of the year , grace thomas , and 4 % was due to lower sales of truly me products . cost of sales decreased 6 % in 2015 , as compared to a 9 % decrease in net sales , primarily due to lower product and other costs . gross margins decreased due to higher product-related costs , partially offset by funding our future savings . american girl segment income decreased 38 % to $ 69.9 million in 2015 , as compared to $ 113.6 million in 2014 , primarily due to lower gross profit . 2014 compared to 2013 consolidated results net sales for 2014 were $ 6.02 billion , a 7 % decrease as reported , and a 5 % decrease in constant currency , as compared to $ 6.48 billion in 2013. net income for 2014 was $ 498.9 million , or $ 1.45 per diluted share , as compared to net income of $ 903.9 million , or $ 2.58 per diluted share , in 2013. earnings per share for 2014 was negatively impacted by lower sales volume and lower gross profit . the following table provides a summary of mattel 's consolidated results for 2014 and 2013 ( in millions , except percentage and basis point information ) : replace_table_token_11_th sales net sales for 2014 were $ 6.02 billion , a 7 % decrease as reported , and a 5 % decrease in constant currency , as compared to $ 6.48 billion in 2013 . story_separator_special_tag of the 22 % decrease in fisher-price friends gross sales in constant currency , 6 % was due to lower sales of nickelodeon products , 5 % was due to lower sales of thomas & friends products , 5 % was due to lower sales of disney jake and the never land pirates products , and 4 % was due to lower sales of mike the knight products . of the 16 % decrease in core fisher-price gross sales in constant currency , 6 % was due to lower sales of little people products and 4 % was due to lower sales of imaginext products . of the 16 % decrease in entertainment gross sales in constant currency , 6 % was due to lower sales of superman products , 5 % was due to lower sales of cars products , 4 % was due to lower sales of radica products , and 3 % was due to lower sales of max steel products . the increase in construction and arts & crafts gross 29 sales was due to initial sales of mega brands products . cost of sales increased 3 % in 2014 , compared to a 7 % decrease in net sales , primarily due to higher product and other costs , partially offset by lower royalty expenses . gross margins decreased due to the impact of the mega brands acquisition , including the impact of the inventory fair value markup above historical cost , efforts to improve consumer takeaway , the impact of lower sales volume on mattel 's fixed cost manufacturing and distribution base , and unfavorable product mix , partially offset by price increases and operational excellence 3.0 savings offset by higher input costs . north america segment income decreased 36 % to $ 459.8 million in 2014 , as compared to $ 723.8 million in 2013 , due to lower gross profit and higher other selling and administrative expenses . international segment the following table provides a summary of percentage changes in gross sales within the international segment in 2014 versus 2013 : replace_table_token_14_th the following table provides a summary of mattel 's gross sales by brand for the international segment for 2014 and 2013 : replace_table_token_15_th gross sales for the international segment were $ 3.06 billion in 2014 , a decrease of $ 216.3 million or 7 % as reported , and 3 % in constant currency , compared to 2013. the decrease in the international segment gross sales in constant currency was primarily due to lower sales of entertainment and barbie products , partially offset by construction and arts & crafts products . of the 20 % decrease in entertainment gross sales in constant currency , 7 % was due to lower sales of max steel products , 5 % was due to lower sales of kids ' games , 3 % was due to lower sales of cars products , 3 % was due to lower sales of superman products , and 2 % was due to lower sales of disney planes products . the 18 % decrease in barbie gross sales in constant currency was primarily due to competition within the doll category and brand propositions that were not compelling enough to consumers . the increase in construction and arts & crafts gross sales was due to initial sales of mega brands products . cost of sales remained flat in 2014 , as compared to a 9 % decrease in net sales , as lower product and other costs and lower freight and logistics expenses were offset by higher royalty expenses . gross margins decreased due to efforts to improve consumer 30 takeaway , the impact of the mega brands acquisition , including the impact of the inventory fair value markup above historical cost , the impact of lower sales volume on mattel 's fixed cost manufacturing and distribution base , unfavorable product mix , and higher input costs offset by price increases . international segment income decreased 42 % to $ 359.9 million in 2014 , as compared to $ 622.9 million in 2013 , primarily due to lower gross profit and higher other selling and administrative expenses . american girl segment the following table provides a summary of mattel 's gross sales by brand for the american girl segment for 2014 and 2013 : replace_table_token_16_th gross sales for the american girl segment were $ 645.3 million in 2014 , a decrease of $ 13.5 million or 2 % as reported and in constant currency , compared to 2013. of the 2 % decrease in american girl brands gross sales in constant currency , 3 % was due to lower sales of beforever products . cost of sales increased 2 % in 2014 , as compared to a 2 % decrease in net sales , primarily due to higher product and other costs . gross margins decreased as a result of efforts to improve consumer takeaway . american girl segment income decreased 18 % to $ 113.6 million in 2014 , as compared to $ 138.0 million in 2013 , primarily due to lower gross profit and higher advertising and promotion expenses . cost savings programs during 2013 , mattel initiated operational excellence 3.0 , which targeted cumulative gross cost savings of approximately $ 175 million by the end of 2014. mattel exceeded its operational excellence 3.0 goal by realizing approximately $ 179 million of cumulative gross cost savings throughout the program . the cost savings program was designed to generate sustainable cost savings through the following primary initiatives : manufacturing efficiencies through automation , lean manufacturing principles , design for manufacturing , enterprise quality , and packaging optimization ; indirect procurement ; and operational efficiencies related to enhanced international clustering and realignment of north america operations . during 2013 , mattel realized gross cost savings before severance charges and investments of approximately $ 60 million ( or approximately $ 39 million in net cost savings ) .

consolidated results net sales for 2015 were $ 5.70 billion , a 5 % decrease as reported , and a 2 % increase in constant currency , as compared to $ 6.02 billion in 2014. net income for 2015 was $ 369.4 million , or $ 1.08 per diluted share , as compared to net income of $ 498.9 million , or $ 1.45 per diluted share , in 2014. adjusted earnings per share , including discrete tax items , in 2015 was $ 1.31 , compared to adjusted earnings per share , including discrete tax items , of $ 1.71 in 2014. adjusted earnings per share , including discrete tax items , in 2015 was negatively impacted by unfavorable foreign exchange and lower gross profit , partially offset by funding our future savings . the following table provides a summary of mattel 's consolidated results for 2015 and 2014 ( in millions , except percentage and basis point information ) : replace_table_token_5_th sales net sales for 2015 were $ 5.70 billion , a 5 % decrease as reported , and a 2 % increase in constant currency , as compared to $ 6.02 billion in 2014 . 23 the following table provides a summary of mattel 's consolidated gross sales by brand for 2015 and 2014 : replace_table_token_6_th gross sales were $ 6.28 billion in 2015 , a decrease of $ 434.8 million or 6 % as reported , and an increase of 1 % in constant currency , as compared to 2014. the decrease in gross sales in constant currency was primarily due to lower sales of other girls products , partially offset by higher sales of wheels products . of the 17 % decrease in other girls gross sales in constant currency , 16 % was due to lower sales of monster high products . of the 21 % increase in wheels gross sales in constant currency , 20 % was due to higher sales of hot wheels products .

as a result of many factors , such as those set forth in part i , item 1a . risk factors , of this annual report on form 10-k , our actual results may differ materially from those anticipated in these forward-looking statements . we are a science-driven global biopharmaceutical company focused on the discovery , development and commercialization of clinically-differentiated medicines that provide benefits to patients with rare disorders . our ability to commercialize products is the foundation that drives our continued investment in a robust diversified pipeline of transformative medicines and our mission to provide access to best-in-class treatments for patients who have an unmet medical need . our strategy is to bring best-in-class therapies with differentiated clinical benefit to patients affected by rare disorders and to leverage our global commercial infrastructure to maximize value for our patients and other stakeholders . we have a portfolio pipeline that includes commercial products as well as product candidates in various stages of development , including clinical , pre-clinical and research and discovery stages , focused on the development of new treatments for multiple therapeutic areas , including rare diseases and oncology . we have two products , translarna ( ataluren ) and emflaza ( deflazacort ) , for the treatment of duchenne muscular dystrophy , or dmd , a rare , life threatening disorder . translarna has marketing authorization in the european economic area , or eea , for the treatment of nonsense mutation duchenne muscular dystrophy , or nmdmd , in ambulatory patients aged two years and older and in brazil for the treatment of nmdmd in ambulatory patients aged five years and older . during the year ended december 31 , 2019 , we recognized $ 190.0 million in sales of translarna . we hold worldwide commercialization rights to translarna for all indications in all territories . emflaza is approved in the united states for the treatment of dmd in patients two years and older . during the year ended december 31 , 2019 , emflaza achieved net sales of $ 101.0 million . our marketing authorization for translarna in the eea is subject to annual review and renewal by the european commission following reassessment by the european medicines agency , or ema , of the benefit-risk balance of the authorization , which we refer to as the annual ema reassessment . in july 2019 , the european commission renewed our marketing authorization , making it effective , unless extended , through august 5 , 2020. in february 2020 , we submitted a marketing authorization renewal request to the ema . this marketing authorization is further subject to a specific obligation to conduct and submit the results of a18-month , placebo-controlled trial , followed by an 18-month open-label extension , which we refer to together as study 041. the final report on the trial and open-label extension is to be submitted by us to the ema by the end of the third quarter of 2022. each country , including each member state of the eea , has its own pricing and reimbursement regulations . in order to commence commercial sale of product pursuant to our translarna marketing authorization in any particular country in the eea , we must finalize pricing and reimbursement negotiations with the applicable government body in such country . as a result , our commercial launch will continue to be on a country-by-country basis . we also have made , and expect to continue to make , product available under early access programs , or eap programs , both in countries in the eea and other territories . our ability to negotiate , secure and maintain reimbursement for product under commercial and eap programs can be subject to challenge in any particular country and can also be affected by political , economic and regulatory developments in such country . there is substantial risk that if we are unable to renew our eea marketing authorization during any annual renewal cycle , or if our product label is materially restricted , or if study 041 does not provide the data necessary to maintain our marketing authorization , we would lose all , or a significant portion of , our ability to generate revenue from sales of translarna in the eea and other territories . translarna is an investigational new drug in the united states . during the first quarter of 2017 , we filed a new drug application , or nda , for translarna for the treatment of nmdmd over protest with the united states food and drug administration , or fda . in october 2017 , the office of drug evaluation i of the fda issued a complete response letter for the nda , stating that it was unable to approve the application in its current form . in response , we filed a formal dispute resolution request with the office of new drugs of the fda . in february 2018 , the office of new drugs of the fda denied our appeal of the complete response letter . in its response , the office of new drugs recommended a possible path forward for the ataluren nda submission based on the accelerated approval pathway . this would involve a re-submission of an nda containing the current data on effectiveness of ataluren with new data to be generated on dystrophin production in nmdmd patients ' muscles . we intend to follow the fda 's recommendation and will collect , using newer technologies via procedures and methods that we designed , such dystrophin data in a new study , study 045 , which we initiated in the fourth quarter of 2018. we expect that a potential re-submission of an nda could occur in mid-year 2020. additionally , should a re-submission of an nda receive accelerated approval , the office of new drugs stated that study 041 , which is currently enrolling , could serve as the confirmatory post-approval trial required in connection with the accelerated approval framework . story_separator_special_tag we received net proceeds of approximately $ 117.9 million after deducting underwriting discounts and commissions and other offering expenses payable by us . on august 23 , 2018 , we completed our acquisition of agilis biotherapeutics , inc. , or agilis , for total upfront consideration comprised of $ 49.2 million in cash and 3,500,907 shares of our common stock , which was determined by dividing $ 150.0 million by the volume-weighted average price per share of our common stock on nasdaq for the 10 consecutive trading-day period ending on the second trading-day immediately preceding the closing . in january 2019 , we closed an underwritten public offering of our common stock pursuant to a registration statement on form s-3 . we issued and sold an aggregate of 7,563,725 shares of common stock under the registration statement at a public offering price of $ 30.20 per share , including 843,725 shares issued upon exercise by the underwriter of its option to purchase additional shares in february 2019. we received net proceeds of approximately $ 224.2 million after deducting underwriting discounts and commissions and other offering expenses payable by us . in august 2019 , we entered into an at the market offering sales agreement , or the sales agreement , with cantor fitzgerald and rbc capital markets , llc , or together , the sales agents , pursuant to which , we may offer and sell shares of our common stock , having an aggregate offering price of up to $ 125.0 million from time to time through the sales agents by any method that is deemed to be an “ at the market offering ” as defined in rule 415 ( a ) ( 4 ) promulgated under the securities act of 1933 , as amended , or the securities act pursuant to a registration statement on form s-3 . during the year ended december 31 , 2019 , we issued and sold an aggregate of 63,926 shares of common stock pursuant to the sales agreement at a weighted average public offering price of $ 46.60 per share . we received net proceeds of $ 2.6 million after deducting agent discounts and commissions and other offering expenses payable by us . in september 2019 , we closed an underwritten public offering of our common stock pursuant to a registration statement on form s-3 . we issued and sold an aggregate of 2,475,248 shares of common stock under the registration statement at a public offering price of $ 40.40 per share . the offering included an option to purchase up to an additional 371,287 shares for a period of 30 days following the offering . this option was not exercised by the underwriter . we received net proceeds of $ 97.0 million after deducting underwriting discounts and commissions and other offering expenses payable by us . in september 2019 , we issued $ 287.5 million aggregate principal amount of 1.50 % convertible senior notes due september 15 , 2026 , or the 2026 convertible notes , which included an option to purchase up to an additional $ 37.5 million in aggregate principal amount of the 2026 convertible notes , which was exercised in full by the initial purchasers . the 2026 convertible notes bear cash interest at a rate of 1.50 % per year , payable semi-annually on march 15 and september 15 of each year , beginning on march 15 , 2020. the 2026 convertible notes will mature on september 15 , 2026 , unless earlier repurchased or converted . we received net proceeds of $ 279.3 million after deducting the initial purchasers ' discounts and commissions and the offering expenses payable by us . on october 25 , 2019 , we completed our acquisition of substantially all of the assets of bioelectron for total upfront consideration of $ 10.0 million in cash less ( i ) transaction expenses incurred by bioelectron , ( ii ) the amount of outstanding indebtedness of bioelectron including a $ 4.0 million loan advance to bioelectron plus accrued and unpaid interest thereon and ( iii ) $ 1.5 million held in an escrow account to secure potential indemnification obligations owed to us . to date , we have financed our operations primarily through our offering of 3.00 % convertible senior notes due august 15 , 2022 , or the 2022 convertible notes offering , our offering of 1.50 % convertible senior notes due september 15 , 2026 , or the 2026 convertible notes , and , together with the 2022 convertible notes , the convertible notes , our public offerings of common stock in february 2014 , in october 2014 , in april 2018 , in january 2019 , and in september 2019 , the common stock issued in our “ at the marketing offering ” , our initial public offering of common stock in june 2013 , private placements of our preferred stock , collaborations , bank debt and convertible debt financings , the credit agreement and grants and clinical trial support from governmental and philanthropic organizations and patient advocacy groups in the disease areas addressed by our product candidates . since 2014 , we have also relied on revenue generated from net sales of translarna for the treatment of nmdmd in territories outside of the united states , and since may 2017 , we have generated revenue from net sales of emflaza for the treatment of dmd in the united states . as of december 31 , 2019 , we had an accumulated deficit of $ 1,190.5 million . we had a net loss of $ 251.6 million and $ 128.1 million for the fiscal years ended december 31 , 2019 and 2018 , respectively .

financial operations overview to date , our net product revenues have consisted primarily of sales of translarna for the treatment of nmdmd in territories outside of the united states and sales of emflaza for the treatment of dmd in the united states . our process for recognizing revenue is described below under “ critical accounting policies and significant judgments and estimates—revenue recognition ” . roche and the sma foundation collaboration . in november 2011 , we entered into a license and collaboration agreement , or licensing agreement , with roche and the sma foundation pursuant to which we are collaborating with roche and the sma foundation to further develop and commercialize compounds identified under our spinal muscular atrophy program with the sma foundation . the research component of this agreement terminated effective december 31 , 2014. the licensing agreement included a $ 30 million upfront payment made in 2011 which was recognized on a deferred basis over the research term , and the potential for up to $ 460 million in milestone payments and royalties on net sales . in august 2013 , we announced the selection of a development candidate , rg7800 . the achievement of this milestone triggered a $ 10.0 million payment to us from roche , which we recorded as collaboration revenue for the year ended december 31 , 2013. in january 2014 , we initiated a phase 1 clinical program for rg7800 , which triggered a $ 7.5 million milestone payment to us from roche which we recorded as collaboration revenue for the year ended december 31 , 2014. in november 2014 , we announced that our joint development program in sma with roche and the sma foundation , or smaf has started a phase 2 study for rg7800 in adult and pediatric patients .

” p. 72 – the new york times company recently adopted accounting pronouncements accounting standard update ( s ) topic effective period summary 2018-05 income taxes ( topic 740 ) upon issuance the financial accounting standards board ( “ fasb ” ) issued authoritative guidance that amends accounting standards codification ( “ asc ” ) topic 740 “ income taxes ” to conform with sec staff accounting bulletin 118 , issued in december 2017 , story_separator_special_tag the following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our consolidated financial condition as of december 30 , 2018 , and results of operations for the three years ended december 30 , 2018 . this item should be read in conjunction with our consolidated financial statements and the related notes included in this annual report . executive overview we are a global media organization that includes newspapers , print and digital products and related businesses . we have one reportable segment with businesses that include our newspaper , websites and mobile applications . we generate revenues principally from subscriptions and advertising . other revenues primarily consist of revenues from licensing , affiliate referrals , building rental revenue , commercial printing , nyt live ( our live events business ) and retail commerce . our main operating costs are employee-related costs . in the accompanying analysis of financial information , we present certain information derived from consolidated financial information but not presented in our financial statements prepared in accordance with generally accepted accounting principles in the united states of america ( “ gaap ” ) . we are presenting in this report supplemental non-gaap financial performance measures that exclude depreciation , amortization , severance , non-operating retirement costs and certain identified special items , as applicable . these non-gaap financial measures should not be considered in isolation from or as a substitute for the related gaap measures , and should be read in conjunction with financial information presented on a gaap basis . for further information and reconciliations of these non-gaap measures to the most directly comparable gaap measures , see “ — results of operations — non-gaap financial measures. ” as a result of the adoption of the asu 2017-07 during the first quarter of 2018 , the company has recast the consolidated statement of operations for periods prior to 2018 to conform with the current period presentation . fiscal year 2017 comprised 53 weeks , while all other fiscal years presented in this item 7 comprised 52 weeks . this report includes a discussion of the estimated impact of this additional week in 2017 on our year-over-year comparison of revenues where meaningful . management believes that estimating the impact of the additional week on the company 's operating costs and operating profit presents challenges and , therefore , no such estimate is made with respect to these items . for further detail on the impact of the additional week on our results , see the discussion below and “ — results of operations-non-gaap financial measures. ” 2018 financial highlights in 2018 , diluted earnings per share from continuing operations were $ 0.75 , compared with $ 0.03 for 2017 . diluted earnings per share from continuing operations excluding severance , non-operating retirement costs and special items discussed below ( or “ adjusted diluted earnings per share , ” a non-gaap measure ) were $ 0.81 for 2018 , compared with $ 0.76 for 2017 . operating profit in 2018 was $ 190.2 million , compared with $ 176.6 million for 2017 . the increase was mainly driven by higher digital subscription revenues , other revenues and digital advertising revenues , partially offset by lower print advertising revenues and higher operating costs . operating profit before depreciation , amortization , severance , multiemployer pension plan withdrawal costs and special items discussed below ( or “ adjusted operating profit , ” a non-gaap measure ) was $ 262.6 million and $ 274.8 million for 2018 and 2017 , respectively . total revenues increased 4.4 % to $ 1.75 billion in 2018 from $ 1.68 billion in 2017 primarily driven by an increase in digital subscription revenue as well as increases in other revenues and digital advertising revenue , partially offset by a decrease in print advertising revenue and print subscription revenue . total digital revenues increased to approximately $ 709 million in 2018 compared with $ 620 million in 2017. excluding the impact of the additional week in 2017 , estimated total revenues increased 6.2 % , driven by the same factors identified above . subscription revenues increased 3.4 % to $ 1.04 billion in 2018 compared with $ 1.01 billion in 2017 , primarily due to growth in the number of subscriptions to the company 's digital-only products . revenue from the company 's digital-only subscription products ( which include our news product , as well as our crossword and cooking products ) increased 17.7 % compared with 2017 , to $ 400.6 million . excluding the impact of the additional week in p. 24 – the new york times company 2017 , estimated subscription revenues and digital-only subscription revenues increased 5.3 % and 20.2 % , respectively , driven by the same factors identified above . paid digital-only subscriptions totaled approximately 3,360,000 as of december 30 , 2018 , a 27.1 % increase compared with year-end 2017 . news product subscriptions totaled approximately 2,713,000 at the end of 2018 , a 21.6 % increase compared with 2017 . other product subscriptions , which include subscriptions to our crossword product and cooking product , totaled approximately 647,000 at the end of 2018 , a 56.7 % increase compared with 2017 . total advertising revenues remained flat at $ 558.3 million in 2018 compared with 2017 , reflecting a 6.5 % decrease in print advertising revenues , offset by an 8.6 % increase in digital advertising revenues . the decrease in print advertising revenues resulted from a continued decline in display advertising , primarily in the luxury and entertainment categories . story_separator_special_tag the increasing number of digital media options available , including through social media platforms and news aggregators , has resulted in audience fragmentation and increased competition for advertising . competition from digital content providers and platforms , some of which charge lower rates than we do or have greater audience reach and targeting capabilities , and the significant increase in inventory of digital advertising space , have affected and will likely continue to affect our ability to attract and retain advertisers and to maintain or increase our advertising rates . in recent years , large digital platforms , such as facebook , google and amazon , which have greater audience reach and targeting capabilities than we do , have commanded an increased share of the digital display advertising market , and we anticipate that this trend will continue . in addition , digital advertising networks and exchanges , real-time bidding and other programmatic buying channels that allow advertisers to buy audiences at scale are playing a more significant role in the advertising marketplace and may cause further downward pricing pressure . the character of our digital advertising business also continues to change , as demand for newer forms of advertising , such as branded content and other customized advertising increases . the margin on revenues from some of these advertising forms is generally lower than the margin on revenues we generate from our print advertising and traditional digital display advertising . consequently , we may experience further downward pressure on our advertising revenue margins as a greater percentage of advertising revenues comes from these newer forms . in addition , technologies have been and will continue to be developed that enable consumers to block digital advertising on websites and mobile devices . advertisements blocked by these technologies are treated as not delivered and any revenue we would otherwise receive from the advertiser for that advertisement is lost . as the digital advertising market continues to evolve , our ability to compete successfully for advertising budgets will depend on , among other things , our ability to engage and grow our audience and prove the value of our advertising and the effectiveness of our platforms to advertisers . economic conditions global , national and local economic conditions affect various aspects of our business . our subscription revenue is sensitive to discretionary spending available to subscribers in the markets we serve , and to the extent poor economic conditions lead consumers to reduce spending on discretionary activities , our ability to retain current subscribers and obtain new subscribers could be hindered . in addition , the level of advertising sales in any period may be affected by advertisers ' decisions to increase or decrease their advertising expenditures in response to anticipated consumer demand and general economic conditions . changes in spending patterns and priorities , including shifts in marketing strategies and or budget cuts of key advertisers in response to economic conditions could have an effect on our advertising revenues . p. 26 – the new york times company fixed costs a significant portion of our expenses are fixed costs that neither increase nor decrease proportionately with revenues . we are limited in our ability to make short-term adjustments to manage some of these costs by certain of our collective bargaining agreements . employee-related costs , depreciation , amortization and raw materials together accounted for nearly half of our total operating costs in 2018 . for a discussion of these and other factors that could affect our business , results of operations and financial condition , see “ item 1a — risk factors. ” our strategy we continue to operate during a period of transformation in our industry , which has presented both challenges to and opportunities for the company . we believe that the following priorities will be key to our strategic efforts . providing journalism worth paying for we believe that the times 's original and high-quality content and journalistic excellence set us apart from other news organizations , and that our readers are willing to pay for trustworthy , insightful and differentiated content . during 2018 , the times again broke stories and produced investigative reports that sparked global conversations on wide-ranging topics . our ground-breaking journalism continues to be recognized , most notably in the number of pulitzer prizes the times has received — more than any other news organization . in addition , we have continued to make significant investments in our newsroom , adding journalistic talent across a wide range of areas — from our business coverage to our opinion pages — and investing in new forms of visual and multimedia journalism . our highly popular news podcast , the daily , which we launched in 2017 , was the most downloaded podcast on apple 's itunes in 2018. and during the year , we announced the development of a new tv show called the weekly that will launch in 2019 and provide a new platform through which to deliver our journalism . we believe that the continued growth over the last year in subscriptions to our products demonstrates the success of our “ subscription-first ” strategy and the willingness of our readers to pay for high-quality journalism . as of december 30 , 2018 , we had approximately 4.3 million total subscriptions to our products , more than at any point in our history . in 2019 , we expect to continue to make significant investments in our journalism and remain committed to providing high-quality , trustworthy and differentiated content that we believe sets us apart . growing our audience and strengthening engagement to support subscription growth we continue to focus on expanding our audience reach and strengthening the engagement of users by making the times an indispensable part of their daily lives . and we continue to communicate the value of independent , high-quality journalism and why it matters . during 2018 , we continued to enhance our core news product to improve user experience and engagement , and took further steps to build direct relationships with users to support continued subscription growth .

results of operations overview fiscal years 2018 and 2016 each comprised 52 weeks and fiscal year 2017 comprised 53 weeks . the following table presents our consolidated financial results : replace_table_token_6_th * represents a change equal to or in excess of 100 % or one that is not meaningful . ( 1 ) as a result of the adoption of asu 2017-07 during the first quarter of 2018 , the service cost component of net periodic benefit costs/ ( income ) from our pension and other postretirement benefits plans will continue to be presented within operating costs , while the other components of net periodic benefits costs/ ( income ) such as interest cost , amortization of prior service credit and gains or losses from our pension and other postretirement benefits plans will be separately presented outside of “ operating costs ” in the new line item “ other components of net periodic benefits costs/ ( income ) ” . the company has recast the consolidated statement of operations for the respective prior periods presented to conform with the current period presentation . costs associated with multiemployer pension plans were not addressed in asu 2017-07 , and continue to be included in operating costs , except as separately disclosed . the new york times company – p. 29 revenues subscription , advertising and other revenues were as follows : replace_table_token_7_th subscription revenues subscription revenues consist of revenues from subscriptions to our print and digital products ( which include our news product , as well as our crossword and cooking products ) , and single-copy and bulk sales of our print products ( which represent less than 10 % of these revenues ) . our cooking product first launched as a paid digital product in the third quarter of 2017. subscription revenues are based on both the number of copies of the printed newspaper sold and digital-only subscriptions , and the rates charged to the respective customers .

the future minimum lease payments for the operating leases at december 31 , 2013 are as follows . replace_table_token_22_th rent expense for office space for the years ended december 31 , 2013 and 2012 was $ 699,000 and $ 755,000 , respectively . asset retirement obligation : a reconciliation of the liability for plugging and abandonment costs for the years ended december 31 , 2013 and 2012 is as follows : replace_table_token_23_th f-14 the company 's liability is determined using significant assumptions , including current estimates of plugging and abandonment costs , annual inflation of these costs , the productive life of wells and a risk-adjusted interest rate . changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligation . revisions to the asset retirement obligation are recorded with an offsetting change to producing properties , resulting in prospective changes to depreciation , depletion and amortization expense and accretion of discount . because of the subjectivity of assumptions and the relatively long life of most of the company 's wells , the costs to ultimately retire the wells may vary significantly from previous estimates . during 2013 and 2012 revisions in estimated liabilities for asset retirement obligation resulted primarily from the enactment of new federal regulation requirements for plugging and abandonment . 7. contingent liabilities the company , as managing general partner of the affiliated partnerships , is responsible for all partnership activities , including the drilling of development wells and the production and sale of oil and gas from productive wells . the company also provides the administration , accounting and tax preparation work for the partnerships , and is liable for all debts and liabilities of the affiliated partnerships , to the extent that the assets of a given limited partnership are not sufficient to satisfy its obligations . at december 31 , 2013 , the affiliated partnerships have established cash reserves in excess of their debts and liabilities , and the company believes these reserves will be sufficient to satisfy partnership obligations . the company is subject to environmental laws and regulations . management believes that future expenses , before recoveries from third parties , if any , will not have a material effect on the company 's financial condition . this opinion is based on expenses incurred to date for remediation and compliance with laws and regulations , which have not been material to the company 's results of operations . from time to time , the company is party to certain legal actions arising in the ordinary course of business . while the outcome of these events can not be predicted with certainty , management does not expect these matters to have a materially adverse effect on the financial position or results of operations of the company . 8. stock options and other compensation in may 1989 , non-statutory stock options were granted story_separator_special_tag the following discussion is intended to assist you in understanding our results of operations and our present financial condition . our consolidated financial statements and the accompanying notes to the consolidated financial statements included elsewhere in this report contains additional information that should be referred to when reviewing this material . our subsidiaries are listed in note 1 to the consolidated financial statements . overview : we are an independent oil and natural gas company engaged in acquiring , developing and producing oil and natural gas . we presently own producing and non-producing properties located primarily in texas , oklahoma , west virginia , new mexico , colorado and louisiana . in addition , we own a substantial amount of well servicing equipment . all of our oil and gas properties and interests are located in the united states . assets in our principal focus areas include mature properties with long-lived reserves and significant development opportunities as well as newer properties with development and exploration potential . we believe our balanced portfolio of assets and our ongoing hedging program position us well for both the current commodity price environment and future potential upside as we develop our attractive resource opportunities . our primary sources of liquidity are cash generated from our operations and our credit facility . we attempt to assume the position of operator in all acquisitions of producing properties and will continue to evaluate prospects for leasehold acquisitions and for exploration and development operations in areas in which we own interests . we continue to actively pursue the acquisition of producing properties . in order to diversify and broaden our asset base , we will consider acquiring the assets or stock in other entities and companies in the oil and gas business . our main objective in making any such acquisitions will be to acquire income producing assets so as to build stockholder value through consistent growth in our oil and gas reserve base on a cost-efficient basis . our cash flows depend on many factors , including the price of oil and gas , the success of our acquisition and drilling activities and the operational performance of our producing properties . we use derivative instruments to manage our commodity price risk . this practice may prevent us from receiving the full advantage of any increases in oil and gas prices above the maximum fixed amount specified in the derivative agreements and subjects us to the credit risk of the counterparties to such agreements . since all of our derivative contracts are accounted for under mark-to-market accounting , we expect continued volatility in gains and losses on mark-to-market derivative contracts in our consolidated statement of operations as changes occur in the nymex price indices . critical accounting estimates : proved oil and gas reserves proved oil and gas reserves directly impact financial accounting estimates , including depreciation , depletion and amortization . story_separator_special_tag proved reserves represent estimated quantities of natural gas , crude oil , condensate , and natural gas liquids that geological and engineering data demonstrate , with reasonable certainty , to be recoverable in future years from known reservoirs under economic and operating conditions existing at the time the estimates were made . the process of estimating quantities of proved oil and gas reserves is very complex , requiring significant subjective decisions in the evaluation of all available geological , engineering and economic data for each reservoir . the data for a given reservoir may also change substantially over time as a result of numerous factors including , but not limited to , additional development activity , evolving production history and continual reassessment of the viability of production under varying economic conditions . consequently , material revisions ( upward or downward ) to existing reserve estimates may occur from time to time . 29 depreciation , depletion and amortization for oil and gas properties the quantities of estimated proved oil and gas reserves are a significant component of our calculation of depletion expense and revisions in such estimates may alter the rate of future expense . holding all other factors constant , if reserves were revised upward or downward , earnings would increase or decrease respectively . depreciation , depletion and amortization of the cost of proved oil and gas properties are calculated using the unit-of-production method . the reserve base used to calculate depletion , depreciation or amortization is the sum of proved developed reserves and proved undeveloped reserves for leasehold acquisition costs and the cost to acquire proved properties . the reserve base includes only proved developed reserves for lease and well equipment costs , which include development costs and successful exploration drilling costs . estimated future dismantlement , restoration and abandonment costs , net of salvage values , are taken into account . liquidity and capital resources : net cash provided by operating activities for the year ended december 31 , 2013 was $ 36 million , compared to $ 40 million in the prior year . excluding the effects of significant unforeseen expenses or other income , our cash flow from operations fluctuates primarily because of variations in oil and gas production and prices or changes in working capital accounts . our oil and gas production will vary based on actual well performance but may be curtailed due to factors beyond our control . our realized oil and gas prices vary due to world political events , supply and demand of products , product storage levels , and weather patterns . we sell the vast majority of our production at spot market prices . accordingly , product price volatility will affect our cash flow from operations . to mitigate price volatility we sometimes lock in prices for some portion of our production through the use of derivatives . if our exploratory drilling results in significant new discoveries , we will have to expend additional capital in order to finance the completion , development , and potential additional opportunities generated by our success . we believe that , because of the additional reserves resulting from the successful wells and our record of reserve growth in recent years , we will be able to access sufficient additional capital through additional bank financing . as of march 1 , 2014 , the company maintains a credit facility totaling $ 250 million , with a borrowing base of $ 140 million . the bank reviews the borrowing base semi-annually and , at their discretion , may decrease or propose an increase to the borrowing base relative to a redetermined estimate of proved oil and gas reserves . our oil and gas properties are pledged as collateral for the line of credit and we are subject to certain financial and operational covenants defined in the agreement . we are currently in compliance with these covenants and expect to be in compliance over the next twelve months . if we do not comply with these covenants on a continuing basis , the lenders have the right to refuse to advance additional funds under the facility and or declare all principal and interest immediately due and payable . in july 2013 , we obtained a $ 10 million loan secured by most of the field service equipment that we own to conduct our field service operations . we used the funds from that loan to pay down our credit facility , and as a result , freed up additional funds under the credit facility for future acquisitions , development and operations . as of march 20 , 2014 , we had a total of $ 8.9 million outstanding on this loan . it is our goal to increase our oil and gas reserves and production through the acquisition and development of oil and gas properties . we continued our drilling program in our west texas and mid-continent regions . based upon the results of horizontal wells drilled by us and other offsetting operators and historical vertical well performance we have decided to reduce the number of vertical wells in our drilling program and drill more horizontal wells . we believe horizontal development of our resource base will provide the opportunity to improve returns relative to vertical drilling by accessing a larger base of reserves in target zone with a lateral wellbore . during 2014 , we intend to drill a total of approximately 20 gross ( 11 net ) wells , primarily in the west texas area , at a net cost of $ 60 million . we also continue to explore and consider opportunities to further expand our oilfield servicing revenues through additional investment in field service equipment . however , the majority of our capital spending is discretionary , and the ultimate level of expenditures will be dependent on our assessment of the oil and gas business environment , the number and quality of oil and gas prospects available , the market

results of operations : 2013 and 2012 compared we reported net income for 2013 of $ 12.27 million , or $ 5.04 per share . during 2012 , we reported net income of $ 15.06 million , or $ 5.74 per share . net income decreased in 2013 by $ 2.79 million or 18 % , primarily due to net decreases in gains from derivative instruments , increased lease operating and field service expenses partially offset by increases in oil and gas sales and field service income and decreased depreciation and depletion expenses . operating revenues increased by $ 4.09 million in 2013 as compared to 2012 largely due to a slight increase in net production and increased commodity prices realized in 2013 and an increase in field service income with the addition of new service equipment during 2013 partially offset by losses on derivative instruments in 2013 versus gains on derivative instruments recognized in 2012. lease operating and field service expenses increased $ 3.94 million and $ 3.45 million , respectively , in 2013 as compared to 2012 primarily from increased labor and chemical costs and an increase in services provided . depreciation and depletion decreased by $ 1.41 million in 2013 as compared to 2012 primarily associated with offshore properties as our offshore properties were plugged and abandoned during 2012. the significant components of net income are discussed below . oil and gas sales increased $ 4.96 million , or 6 % from $ 87.83 million for the year ended december 31 , 2012 to $ 92.79 million for the year ended december 31 , 2013. crude oil and natural gas sales vary due to changes in volumes of production sold and realized commodity prices .